Demand & Supply

Firstly the Market System consists of:
Consumers- Create demand for a product of service
Demand- The amount consumers will like to buy. It is not what they do buy but WANT
Effective Demand- The amount consumer are willing and able to buy.
Market Demand- A table showing the different quantities of a good that consumers are willing and able to buy at various prices over a given period of time.


This is a demand and supply diagram. In this diagram the demand curve SHIFTS to the left(from D1 to D2). This is bad. When the demand curve shifts, this means that the demand has decreased even though you are selling the product at the same price. A shift in demand can be caused by advertisements(shift to the right=GOOD) or by an article saying the product is good/bad.
Supply curves can also shift. This can be caused by eg. a typhoon destroying a rice field (shift to the left).
Just remember LEFT IS BAD, RIGHT IS GOOD

THE MINDMAP

Income Elasticity of Demand

INCOME ELASTICITY

Income Elasticity of Demand is the response of the change in quantity of demand when there is a change in income. The formula for measuring the income elasticity of demand is the percentage change in demand divided by the percentage change in income.

Or

(% change in demand)/(% change in income)

Now, this topic may appear in the test, maybe multiple choice tests, maybe written answer tests, maybe on “How to make gold in WoW”, yes I have seen many economic terms in gold making guides. For those want to make any type of money, in anyway, you must master the ways of economics!

Ok, but seriously, a question that will most likely appear on the test, would be something cheesy and annoying like: “Given the following data/chart, calculate the Income Elasticity of Demand of the good when the change from X income to Y income.”

Look for the table and find the data for X and for Y. the chart should give the incomes corresponding to the demand of the good. Look for the X income and demand along with the Y income and demand.

First, we find the percentage (%) change in the demand from Y demand take away by the X demand and the total divided by X demand. (Y demand - X demand)/X demand.

Not so fast! We're only halfway there! We now must find the percentage (%) change in the quantity, this similar to the formula above, we use the formula:

Y quantity take away by the X quantity and the total divided by X quantity.

(Y quantity - X quantity)/X quantity.

REMEMBER
X is OLD income and Y is NEW income!

REMEMBER
Then you use the new numbers and use the Income Elasticity of Demand formula! For those who have a short term memory, like me, the formula is...
(% change in demand) /(% change in income). Using the new values, input them into the formula and you'll get your answers!

HOORAY! You’ve passed all the math part! Now for the easy part, if the answer is in the chart below:

If IEoD is >1, the good is a Luxury Good or Income Elastic
If IEoD is 0>1, the good is a Normal Good or Income Inelastic
If IEoD is >0, the good is an Inferior Good or Negative Income Inelastic


Now, tests will usually come with a follow-up question, "Is the product a luxury, normal or inferior good from the range X-Y incomes?"

Then you write the answer depending on the chart above, corresponding to the answer you got after applying the numbers to the Income Elasticity of Demand formula.

Price Elasticity of Supply and Demand

Price Elasticity of Demand

Price Elasticity of Demand is defined as the responsiveness of the quantity demanded of a good or service to a change in its price.
It is measured with the formula

% change in quantity
% change in price

If you have an answer >1, then demand is very sensitive to price. This means a small change of price leads to a BIG change in demand. Then demand is said to be PRICE ELASTIC.

If you have an answer <1 change in price leads to a small change in demand. The demand is said to be PRICE INELASTIC.

If your answer is =1 that means the demand is said to have UNITARY ELASTICITY, this means that price and demand change in the same portion.

It is possible to get an answer of 0. This is called Perfectly Inelastic Demand, this means change in price does not affect the demand at all.

It is possible to get an answer of infinity. This is called Perfectly Elastic Demand, this means if there is an increase in demand, no matter how small will cause the demand to drop to 0.

Video on Price Elasticity of Demand
http://www.youtube.com/watch?v=MNiEHvw6TTg

Price Elasticity of Supply

Price Elasticity of Supply is defined as the responsiveness of the quantity supplied of a good or service to a change in its price.

It is measured with the formula

% change in quantity supplied
% change in price

If you have an answer >1, then supply is very sensitive to price. This means a small change price leads to a BIG change in the amount that firms wish to supply. Then supply is said to be PRICE ELASTIC.

If you have an answer <1 change in price leads to a small change in supple. The demand is said to be PRICE INELASTIC.

If your answer is =1 that means the supply is said to have UNITARY ELASTICITY, this means that price and supply change in the same portion.

It is possible to get an answer of 0. This is called Perfectly Inelastic Supply, this means change in price does not affect the supply at all.

It is possible to get an answer of infinity. This is called Perfectly Elastic Supply, this means if there is an increase in supply, no matter how small will cause the demand to drop to 0.

Video on Price Elasticity of Supply
http://www.youtube.com/watch?v=20b_zVHmZG0