Demand, supply and elasticity
Demand and supply
- Demand = how much buyers will buy at each price; supply = how much sellers offer.
- Usually, when price falls, demand rises.
- They meet at the equilibrium market price.
Practice
The equilibrium price is where:
Equilibrium is the price where the quantity demanded equals the quantity supplied.
Price elasticity of demand
$$\text{PED} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}$$
- PED > 1 → elastic: a small price cut raises sales a lot (lowering price raises revenue).
- PED < 1 → inelastic: demand changes little (raising price raises revenue).
Practice
If demand is price elastic (PED > 1), a price cut will usually:
Elastic demand reacts strongly, so cutting price raises quantity enough to raise revenue.
Income & cross elasticity
- Income elasticity (YED) — how demand reacts to income. Luxuries react strongly.
- Cross elasticity (XED) — how one product's demand reacts to another's price: positive for substitutes (tea/coffee), negative for complements (cars/fuel).
Practice
Match each pair to its cross-elasticity sign.
XED is positive for substitutes and negative for complements.
You've got it
Key idea
- price falls → demand usually rises; they meet at equilibrium
- PED > 1 elastic (cut price to raise revenue); PED < 1 inelastic (raise price to raise revenue)
- YED = income reaction; XED = +ve for substitutes, −ve for complements