P S1 S

P1 P

D Q3 Q1 Q

Good A

Raw material is used to produce a good. For example, for a company producing good A, when the cost of raw material rises, the cost of production of good A will also rise. The supplier will tend to produce less of good A. Thus, the supply curve will to shift to the left from S to S1. There will be a shortage at the old price. Price will rise from P to P1 to ration the good. According to the law of demand, as the price rises the quantity demanded will fall from Q to Q1 and the law of supply, as price rises, the quantity supplied will also rise from Q3 to Q1. Hence, it will reach a new equilibrium at P1Q1. P S P P1

D1 Q3 Q1 Q

DQ Good B

Complementary goods are a pair of goods consumed together. As the price of one goes up, causing the demand for the good to decrease, the demand for the complementary good will also fall. Hence, if good A and good B are complementary goods, consumer will tend to consume less of good B, causing the demand for good B to decrease and the demand curve shifts from D to D1. There will be surplus at the old price. Price will tend to move downward from P to P1 to get rid of the stock. According to the law of demand and the law of supply, when price fall, the quantity demanded will increase from Q3 to Q1, and the quantity supply will decreases from Q to Q1. A new equilibrium will be achieved at P1Q1.

P
S

P1 P

D Q Q1 Q3

D1 Q Good C

Substitute goods are a pair of goods, which are considered by consumers to be alternatives to each other. As the price of one goes up and the demand of the good falls, the demand for the rival good rises. Thus, as good A becomes less competitive, good C which is the substitute good will become more attractive. Consumer will then reallocate their expenditure to good C. The demand for good C will rise and the demand curve will shift from D to D1. There will be a shortage. Price will tend to rise to ration the good. According to the law of demand and supply, as price rises, the quantity demanded will fall from Q3 to Q1 and the quantity supplied will rise from Q to Q1. A new equilibrium will be achieved at P1Q1

Price elasticity of demand is the responsiveness of quantity demanded to a change in price. For a normal, downward sloping demand curve, PED has a negative value and for abnormal demand curve, for example demand for giffen goods, PED will has a positive value. Demand is relatively elastic when PED is more than 1. This means that a change in price will lead to a bigger proportional change in quantity demanded. Thus, a change in quantity demanded will have a bigger effect on consumer expenditure than the change in price. When price rises, the quantity demanded by consumer will fall at a greater proportion compare to the rise in price. Hence, the total consumer expenditure on the good will fall causing the total revenue of the business to fall. By knowing this, suitable precautions can be taken by a firm to avoid the fall in the total revenue such as reducing the cost of production. When PED is less than 1, the demand is relatively inelastic. A change in price will lead to a smaller change in quantity demanded which means that the change in price will have a bigger effect to the total consumer expenditure than the change in quantity. Thus, when price rises, the quantity demanded will fall proportionately less. Consumer will basically buy almost the same amount of good as they normally do but at a higher price. Hence, the total consumer expenditure on the good will rise and the business will also have bigger total revenue. This is good for the business in a short run. However, according to the Marshall Learner Condition, demand will become more elastic after a long run and consumer will find a better substitute for the good if the price rises too high. Hence, a firm should try to maintain the price of their goods so that it would not be too high for the consumer to switch to another goods. Sometimes, the demand can also be totally inelastic when PED is equal to zero and the demand curve will be a vertical straight line. When price rises, the quantity demanded will not change and thus, the total consumer expenditure will rise as well as the total revenue of a business. Thus, a firm can get more total revenue when they increase the price. However, if the price increase is too high this might lead to dissatisfaction to the consumers and they might cause riot, which can disrupt the production of the good. Moreover, demand is infinitely elastic when PED is and the demand curve will be a horizontal straight. This means that if the price rises, demand will be zero, as consumer will not spend their money at the good at any other price. Thus, business has to make sure that the price will not rise in order to stay making revenue. Furthermore, unit elastic demand happen when PED is equal to 1. The demand curve will be rectangular hyperbola. This is where price and quantity will change at exactly the same proportion. Thus, when price rises, demand will fall but both changes will offset each other causing the total consumer expenditure unchanged. In this case, a firm should not concern about the change in price but they will have to maintain the PED. Furthermore, by knowing the elasticity of demand, a firm can make their budget easier as they know the amount of their total revenue. If a good is being imposed tax, the firm will know how much they can allocate the tax to the consumers.

Income elasticity of demand is the responsiveness of quantity demanded to a change in consumer incomes. YED will have a positive value for normal goods, as the quantity demanded will rise as peoples income rise. In this case YED will be large when it involves luxury goods, as consumer will tend to buy more of luxury goods when they have a higher income. YED is small for necessity goods, as consumer will buy more of the goods but not too much. Thus, as the peoples income increases, the demand for the good will also increases. Hence, the total revenue of a firm will rise, as the price will be pushed up. A firm can take this as an incentive to produce more. YED will have a negative value for inferior goods because quantity will fall as peoples income rise. The quantity will fall as consumer will buy less and less of the goods as their income rises because they will come to afford to buy a much better goods which can give them a higher utility. The fall in quantity demanded will be extremely large on giffen goods as consumers buy a lot of this kind of good when they are desperate and could not afford any other goods. Hence a firm producing this kind of goods should be prepared on a fall in their total revenue as the national income rises.