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Consumer demand and

supply

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Demand

Willingness and ability to purchaseduring a specific time period undergiven 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 Profitabilit as the underl in motive 2

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Market demand

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Horizontal summation of individualdemands

Qy = f (Py, Px, Income, Tastes,

Preferences, advertisingexpenditure, expectations of price

change)

Information and demand Ceteris paribus assumption

Movement along demand curve

Shift in demand curve

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Demand curve

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Shift in demandMovement due to price change

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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 responsivenessof demand to change in factor

affecting demand

e =

Impact of endogenous and exogenous

factors on demand

Price, income and cross elasticity

Point and arc elasticity

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% change in Y

% change in X

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Price elasticity at point

% change in quantity demanded at a given timeresulting from given % change in price of the

commodity

For small changes in prices, point elasticity is the

appropriate measure

e = -

= -

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Q / Q

P / P

Q

P

P

Q*

Point

elasticity

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Point elasticity on linear demand

curve

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Arc elasticity

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Q / Q

P / P

QB - QA

PB - PA

PA

QA*

Arc

elasticity

For sizable (bigger) changes in prices, arc elasticity

is the appropriate measure

e = -

= -

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

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Q

M

M

Q*

Qx

Py

Py

Qx*

Income elasticity =

Cross elasticity =

Negative em inferior

Positive em

normalem>1 luxury, em

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Supply

Quantity of a good or service produceris 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

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Relation between price and quantity supplied

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Shifts in supply curve

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Supply elasticity

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Q

P

P

Q*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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