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Demand and Supply by Mind Map: Demand and Supply
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Demand and Supply

relations between products

Substitutes

Increase in the price of one good (X) will cause an increase in demand for another good (Y)

^Px -> ^Dy increase in price X increase in demand Y

Complements

Increase in the price of one good X will lead to the fall in demand for another good

^Px - > ˇDx -> ˇDy increase in price X ˇ decrease in demand X & Y

Demand

Quantity demanded of X is the amount of a commodity that households wish to purchase

increase in P, decrease in D

increase in I, increase in D provided X is a normal good

Demand curve

Negative relationship fall in price, increase in quantity demanded, increase in demand shifts the entire demand curve to the right

P against Quantity of X

Supply

The amount of a commodity that firms are able and willing to sell (Desired, not actual sale)

Sx = f (Px, Tech, W, r) Px = Price of commodity Te = state of technology < inversly related > W = Wages R = interest rates

improvement in technology will cause more outputs to be produced with the same amount of imput

Wages and Interest Rates will lead to an increase in the cost of production

Supply Curve

Positive Relationship increase in prices will lead to an increase in quantity supplied

Determination of Prices

Equilibrum occurs when demand = supply

Above equilibrium price, P will fall

Below equilibrium price, P will rise

Elasticity of demand

Elasticity refers to the responsiveness of demand to changes in prices, income, prices.

income elasticity of demand % change in demand X = -------------------------- % change in income

Cross price elasticity of demand

% change in demand X = -------------------------- % change price Y

if npy is +ve, the good is a substitute, ^Py -> ^Dx

Price Elasticity of demand

% change in demand X = -------------------------- % change in price X, always -ve for a -ve slope demand curve, demand for a good is more sensitive when there is more substitutes in the market

Elastic, >1% change in demand per 1% change in price, perfectly elastic

Inelastic, <1% change in demand per 1% change in price, perfectly inelastic