DEMAND, SUPPLY AND

ELASTICITY C-TWO
 DEFINITION OF DEMAND
In economics demand is defined as consumers' willingness and ability to consume a given good.

To be demand, three conditions must be met

1. Desire to purchase
2. Ability to purchase and
3. Willingness to pay

According to Benham, “Demand for anything, at a given price, is the amount of it which will be bought per unit of time at that price”

Demand is a multivariate relationship, that is, it is determined by many factors simultaneously. Some of the most important determinates of the
market demand for a particular product are its own price, consumers’ income, price of other commodities, consumers’ tastes, income distribution,
total population, consumers’ wealth, credit availability, government policy, past levels of demand, past levels of income, etc.
SUPPLY
Supply is the willingness and ability of producers to create goods and services to
take them to market.
Supply is positively related to price given that at higher prices there is an incentive
to supply more as higher prices may generate increased revenue and profits.
Supply and stock are not the same thing. example of stock and supply will be
suppose a television manufacturer has 20000 television stock, out of which the
manufacturer supplies only 2000 television at prevailing market price. Hence
remaining 18000 units will be called stock and 2000 units will be called as supply.
 Law of Demand Law of Supply

The law of demand states that other The law of supply states that all
factors being constant (ceteris paribus), other factors being equal, as the
price and quantity demand of any goods price of a good or service
and services are inversely related to each increases, the quantity of that
other. An increase in price will decrease good or service that suppliers
the quantity demanded of most goods. offer will increase, and vice versa.
On the other hand, a decrease in price The law of supply says that as the
will increase the quantity demanded of price of an item goes up, suppliers
most goods. The inverse relationship will attempt to maximize their
between price and quantity demanded of profits by increasing the quantity
a good is known as the law of demand. offered for sale.
 Factors Affecting Demand Factor Affecting Supply

Income Technology
Input Prices
Price of other goods and
services Weather
Expectations
Taste
Number of sellers
Expectations
Government Policy
The size of the market
Goods in joint Supply
Weather Goods in Competitive
SUPPLY SCHEDULE AND
SUPPLY CURVE Table 2: Supply Schedule

Price of Ice-cream (Per piece) Quantity Supplied

0 0
1 3
2 6
3 9
4 12
5 15
6 18

Figure 2: Supply Curve

 EXTENSION & CONTRACTION OF DEMAND
OR CHANGE IN QUANTITY DEMANDED

Changes in the price of a commodity causes movements along the demand curve;
such movements are called changes in the quantity demanded.

 If price decreases, then we move down and to the right along the demand curve;
this is an increase in the quantity demanded which is known as extension of demand.

 If price increases, then we move upward and to left along the demand curve, this
is a decrease in the quantity demanded which is called contraction of demand.
EXTENSION &
CONTRACTION
OF DEMAND
 Assuming other things such as income, tastes and
fashion, prices of related goods remaining constant,
a demand curve DD has been drawn. It will be seen
in this figure that when the price of the good is OP,
then the quantity demanded of the good is OM.

 Now, if the price of the good falls to OP’ the

quantity de­manded of the good rises to ON. Thus,
there is extension in demand by the amount MN.
On the other hand, if price of the good rises from
OP to OP” the quantity demanded of the good falls
to OL. Thus, there is contraction in demand by ML.
 INCREASE AND DECREASE OF
DEMAND OR CHANGE IN DEMAND
Increase and decrease in demand are referred to change in demand due to
changes in various other factors such as change in income, distribution of
income, change in consumer’s tastes and preferences, change in the price of
related goods, while Price factor is kept constant.

 Increase in demand refers to the rise in demand of a product at a given price.

On the other hand, decrease in demand refers to the fall in demand of a product
at a given price.
 INCREASE & DECREASE
IN DEMAND
In case of increase in demand, the demand In case of decrease in demand, it shifts
curve shifts to right of the original demand curve to left of the original demand curve.
 SOME SIMILAR TYPE OF
QUESTION
True or False: A "change in quantity If other factors remain constant, analyze the
demanded" is a shift of the entire demand effect of own price changes on demand
curve to the right or to the left. Explain.
If price remains constant, analyze the effect
Does a price change cause a movement
of other factors’ changes on demand
along a demand curve or a shift of the
entire curve? How does price create movement along the
Can a change in price cause a shift of the demand curve?
demand curve?
Will a change in price cause a movement or What causes a movement in the demand
a shift? curve?
Is price a movement along the demand What causes a shift in the entire demand
curve? curve
MARKET EQUILIBRIUM
THE ROLE OF EXCESS SUPPLY (SURPLUS) AND EXCESS
DEMAND (DEFICIT)
 CONCEPT OF ELASTICITY
Elasticity is an economic measure of how sensitive an economic factor is to another. In economics, elasticity is the measurement of
the percentage change of one economic variable in response to a change in another. The definition of elasticity, a measure of
responsiveness of consumers to changes in prices or incomes.

The meaning of the price elasticity of demand, which measures the responsiveness of the quantity demanded to changes in price.

The meaning of the income elasticity of demand, a measure of the responsiveness of demand to changes in income.

The cross-price elasticity of demand measures the responsiveness of demand for one good to changes in the price of another good.

The meaning of the price elasticity of supply, which measures the responsiveness of the quantity supplied to changes in price
 PRICE ELASTICITY OF DEMAND
The price elasticity of demand (sometimes simply called price elasticity) measures how much the
quantity demanded of a good changes when its price changes. The precise definition of price elasticity
is the percentage change in quantity demanded divided by the percentage change in price.
TYPES OF PRICE ELASTICITY OF DEMAND
TYPES OF PRICE ELASTICITY
OF DEMAND
PRICE ELASTICITY OF SUPPLY
FACTOR AFFECTING ELASTICITY OF DEMAND
FACTOR AFFECTING
ELASTICITY OF DEMAND
LINK FOR THE CONCEPT OF
ELASTICITY
https://youtu.be/pKo8LBHhn7s?si=L0qK0VxEFxTv4wyI

Book:1. N_Gregory_Mankiw_Principles_of_Economic- chapter 4 and chapter 5- Page 65-101

(Especially Market Equilibrium -Page -76)

Book-3 - Economics by Paul Samuelson, William Nordhaus (Chapter- 3&4, Page-45)