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 An out- or right- shift in demand
demanded" to distinguish it from a "change in changes the equilibrium price and
demand," that is, a shift of the curve. In the quantity
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.

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
elastic. inelastic.

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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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