Demand & Supply

Economic concepts: Demand & Supply

The following notes are the basic concepts in the mainstream (Capitalistic, neo-classical) Economics.

Demand

  • 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)
      • Marketing
      • 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
Income (-) Inferior
(+) > 1 Luxury
(+) < 1 Necessity
Cross (-) Substitutes
(+) Complements

Supply

  • 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.

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