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Demand
The “demand” for a good is simply how much of that good consumers would buy
at various prices
...
” (It’s referred to as a curve even when the graph is a straight line
...
The steepness of a demand curve illustrates how sensitive consumers are to
changes in the price of the good
...
Goods of this
nature are said to have very “elastic demand
...
”
On the basis of different factors affecting the quantity demanded for a product, elasticity of
demand is categorized into mainly three categories:
Price Elasticity of Demand (PED)- Price elasticity of demand is a measurement of
the change in consumption of a product in relation to a change in its price
...
There are five types of price elasticity of demand:
• perfectly inelastic
• inelastic
• perfectly elastic
• Elastic
• Unitary
...
Formula:
Income Elasticity of Demand (YED)
...
It is defined as the ratio of the change in quantity
demanded over the change in income
...
The formula for calculating income elasticity of demand is the percent change in
quantity demanded divided by the percent change in income
...
It is defined as the ratio of the change in quantity
demanded over the change in income
...
This means the demand for an
inferior good will decrease as the consumer’s income decreases
...
This implies that consumer demand is more responsive to a change in
income
...
Relatively Inelastic Income Elasticity of Demand
0 < Income Elasticity of Demand < 1 are goods that are relatively inelastic
...
Income Elasticity of Demand is 0
Income Elasticity of Demand = 0 means that the demand for the good isn’t affected by a
change in income
...
Change in Demand” as Opposed to “Change in Quantity Demanded
When the price of a good changes, the resulting change in how much of it people want
to buy is referred to as a “change in the quantity demanded
...
In contrast, a “change in demand” is a shift of the demand curve, caused by
changes in factors other than the good’s price
...
Conversely, an increase
in demand is a shift of the demand curve to the right, meaning that at any given price,
consumers would demand more of the good than they would have demanded at that
price in the past
...
Note:
The demand curve for a product shows the quantity of that product that
consumers would buy at various prices
...
When demand for a good is inelastic, the
quantity purchased is less sensitive to price changes
...
A change in demand is a shift of the demand curve
due to changes in factors other than the price of the good
...
When the price of a good goes up, demand for its substitutes goes up and
demand for its complements goes down
...
The “supply” for a good is how much of that good producers would produce at
various prices
...
One can draw a supply curve for an individual producer,
just as one can draw a demand curve for an individual consumer
...
How Costs Affect Supply
If a firm faces higher costs of production, then it will earn lower profits at any given
selling price for its products
...
In this case, the supply curve shifts to the
left
...
Elasticity of Supply
The elasticity of supply establishes a quantitative relationship between the supply of a
commodity and it's price
...
If a slight increase in price
draws many new producers into the market (or persuades existing ones to increase
production dramatically), supply for the good is said to be elastic
...
”
Price Elasticity of Supply
...
Change in Supply” as Opposed to “Change in Quantity Supplied
When the price of a good changes, the resulting change in how much of it producers
want to produce is said to be a “change in the quantity supplied
...
In contrast, a “change in supply” is a shift of the supply curve, caused by changes in
factors other than the good’s price
...
Said differently,
producers would be willing to accept a lower price for any quantity
Changes in supply can be caused by several factors, including:
Changes in costs of production,
Changes in opportunity costs,
Changes in supplier expectations, and
Changes in the number of suppliers
...
A good’s marginal cost of production is the additional cost that must be incurred
to produce one additional unit of the good
...
When supply for a good is elastic, the amount producers will produce is more
sensitive to price changes
...
A movement along the supply curve due to a change in price is a change in the
quantity supplied
...
Supply can change in response to changes in any of several factors: costs of
production, opportunity costs, supplier expectations, or the number of suppliers