CHAPTER 2 : DEMAND & SUPPLY THEORIES 1. Demand a) Law of dd b) Determinants of dd c) Changes in dd vs changes in qt demanded d) Elasticity of dd : P, cross, Y e) Determinants of P elasticity of dd 2. Supply a) Law of ss b) Determinants of ss c) Changes in ss vs changes in qt ss d) Elasticity of ss e) Determinants of P elasticity of ss

DEFINITION dd – ability & willingness to buy specific qt of goods in a given period at particular P, ceteris paribus ss – qt of g & s that will be offered for sale at a given P over a period of time in a given market, ceteris paribus

LAW OF DD VS SS LAW OF DD – other things being equal – higher P of goods, lower qt dd – negative r/ship – downward sloping LAW OF SS – other things being equal – higher P of goods, higher qt ss – positive r/ship – upward sloping P Q dd ss

DETERMINANTS OF DD i. Income – normal vs inferior goods ii. P of related goods – complementary vs substitute iii. Tastes & preferences iv. Govt policies – eg : T, Subsidies, IR v. Population vi. P expectation vii. seasons

DETERMINANTS OF SS i. No of sellers ii. P of related goods – complementary vs substitute iii. Cost of factor of prodn iv. Govt policies – eg : import T, Subsidies, v. Techno development vi. Length of time

CHANGES IN DD (SS) VS CHANGES IN QT DD (SS) Changes in dd (ss) - refer to shift of curve - caused by other than P Changes in qt dd (ss) - refer to movement along the curve - caused by changes in P, ceteris paribus Downward movement vs Upward movement Expansion vs contraction

CHANGES IN DD (SS) VS CHANGES IN QT DD (SS) P Q dd P Q ss Q1Q1 Q0Q0 Q2Q2 P0P0 P2P2 P1P1 P0P0 P2P2 P1P1 Q1Q1 Q0Q0 Q2Q2 P Q dd 1 dd 0 dd 2 P Q ss 0 ss 2 ss 1 P0P0 Q1Q1 Q0Q0 Q2Q2 P0P0 Q1Q1 Q0Q0 Q2Q2

ELASTICITY OF DD Def : sensitivity / responsive to ∆ that can effect dd Elasticity of dd i. P : when P ∆, how much qt dd ∆ ii. Y : when Y ∆, how much qt dd ∆ iii. cross E : what will happen to dd of x when Py ∆

i) Price Elasticity Of dd Degrees of P E dd is elastic : E > 1 (∆Q > ∆P) dd is inelastic : E < 1 (∆Q < ∆P) dd is unitary elastic : E = 1 (∆Q = ∆P) dd is perfectly elastic : E = ∞ (P unchanged but Q∆) dd is perfectly inelastic : E = 0 (P∆ but Q unchanged) Formula = ( – % ∆ in Qx / % ∆ in P) = ( – ∆ in Qx / Q 0 ) x ( Px 0 / ∆ in Px )

Determinants Of P E Of dd i. Substitutability ii. Relative importance of the goods in the budget iii. Time dimension (SR vs LR) iv. Status of goods (luxury vs necessity) v. Income level vi. Habits

P E vs Total Revenue TR = P x Q TR ↑↓ when P ∆ therefore will affect E of dd Eg : If dd elastic, when P ↓, TR ↑ If dd inelastic, when P ↓, TR ↓ If dd unitary, if P ∆, TR unchange

ii) Y Elasticity Of dd Degrees of Y E YE is +ve (0 – 1) : when Y ↑ 1%, dd ↑ YE > 1 : when Y ↑ 1%, dd ↑ > 1% YE < 0 : when Y ↑ 1%, dd ↓ YE = 0 : when Y ↓, no effect on dd Formula = ( – % ∆ in Qx / % ∆ in Y) = ( – ∆ in Qx / Q 0 ) x ( Y 0 / ∆ in Y )

iii) Cross Elasticity Of dd - Responsiveness of dd for product x to a change in P of related product (product y) Degrees of Cross E Positive : when Px ↑, dd y ↑ (-ve r/ship) Negative : when Px ↑, dd y ↓ (+ve r/ship) Cross Price E = 0 (no r/ship) Formula = ( – % ∆ in Qx / % ∆ in Py) = ( – ∆ in Qx / Q 0 ) x ( Py 0 / ∆ in Py )

ELASTICITY OF SUPPLY - Responsiveness of qt ss to a ∆ in P Degrees of E ss E ss > 1 (fairly elastic) : %∆in qt ss > % ∆ in P E ss < 1 (fairly inelastic) : %∆in qt ss < % ∆ in P E ss = 1 (unitary elastic) : %∆in qt ss = % ∆ in P E ss = 0 (perfectly inelastic) : %∆in qt ss = 0, P∆ E ss = ∞ (perfectly elastic) : %∆in qt ss is infinitely large, P unchanged Formula = (% ∆ in Qx / % ∆ in P) = (∆ in Qx / Q 0 ) x ( Px 0 / ∆ in Px )

Determinants Of E Of Ss i. Time ii. Nature of the goods iii. Cost & feasibility of storage iv. Substitutability of factors or inputs used v. Perishability