Economics - Demand and Supply

• The Price Mechanism


  The way prices adjust due to an event
• Demand for a product


  The quantity that purchaser/ consumers are willing an able to buy at given price in a time period
• Effective Demand


  When backed up by a willingness and ability to pay the market price
• Examples of the Law of Demand

  • a fall in market price causes an extension demand
  • a rise in market price causes a contraction in demand
• Income Effect 


  Most individuals have fixed regular incomes
• Derived Demand


  The demand for a factor of production that is used to produce another good or service
• Joint Demand


  When the demand for one product is directly and positively related to the market demand for a related good or service
• Composite Demand 


  Where goods have more than one use
• Giffen Good


  When cheap staple foods are consumed in greater quantity when their prices rise
• Veblen Good


  When certain luxury goods with status appeal are consumed in greater quantity when their price rises
• The Law of Demand


  When the price of a good rises, the quantity demanded will fall
• Normal Good


  When an increase in income leads to an increase in demand
• Inferior Good


  When the price of a good rises, the quantity demanded will fall
• Utility


  The usefulness or enjoyment a consumer can get from a service or good
• Price Elasticity of Demand


  Measures the responsiveness of the quantity demanded of a good or service to changes in its price (help us understand how sensitive consumer demand is to changes in price)
• Breadth


  A measure of how many stocks are advancing relative to the number declining
• Coefficient of Price Elasticity Demand

  • if PED=0, demand is perfectly price inelastic
  • if PED<1, demand is price inelastic
  • if PED>1, demand is price elastic
  • if PED=infinity, demand is perfectly price elastic
  • if PED=1, demand is unitary elasticity
• Coefficient of Income Elasticity of Demand

  • necessities= low(+) reading (0-1)
  • normal= (+) between (0-1) closer to 1
  • luxury= (+) large > 1
  • inferior= (-1) less tan zero
• Income Elasticity of Demand


  Measures how demand responds to a change in income
• Income Elasticity of Demand

  = percentage change in quantity demanded/ percentage change in income
• Price Elasticity of Demand

  = percentage change in quantity demanded/ percentage change in price
• Price Elasticity of Demand and Total Revenue

  • if demand is price elastic, a reduction in price leads to an increase in total revenue
  • if demand is price inelastic, a reduction in price leads to a decrease in total revenue
  • if demand is price elastic, a price increase leads to a reduction in total revenue
  • If demand is inelastic, a price increase leads to an increase in total revenue
• Determinants of Price Elasticity of Demand

  • availability of close substitutes
  • Percentage of income spent on the product
  • if the good is a luxury or necessity
  • how much time has elapsed since the price has changed
• Income Elastic Demand -> luxury goods

  When demand for a product is income elastic, the value of YED is greater than +1
• Income Inelastic Demand -> necessities 


  When demand for a product is income inelastic, the value of YED is between 0 and +1
• Negative Income Elastic -> Inferior goods


  When demand for a product is negative inelastic, the value of YED is negative
• Cross Elasticity of Demand


  Measures the demand for one good responds to changes in the price of another good
• Cross Elasticity of Demand

  = percentage change of quantity demanded of product A/ percentage change in price of product B
• Shifts of a Demand Curve

  • real disposable income
  • tastes and preferences (fashion)
  • Population
  • prices of substitute products (competitive demand)
  • prices of complementary products (joint demand)
• Substitute


  A good that may be consumed as an alternative to another good
• Complement


  A good that tends to be consumed together with another good
• Effective Demand 


  Consumers desire to buy a good, backed up by the ability to pay
• The Law of Supply


  As price increases the quantity supplied will increase (positive relationship)
• Shifts of a Supply Curve

  • production costs
  • productivity of labour
  • taxes on businesses
  • production subsidies
  • technology
• Price Elasticity of Supply

  = percentage change in quantity supplied/ percentage change in price
• Price Elasticity of Demand


  The responsiveness of the quantity supplied of a good or service to a change in price
• Price Inelastic Supply

  • the value of PES is between 0 and 1
  • supply curve will be relatively steep
• Price Elastic Supply

  • the value of PES is greater than 1
  • supply curve will be relatively shallow
• Unitary Elastic Supply

  • the value of PES is exactly 1
  • supply curve is any straight line drawn through the origin
• Perfectly Inelastic Supply

  • the value of PES is 0
  • supply curve is vertical