Posts Tagged: Demand and Supply

Economics — No Comments
7
Aug 10

Price Elasticity of Demand and Supply

Price Elasticity of Demand

Price elasticity of demand can be defined a measure of the sensitivity of quantity demanded to changes in price. It is a measure of how consumers react to a change in price. Demand can be relatively elastic or inelastic. A price fall usually results in an increase in the quantity demanded by consumers and price rise has the opposite effect. But degree of it is different for different goods, for some goods demand will fall more with price rise and for some it will fall less.

When the price elasticity of demand for a good is elastic, the percentage change in quantity demanded is greater than that in price. While when the price elasticity of demand for a good is inelastic, the percentage change in quantity demanded is smaller than that in price. For example people who smoke, for them demand for cigarettes is inelastic because they are quite habitual to smoking and they will be willing to pay more price for cigarettes because of their habit.

Knowledge of price elasticity is important for a company because for a company whose products demand is inelastic can easily raise the price without much drop in demand and hence can increase the total revenue of the company.

Price elasticity of supply

Price elasticity of supply can be defined as measure of the sensitivity of the quantity supplied of product to a change in price of product. In other words Elasticity of supply is measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price. Higher elasticity indicates that supply of good is sensitive to the change in prices and lower elasticity means supply of goods is relatively inelastic to the change in prices.

For example the objects of art are relatively inelastic because any rise in prices does not affect their supply due to obvious reasons; while products which are of daily use like soaps, food items etc are elastic because producers can easily increase their supply if price rises.

Economics — 1 Comment
11
Jul 10

Demand and Supply and how is price determined

Demand can be defined as the amount of a particular good or service that a consumer or group of consumers will want to purchase at a given price. Hence the demand curve is usually downward sloping, since consumers will want to buy more as price decreases and less when price increases. In contrast supply can be defined as the total amount of goods or services which are available at a given price. Hence the supply curve is usually downward sloping, since producers of goods and services will want to sell more as price increases and less as price decreases.

So how the price is decided for which goods and services can be exchanged, well it can be understood with following example

Price Demand for crude (gallons) Supply of crude (gallons)
10 $ 1000 600
20 $ 800 800
30 $ 600 1000

In the above example if price is 10$ then demand will be 1000 gallons and supply will be only 600 gallons while if price increases to 30$ then demand will fall to 600 gallons while supply will be 1000 gallons. It is at 20$ that both demand and supply will be same and it is at this price exchange will take place between buyer and seller.

Well to the above example one can include certain external factors which can affect both demand and supply and come with different price for exchange of crude.