Logic > Hum

HANDOUT’S OF ECONOMIC’S PRESENTATION

PRESENTED BY: UMAR HASSAN MOAZEM IFTEKHAR HAMZA AYYUB

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DEMAND Demand refers to the quantity of goods that potential purchasers would buy or attempt to buy while having buying or purchasing power.

DEMAND SCHEDULE It represents the amount of a good that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. The main determinants of individual demand are the price of the good, level of income, personal tastes, the price of substitute goods, and the price of complementary goods. The shape of the aggregate demand curve can be convex or concave, possibly depending on income distribution.

DEMAND CURVE The demand curve can be defined as the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price (demand). Demand curves are used to estimate behaviors in a competitive markets, and is often combined with supply curves, often to estimate the equilibrium price (The price at which all sellers are able to find a willing buyer, also known as equilibrium price and market clearing price) and the equilibrium quantity (the amount that good or service that will be produced and bought without surplus/excess supply or shortage/excess demand) of that market. Please see the article on Supply and Demand for more details on how this is done. This negative slope is often referred to as the "law of demand," which means that when all things but price are held equal, if the price of the good/service increases, the less of that good/service will be purchased by consumers.

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CHANGES IN MARKET EQUILIBRIUM Practical uses of demand analysis often center on the different variables that change equilibrium price and quantity, represented as shifts in the respective curves.

DEMAND CURVE SHIFTS People increasing the quantity demanded at a given price is be referred to as an increase in demand. Increased demand can be represented on the graph as the curve being shifted right, because at each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2. An example of this would be more people suddenly wanting more coffee. In the diagram, this raises the equilibrium price from P1 to the higher P2. This raises the equilibrium quantity from Q1 to the higher Q2. In standard usage, a movement along a given demand curve can be described as a "change in the quantity demanded" to distinguish it from a "change in demand," that is, a shift of the curve. In the example above, there has been an increase in demand which has caused an in increase in ( (equilbrium) quantity. The increase in demand could also come from changing tastes, incomes, product information, fashions, and so forth.

An out- or right- shift in demand changes the equilibrium price and quantity

Conversely, if the demand decreases, the opposite happens: a lefward shift of the curve. If the demand starts at D2 and then decreases to D1, the price will decrease and the quantity will decrease&mdash. Notice that this is purely an effect of demand changing. The quantity supplied at each price is the same as before the demand shift (at both Q1 and Q2). The reason that the equilibrium quantity and price are different is the demand is different. At each point a greater amount is demanded (when there is a shift from D1 to D2).

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ELASTICITY elasticity is the ratio of the proportional change in one variable with respect to proportional change in another variable. Price elasticity, for example, is the sensitivity of quantity demanded or supplied to changes in prices. Elasticity is usually expressed as a negative number but shown as a positive percent value. MATHEMATICAL DEFINITION In economics, the definition of elasticity is based on the mathematical notion of point elasticity. For example, it applies to price elasticity of demand in which case the functions of the interest are Qd(P) and Qs(P). In general, the "y-elasticity of x" is:

. or, in terms of percentage change

The "y-elasticity of x" is also called "the elasticity of x with respect to y". It is typical to represent elasticity as 'E', 'e' or lowercase epsilon, 'ε'. Examples

Unit elasticity for a supply line passing through the origin. This is a special case which illustrates that slope and elasticity are different. In the above example the slope of S1 is clearly different from the slope of S2, but since the rate of

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change of P relative to Q is always proportionate, both S1 and S2 are unit elastic (i.e. E = 1). (Keeping in mind the example of price elasticity of demand, these figures show x = Q horizontal and y = P vertical). Illustrations of perfect elasticity and perfect inelasticity.

The demand curve (D1) is perfectly ("infinitely") The demand curve (D2) is perfectly inelastic. elastic.

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PRICE ELASTICITY OF DEMAND The price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price. When the price of a good falls, the quantity consumers demand of the good typically rises--if it costs less, consumers buy more. Price elasticity of demand measures the responsiveness of a change in quantity demanded for a good or service to a change in price. When the PED of a good is greater than one in absolute value, the demand is said to be elastic; it is highly responsive to changes in price. Demands with an elasticity less than one in absolute value are inelastic; the demand is weakly responsive to price changes. MATHEMATICAL DEFINITION The formula used to calculate the coefficient of price elasticity of demand is

Or, using the differential calculus:

or alternatively:

where: P = price Q = quantity Qd = original quantity Pd = original price ΔQd = Qdnew - Qdold ΔPd = Pdnew - Pdold

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INCOME ELASTICITY OF DEMAND income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. Formula: (%change in quantity demanded) / (%change in income) = Income elasticity It is measured as the percentage change in demand that occurs in response to a percentage change in income. For example, if, in response to a 10% increase in income, the quantity of a good demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2.

With income I, and vector of prices . A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the quantity demanded and may lead to changes to more luxurious substitutes. A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in the quantity demanded. A high positive income elasticity of demand is associated with luxury goods. A zero income elasticity of demand is an increase in income without leading to a change in the quantity demanded of a good. Many necessities have an income elasticity of demand between zero and one: expenditure on these goods may increase with income, but not as fast as income does, so the proportion of expenditure on these goods falls as income rises. This observation for food is known as Engel's law.

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CROSS ELASTICITY OF DEMAND cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demand of a good to a change in the price of another good. It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20% /10% = -2. The formula used to calculate the coefficient cross elasticity of demand is

or:

In the example above, the two goods, fuel and cars(consists of fuel consumption), are complements - that is, one is used with the other. In these cases the cross elasticity of demand will be negative. In the case of perfect complements, the cross elasticity of demand is infinitely negative.

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COMPLEMENTRY GOODS A complement or complementary good is defined in economics as a good that should be consumed with another good; its cross elasticity of demand is negative. This means that, if goods A and B were complements, more of good A being bought would result in more of good B also being bought. An example of complement goods is hamburgers and hamburger buns. If the price of hamburgers falls, more hamburger buns would be sold because the two are usually used together.

SUBSTITUDE GOODS As the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. Classic examples of substitute goods include margarine and butter, or petroleum and natural gas (used for heating or electricity). The fact that one good is substitutable for another has immediate economic consequences: insofar as one good can be substituted for another, the demand for the two kinds of good will be bound together by the fact that customers can trade off one good for the other if it becomes advantageous to do so. Thus, an increase in price for one kind of good will result in an increase in demand for its substitute goods, and a decrease in price will result in a decrease in demand for its substitutes.

HISTORY The phrase "supply and demand" was first used by James Denham-Steuart in his Inquiry into the Principles of Political Economy, published in 1767. Adam Smith used the phrase in his 1776 book The Wealth of Nations, and David Ricardo titled one chapter of his 1817 work Principles of Political Economy and Taxation "On the Influence of Demand and Supply on Price". In The Wealth of Nations, Smith generally assumed that the supply price was fixed but that its "merit" (value) would decrease as its "scarcity" increased, in effect what was later called the law of demand. Ricardo, in Principles of Political Economy and Taxation, more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand. Antoine Augustin Cournot first developed a mathematical model of supply and demand in his 1838 Researches on the Mathematical Principles of the Theory of Wealth. During the late 19th century the marginalist school of thought emerged. This field mainly was started by Stanley Jevons, Carl Menger, and Léon Walras. The key idea was that the price was set by the most expensive price, that is, the price at the margin. This was a substantial change from Adam Smith's thoughts on determining the supply price. The model was further developed and popularized by Alfred Marshall in the 1890 textbook Principles of Economics.Along with Léon Walras, Marshall looked at the

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equilibrium point where the two curves crossed. They also began looking at the effect of markets on each other. Since the late 19th century, the theory of supply and demand has mainly been unchanged. Most of the work has been in examining the exceptions to the model (like oligarchy, transaction costs, non-rationality).

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