Demand is a relation showing the quantity of the good that consumers are willing and able to buy at various prices per period, other things remaining constant. There are different types of demand. The law of demand says that the quantity of a good demanded per period, relates inversely to the price, other things remaining constant.
There are few exceptions to the law of demand:
• Giffen goods
• Veblen effect
• Stock market
Demand function shows relation between the price and quantity when all other variables are constant. The derivative of the demand function must be negative.
The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the goods rises. The Supply function shows the relation between price and quantity when all other variables are held constant. Since the price and the quantity supplied are positively related with each other, the supply curve slopes upward.
Equilibrium refers to a situation in which price has reached the level where the quantity supplied also equals to quantity demanded. And it is determined by the intersection of demand and supply curve.
When the price is greater than the equilibrium price, the quantity supplied is greater than the quantity demanded, resulting in excess supply or surplus. The suppliers will lower the price to increase sales, thereby moving towards the equilibrium.
When the price is less than the equilibrium price, the quantity demanded is greater than the quantity supplied, resulting in excess demand or shortage. The suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium
When demand and supply shift simultaneously, you can predict either the direction in which price changes or the direction in which quantity changes, but not both. Also, the change in equilibrium price or quantity is said to be indeterminate when the direction of change depends on the relative magnitudes by which demand and supply shift.
Elasticity of demand generally measures, the degree of responsiveness of the quantity demanded of a commodity, to a given change in any of the determinants of demand.
There are three types of elasticity of demand
• price elasticity of demand,
• the income elasticity of demand,
• cross-price elasticity of demand.
Price elasticity of demand is a measure of, how much quantity demanded of a good responds to a change in the price of that good.
Income elasticity of demand measures the responsiveness of quantity demanded to changes in income, holding the price of the good & all other demand determinants constant.
Cross-price elasticity of demand measures the responsiveness of quantity demanded of good X to changes in the price of related good Y, holding the price of good X and all other determinants for good X constant.
Expenditure on advertisements and on other sales promotion activities help in promoting sales, but not in the same magnitude or degree at all levels of sales. The concept of advertisement elasticity is found useful in the determination of optimum level of advertisement expenditure. This concept assumes a greater significance in deciding advertisement expenditure than other decision variables.
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