Consumer demand and supply

Demand
Willingness and ability to purchase during a specific time period under given economic conditions Direct demand

Explained by theory of consumer behaviour Maximizing total utility

Derived demand
Inputs required in production process Determined by marginal benefits and costs Profitability as the underlying motive

Market demand
Horizontal summation of individual demands Qy = f (Py, Px, Income, Tastes, Preferences, advertising expenditure, expectations of price change) Information and demand Ceteris paribus assumption Movement along demand curve Shift in demand curve

Demand curve
Movement due to price change Shift in demand

Movement v/s shift in demand

Movement along the curve

Changes in price of the good/service

Shift in demand curve

Changes in
Disposable income Tastes & preferences Change in prices of related goods Availability & cost of credit Expectations Population dynamics Climate or weather
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Elasticity of demand

Elasticity is degree of responsiveness of demand to change in factor affecting demand % change in Y e=

% change in X

Impact of endogenous and exogenous factors on demand Price, income and cross elasticity Point and arc elasticity

Price elasticity at point

% change in quantity demanded at a given time resulting from given % change in price of the commodity For small changes in prices, point elasticity is the appropriate measure
Q/Q

e==-

P/P Q P P

Point elasticity

Point elasticity on linear demand curve

Arc elasticity

For sizable (bigger) changes in prices, arc elasticity is the appropriate measure
Q/Q

e= =-

P/P PA

QB - QA PB - PA

Arc elasticity

QA

Average elasticity at midpoint =

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Determinants
Necessities v/s luxuries Availability of close substitutes Market size Time horizon

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Price elasticity and demand curve

Perfectly elastic Perfectly inelastic Unitary elastic Relative elastic Relatively inelastic

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Income and cross elasticity of demand

Q Income elasticity = M M

Negative em inferior Positive em normal em>1 luxury, em<1 necessity

Qx Cross elasticity = Py

Py

Qx

Negative ec complements Positive ec substitutes

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Supply
Quantity of a good or service producer is willing and able to sell in the market during a period under given conditions Determinants

Price Prices of related commodities Input prices Technology Expectations

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Supply curve
Relation between price and quantity supplied

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Shifts in supply curve

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Supply elasticity
Q P

Price elasticity of supply =

Elasticity and supply curve Perfectly elastic Perfectly inelastic Unitary elastic Relative elastic Relatively inelastic
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Market equilibrium

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Application of elasticity to understand market dynamics

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