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Shift In Demand

Definition:

A shift in demand occurs when more or less of a quantity of good is demanded at each price level.

The diagram shows the effect of a rise in the price of butter on the market for margarine.

Here is how the new equilibrium is established:

·        Equilibrium initially at P0Q0.

·        Rise in price of butter causes a contraction in the demand for butter (not shown: this is a model of the margarine market) as consumers switch expenditure towards margarine, a substitute.

·        Rise in demand for margarine, shown by shift from D to D1, causes a shortage of Qd-Q0 at price P0.

·        Price rises. Demand contracts and supply extends.

·        New equilibrium at Q1P1.

Equilibrium Market Price

Definition:

The price at which quantity demanded equals quantity supplied and which will be established and restored by market forces.

It can be seen that Pe and Qe are the price and quantity, respectively, which will prevail in this market.

Supply and Law of Supply

Supply:

The quantity which firms are willing and able to supply at the prevailing market price.

Law of Supply:

As the price of a good rises, ceteris paribus, supply of the good extends and conversely…

As the price of a good falls, ceteris paribus, supply of the good contracts.

Note: Ceteris paribus: a Latin expression which means ‘other things remaining equal’

Supply Curve:

As prices rises from Rs. 10 to Rs. 20 the quantity supplied extends from 50 to 120 units.

Demand and Law of Demand

Demand:

The quantity which buyers are willing and able to purchase of a product at the prevailing market price.

Law of Demand:

As the price of a product falls, ceteris paribus, the demand for the product extends and conversely…

As the price of a product rises, ceteris paribus, the demand for the good contracts.

Note: Ceteris paribus is a Latin expression which means “other things remaining equal”

Demand Curve:

In the above diagram when price is Rs. 10 the quantity demanded is 20. If price falls to Rs. 5 the quantity demanded extends to 50.

Income Elasticity of Demand

Definition:

A measure of the responsiveness of demand for a good in relation to a change in the level of money income amongst consumers.

Formula:

Example:

Price Elasticity of Demand

Definition:

A measure of the extent of changes in the market demand for a good in response to a change in price.