DEMAND AND SUPPLY
Elasticity
of demand: it is a measure of how consumers react to a change
in price.
Three
types of elasticity of demand:
1. Elastic demand:
demand that is very sensitive to a change in price. Elastic demand is always
greater than 1. {E>1}. The product is not a necessity and there are
available substitutes.
2. Inelastic demand:
demand that is not very sensitive to the change in price. {E<1}. Product is
a necessity, there are few or no substitutes people will buy no matter what.
3. Unit/unitary elastic demand: situation
where a change in one factor causes an equal and proportional change in another
factor. {E=1}.
ELASTIC
DEMAND
|
INELASTIC
DEMAND
|
Soda
|
gas
|
Steaks
|
salt
|
Candy
|
Insulin/medicine
|
Fur
coats
|
milk
|
toothpaste
|
Price elasticity of demand (ped)
Step1:
Quantity
New quantity minus old quantity divided by
old quantity
Step2:
Price
New price minus old price divided by old
price.
Step
3: PED
%change
in quantity demanded divided by %change in price.
Fixed
cost
A cost that does not change no matter how much is
produced. ( for example rent, morgage, insurance and salaries).
Variable cost
A cost that rises or falls depending upon how much is
produced. (For example electricity).
Marginal cost
The cost of producing one more unit of a good. (for
example going back late to buy a good at an expired time) new Tc – old Tc.
Below are the formulas:
TC= TFC + TVC
ATC=AFC + AVC
AFC=TFC / Q
AVC=TVC/Q
ATC=TC/ Q
TFC=AFC* Q
MC= NEW TC- OLD TC
TVC=AVC*Q
Supply
is the quantities that producers or sellers are willing to produce at various
prices. The law of supply states that there is a relationship between price and
quantity supplied. When price increases quantity decreases.
What causes a change in quantity supplied?
1. Change
in weather.
2. Change
in the number of sellers or suppliers.
3. Change
in technology.
4. Change
in cost of production.
5. Change
in subsidy.
6. Change
in expectations.
Demand
is the quantities that people are willing and able to buy at various prices.
The law of demand states that there is an inverse relationship between price
and the quantity demanded. When price increases quantity decreases.
What causes a change in demand?
1. Change
in buyers taste.
2. Change
in the number of buyers.
3. Change
in income (normal goods, inferior goods).
4. Change
in price of related goods.(complementary goods, substitute goods).
5. Change
in expectations (looking at the future).
*Change
in price causes a change in quantity demanded and quantity supplied.
Supply:
shift left- decrease
·
Decrease in # of sellers
·
Poor weather.
·
Increase in Cost of production.
·
Decrease in technology.
·
Increase in taxes
·
Decrease in subsidies.
Shift
right- increase
·
Decrease in cost of production.
·
Increase in technology.
·
Increase in taxes.
·
Increase in subsidies.
·
Increase in # of sellers.
·
Good weather.
price ceiling
This occurs when the government puts a limit on how high a good or product can be.
price floor
This is referred to as the lowest price a good or product can be sold at.
By paying close attention to how supply and demand works, you'll notice how one can simply does not progress without the other. They're essential to making one another progress and benefit each other. For example: A company's product is at the price of $30. However, there is no profit from it at this price, therefore the price is lowered to $20. Due to the change in price, demand for the product increases and the company begins to make a substantial profit.
ReplyDeleteThe topic on supply and demand discussed in class is neatly organized into a single post. Regarding graphs, the law of demand and the law of supply is represented by the demand curve and the supply curve, respectively. The supply and demand graphs provide graphical visualizations and understanding of basic economic principles, such as price equilibrium, surplus (caused by excess supply), shortage (caused by excess demand), price floor, and price ceiling. The shift in the demand curve or the supply curve help us visualize how a change in demand or supply affects the price equilibrium, surplus, shortage, and price of the specific quantity of a good or service.
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