This document provides an overview of demand and supply, including key concepts like: 1) Demand schedules and curves show the relationship between price and quantity demanded, while supply schedules and curves show the relationship between price and quantity supplied. 2) Equilibrium occurs where quantity demanded equals quantity supplied, establishing the market clearing price. 3) Elasticity measures the responsiveness of demand or supply to changes in price and other factors, and can be own-price elasticity, cross-price elasticity, or income elasticity.

1. 1. DEMAND SCHEDULE AND DEMAND
CURVE
2. SUPPLY SCHEDULE AND THE
SUPPLY CURVE
3. ELASTICITY OF DEMAND AND
SUPPLY
Demand and Supply
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2. ZIN Production
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3. Demand - Total quantity customers are willing and
able to purchase.
 A demand function is a behavior function for
consumers.
A supply function is a behavior function for
producers.
We describe market behavior using these two
functions.
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4. Direct Demand and Derived Demand
Direct Demand-for consumption goods
Goods and services that satisfy consumer desires.
Derived Demand-These are sometimes called
intermediate goods.
For example, demand for steel (an intermediate
good) is derived from the demand for final goods
(e.g., automobiles).
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5. Quantity Demanded – amount of a good that
the consumer is willing to buy and able to buy at a
given price over a period of time.
Law of Demand :All other things remaining
unchanged, the quantity demanded of a good
increases when its price decreases and vice versa.
This relationship can be shown by a demand
schedule, a demand curve or a demand function.
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6. Demand Schedule
Demand Schedule
shows the different
quantities of goods that
a consumer is willing to
buy at various prices.
Prices and quantities
normally move in
opposite directions
Prices Quantity
4 28
8 15
12 5
16 1
20 0
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7. Demand Curve : A curve showing the
relationship between the price of a good and the
quantity demanded.
price
quantity
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8. Demand Function:
A demand function is a causal relationship
between a dependent variable (i.e., quantity
demanded) and various independent variables (i.e.,
factors which are believed to influence quantity
demanded)
Q = f(P)
Where Q= quantity and P = price of a good.
Example Q = 2 – 4P
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9. Determinants of Demand
Own Price
Income of the consumer
Price of other goods- 1. complements
2. substitutes
Tastes and preferences
Expectations of future prices
Advertising
Distribution of income
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10. Types of goods
Complementary goods are a pair of goods consumed
together. As the price of one goes up the demand for
the other falls.
Example- car and petrol
Substitute goods are alternatives to each other. As
the price of one goes up the demand for the other
also goes up.
Example – pepsi and coke
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11. Normal goods are those goods whose demand goes
up when the consumer’s income increases.
Inferior goods are those goods whose demand falls
when the consumer’s income increases.
Example : autotravel, kerosene
Giffen goods are those goods whose demand moves
in same direction as price
Snob or Veblen goods are those goods whose
demand falls when price falls
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12. Shift of the Demand Curve
A change in demand is reflected by shift of the
Demand curve and is caused by a change in any of
the non price determinants of demand
price
qty
Here, the curve shifts due to an
increase in income or an
increase in price of a substitute
good etc
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13. A change in quantity demanded is however
reflected in a movement along the demand curve
and is called an extension or contraction in
demand.
 The movement from A to B is due to the change
in price of the good all other factors remaining
unchanged
A
B
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14. Supply
The quantity supplied is the number of units that
sellers want to sell over a specified period of time at a
particular price.
Law of Supply states that all other factors remaining
unchanged the supply of a good increases as its price
increases. This can be shown by a supply schedule, a
supply curve or a supply function.
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15. Supply schedule
There exists a positive
relation between
quantity and price
price quantity
1 2
5 10
8 15
13 25
20 35
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16. Supply Curve:
qty
price
• Supply function shows the relation between quantity
and price.
It is a positive relation. Example : q= 4+3p
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17. Determinants Of Supply
Price
Cost of production
Technological progress
Prices of related outputs
Govt policy
All factors other than price cause a shift of the supply
curve and is called a change in supply
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18. EQUILIBRIUM
Equilibrium - perfect balance in supply and demand
Determines market output and price
eqm
p
q
s
dem
p
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19. Market forces drive market to equilibrium
at prices < equilibrium level: excess demand
(amount by which quantity demanded exceeds
quantity supplied at the specified price)
at price > equilibrium level: excess supply
equilibrium price is market clearing price: no excess
demand or excess supply
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20. Equilibrium in a Market
Demand Price Supply
800 $3,000 2,900
1,150 $2,500 2,550
1,500 $2,000 2,200
1,850 $1,500 1,850
2,200 $1,000 1,500
2,550 $500 1,150
2,900 $0 0
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21. Surplus and Shortage
Any price above the equilibrium causes an excess
supply and any price below the equilibrium causes a
shortage.
The market if uncontrolled will automatically arrive at
the equilibrium price at which supply equals demand.
Any shift in demand and supply curves will result in a
new equilibrium
Comparison of equilibrium is called comparative
-statics
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22. Price Rationing
A decrease in supply
creates a shortage at P0.
Quantity demanded is
greater than quantity
supplied. Price will begin
to rise.
• The lower total supplyThe lower total supply
isis rationed to thoserationed to those
who are willing andwho are willing and
able to payable to pay the higherthe higher
price.price.
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23. Alternative Price- Control Mechanisms
• A price ceilingprice ceiling is a maximum price
that sellers may charge for a good,
usually set by government.
• Example: rent control
• AA price floorprice floor is a price aboveis a price above
equilibrium price that the buyers haveequilibrium price that the buyers have
to pay.to pay.
• Example : agricultural support price,Example : agricultural support price,
minimum wagesminimum wages
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24. Elasticity
Elasticity: A measure of the responsiveness of
one variable to changes in another variable; the
percentage change in one variable that arises
due to a given percentage change in another
variable.
By converting each of these changes into
percentages, the elasticity measure does not
depend on the units in which we measure the
variables.
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25. ELASTICITY
Sensitivity of the quantity
demanded to price is
called: price elasticity of
demand:
% change in quantity demanded /
% change in price /
P
Q Q
E
P P
∆
= =
∆
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26. Arc Elasticity
To get the average elasticity between
two points on a demand curve we
take the average of the two end
points (for both price and quantity)
and use it as the initial value:
q2-q1/(q2+q1)/2
p2-p1/(p2+p1)/2
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27. Own Price Elasticity of Demand
Own price elasticity: A measure of the
responsiveness of the quantity demanded of a
good to a change in the price of that good; the
percentage change in quantity demanded
divided by the percentage change in the price of
the good.
Elastic demand: Demand is elastic if the
absolute value of the own price elasticity is
greater than 1.
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28. Types of elasticities
elastic: the quantity demanded changes more than in
proportion to a change in price
inelastic: the quantity demanded changes less than
in proportion to a change in price
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29. Elasticity and slope
Price
Quantity Demanded
The demand curve can be a
range of shapes each of which
is associated with a different
relationship between price and
the quantity demanded.
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30. Slope of the Demand Curve
∆P is the change
in price. (∆P<0) Price
Quantity
Demand
Q Q + ∆Q
∆Q
P
P+ ∆P
∆P
 ∆Q is the
change in
quantity.
 slope =
∆P/ ∆Q
Q
P
∆
∆
=slope
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31. Elasticity and slope
slope
P
Q
=
∆
∆
1
slope
Q
P
=
∆
∆
elasticity
P
Q slope
=
1
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32. Elastic demand : Demand is elastic if the absolute
value of own price elasticity is greater than 1.
Inelastic demand: Demand is inelastic if the
absolute value of the own price elasticity is less
than 1.
Unitary elastic demand: Demand is unitary elastic
if the absolute value of the own price elasticity is
equal to 1.
Perfectly elastic demand : e= infinity
Perfectly inelastic demand : e = 0
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33. Linear Demand Curve:
price
Qty
E = infinity e=lower segment/upper segment
E=0
E=1
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34. Determinants of Elasticity
 Number and closeness of substitutes –
the greater the number of substitutes,
the more elastic
 The proportion of income taken up by the product – the
smaller the proportion the more inelastic
 Price of the product- lower the price, lower the elasticity
 Luxury or Necessity - for example,
addictive drugs
 Time period – the longer the time under consideration the more
elastic a good is likely to be
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35. Cross-Price Elasticity
Cross-price elasticity: A measure of the
responsiveness of the demand for a good to changes
in the price of a related good; the percentage change
in the quantity demanded of one good divided by the
percentage change in the price of a related good.
The cross-price elasticity is positive whenever goods
are substitutes.
The cross-price elasticity is negative whenever goods
are complements.
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36. Cross-price elasticity of demand
how quantity of one good
changes as price of
another good increases
,
%change in quantity demanded
%change in price of another good
/
/
o
o
Q P
o o o
Q Q Q P
E
P P P Q
∆ ∆
= =
∆ ∆
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37. Income elasticity of demand
% change in quantity demanded
% change in income
/
/
IE
Q Q Q I
Y Y Y Q
=
∆ ∆
= =
∆ ∆
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38. Income Elasticity
Income elasticity: A measure of the responsiveness of
the demand for a good to changes in consumer
income; the percentage change in quantity
demanded divided by the percentage change in
income.
The income elasticity is positive whenever the good is
a normal good.
The income elasticity is negative whenever the good
is an inferior good.
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39. Factors affecting Income elasticity:
Nature of the good:
inferior goods have negative income elasticity
Normal goods have positive income elasticity
Luxury goods have income elasticity greater than
one
Necessary goods have income elasticity less than
one
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40. Advertising Elasticity
The own advertising elasticity of demand for good X
defines the percentage change in the consumption of
X that results from a given percentage change in
advertising spent on X.
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41. Elasticity and Total Revenue
If demand is elastic, an increase (decrease) in price
will lead to a decrease (increase) in total revenue.
If demand is inelastic, an increase (decrease) in price
will lead to an increase (decrease) in total revenue.
Total revenue is maximized at the point where
demand is unitary elastic.
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42. price revenue elasticity
Increases increases E< 1
increases decreases E>1
decreases decreases E<1
decreases increases E>1
Increases/
decreases
constant E=1
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43. MARGINAL REVENUE
TR = P.Q
MR = P + Q dP/dQ
= P(1 + Q/P. dP/dQ)
= P(1- 1/e)
= AR(1-1/e)
Hence if e=1, MR =0
if e =0 , MR = INFINITY
if e = infinity, MR = AR
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44. MR,AR
QTY
E=1
E=infinity
MR
E=0
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45. Total
revenue
qty
E = 1
Tr is
max
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46. Elasticity of Supply
Price Elasticity of Supply:
 The responsiveness of supply to changes
in price
 If es is inelastic (<1)- it will be difficult for suppliers to
react swiftly to changes in price
 If es is elastic(>1) – supply can react quickly to changes in
price
es =
% Δ Quantity Supplied____________________
% Δ Price
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47. Paradox of the Bumper harvest
When prices of food crops increase, the demand does
not increase proportionally.
Hence the revenue earned by farmers fall.
The Govt announces a floor price for the farmers-
agricultural price subsidy.
This interference with prices comes at a cost to the
Govt in form of storage costs of Govt granaries.
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48. Application of elasticity:
Incidence of taxation: Supply
after tax
supply
demand
taxe1
eqm
pt
p1
p0
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