Economic concepts: Demand & Supply
The following notes are the basic concepts in the mainstream (Capitalistic, neo-classical) Economics.
- The relationship between the demand (as quantity of goods) and price.
- The typical shape of the demand curve is downward-sloping: less demand with higher price
- The Law of Diminishing Marginal Utility
- As a buyer consumes additional unit of a product, the additional utility (satisfaction) will decline.
- Movement along the demand curve
- The price change leads to the change of demand.
- Shift of the demand curve
- Right shift: more demand at the same price
- Left shift: less demand at the same price
- Reasons of shifts
- A change in income (normal goods: right-shift, inferior goods: left-shift)
- A change in the number of buyers
- A change in the price of substitute/complement products
- A change in social patterns
Elasticity of Demand
- Price Elasticity of Demand = % change in demand ⁄ % change in price
- Inelastic ( < 1 ): not price sensitive
- Unitary elastic ( =1 ):
- Elastic ( > 1 ) : sensitive
- Total Revenue (TR) is an earning: TR = Price per unit × quantity sold
- If the demand is elastic, an increase in price will lead to a fall in revenue.
- Income Elasticity of Demand = % change in demand ⁄ % change in income
- Cross Price Elasticity of Demand = % change in demand (product A) ⁄ % change in price (product B)
|Type of Elasticity||Sign||Size||Type of Product|
|Price||(-)||> 1||Price Elastic|
|(-)||< 1||Price Inelastic|
|(+)||Vablen goods or Griffen goods|
- The supply is the amount that producers are willing to produce at each price.
- The supply curve is generally upward-sloping; more supply with higher price.
- Shifts in supply
- Inward, left shift: less supply at the same price
- Outward, right shift: more supply at the same price
- Reasons of shifts
- A change in the number of producers
- A change in technology
- A change in cost
- A change in taxes
- Price Elasticity of Supply = % change in supply ⁄ % change in price
Supply and Demand: Market Equilibrium
- Market Equilibrium is the point where the demand and the supply equals.