lesson 3 - Demand and supply

Question 1

Market

Market Demand:

Answer 1

Buyers & sellers exchanging goods/services.

Total quantity consumers are willing AND able to buy at each price (other factors constant). Represented by a demand curve.

Question 2

demand curve and function

Answer 2

Qx = f(Px, Py, I, T, N) (where Px=price of good x, Py=price of related good, I=income, T=tastes, N=number of consumers).

Demand Curve: — Shows quantity demanded at different prices (other factors held constant).
- Usually downward-sloping (Law of Demand).
- Movement along the curve is a change in quantity demanded due to a price change.
- A shift of the curve is due to changes in other factors (income, tastes, related goods’ prices).

Question 3

supply

Answer 3

Market Supply: Total quantity producers are willing to sell at each price (other factors constant).
- Represented by a supply curve.

Supply Function: Qx = f(Px, T, N, W, R) (where T=technology, N=number of firms, W=wage, R=rental cost).

Supply Curve: Shows quantity supplied at different prices (other factors held constant).
- Usually upward-sloping (Law of Supply).
- Movement along the curve is a change in quantity supplied due to a price change.
- A shift of the curve is due to changes in other factors (technology, input costs, number of firms).

Question 4

equilibrium

Answer 4

Market Equilibrium: Where supply and demand curves intersect;
quantity demanded = quantity supplied.

Surplus:
Price above equilibrium;
quantity supplied > quantity demanded.

Shortage:
Price below equilibrium;
quantity demanded > quantity supplied.

Changes in Equilibrium: Analyze shifts in supply and/or demand curves to determine new equilibrium price and quantity.

Question 5

Market Equilibrium Changes

Answer 5

1. Demand ↑: Price ↑, Quantity ↑ (Shortage → New Equilibrium)
2. Demand ↓: Price ↓, Quantity ↓ (Surplus → New Equilibrium)
3. Supply ↑: Price ↓, Quantity ↑ (Surplus → New Equilibrium)
4. Supply ↓: Price ↑, Quantity ↓ (Shortage → New Equilibrium)

Both Shifts: Analyze relative magnitudes graphically.

Question 6

elasticity

Answer 6

Measures percentage change in one variable due to a 1% change in another.

➢(Own) price elasticity of demand
➢ Income elasticity of demand
➢ Cross price elasticity of demand
➢ Price elasticity of supply

Question 7

Price Elasticity of Demand (PED):

Answer 7

(% change in QD) / (% change in P).
- Measures responsiveness of quantity demanded to price changes.
1. Elastic: |PED| > 1; price increase leads to revenue decrease.
2. Inelastic: |PED| < 1; price increase leads to revenue increase.
3. Unitary Elastic: |PED| = 1; total revenue maximized.
4. Perfectly Inelastic: PED = 0; quantity demanded doesn’t change with price.
5. Perfectly Elastic: PED = -∞; any price increase leads to zero quantity demanded.

Question 8

Income Elasticity of Demand (YED)

Answer 8

(% change in QD) / (% change in Income). Measures responsiveness of quantity demanded to income changes.
Normal Goods: YED > 0
Inferior Goods: YED < 0

Question 9

Cross-Price Elasticity of Demand (XED)

Answer 9

(% change in QDx) / (% change in Py). Measures responsiveness of quantity demanded of good x to price changes of good y.
Substitutes: XED > 0
Complements: XED < 0

Question 10

Price Elasticity of Supply (PES)

Answer 10

(% change in QS) / (% change in P). Measures responsiveness of quantity supplied to price changes.

Question 11

Formulas

Answer 11

1. PED = [(ΔQD/QD) / (ΔP/P)] or PED = (P/QD) * (dQD/dP)
2. YED = [(ΔQD/QD) / (ΔY/Y)]
3. XED = [(ΔQDx/QDx) / (ΔPy/Py)]
4. PES = [(ΔQS/QS) / (ΔP/P)]