December 11, 2011

Elements of Supply and Demand - Review Notes

Demand Schedule

A demand schedule represents the relation between the quantity of a good or service that people in an economic system want to buy and the price of that good or service.

Law of downward-sloping demand.

Almost all commodities obey the law of downward-sloping demand. The law says quantity demanded increases as price of the good falls or the quantity demanded decreases as the price increases.

Supply schedue

Gives the relationship between the quantity that producers in an economic system are willing to sell at various prices.

Equilibrium in the market for a good

The equilibrium of supply and demand occur at a price where forces of supply and demand are in balance.

Elasticity of demand

The elasticity of demand of a specific good is defined as:

Percentage increase in quantity demanded of the product/Percent decrease in price of the product

Price elastic demand

If a one percent drop in prices leads to more than one percent increase in quantity demanded, we say it is price elastic demand.

If the percentage drop in price and percentage increase in quantity demanded are same, it said to be unit elastic demand.

If percentage drop in price is higher than the percentage change in quantity demanded, we say it is price inelastic demand.

The concepts are useful because measurements can be made and elasticities can be calculated. The results are used for decision making regarding setting supply schedules.

Elasticity of supply

Similar to elasticity of demand, elasticity of supply can also be defined.

Supply elasticiy =

Percentage rise in quantity supplied/Percentage change in price

Elasticity refers to percentage change in one variable with respect to percentage change in another variable.

The supply elasticity helps the Government to decide incentives it wants to offer to industries to increase supply.





No comments:

Post a Comment