Demand and Supply

Demand and Supply

Introduction

Demand and Supply is a concept which is used to determine the price in the market. This microeconomic concept states that the price in the market is determined where the quantity supplied equals the quantity demanded by the consumers of the market which hence results in the market equilibrium to be attained (Cachon, G., & Terwiesch, C., 2006).

Task A

Price elasticity of demand

Ped is the coefficient that measures receptiveness of quantity demanded of a good to change in its price. In other words Ped determines the change in the quantity demanded of a commodity due to the change in its price (Tellis, G. J., 1988).

Cross price elasticity of demand Xed is the measure of the extent to which demand of a good or commodity varies in response to changes in price of other goods or commodities. In case of complementary goods the Xed is negative while in the case of substitute goods the Xed is positive.

Income elasticity (Yed)

Yed shows the relationship of the change in the real income and change in quantity demanded of a good. The Yed of demand is negative in case of the inferior goods as the increase in the real income will cause their demand to decrease. Positive income elasticity shows normal goods as the increase in real income of consumers will increase the quantity demanded of these goods (Robbins, L., 1930).

Part B

Elasticity Coefficients

The elasticity coefficient of Ped is represented as percentage increase in quantity demanded of a good in relation to the percentage increase in the price of the good. The coefficient can be interpreted as being perfectly inelastic is the price elasticity of demand is zero. The demand is relatively inelastic if the price elasticity of demand lies between -1 and 0. The price elasticity of demand is said to be unitary elastic if it is equal to-1. The price elasticity of demand is relatively elastic if it lies between infinity and -1, and price elasticity of demand is said to be perfectly elastic if it is a horizontal line showing infinity.

The negative coefficient in the Xed of demand shows that the two commodities are complements of each other and if the Xed of demand is positive the commodities are said to be substitutes of each other.

The Yed of demand is said to be associated with inferior goods if it is negative and positive in case of normal ...