Demand and supply: Law, elasticity, determinants

1. Demand

1. Definition: The quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period.
2. Law of Demand: States that, other things being equal, as the price of a good decreases, its demand increases, and vice versa.
3. Determinants of Demand:
   • Price: Inverse relationship between price and demand.
   • Income: Higher income increases demand for normal goods.
   • Prices of Related Goods: Substitutes and complements affect demand.
   • Tastes and Preferences: Changing consumer preferences impact demand.
   • Expectations: Future price or income changes can influence current demand.
   • Population: Larger populations typically increase demand.
4. Elasticity of Demand:
   • Price Elasticity: Measures responsiveness of demand to price changes.
   • Income Elasticity: Measures how demand changes with income variations.
   • Cross Elasticity: Measures the effect of a price change in one good on the demand for another.

2. Supply

1. Definition: The quantity of a good or service that producers are willing and able to sell at various prices during a specific period.
2. Law of Supply: States that, other things being equal, as the price of a good increases, its supply increases, and vice versa.
3. Determinants of Supply:
   • Price: Direct relationship between price and supply.
   • Input Costs: Higher production costs reduce supply.
   • Technology: Technological advancements increase supply.
   • Taxes and Subsidies: Taxes reduce supply, subsidies increase it.
   • Expectations: Future price changes affect current supply.
   • Number of Sellers: More sellers in the market increase supply.
4. Elasticity of Supply:
   • Price Elasticity: Measures responsiveness of supply to price changes.
   • Time Period: Supply elasticity is higher in the long run due to greater adjustments.

3. Market Equilibrium

1. Definition: The point where the quantity demanded equals the quantity supplied at a given price.
2. Equilibrium Price: The price at which demand and supply are balanced.
3. Excess Demand: Occurs when demand exceeds supply, causing upward pressure on price.
4. Excess Supply: Occurs when supply exceeds demand, causing downward pressure on price.

Key Points

1. Demand refers to the quantity of goods or services consumers are willing to buy at different prices.
2. Law of Demand: Price and demand are inversely related.
3. Key determinants of demand: Price, income, preferences, and population.
4. Elasticity of Demand: Measures responsiveness of demand to price, income, and related goods.
5. Supply refers to the quantity of goods producers are willing to sell at various prices.
6. Law of Supply: Price and supply are directly related.
7. Key determinants of supply: Price, input costs, technology, and government policies.
8. Elasticity of Supply: Measures how supply responds to price changes.
9. Market equilibrium is where demand equals supply.
10. Equilibrium price: The price at which the market clears.
11. Excess demand leads to higher prices; excess supply leads to lower prices.
12. Substitute goods: A price increase in one increases demand for the other.
13. Complementary goods: A price increase in one reduces demand for the other.
14. Technological improvements reduce costs and increase supply.
15. Government subsidies encourage production and increase supply.
16. Price elasticity is high for luxury goods and low for necessities.
17. Understanding demand and supply is crucial for market analysis.
18. Income elasticity helps differentiate between normal and inferior goods.
19. Market interventions like price controls disrupt equilibrium.
20. Elastic goods: Highly sensitive to price changes (e.g., luxury items).
21. Inelastic goods: Less sensitive to price changes (e.g., essential goods).
22. Short-run supply: Limited by existing capacity; long-run supply is more flexible.
23. High input costs reduce supply and shift the supply curve leftward.
24. Changes in consumer preferences shift the demand curve.