1.3.2 - The market

Demand is the quantity consumers are willing and able to buy at each price in a given period. A change in the product's own price causes movement along demand; a non-price factor shifts the whole demand curve.

State the changed factor, identify which customers become more willing and able to buy, shift demand right or left, then explain the likely effect on equilibrium price and quantity after considering supply.

Supply is the quantity producers are willing and able to offer at each price in a given period. A change in the product's own price causes movement along supply; production conditions shift the curve.

Higher input, wage or energy costs make each unit less profitable, so producers offer less at every price: supply shifts left. An indirect tax has a similar cost effect. A subsidy lowers the effective cost and shifts supply right.

Productive technology can shift supply right when it lowers unit cost or expands output capacity. A favourable external event can improve access to labour, materials or transport; a disaster, shortage or disruption can remove capacity and shift supply left.

Identify the changed production condition, explain its effect on cost or capacity, and only then give the shift direction. Read the new equilibrium against the unchanged demand curve.

Market equilibrium occurs where quantity demanded equals quantity supplied. At that price, buyers' planned purchases match sellers' planned output.

A shift changes the old balance. Increased demand creates a shortage at the original price, normally producing a higher equilibrium price and quantity. Increased supply creates a surplus at the original price, normally producing a lower price and higher quantity.

A valid market diagram uses price on the vertical axis and quantity on the horizontal axis, with downward demand and upward supply. Their intersection is the original equilibrium.

1. Label axes P and Q and curves D₁ and S₁. 2. Mark the original equilibrium E₁, price P₁ and quantity Q₁. 3. Decide whether the cause changes demand or supply—not the product's own price. 4. shift only that curve right for an increase or left for a decrease, labelling D₂ or S₂. 5. Mark E₂ and project P₂ and Q₂ to the axes. 6. explain the causal chain in words.

Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in the product's price.

Calculate each percentage change from its original value, retain the signs, divide, and report the coefficient. Example: price falls from $10 to$8, a −20% change; weekly sales rise from 2,500 to 3,500, a +40% change. PED = +40% ÷ −20% = −2.0.

The negative sign reflects the usual inverse price-demand relationship. For responsiveness, compare the absolute value: |−2.0| = 2, so demand is elastic and the percentage quantity response is twice the percentage price change.

PED's magnitude compares the percentage response of quantity demanded with the percentage change in price.

If PED = −1.5 and price falls 8%, estimated quantity demanded changes by (−1.5) × (−8%) = +12%. State direction, size and the assumption that other demand factors remain unchanged.

Demand is more price elastic when customers can readily alter or postpone purchase; it is more inelastic when alternatives and adjustment are limited.

Branding and differentiation can reduce substitutability, while online comparison can increase it. The relevant PED belongs to a particular product, customer group, price range and period—not to the entire industry forever.

PED helps estimate how a price change may affect sales volume and revenue, but a profitable pricing decision also depends on costs, capacity, competitors and strategic aims.

Revenue is price × quantity, not profit. A cut that raises revenue can still reduce profit if the extra units have high variable cost or capacity is constrained. A price rise may damage loyalty or invite entry even when short-run demand is inelastic.

Total revenue (TR) equals price multiplied by quantity sold. PED predicts whether the quantity response is proportionally large enough to offset a price change.

A price rises 8% and PED is −0.5. Estimated quantity falls 4%, so the proportional price increase is larger than the volume loss and revenue is likely to rise. This is a directional estimate; exact revenue can be calculated only with actual prices and quantities.

Income elasticity of demand (YED) measures how quantity demanded responds to a change in consumer income.

Calculate both percentage changes from their original values, keep their signs, then divide. Example: income rises 4% and weekly sales rise from 1,000 to 1,120, a 12% increase. YED = 12% ÷ 4% = +3.0.

A positive result indicates a normal good; +3.0 means demand is income elastic and rises three times as fast as income in this estimate. A negative result indicates an inferior good because demand moves opposite to income.

A normal good has positive YED: demand rises when income rises. An inferior good has negative YED: demand falls as customers switch to preferred alternatives when income rises.

The classification belongs to a product for a particular consumer group. Basic transport may be inferior for higher-income commuters who switch to private travel, yet normal for another group. Evidence must show the actual income-demand relationship.

YED's sign classifies the income relationship; its magnitude shows how strongly demand responds.

If YED = +0.6 and income rises 5%, estimated demand rises 3% because 0.6 × 5% = 3%. If income instead falls 5%, the same estimate predicts demand falls 3%, assuming other demand conditions remain constant.

Income responsiveness depends on how customers rank the product as purchasing power changes. It is therefore shaped by the product, consumer group, income level and available alternatives.

YED helps businesses forecast how economic growth or recession may change demand, then align capacity, product mix, inventory, finance and marketing with plausible scenarios.

A multi-product business can combine offers with different income responses, target regions with different growth and stress-test forecasts. The coefficient converts an income forecast into an estimated percentage demand change, not an exact sales total without a baseline.