Supply and Demand

Supply and Demand

Supply and demand are fundamental concepts in economics that determine the price and quantity of goods in the market.

Law of Demand

“When price increases, quantity demanded decreases (ceteris paribus)”

Factors Affecting Demand:

1. Price of the good itself
2. Consumer income - Normal goods vs Inferior goods
3. Price of substitute goods - Example: tea vs coffee
4. Price of complementary goods - Example: cars and gasoline
5. Consumer preferences
6. Future price expectations

Law of Supply

“When price increases, quantity supplied increases (ceteris paribus)”

Factors Affecting Supply:

1. Price of the good itself
2. Production costs - Wages, raw materials, etc.
3. Technology - Better technology = increased supply
4. Number of sellers in the market
5. Future price expectations
6. Government policies - Taxes, subsidies

Market Equilibrium

The point where quantity demanded = quantity supplied

At equilibrium: - No shortage - No surplus - Stable price

Curve Shifts

Demand Shifts:

• Demand increases → curve shifts right → price ↑, quantity ↑
• Demand decreases → curve shifts left → price ↓, quantity ↓

Supply Shifts:

• Supply increases → curve shifts right → price ↓, quantity ↑
• Supply decreases → curve shifts left → price ↑, quantity ↓

Elasticity

Price Elasticity of Demand

Measures how sensitive quantity demanded is to price changes.

\[E_d = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\]

• Elastic (|Ed| > 1): Demand is very sensitive to price
• Inelastic (|Ed| < 1): Demand is not very sensitive to price
• Unit elastic (|Ed| = 1): Proportional change