Law of Supply and Demand: Economics

Supply and demand is a basic concept of economics. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.

Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

Elasticity of Demand in Economics

Elastic goods and services generally have lots of substitutes. As a result, if an elastic service/good’s price increases, the quantity demanded of that good decreases. Example of elastic goods and services include furniture, motor vehicles, instrument engineering products, professional services, and transportation services.

Different types of elasticity of demand:

Perfectly Elastic Demand (EP = ∞)
Perfectly Inelastic Demand (EP = 0)
Relatively Elastic Demand (EP> 1)
Relatively Inelastic Demand (Ep< 1 ) Unitary Elastic Demand ( Ep = 1) MBA case study / assignment question on this topic: “There is a high cross elasticity of demand between new and old cars”. Discuss the statement by explaining the features of cross elasticity of demand. Also compare and contrast cross elasticity with other types of elasticities of demand.

Academic Questions on Demand and Supply

Q. What does a demand curve show?

Q. What does a supply curve show?

Q. Produce a diagram: for the market for air travel that shows the effect of a news report on the dangers of travelling by sea.

Q How does Pepsi advertising affects the demand for: a) Pepsi b) Coca-Cola

Q. Explain how changes in consumer income affect the demand for Apple’s I-phone

Q. Use the table below to answer the following questions
What is the equilibrium price and quantity?
What would be the size of the shortage or surplus at a price of €180/tonne?
Assuming the demand for organic wheat rises by 180 tonnes per week at all prices, what would be the new equilibrium price and quantity?

Q. The beer industry is being revolutionized with the invention of new machinery which makes it cheaper and quicker to produce. Identify what would happen to equilibrium price and quantity in the market for beer.

Q. Analyse the specific factors that would affect the demand for McDonalds.

Q. Analyse the effects of the following on equilibrium demand and supply for cars, clearly identifying the shift in the curve:
a) A higher tax on gasoline
b) Increase in wages
c) Reduction in the cost of production
d) A tax on car parking
e) Increased provision of reliable cheap public transport
f) Government legislation for increase safety in cars, like side impact protection
g) Increase in the price of cars
h) Increased in the disposable income of consumers and Improvement in technology used in car manufacturing

Q. The demand for corn is linear and when the price of corn is $800, zero units of the good are demanded. When the price of corn is $0, then 800 units of corn are demanded. The supply of corn is linear and when the price of corn is $100, zero units of the good are supplied. When the price of corn is $1000, then 900 units of corn are supplied.
a) Given the above information, what is the equilibrium quantity and equilibrium price in this market?
b) Suppose a price ceiling of $500 per unit is imposed in this market by the government of Urbana. This will result in…
c) Suppose a price ceiling of $400 per unit is imposed in this market by the government of Urbana. This will result in…

Q. An example of a price control is a law that sets a minimum price that may be legally charged for an agricultural product, such as milk.
a) Is this farm price control a price ceiling or a price floor?
b) Draw a supply and demand diagram to illustrate the market price, equilibrium price, quantity supplied, quantity demanded, and the surplus or shortage when there is a binding farm price support.
c) What is the social objective of a farm price support? Is it effective?

Q. True-False Questions — If a statement is false, explain why.
a) The law of demand states that as price decreases, quantity demanded decreases. (T/F)
b) The market demand for a good is the sum of individual demands for the good. (T/F)
c) An increase in the number of suppliers in a market will cause the supply curve to shift to the left. (T/F)
d) An increase in the price of a good will cause the supply curve to shift to the right. (T/F)
e) An increase in supply causes an excess demand at the original price, and competition between sellers leads to a lower equilibrium price. (T/F)
f) An increase in demand causes an excess demand at the original price, and competition between demanders leads to a higher equilibrium price. (T/F)
g) The expectation that the price of a good will increase can cause the demand for that good to increase. (T/F)
h) If two goods are complements, then one can replace the other in consumption.. (T/F)
i) If income increases and the demand for a good increases, then it is a normal good. (T/F)
j) A change in demand refers to a movement along a demand curve due to a price change, but a change in quantity demanded refers to a shift in the entire demand curve. (T/F)

Q) Neha has just completed her MBA and joined a startup company. The company was planning to launch a new product in the market so the management wanted to understand the different factors that can impact the demand and supply of their products in the market. Help Neha to prepare a report on the factors impacting demand and supply of products in the market.

Q) Alpha Ltd market share was declining due to high competition in the market so it decided to enter a new segment. It wanted to determine the relationship between change in the quantity demanded of the product due to change in the price of the product in the market. Assume that at the price of ₹100, the demand for the product is 400 units. If the price of the product increases to ₹120, the demand decreases to 250 units. Calculate the price elasticity:

a) Using Arc elasticity method
b) Using Percentage method

Q)
a) What are the practical uses of the concept of price elasticity of demand for
different stakeholders in the production process?
b) Distinguish between the shift and movement in the demand curve.
Explain any five factors which would bring about a shift in the demand
curve for Maggie noodles.

Q. Explain the types of elasticity of demand. Calculate elasticity of demand for the following data.
Price of Apple (Rs.) Quantity demanded (KGs)
20, 100
21, 96

Q. Distinguish between the features of perfect competition and monopolistic competition. Give real world examples of each of these types of markets.

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