Definition of demand:-

The amount of a particular economic good or service that a consumer or

group of consumers will want to purchase at a given price. The demand
curve is usually downward sloping, since consumers will want to buy more
as price decreases. Demand for a good or service is determined by many
different factors other than price, such as the price of substitute goods and
complementary goods. In extreme cases, demand may be completely
unrelated to price, or nearly infinite at a given price.
Determinants of demand:-
Levels of income
A key determinant of demand is the level of income evident in the
appropriate country or region under analysis. As a generality, the higher
the level of aggregate and/or personal income the higher the demand for a
typical commodity, including forest products. More of a good or service will
be chosen at a given price where income is higher. Thus determinants of
demand normally utilize some form of income measure, including Gross
Domestic Product (GDP).
Population
Population is of course a key determinant of demand. Although all forest
products do not necessarily enter final consumer markets, the actual
markets are largely presumed to be functionally related to population.
Growing populations are positively correlated to timber demands in the
aggregate, as well as specifically to individual forest products. Frequently,
population and income estimators are combined, as in the case of the use of
Gross Domestic Product per capita.
End market indicators
The use of end market indicators as determinants of demand is frequently
incorporated into demand analysis. For example, much of the final use of
forest products is linked to construction (residential and total). Indicators
and trends related to construction activities, or which are determinants of
construction, provide indirect estimates of the influence of these activities
as the source of derived demand for wood. Housing starts, public
investments, interest rates, etc. can be highly correlated to timber demand.
Availability and price of substitute goods
Consumption choices related to timber are also influenced by the
alternative options facing users in the relevant marketplace. The availability
of potential substitute products, and their prices, weigh heavily in
determining the elasticity of demand, both in the short run (static) sense
and over time (long run). Fuel wood, as a dominant use of timber in the
Asia Pacific Region, reflects conditions of very limited options for energy
sources at 'reasonable' prices. Rural low income or subsistence populations
simply do not have 'options' regarding energy - they use wood or go
without. Demand, at this basic level, in almost perfectly inelastic. The cost
(if only implicit in terms of gathering time) does not materially affect
consumption quantity.
Suitability of alternative goods and services is, in part, a question of
knowledge as well as availability. Market information regarding alternative
products, quality, convenience, and dependability all influence choices.
Under conditions of increased scarcity and rising prices for tropical
hardwood panels, for example, users have a positive incentive to search for
and investigate the suitability of alternatives that were previously
overlooked or ignored.
Tastes and preferences
All markets are shaped by collective and individual tastes and preferences.
These patterns are partly shaped by culture and partly implanted by
information and knowledge of products and services (including the
influence of advertising). Different societies use forest products differently
because of these differences in taste and preferences. For example, markets
for wood products in Japan are commonly recognized as requiring very
high product quality standards, the importance of visual attributes of wood,
and other preferences not commonly found in many other markets.

LAW OF DEMAND
The relationship between price and the amount of a product people want to
buy is what economists call the demand curve. This relationship is inverse
or indirect because as price gets higher, people want less of a particular
product. This inverse relationship is almost always found in studies of
particular products, and its very widespread occurrence has given it a
special name: the law of demand. The word "law" in this case does not refer
to a bill that the government has passed but to an observed regularity.1
There are various ways to express the relationship between price and the
quantity that people will buy. Mathematically, one can say that quantity
demanded is a function of price, with other factors held constant, or:
Qd = f (Price, other factors held constant)
A more elementary way to capture the relationship is in the form of a table.
The numbers in the table below are what one expects in a demand curve: as
price goes up, the amount people are willing to buy decreases. (A widget is
an imaginary product that some economist invented when he could not
think of a real product to use in an example.)
A Demand Curve
Price of Number of Widgets
Widgets People Want to Buy
$1.00 100
$2.00 90
$3.00 70
$4.00 40

The same information can also be plotted on a graph, where it will look like
the graph below.
If one of the factors being held constant becomes unstuck, changes, and
then is held constant again, the relationship between price and quantity will
change. For example, suppose the price of getwids, a substitute for widgets,
falls. Then, people who previously were buying widgets will reconsider their
choices, and some may decide to switch to getwids. This would be true at all
possible prices for widgets. These changes in the way people will behave at
each price will change the demand curve to look like the table below.
A Demand Curve Can Shift
Price of Number of Widgets
Widgets People Want to Buy
$1.00 [100] becomes 80
$2.00 [90] becomes 70
$3.00 [70] becomes 50
$4.00 [40] becomes 10

These are the same changes shown in a graph.

ELASTICSITY OF DEMAND
(1) PRICE ELASTICITY OF DEMAND
(2)CROSS ELASTICITY OF DEMAND
(3) ARC ELASTICITY

(1)Price elasticity of demand is defined as the measure of

responsiveness in the quantity demanded for a commodity as a result of
change in price of the same commodity. It is a measure of how consumers
react to a change in price. [1] In other words, it is percentage change in
quantity demanded as per the percentage change in price of the same
commodity. In economics and business studies, the price elasticity of
demand (PED) is a measure of the sensitivity of quantity demanded to
changes in price. It is measured as elasticity, that is it measures the
relationship as the ratio of percentage changes between quantity demanded
of a good and changes in its price. In simpler words, demand for a product
can be said to be very inelastic if consumers will pay almost any price for
the product, and very elastic if consumers will only pay a certain price, or a
narrow range of prices, for the product. Inelastic demand means a producer
can raise prices without much hurting demand for its product, and elastic
demand means that consumers are sensitive to the price at which a product
is sold and will not buy it if the price rises by what they consider too much.
Drinking water is a good example of a good that has inelastic
characteristics in that people will pay anything for it (high or low prices
with relatively equivalent quantity demanded), so it is not elastic. On the
other hand, demand for sugar is very elastic because as the price of sugar
increases, there are many substitutions which consumers may switch to.
(1)When the price elasticity of demand for a good is inelastic (|Ed| < 1),
the percentage change in quantity demanded is smaller than that in price.
Hence, when the price is raised, the total revenue of producers rises, and
vice versa.
(2)When the price elasticity of demand for a good is elastic (|Ed| > 1), the
percentage change in quantity demanded is greater than that in price.
Hence, when the price is raised, the total revenue of producers falls, and
vice versa.
(3)When the price elasticity of demand for a good is unit elastic (or
unitary elastic) (|Ed| = 1), the percentage change in quantity is equal to that
in price.
(4)When the price elasticity of demand for a good is perfectly elastic (Ed
is undefined), any increase in the price, no matter how small, will cause
demand for the good to drop to zero. Hence, when the price is raised, the
total revenue of producers falls to zero. The demand curve is a horizontal
straight line. A banknote is the classic example of a perfectly elastic good;
nobody would pay £10.01 for a £10 note, yet everyone will pay £9.99 for it.
(5)When the price elasticity of demand for a good is perfectly inelastic
(Ed = 0), changes in the price do not affect the quantity demanded for the
good. The demand curve is a vertical straight line; this violates the law of
demand. An example of a perfectly inelastic good is a human heart for
someone who needs a transplant; neither increases nor decreases in price
affect the quantity demanded (no matter what the price, a person will pay
for one heart but only one; nobody would buy more than the exact amount
of hearts demanded, no matter how low the price is).

The formula used to calculate the coefficient of price elasticity of demand

for a given product is

Conventions differ regarding the minus sign, considering remarks like

"price elasticity of demand is usually negative".
This simple formula has a problem, however. It yields different values for
Ed depending on whether Qd and Pd are the original or final values for
quantity and price. This formula is usually valid either way as long as you
are consistent and choose only original values or only final values.
Or, using the differential calculus form:

This can be rewritten in the form:

CROSS ELASTICITY OF DEMAND
In economics, the cross elasticity of demand and cross price
elasticity of demand measures the responsiveness of the quantity
demanded of a good to a change in the price of another good.
It is measured as the percentage change in quantity demanded for the first
good that occurs in response to a percentage change in price of the second
good. For example, if, in response to a 10% increase in the price of fuel, the
quantity of new cars that are fuel inefficient demanded decreased by 20%,
the cross elasticity of demand would be -20%/10% = -2.
The formula used to calculate the coefficient cross elasticity of demand is

or:

In economics, the cross elasticity of demand and cross price

elasticity of demand measures the responsiveness of the quantity
demanded of a good to a change in the price of another good.
It is measured as the percentage change in quantity demanded for the first
good that occurs in response to a percentage change in price of the second
good. For example, if, in response to a 10% increase in the price of fuel, the
quantity of new cars that are fuel inefficient demanded decreased by 20%,
the cross elasticity of demand would be -20%/10% = -2.
The formula used to calculate the coefficient cross elasticity of demand is

or:
In the example above, the two goods, fuel and cars(consists of fuel
consumption), are complements - that is, one is used with the other. In
these cases the cross elasticity of demand will be negative. In the case of
perfect complements, the cross elasticity of demand is infinitely negative.
Where the two goods are substitutes the cross elasticity of demand will be
positive, so that as the price of one goes up the quantity demanded of the
other will increase. For example, in response to an increase in the price of
carbonated soft drinks, the demand for non-carbonated soft drinks will
rise. In the case of perfect substitutes, the cross elasticity of demand is
equal to infinity.
Where the two goods are complements the cross elasticity of demand will
be negative, so that as the price of one goes up the quantity demanded of
the other will decrease. For example, in response to an increase in the price
of fuel, the demand for new cars will decrease.
Where the two goods are independent, the cross elasticity demand will be
zero: as the price of one good changes, there will be no change in quantity
demanded of the other good.
When goods are substitutable, the diversion ratio - which quantifies how
much of the displaced demand for product j switches to product i - is
measured by the ratio of the cross-elasticity to the own-elasticity multiplied
by the ratio of product i's demand to product j's demand. In the discrete
case, the diversion ratio is naturally interpreted as the fraction of product j
demand which treats product i as a second choice,[1] measuring how much
of the demand diverting from product j because of a price increase is
diverted to product i can be written as the product of the ratio of the cross-
elasticity to the own-elasticity and the ratio of the demand for product i to
the demand for product j. In some cases, it has a natural interpretation as
the proportion of people buying product j who would consider product i
their `second choice.'

ARC ELASTICITY
Arc elasticity is the elasticity of one variable with respect to another
between two given points.
The y arc elasticity of x is defined as:

where the percentage change is calculated relative to the midpoint

The midpoint arc elasticity formula was advocated by R. G. D. Allen due to

the following properties: (1) symmetric with respect to the two prices and
two quantities, (2) independent of the units of measurement, and (3) yield a
value of unity if the total revenues at two points are equal.[1]
Arc elasticity is used when there is not a general function for the
relationship of two variables. Therefore, point elasticity may be seen as an
estimator of elasticity; this is because point elasticity may be ascertained
whenever a function is defined.
For comparison, the y point elasticity of x is given by:

suppl
y
Total amount of a product (good or service) available for purchase
at any specified price. It is determined by: (1) Price: producers
will try to obtain the highest possible price whereas the buyers
will try to pay the lowest possible price—both settling at the
equilibrium price where supply equals demand. (2) Cost of
inputs: lower the input price the higher the profit at a price level
and more product will be offered at that price. (3) Price of other
goods: lower prices of competing goods will reduce the price and
the supplier may switch to switch to more profitable products
thus reducing the supply.

Determinants of supply:-

1.Prices of different goods including substitutes

2. Number of suppliers

3. Production function and technology

4. Prices of different inputs including wage rates, interest

5. Producers' future expectations

if more producers enter a market, the supply will increase, shifting the supply curve
to the right.

Resource Prices

the prices that a producer must pay for its resources (inputs) influence supply.
Resource prices affect the cost of production. As resource prices increase, the cost
of production increases. As a result, producers must receive higher prices to be
willing to produce any given level of output.

Technological Changes

changes in technology usually result in improved productivity. Increased

productivity can reduce the cost of production. A decrease in the cost of production
will increase supply.

prices of Other Products of the Firm

if a firm produces more than one product, a change in the price of one product can
change the supply of another product. For example, automobile manufacturers can
produce both small and large cars. If the price of small cars rises, the producers will
produce more small cars. This draws the resources of the plant into the production
of small cars and away from the production of large cars. Therefore, the supply of
large cars will decrease.

producer Expectations
changes in producers' expectations about the future can cause a change in the
current supply of products. For example, if producers of peanuts were to anticipate
a price rise in the future, they may prefer to store their peanuts and sell them later.
As a result, the current supply of peanuts would decrease.

law of supply

The relationship between the quantity sellers want to sell during some time period (quantity
supplied) and price is what economists call the supply curve. Though usually the relationship is
positive, so that when price increases so does quantity supplied, there are exceptions. Hence
there is no law of supply that parallels the law of demand.
The supply curve can be expressed mathematically in functional form as
Qs = f(price, other factors held constant).
It can also be illustrated in the form of a table or a graph.

A Supply Curve
Price of Number of Widgets
Widgets Sellers Want to Sell
$1.00 10
$2.00 40
$3.00 70
$4.00 140

The graph shown below has a positive slope, which is the slope one normally expects from a
supply curve
If one of the factors that is held constant changes, the relationship between price and quantity,
(supply) will change. If the price of an input falls, for example, the supply relationship may
change, as in the following table.
A Supply Curve Can Shift
Price of Number of Widgets
Widgets Sellers Want to Sell
$1.00 [10] becomes 20
$2.00 [40] becomes 60
$3.00 [70] becomes 100
$4.00 [140] becomes 180
The same changes can be shown with a graph that shows the supply curve shifting to the right.
Notice each price has a larger quantity associated with it.