Demand and Supply:
Demand is an economic term that refers to the number of products or services that consumers wish to purchase at any given price level. Demand includes the purchasing power of the consumer to acquire a given period. In other words, it’s the number of products or services that consumers are willing and able to purchase.
The factors of demand for given products or services is related to:
The price of the good or service.
The income levels.
The prices of complementary products.
The prices of substitute products.
The law of demand is controlled by the relationship between the quantity demanded and the price. If the price increases, people buy less. The reverse is also true, if the price drops, people buy more. The law of demand results from two factors: the substitution effect and the income effect. The substitution effect is when the relative price of good or services rises, people seek substitute for it, so the quantity demanded of the good or service decreases. Income effect when the price of a good or services rises to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases.
A demand curve shows the relationship between the quantity demanded of a good and its price.
The quantity demanded is the quantity of a goods and services that people are willing to buy at a particular price and at a particular point of time. In economics the terms change in quantity demanded and change in demand are two different concepts. Change in quantity demanded refers to movements along the demand curve which are caused due to change in price of the product. On other hand, change in demand refers to increase or decrease in demand of a product due to various determinates of demand, while keeping price at constant. Changes in quantity demanded can be measured by the movement of demand curve, while changes in demand are measured by shifts in demand curve.
Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumer. Supply curve is a graphic representation of the relationship between product price and quantity of a product that a seller is willing and able to supply. Product price is measured on the vertical axis of the graph and quantity of product supplied on the horizontal axis. The supply curve can shift right and left based on some sort of shifters.
The result of the interaction between consumers and producers in a competitive market determines supply and demand equilibrium. The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price.
Sometimes the market is not in equilibrium-that is quantity supplied doesn’t equal quantity demanded. When this occurs, there is either excess supply or excess demand. A market surplus occurs when there is excess that is quantity supplied is greater than the quantity demanded. In this situation, some producers won’t be able to sell all their goods. This will include them to lower their price. A market shortage occurs when there is excess demand that is quantity demanded is greater than quantity supplied. In this situation, consumers won’t be able to buy as much of a good as they would like. In response to the demand of the consumers, producers will raise both the price of product and the quantity they are willing to supply.
Elasticity and welfare economics:
The elasticity of demand is a measure of change in the quantity demanded in response to the change in the price of the product.
According to this formula, the elasticity of demand can be defined as a percentage change in demand as a result of the percentage change in price.
There are two kinds of elasticity: inelastic demand defines as a change in price results in only a small change in quantity demanded. In other words, the quantity demanded is not very responsive to changes in price.
Elastic demand defines as a change in price results in a large change in quantity demanded.
Cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in price of the other good. The cross elasticity of demand for substitute goods is always positive because the demand for one good increase when the price for the substitute good increases. Alternatively, the cross elasticity of demand for complementary goods is negative. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped. Price elasticity of supply measures the responsiveness of quantity supplied to a change in price. It is necessary for a firm to know how quickly, and effectively, it can respond to changing market conditions, especially to price changes.
Welfare economics is the total benefit available from an economic transaction. Economic welfare is also called community surplus. Consumer surplus is derived whenever the price a consumer actually pays is less than the are prepared to pay. A demand curve indicates what price a consumer is prepared to pay foe any quantity of a good, based on their expectation of private benefit. For example, at a price P, the total private benefit in terms of utility derived by consumers from consuming quantity, Q is shown as the area ABQC in the diagram
The amount consumers actually spend is determined by the market price they pay, P, and the quantity they buy Q, namely P*Q, or area PBQC. This means that there is a net gain to the consumer, because area ABQC is greater than the area PBQC. This net gain is called consumer surplus, which is the total benefit, area ABQC, less the amount spent, area PBQ.
Producer surplus is the additional private benefit to producers, gained when the price they receive in the market is more than the minimum the would be prepared to supply for. The producer surplus derived by all firms in the market is the area from the supply curve to the price line, EPB.
Welfare is represented by the area ABE in the diagram below, which is made up of area for consumer surplus, ABP plus the are for producer surplus, PBE.
Maximization of utility:
Utility means satisfaction, it refers to how consumers rank different good and services. People choose goods and services highly. Total utility is the total benefit a person gets from the consumption of good. Generally, more consumption gives more utility. Marginal utility is the change in total utility that result from a one unit increase in the quantity of a good consumed. As the quantity consumed of the good increases, the marginal utility from consuming it decreases. We call this decrease in marginal utility as the quantity of the good consumed increases the principle of diminishing marginal utility.