Topic 1: Demand and Supply Analysis: Paramitam/Maneco/Summarydd-Ss

Topic 1: Demand and Supply Analysis
 Demand schedule and demand curve (of the market), demand price
 Law of Demand
 Change along the demand curve (when own price changes) and shift of the curve (when
other factors change, e.g. income of the consumer, prices of other related goods, tastes
and preferences etc.)
 Slope of the demand curve and demand equation
 Market Supply schedule and supply curve, supply price

 Change along the supply curve and shift of the curve
 Elasticity of supply
 Equilibrium of supply and demand

 Excess demand and excess supply, price mechanism
 Comparative statics: impact on p and q

o If demand curve shifts
o If supply curve shifts
o If both demand and supply curves shift (in the same direction or in opposite
directions)
 Elasticity of demand: own price elasticity, income elasticity and cross price elasticity
o Own price elasticity: responsiveness of change in demand when there is a
change in price
o Point elasticity and arc elasticity
o Own price elasticity = dQ/dP * P/Q
o Elastic, unitary elastic and inelastic demand: meaning and implication
o Income elasticity: normal (if elasticity is positive) and inferior goods (if elasticity
is negative); luxury (if elasticity greater than 1), necessity (if elasticity less than 1)
o Cross price elasticity:
 if positive, goods are substitutes,
 if negative, goods are substitutes
 if zero (close to zero), goods are not related
 Price Elasticity of demand and Revenue:

o MR = P(1-1/|ep|); when elasticity = 1, MR = 0 implying if price falls/increases, TR
remains the same
ParamitaM/ManEco/SummaryDD-SS
o When elasticity less than 1, MR less than 0 implying if price falls(increases), TR
falls(increases)
o When elasticity greater than 1, MR greater than 0 implying if price
falls(increases), TR increases(falls)
 Interfering with the market vs Working through the market

 Interference in two forms: price ceiling (rent control, petro price control etc.) and price
floor (min. support price/ min wage etc.)
 Ceiling is the max price set, hence effective only if it is set below eqm price
 Floor is the min price set, hence effective only if it is set above the eqm price
 Working through the market: imposition of tax/ provision of subsidies. Effect of specific
tax: price will be higher, quantity less; burden of tax will be shared between producers
and consumers depending upon the elasticity of demand and supply.
 NUMERICAL/ Application Exercises:

o Slope and elasticity of demand
o Find equilibrium price and quantity
o Find out own, cross price and income elasticity
o Application of revenue and elasticity relation
o Application of all the concepts in real life situations
Practice Problems
1. . Listed below are six statements. Indicate which is a change in demand/supply and/or a change in
quantity demanded/supplied using demand-supply curves.
a. Indian Airlines reduces its average plane fare by 30 percent in order to attract more passengers.
b. The government grants an export subsidy to the producers of oranges.
c. The higher price of imported apple causes more people to eat local apples.
d. The government imposes an excise tax on automobile tires, what happens to the tires offered on the
market?
2. Suppose demand for good X is given as: Q= 36 – 3P. The supply eqn is given as Q= 20 + 5P.
a. Find out equilibrium price and quantity. Draw the demand and supply curves.
b. If demand increases and becomes Q= 44 – 3P, find out the new equilibrium.
c. if price is at 8, should you raise price to have more revenue?
d. At equilibrium price, find out elasticity of demand and supply.
3. The demand function for a good produced by Amex India Ltd. Is given by
Q = 12,000-25P+5Y+500Pc
where P = price of the good
Y = per of the good
P c = price of the related good
Q = quantity of good demand for Amex India Ltd .
The current price charged by Amex India for the good Rs.10. Price of the related good is Rs.11 and
per capita income is Rs.1,000.
a. If the marketing manager of Amex India Ltd., Proposed to reduce the price of the
good by 10 percent, What is the change in sales volume?
b. Suppose the price of the related good is reduced by 10 percent, what is the new
price charged by Amex to retain the sales at the current level?

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Topic 1: Demand and Supply Analysis

 Market Supply schedule and supply curve, supply price

 Equilibrium of supply and demand

 Comparative statics: impact on p and q

 Price Elasticity of demand and Revenue:

 Interfering with the market vs Working through the market

 NUMERICAL/ Application Exercises:

b. The government grants an export subsidy to the producers of oranges.

c. if price is at 8, should you raise price to have more revenue?

d. At equilibrium price, find out elasticity of demand and supply.

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