SUPPLY and DEMAND EQUILIBRIUM

Demand Demand is the desire, ability, and willingness to buy a product.

Demand Schedule A demand schedule is a listing that shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time.

Demand Curve A demand curve is a graph that shows the quantity demanded at each and every price that might prevail in the market.

Law of Demand The quantity demanded of a good or service varies inversely with its price.

Demand Curve

Change in Quantity Demanded Movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price.

Change in Quantity Demanded

Change in Demand People are willing to buy different amounts of the product at the same prices. As a result, the entire demand curve shifts (to the right to show an increase in demand or to the left to show a decrease in demand for the product).

Change in Demand

Reasons for a Change in Demand Consumer Income Consumer Tastes Substitutes Complements Change in Expectations Number of Consumers

Demand Elasticity The extent to which a change in price causes a change in the quantity demanded.

Elastic Demand Demand is elastic when a given change in price causes a relatively larger change in quantity demanded.

Inelastic Demand Demand is inelastic when a given change in price causes a relatively smaller change in the quantity demanded.

Determinates of Demand Elasticity Can the purchase be delayed? Are adequate substitutes available? Does the purchase use a large portion of income?

Total Expenditures Test P x Q = TE

Total Expenditure Test PriceQuantity Demanded Total Revenue (Expenditure

Total Revenue/Expenditures Test PriceQuantity Demanded Total Revenue (Expenditure) Elasticity ↑↓↑Inelastic ↑↓↓Elastic ↑↓→ (no change) Unit elastic ↓↑↑Elastic ↓↑↓Inelastic ↓↑→ (no change) Unit Elastic

Price Elasticity Formula = percentage change in quantity demanded ÷ percentage change in price

Price Elasticity Formula

Elasticity > 1, elastic < 1, inelastic = 1, unit elastic

Demand Schedule for Wheat Price Quantity

Price Elasticity Problem

Arc Elasticity of Demand

Arc Elasticity Formula

Arc Elasticity Problem

Supply Supply is defined as the amount of a product that would be offered for sale at all possible prices that could prevail in the market.

Law of Supply The law of supply is the principle that suppliers will normally offer more for sale at high prices and less at lower prices.

Supply curve

Change in Quantity Supplied A change in quantity supplied is the change in amount offered for sale in response to a change in price.

Change in Quantity Supplied

Change in Supply A change in supply is a situation where suppliers offer different amounts of products for sale al all possible prices in the market.

Change in Supply

Reasons for Changes in Supply Cost of inputs Productivity Technology Taxes and subsidies Expectations Government regulations Number of sellers

Market Equilibrium Market equilibrium is a situation in which prices are relatively stable, and the quantity of goods or services supplied is equal to the quantity demanded.

Equilibrium

Importance of Elasticity When a given change in supply is coupled with an inelastic demand curve, price changes dramatically. When the same change in supply is coupled with a very elastic demand, the change in price is much smaller.

Importance of Elasticity In general, price changes in any given market are likely to be wider if both supply and demand are inelastic. The same price changes are likely to be less volatile if both curves are elastic.