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Chapter 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

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
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)

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

ParamitaM/ManEco/SummaryDD-SS

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)
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

ParamitaM/ManEco/SummaryDD-SS

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