Concept of Elasticity: Demand & Supply

A market is a place where both consumers and producers meet together to buy and sell commodities to each other in exchange for money. There are different market structures which have different characteristics of the quantity of buyers and sellers along with some other characteristics like the type of product, the price and quantity of the product, different costs of the production, entry and exit barriers etc.

We will start with the market with many buyers and sellers. Here buyers are also known as demanders, and sellers are also known as the producers or the firms; where each firm produces a good or a product or a commodity using the factors of production and then will discuss the concept of elasticity in detail.

Demand and Supply

Demand

The main motive of all individuals is to spend their income on purchasing products in order to maximize their utility or satisfaction. Though utility is hard to measure, but a person can maximize his utility given the availability of the resources.

The amount of a product that consumers wish to purchase is known as the quantity demanded. Here quantity demanded is a flow variable, and it is a desired quantity which consumers wish to purchase in a market from the sellers. There are five main factors which affect the quantity demanded of a product by each individual consumer, namely,

• Price of the product
• Prices of the other or related products
• Income and wealth of the consumers
• Taste and preferences of the consumers
• Various individual specific or environmental factors

The above factors are also known as the determinants of demand and could be written in a functional notation known as the Demand Function as follows:

D = f (Px, Pr, Y, T, S)

Here,

D stands for the demand of the good x

f represents the function

Px stands for the price of the good x

Pr is the Price of the other related good

Y stands for the income and wealth of the consumers

T represents different tastes and preferences of the consumers

S indicates all the other environmental and consumer-specific factors

The demand functions states that the quantity demanded of a product by a consumer depends on the price of the product, the price of its related product, the income of the consumers and all the other specific and environmental factors. The form of the function determines the nature of that dependence.

Supply:

The supply of goods and services is done by the firms; therefore, the firms are known as the suppliers. The main motive of the firm as a supplier is to make a profit by selling its goods and services to its ultimate consumers. For this, they hire several factors of production to which they pay their payment.

After that, the firms decide about the prices at which they will sell their product in the market, keeping in view the maximization of their profit.

The amount of a product that the firms are able to and willing to sell in the market to its consumers is known as quantity supplied. Supply is a flow variable which is affected by the following factors:

• The price of the product
• The price of the inputs or factors of production
• The state of technology

The above factors are also known as the determinants of supply, and when we express the above determinants of supply in a functional form, then it is known as supply function.

S = f (Px, F1, , Fm, T )

Where,

S = Quantity supplied

Px = Price of the good X

F₁………. F_m = Prices of all inputs of production

T = Level of technology

1. Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity

2. Determinants of Price Elasticity of Demand

3. Measuring Price Elasticity of Demand

4. Price Elasticity of Supply and Its Determinants

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3. Problem of Choice & Production Possibility Curve
4. Concept of Market & Market Mechanism in Economics
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6. Concept of Equilibrium & Dis-equilibrium in Economics
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8. Ordinal Utility Theory: Meaning & Assumptions
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11. Consumer Equilibrium: Ordinal Approach, Income & Price Consumption Curve
12. Applications of Indifference Curve
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14. Normal Goods: Income & Substitution Effects
15. Inferior Goods: Income & Substitution Effects
16. Giffen Paradox or Giffen Goods: Income & Substitution Effects
17. Concept of Elasticity: Demand & Supply
18. Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity
19. Determinants of Price Elasticity of Demand
20. Measuring Price Elasticity of Demand
21. Price Elasticity of Supply and Its Determinants
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23. Hicks’s Revision of Demand Theory
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30. Isoquant: Assumptions and Properties
31. Isoquant Map and Economic Region of Production
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33. Law of Returns to Scale
34. Production Function and Returns to Scale
35. Euler’s Theorem and Product Exhaustion Theorem
36. Technical Progress (Production Function)
37. Multi-Product Firm and Production Possibility Curve
38. Concept of Production Function
39. Cobb Douglas Production Function
40. CES Production Function
41. VES Production Function
42. Translog Production Function
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44. Traditional Theory of Costs: Short Run
45. Traditional Theory of Costs: Long Run
46. Modern Theory Of Cost: Short-run and Long-run
47. Modern Theory Of Cost: Short Run
48. Modern Theory Of Cost: Long Run
49. Empirical Evidences on the Shape of Cost Curves
50. Derivation of Short-Run Average and Marginal Cost Curves From Total Cost Curves
51. Cost Curves In The Long-Run: LRAC and LRMC
52. Economies of Scope
53. The Learning Curve
54. Perfect Competition: Meaning and Assumptions
55. Perfect Competition: Pricing and Output Decisions
56. Perfect Competition: Demand Curve
57. Perfect Competition Equilibrium: Short Run and Long Run
58. Monopoly: Meaning, Characteristics and Equilibrium (Short-run & Long-run)
59. Multi-Plant Monopoly
60. Deadweight Loss in Monopoly
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63. Monopolistic Competition: Concept, Characteristics and Criticism
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66. Oligopoly Market: Concept, Types and Characteristics
67. Difference Between Oligopoly Market and Monopolistic Market
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69. Oligopoly: Non-Collusive Models- Cournot, Stackelberg, Bertrand, Sweezy or Kinked Demand Curve
70. Monopsony Market Structure
71. Bilateral Monopoly Market Structure
72. Workable Competition in Market: Meaning and Explanation
73. Baumol’s Sales Revenue Maximization Model
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75. Robin Marris Model of Managerial Enterprise
76. Hall and Hitch Full Cost Pricing Theory
77. Andrew’s Full Cost Pricing Theory
78. Bain’s Model of Limit Pricing
79. Sylos Labini’s Model of Limit Pricing
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