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% Change Q % Change P % Change Q : Ped Q Q Average Q P P Average P

This document defines and explains several economic concepts related to supply and demand. It discusses the laws of supply and demand, factors that affect supply and demand, market equilibrium, elasticity including price elasticity of demand and supply and income elasticity of demand. It provides examples and interpretations for different elasticity values. Finally, it covers cross price elasticity of demand and how it indicates whether goods are substitutes or complements.

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Kyla Dunton
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44 views3 pages

% Change Q % Change P % Change Q : Ped Q Q Average Q P P Average P

This document defines and explains several economic concepts related to supply and demand. It discusses the laws of supply and demand, factors that affect supply and demand, market equilibrium, elasticity including price elasticity of demand and supply and income elasticity of demand. It provides examples and interpretations for different elasticity values. Finally, it covers cross price elasticity of demand and how it indicates whether goods are substitutes or complements.

Uploaded by

Kyla Dunton
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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GE ELECTIVE III

Law of Demand – price is inversely proportional to quantity. This is due to the fact that as price decreases, more
consumers are willing to purchase the good; and when price increases. Less of the good will be bought.

Factors affecting Demand


- Changes in the average income
- Size of population
- Tastes and preferences
- Consumer’s speculations

Law of Supply – price and quantity are directly proportional. The law of supply states that as price increases, more
sellers are willing to sell a good; and as price decreases, fewer sellers become interested in selling the said good.

Factors affecting Supply


- Changes in the number of sellers
- Cost of production
- Technology
- Government policies

Market Equilibrium – exists when quantity demanded is equal to quantity supplied (Qd = Qs)

Elasticity – degree of responsiveness to changes in price or income

Price Elasticity of Demand

% change∈Q d
PED=
% change∈ P

Q d 2−Q d 1
% change∈Q d =
Average Q d

P2−P1
% change∈ P=
Average P

Price Elasticity of Demand Interpretation


=1 Unitary elastic
>1 Elastic
<1 Inelastic

Example: Qd2 = 200, Qd1 = 100, P2 = 20, P1 = 10

200−100 100 2
% change∈Q d = = = =0.67
100+ 200/2 150 3

20−10 2
% change∈ P= = =0.67
10+20/2 3

0.67
PED= =1 , unitary
0.67


Price Elasticity of Supply

% change∈Q s
PES=
% change∈ P

Q s 2−Qs 1
% change∈Qs =
Average Q s

P2−P1
% change∈ P=
Average P

Price Elasticity of Demand Interpretation


=1 Unitary elastic
>1 Elastic
<1 Inelastic

Example: Qs2 = 300, Qs1 = 120, P2 = 30, P1 = 8

300−120 180
% change∈Q d = = =0.86
120+300 /2 210

30−8 22
% change∈ P= = =1.16
8+30 /2 19

0.86
PES= =0.74 , inelastic
1.16

Income Elasticity Demand

% change∈Q d
PES=
% change∈Y

Qd 2 −Qd 1
% change∈Qs =
Average Qd

Y 2 −Y
% change∈Y =
Average Y

Income Elasticity of Demand Interpretation


>1 Luxury good
<1 Necessity
>0 Normal good
<0 Inferior good

Example: Qd2 = 350, Qd1 = 200, Y2 = 1000, Y1 = 500



350−200 150
% change∈Q d = = =0.55
200+ 350/2 275

1000−500 500
% change∈P= = =0.67
500+1000/2 750

0.55
IED= =0.82 , necessity(<1) and normal good(>0)
0.67

Cross Price Elasticity of Demand

% change ∈Q d for product X


CPED=
% change ∈ price of product Y

Qdx 2−Qdx 1
% change∈Qd for product X =
Average Qd

PY 2−PY 1
% change∈ price for product Y =
Average PY

Cross of Demand Relation of Goods


=0 X and Y are not related
> 0, positive Substitutes
< 0, negative Complements

Example:

Good Qd1 Qd2 P1 P2


X 4 5 4 5
Y 2 3 2 3

5−4 1
% change∈Q d for product X = = =0.22
4+ 5/2 4.5

3−2 1
% change∈ price for product Y = = =0.4
2+3/2 2.5

0.22
CPED= =0.55 , substitute good
0.40



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