Law of Demand
The law of demand expresses the functional relationship between the price and quantity of a commodity demanded.
- Statement: Other things being equal, if the price of a commodity falls, the quantity demanded will rise, and if the price of the commodity rises, the quantity demanded will decline.
- Nature of Relationship: There is an inverse relationship between price and quantity demanded, assuming other factors remain constant.
Other Factors Assumed Constant:
a) Tastes and preferences of the consumer.
b) Income of the consumer.
c) Prices of related goods (substitute and complementary goods).
Elasticity of Demand;
Elasticity of demand measures the sensitivity of the quantity demanded of a good or service to changes in various factors, such as price, income, or the price of related goods.
Types of Elasticity of Demand:
- Price Elasticity of Demand (PED)
- Definition: Measures the responsiveness of the quantity demanded of a good or service to a change in its price.
- Formula: PED = % Change in Quantity Demanded / %Change in Price
- Income Elasticity of Demand (YED)
- Definition: Measures the responsiveness of the quantity demanded of a good or service to changes in consumer income.
- Formula: YED= % Change in Quantity Demanded / %Change in Demand
- Cross Elasticity of Demand (XED)
- Definition: Measures the responsiveness of the quantity demanded of one good to changes in the price of another good.
- Formula: XED=% Change in Quantity Demanded of Good A / % Change in Price of Good B
Law of Supply
The law of supply expresses the relationship between the price of a good or service and the quantity supplied, holding all else constant.
- Statement: All else being equal, as the price of a good or service increases, the quantity supplied also increases. Conversely, as the price of a good or service decreases, the quantity supplied decreases.
- Nature of Relationship: There is a direct relationship between price and quantity supplied.
- Graphical Representation: This relationship is typically shown by an upward-sloping supply curve.
