DEFINITION OF DEMAND

The definition of demand is the desire of the consumer to purchase certain goods and services
with the ability to pay at certain price at a given time period.

THE LAW OF DEMAND

The law of demand states that the higher the price of the goods, the less the people will demand
for the goods considering all other factors remain equal.

We can conclude that there is a negative relationship between the price and the quantity
demanded.

FACTORS WHICH INFLUENCE DEMAND

There are several factors that influence demand which are the price of related goods, consumer’s
income, and consumer’s preference, the number of buyers in the market, expectation of future
price, the weather and the availability of credit facilities.

There are two ways for goods to be related; substitute and complementary. Substitutes are
competing goods and have a positive relationship. Complementary are goods that complement
each other and have a negative relationship.

Consumer’s income influence the demand as the income increase the demand for things will also
increase. This is because the consumers have the purchasing power to demand for more goods.

Consumer’s preference affects the demand of a certain things by fulfilling the desire of the
consumer. It is up to the consumer’s taste on the goods that they wanted to purchase.

The numbers of buyers in the market influence the demand because in a higher population
demand for goods will increase and vice versa.

The weather affects the demand just like festive season would- fulfilling the need at the certain
period. In rainy season the demand for umbrellas will increase.

CHANGES IN QUANTITY DEMANDED VERSUS CHANGES IN DEMAND

Changes in quantity demanded refer to the movement along the same demand curve due to
changes in price of the product. Therefore, a movement along the demand curve will occur when
the price of the good changes and the quantity demanded changes in accordance to the original
demand relationship

Changes in demand refer to the shift of the demand curve to the left or to the right due to changes
in factors that influence demand. A shift in a demand occurs when a goods quantity demanded
changes even though price remains the same.
ELASTICITY OF DEMAND (Ed)

The definition of elasticity of demand is the responsiveness of demand due to changes to the
factors which influence the demand.

TYPES OF ELASTICITY OF DEMAND

There are three types of elasticity of demand the price elasticity of demand, the income elasticity
of demand and cross elasticity of demand.

PRICE ELASTICITY OF DEMAND (€p)

It measures the responsiveness of the quantity demanded due to changes in its price. It can be
calculated by using the formula (% change in quantity / % change in price)

There are five possibilities of price elasticity; elastic, inelastic, unitary elastic, perfectly inelastic
and perfectly inelastic.

The demand is elastic when the elasticity is bigger than one. (€p>1)

The demand is inelastic when the elasticity is less than one. (€p<1)

The demand is unitary elastic when it is equal to one. (€p=1)

The demand is perfectly inelastic when it equals to zero. (€p=0)

The demand is perfectly inelastic when it equals to infinity. (€p=∞)

The determinants of price elasticity of demand are the substitutability, the relative importance of
the goods in our budget, the time dimension and the importance of the goods in our life.

Substitutability affects the price elasticity of demand as when there is more substitute, it is more
elastic. This is because the buyer can easily change to other similar goods when the price
changes.

The importance of the goods is also the determinants of price elasticity. Necessity goods are
inelastic while luxury goods are elastic.
INCOME ELASTICITY OF DEMAND (€y)
(𝑞1−𝑞0) 𝑦0
It is to determine the types of products. It can be calculated by using the formula(𝑦1−𝑦0) × 𝑞0.

There are four possibilities of income elasticity; normal goods, luxury goods, inferior goods and
necessity goods.

When the income elasticity is between 0 and 1 then it is normal goods.

When the income elasticity is greater than 1 then it is luxury goods.

When the income elasticity is negative it is inferior goods.

When the income elasticity equals to zero they are necessity goods.

CROSS ELASTICITY OF DEMAND (€x)

It is to determine the relationship between the goods and services whether they are substitute or
𝑑𝑄𝑥 𝑃𝑜 𝑦
complementary. It can be measured by using the formula𝑑𝑃𝑦 × 𝑄𝑜𝑥.

There are three possibilities of cross elasticity of demand; substitute, complement and no
relationship.

When the cross elasticity is positive it has substitute relationship.

When the cross elasticity is negative it has complementary relationship.

When the cross elasticity is zero it has no relationship.

DEFINITION OF SUPPLY

Supply can be defined as the amount of a particular product or service that a firm would be
willing and able to offer for sale at a particular price during a given period of time.

THE LAW OF SUPPLY

The law of supply states that the higher the price of a good, the higher the quantity supplied
considering all other factors remain fixed.

We can conclude that there is a positive relationship between the price of goods and the quantity
supplied.

FACTORS WHICH INFLUENCE SUPPLY

There are a few factors that influence supply; price of factor of productions, the profitability of
alternative products, technological change, the mass of production and the government policy.

When the price of factor of productions increases the supply will decrease. As the cost of
productions become higher, the supplier will be reluctant to supply.

When the technology becomes more advanced, then supply will also increase. This is because
the technological change will increase the market supply as the work has become easier and
quicker.

When the size or mass of production increase, the supply of goods and services will also increase
as it requires less inputs.

Two government policies that have a large influence on supply are tax and subsidy. When the tax
imposed by the government increase then the supply will decrease. However, if the subsidy
increases then the supply will also increase. This is because subsidy is an incentive by the
government to encourage producers to produce more.

CHANGE IN QUANTITY SUPPLIED AND CHANGE IN SUPPLY

Changes in quantity supplied refer to the movement along the same supply curve due to changes
in price of the product. Therefore, a movement along the supply curve will occur when the price
of the good changes and the quantity supplied changes in accordance to the original supply
relationship

Changes in supply refer to the shift of the supply curve to the left or to the right due to changes
in factors that influence supply. A shift in a supply curve occurs when a goods quantity supplied
changes even though price remains the same.
ELASTICITY OF SUPPLY (€ss)

The definition of elasticity of supply is the responsiveness of quantity supplied due to changes in
the price of goods.

The elasticity of supply can be calculated by using the formula(𝑄1−𝑄0)

(𝑃1−𝑃0)
𝑃0
× 𝑄0 .

When the €ss>1 then supply is fairly elastic

When the €ss<1 then the supply is fairly inelastic.

When the €ss=1 then the supply is unitary elastic.

When the €ss=0 then the supply is perfectly inelastic.

When the €ss=∞ then the supply in perfectly elastic.

FACTORS THAT INFLUENCE ELASTICITY OF SUPPLY

There are several factors influencing elasticity of supply; time, nature of the goods,
substitutability of factors used and perishability.

In the short run the supply will be inelastic as it is not possible to increase supply immediately in
response to the change in price. However, in the long run, the supply will be more responsive to
the changes in price so it is more elastic.

If the nature to produce a product takes too long, the supply will be fairly inelastic and vice
versa.

When there are more substitutes the supply is more elastic and vice versa.

If the product is easily perishable then the supply will be inelastic; the products would not be
sensitive to price changes.
SUPPLY OF
GOODS AND
SERVICES
DEFINITION OF MARKET EQUILIBRIUM

Market equilibrium can be defined as the condition when the quantity demanded is equal to the
quantity supplied.

Supply curve

Equilibrium point

Demand curve

CHANGES IN MARKET EQUILIBRIUM

If there is an increase in demand but the supply remains constant, there will be a shift of the
demand curve to the right. It will result to an increase of the equilibrium price and quantity and
vice versa.

If there is an increase in supply but the demand remains constant, there will be a shift of the
supply curve to the right. It will result to a decrease of the equilibrium price and an increase in
the quantity and vice versa.
GOVERNMENT INTERVENTION

Theoretically, if left alone, a market will naturally settle into equilibrium as the equilibrium price
ensures that all sellers who are willing to sell at a certain price and all buyers who are willing to
but at the certain price will get what they want. However in some cases, the government will
interfere with the market by putting in price ceilings or price floors, charging taxes or subsidies,
or using other measures to reshape the economy.

PRICE CONTROL

Basically there are two price controls; ceiling price or floor price.

The reason why government wants to control the prices in the market, firstly, is to protect
consumers from exploitation by the suppliers. This way the basic goods will become affordable
to all people.

Secondly, the government wants to control the rate of inflation by ensuring all the producers in
the market have a minimum income.

PRICE CEILING

A price ceiling is an upper limit for the price of a good. A seller cannot charge more that the
designed price ceiling.

The price will be legally set by the government below the market equilibrium. The price is not
allowed to rise above this level but it is allowed to fall below it. So usually there will be a
shortage of supply.

The price ceiling is designed to protect the consumers. Examples for the goods that have the
price ceiling are price of cement and sugar.

The first disadvantages of price ceilings are there will emergence of black market and bribery as
the supply will not be enough for the quantity demanded so the suppliers will take advantage of
the desperation of consumers.

Secondly, it will reduce the quantity produced of an already scarce commodity.

Thirdly, it will drive out some suppliers out of the market as the supplier’s profit is reduced by
the price restrictions.
PRICE FLOOR

Price floor is the opposite of the price ceiling. A price floor is the minimum price introduced for
the price of a good.

The price is legally set by the government above the market equilibrium. The price is not
allowed to fall below the designed price but is allowed to rise above it.

The price floor is designed to benefit the sellers. Usually, price floors are for agricultural
products t help the farmers as the market price can sometimes be so low that the farmer won’t get
enough money.

Price floor will prevent workers’ incomes from falling below a certain level.

Besides that, the price floor is also to create a surplus which can be stored in preparation for
possible future shortages.

The disadvantages of price floor are, firstly, the consumers have to pay more for that particular
product.

Secondly, increasing the prices for the consumers, the costs of imports will also increase due to
increase in import tariffs. So it is unfair to the taxpayers.

Thirdly, there will be wastage in resources because of surplus of goods occur.