Me Unit 2

Unit II: Demand and Supply
Demand theory and analysis

Supply theory and analysis
Application of price, income and
cross elasticity of demand
The theory of consumer choice
Demand forecasting techniques
December 10, 2013 1 Vidya Suresh
Demand theory and analysis
Demand- Need, want and desire
backed by the purchasing power and
willingness of the consumer to part
with his money
Demand indicates how much of a
product consumers are both willing
and able to buy at each possible
price during a given period, other
things remaining constant.
The law of demand says that quantity
demanded varies inversely with price,
other things constant. Thus, the
higher the price, the smaller the
quantity demanded.

Demand Schedule
12/10/2013 Vidya Suresh 4
8 14 20 26 32
Millions of apple per week
$15
12
9
6
3
0
P
r
i
c
e

p
e
r

a
p
p
l
e

a
b
c
d
e
D
Demand Curve for Apple
12/10/2013 Vidya Suresh 5
Market Demand is the Sum of Individual
Demands

Market Demand Curve: The horizontal summation of all the individual demand
curves.
Demand Determinants
The law of demand says that quantity demanded varies
inversely with price, other things constant. Thus, the
higher the price, the smaller the quantity demanded.

QdX = f (PX , P
R
,Y,N
B
,T,E,G)

The demand function
Price of related goods
Complements
Substitutes
Income
Number of Buyers
Tastes
Expectations
Government: Taxes and Subsidies
Demand Determinants
Substitution effect
The change in the relative price (the price of one good relative to the
prices of other goods) causes the substitution effect
If all prices changed by same margin, there would be no substitution
effect
Giffen goods- In case of inferior goods income effect is stronger than
substitution effect for ex. Potatoes and meat, bidi and cigerattee
Income effect
Money income the number of dollars you receive per period
Real income measure in terms of how many goods and services
you can buy
Diminishing marginal utility
Marginal utility additional satisfaction you derive from each item
Law of marginal utility you derive from each additional item
consumed decreases as your consumption increases (example:
pizza slices)

Nature of Demand
Derived Demand and Autonomous demand
Demand for producers goods and Consumers goods
Durable and non-durable goods
Industry demand and firm demand
Total demand and market segment demand
Short-run demand and long-run demand

Elasticity of Demand/ Demand Sensitivity
Analysis
Product demand is a critical determinant of profitability,
and demand estimates are key considerations in virtually
all managerial decisions
For constructive managerial decision making, the firm
must know the sensitivity or responsiveness of demand to
changes in factors that make up the underlying demand
function
is a measure of how much buyers and sellers respond
to changes in market conditions
allows us to analyze supply and demand with greater
precision.

The Elasticity Concept
Elasticity is the percentage change in a dependent
variable, Y, resulting from a 1 percent change in the value
of an independent variable, X
Elasticity = percentage change in Y
percentage change in X
Elasticity-
Price Elasticity
Income Elasticity
Cross Elasticity
Advertisement Elasticity

price in change Percentage
demanded quatity in change Percentage
demand of elasticity Price =
Elasticity, Percentage Change and Slope
Because the price elasticity of demand measures how
much quantity demanded responds to the price, it is
closely related to the slope of the demand curve.
But instead of looking at unit change, elasticity looks at
percentage change. What do we mean by percentage
change?
If there are 50 tomatoes in a store and you picked 16 of
them, what percentage of the total did you pick?
Paul used to weigh 200 Kg last year, but now he only
weighs 175 Kg. How many Kg did he lose? What is the
percent change of the loss?
What is the average of 300 and 330? What is the
midpoint?

Price elasticity of demand
measures the responsiveness of the quantity
demanded of a product to changes in the price of
that same product, ceteris paribus

) (
) (
) (
) (
) (
) (
1 2
1 2
1 2
1 2
1
1
1 2
1 2
Q Q
P P
P P
Q Q
E
Q
P
P P
Q Q
P
P
+
+
-
=
-
= e
Degrees of Price Elasticity
Elastic Demand situation in which a price
change leads to a more than proportionate
change in quantity demanded. Consumers are
extremely responsive to price changes.
Demand is elastic if the absolute value of the
price elasticity of demand is greater than one
1 > e
P
Example:
2 . 3
2 . 3
= e
= e
P
P
Unit Elastic Demand situation in which price and
quantity changes exactly offset each other.
Response is equal to change in price
Demand is unit elastic if the absolute value of the
price elasticity of demand is equal to one
Example:
1 = e
P
1
1
= e
= e
P
P
Inelastic Demand situation in which a price
change leads to a less than proportionate change
in quantity demanded. Consumers are extremely
unresponsive to price changes.
Demand is inelastic if the absolute value of the
price elasticity of demand is less than one

Example:
1 < e
P
5 . 0
5 . 0
= e
= e
P
P
Methods of measuring elasticity of demand
Point elasticity of demand
Arc elasticity of demand
Slope approach or mathematical approach
Total outlay approach
measures elasticity at a given point on a function
used to measure the effect on a dependent
variable Y of a very small (less than 5%) or
marginal change in an independent variable X
Y
X
X
Y
X X
Y Y
X
Y
X
X
X
A
A
= e
A
A
= e
A
A
= e
/
/
%
%
When price increase from $20 to $30, the quantity
demanded decreases from 3 to 2.
E =
67 . 5 . / 33 .
20 / ) 20 30 (
3 / ) 3 2 (
= =
Arc elasticity of demand

measures the average elasticity over a given
range of a function
used to measure the effects on a dependent
variable Y of large-scale changes in an
independent variable X
1 2
1 2
1 2
1 2
1 2
1 2
2 / ) (
) (
2 / ) (
) (
/
/
Y Y
X X
X
Y
E
X X
X X
Y Y
Y Y
E
AveX X
AveY Y
E
+
+
A
A
=
+
=
A
A
=
Slope method or mathematical approach
P L mehta page 102
Total outlay method
If demand is price elastic:
Increasing price would reduce TR (% Qd > % P)
Reducing price would increase TR
(% Qd > % P)

If demand is price inelastic:
Increasing price would increase TR
(% Qd < % P)
Reducing price would reduce TR (% Qd < % P)

Income elasticity of demand
Income elasticity of demand for a commodity shows the
extent to which a consumers demand for the commodity
changes as a result of a change in his income.
Its a ratio of percentage change in the quantity demanded
of a good, say X, to the percentage change in income of
the consumer.
If income increases from $80 to $120, consumption of
bagels increases from 6 to 12.
A positive sign denotes a normal good
A negative sign denotes an inferior good

2 5 . / 1
80 / ) 80 120 (
6 / ) 6 12 (
= =
The ratio of percentage change in the quantity demanded of a

good to the percentage change in the income of the consumer
E= Qx . Y1
Yx . Q1
Types of income elasticity
Unitary income elasticity of demand
Change in quantity demanded=change
in money income
EY=1
Eg: gold
Quantity Qx
Income
Quantity Qx
Income
Quantity Qx
Income
HIGH INCOME ELASTICITY OF DEMAND
when income increases, the quantity
increases in large proportion
EY>1
Eg:Branded items
LOW INCOME ELASTICITY OF
DEMAND
When income increases in large
proportion, quantity increases slightly
EY<1
Eg:Inferior goods
Quantity Qx
Income
ZERO INCOME ELASTICITY OF
DEMAND
Change in income has no effect
on the quantity demanded
EY=0
Eg: salt
NEGATIVE INCOME ELASTICITY OF
DEMAND
more is bought in lower incomes and
less is bought in higher incomes
EY<0
Eg: low branded goods
Quantity Qx
Income
The ratio of the percentage change in demand for one good to
the percentage change in the price of some other related good
Ec=Q of X
P of Y

Price of the product increases,
quantity of the complementary product
decreses
EC=1
Eg:pen and ink
Quantity Qx
Price Py
Cross elasticity of demand
Quantity Qx
Price Py
Quantity Qx
Price Py
Price of one products change does not affect
the quantity of another product.
EC=0
Eg:

Price of one product goes up, demand of
Substitute product raises.
Eg: tea and coffee
Cross elasticity of demand
It measures the response of quantity demanded to change in
expenditure on advertising
Ea=Q . A
A Q
HIGHLY EFFECTIVE PERFECTLY
INEFFECTIVE
ADVERTISEMENT ADVERTISEMENT
Quantity Qx
Income
Quantity Qx
Income
Advertisement elasticity of demand
Demand forecasting

Definition

Factors

Purposes of Forecasting

Criteria for a good forecasting

Methods of demand forecasting
Is a process by which an individual or a firm
predicts future demand for product or products

Accurate forecasting-enables these firms to
produce required quantities at the right time and
arrange well in advance for the various factors
of production

Better planning and allocation of national
resources.
Definition
How far ahead?

Short term
Long- term
Should forecast be general or specific
Problems and methods
Classification of goods
- consumer
- durable
- consumer goods and services
Factors Influencing DF
Forecasting at different levels

Macro

Industrial

Firm-level

Factors
Purposes of short-term forecasting

Purposes of long term forecasting
Purposes of forecasting
Production scheduling
Reducing cost of purchasing raw materials
Determining appropriate price policy
Setting sales targets and establishing controls and
incentives
Evolving a suitable advertising and promotion
programme
Forecasting short-term financial
Short-term forecasting
Short-term Forecasting

Planning of a new unit or expansion of an
existing unit

Planning of long-term financial requirements

Planning of man-power requirements
Long -term Forecasting
Accuracy
Plausibility
Simplicity
Economy
Availability
Durability

Criteria for a good Forecasting
Survey or buyers
intention

Delphi method

Expert opinion

Collective opinion

Nave models
Smoothing techniques

Analysis of time series
and trend projections

Use of economic
indicators

Controlled experiments

Judgmental approach

Direct method of estimating sales in the near future
Asking customers what the buyers are planning to buy
Known as opinion survey
The burden of forecasting goes to buyer
Method is best when bulk of sales is made.
Customers may misjudge or mislead or may be uncertain
about quantity
Not useful in case of house old customers
Does not measure and expose the variables under
managements control

Survey or buyers method
Survey methods
- experts opinion
- consumer survey
- complete enumeration
- sample survey
- end- use
- Delphi method

- market experimentation
- stimulated market method
- actual market method

Statistical method
- trend analysis
- heading indicator analysis
- regression method
- simultaneous equation
conducted by sales agencies

a direct method of addressing people

helps in gaining first hand information
Survey Methods
business firm prefers to depend on survey of
experts
Experts are those who have the feel about the
product
opinion poll is conducted among experts
Sometimes this method is also called the
hunch method
Experts opinion

This method is very easy and less costly to
carry out.
This method produces quick results
When a firm intends to bring a new product, this
method is very useful to elicit the opinion of
experts on its marketing plans
Advantages
The experts must have wide knowledge and
experience otherwise their opinion may be
personal based on guess work.

Experts opinion may be biased for a number
of reasons.
Disadvantages
interviewing the consumers directly to get
information about their purchase plans at a
number of possible prices over a particular
period of time.

information collected through questionnaire

The data will have to be classified and
tabulated for systematic presentation and
analysis.
Consumer survey
All consumers of a product are contacted and
they are interviewed to know their probable
demand for the forecast period.
This individual probable demand is added to
ascertain the demand forecast for the firms
product.
For example there are N consumers, each
demanding commodity X, then the total demand
forecast would be EN * n. where n=1.
Complete enumeration method/ census method:
This method simply records the data and
aggregates; it does not introduce any value
judgment of his own.

The demand forecast through this method is
likely to be more accurate than many other
methods.
Advantages
It is time consuming and costly method

There can be large number of errors in the
data collection, as it is a tedious and
cumbersome process.
Disadvantages
Only few consumers are selected by using some
appropriate sampling technique.
They are interviewed to ascertain their probable
demands for the product for the forecast period.
Their average demand is then calculated.
This average demand for the sample is multiplied by
the total number of consumers to obtain the aggregate
demand forecast for the product in question.
Sample survey
It is a direct method of collecting data from
consumers. The information obtained is first
hand, it is more reliable.

This method saves time, cost and energy. It is
economical, if information is collected by postal
questionnaire.
Advantages
There may be sampling error. The smaller the
size of the sample, the larger the sampling
error.

This method provides scope for errors. The
consumer may not understand the significance
of the questions asked, they may be dishonest,
reluctant or shy to reply or they may be either
vague or imaginary replies. This reduces the
usefulness of information collected.
Disadvantages
the demand for a product is forecasted through a
survey of its users.

A product may be used for final consumption by house
old sector and government and as an intermediate
product by different industries as well as may be
exported and imported.

purposes can be obtained through a survey of all or
selected consumers, exporters and importers and
industries using it as an input thus the total demand
forecast can be obtained as the sum of the demand
forecast of all three components.
End-use Method
It provides use-wise or sector-wise demand
forecasts.

This method is used now as a standard tool in
economic analysis and are extensively used by
governmental and no-governmental agencies.
Advantages
This method assumes that technical structure of
production remains unchanged overtime, which
is not true. Because with economic
development technical innovations continue to
take place and lead to technological changes in
the industrial structure.

This method needs extensive information on
the probable demands of the final goods sector.
No company how so ever large can hope to
possess this information.
Disadvantages
In this method an attempt is made to arrive at a
consensus in an uncertain area by questioning
a group of experts repeatedly until some sort of
unanimity is arrived among all experts.

These meetings help to narrow down different
views of experts.
Delphi method
In this method it is possible to pose the problem
to experts directly

It generates a reasonable opinion in place of
unstructured opinion.

It is a cheap method, save time and resources.
Advantages

The success of this method depends upon wide
knowledge and experience of experts.

It could be tedious and costly method if the
experts are not too large and are cooperative
and forecaster has the necessary funds and
ability to perform the task.
Disadvantages

Time series data: Refers to data collected
over a period of time recording historical
changes in variables like price, income, etc.
that influenced demand for a commodity
Time series analysis relate to determination
of change in variable in relation to time.
Statistical method
Trend analysis: A firm which has been in existence for
a long time will have accumulated data on sales
pertaining to different time periods.
When such data is arranged, chronologically it is know
as Time Series.
A typical time series has four components, trend,
cyclical fluctuations, seasonal variations and random
or irregular fluctuations.
This method is highly subjective and considerably
depends on the bias of the person drawing the curve.
The main advantage of this method is that it does not
require the formal knowledge of economic theory and
the market, it only needs the time series data.
Statistical method
involves a study of the dependence of one
variable on the other variables.

In demand forecasting demand is estimated
with the help of a regression equation where in
demand is the dependent variable and price,
advertising expenditure, consumers income,
etc is the independent variable.
Regression method
An important management activity
Major decisions in business are always
based on some forecasts
Generated by the firms economists or
consultants specialised in forecasting
December 10, 2013 Vidya Suresh 62
Forecasting
Forecasting requires a good set of data
Data serves as the base for analysis
3 important sources of data
expert opinion
surveys
market experiment

Sources of data
Collective judgment of knowledgeable
persons
This include the opinion of people closely
connected with the organisation
Ex: Delphi technique
-it aids individual panel member in
assessing their forecasts
-generates more precise forecasts with
each iteration
Expert opinion
The problem is Delphi method can be
expensive
Usefulness of the expert opinion depends
on their skill to make predictions which
may turn out to be wrong
Some experts may be unwilling to be
influenced by the predictions of others
Contd..
Surveys of managerial plans serve as
important source of data
Rationale for conducting such surveys is
that plans generally form basis for future
actions
If data available does not meet the specific
needs then the firm conducts its own
survey
Surveys
Problem with survey is, the responses
may not be the actual consumer behaviour
Designed to generate data prior to the full-
scale introduction of a product
Factors affecting market experiment
-location
-residents should be applicable to that
area
Market experiment
To identify the components of change in
the data.
It includes:
-Trend
-Seasonality
-Cyclic patterns
-Random fluctations (refer book)
Time-series analysis
Law of Supply - price and the quantity
supplied are positively related, ceteris
paribus.
Supply schedule
Individual supply curve
Market supply curve
Supply
Rams Supply Schedule
Figure 5 Rams Supply Schedule and Supply
Curve
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0
2.50
2.00
1.50
1.00
1 2 3 4 5 6 7 8 9 10 11
Quantity of
Ice-Cream Cones
$3.00
12
0.50
1. An
increase
in price ...
2. ... increases quantity of cones supplied.
The supply function
Input prices
Prices of other outputs
Technology
Expectations
Number of sellers
Government taxes and subsidies
Q
s
=F(P,P
I
,P
O
,T,E,N
S
,G)

Market Supply: The horizontal summation of all the
individual firms supply curves.

Cont..
When prices expected to fall much sellers will
sell more to clear their stocks
In long run supply affected by changes in
costs and technologies
Changes in habits ,tastes ,weather ,national
and international disturbances
When wage rise to a level when workers feel
satisfied, they work less to have more leisure
where supply curve is backward sloping

Exceptions to law of supply
The supply curve is the graphic
representation of the law of supply.
The supply curve slopes upward to the
right.
The slope tells us that the quantity
supplied varies directly in the same
direction with the price.
The Supply Curve
S
A
Quantity supplied (per unit of time)
0
P
r
i
c
e

(
p
e
r

u
n
i
t
)

P
A
Q
A

A Sample Supply Curve
Supply Curve DVDs
Supply refers to a schedule of quantities a
seller is willing to sell per unit of time at
various prices, other things constant.
Shifts in Supply Versus Movements Along a Supply
Curve
Quantity supplied refers to a specific
amount that will be supplied at a specific
price.
Shifts in Supply Versus Movements Along a
Supply Curve
Changes in price causes changes in
quantity supplied represented by a
movement along a supply curve.
Supply Curve
A movement along a supply curve the
graphic representation of the effect of a
change in price on the quantity supplied.
Supply Curve
If the amount supplied is affected by
anything other than a change in price,
there will be a shift in supply.
Supply Curve
Shift in supply the graphic
representation of the effect of a change in
a factor other than price on supply.
Supply Curve
Change in quantity
supplied (a movement
along the curve)
P
r
i
c
e

(
p
e
r

u
n
i
t
)

S
0

$15
A
1,250 1,500
B
Change in Quantity Supplied
P
r
i
c
e

(
p
e
r

u
n
i
t
)

S
0

Shift in Supply
(a shift of the curve)
S
1
$15
A B
1,250 1,500
Shift in Supply
Other factors besides price affect how
much will be supplied:
Prices of inputs used in the production of a
good.
Technology.
Suppliers expectations.
Taxes and subsidies.
Shift Factors of Supply
Supply
Resource
Prices
Technology
And
Productivity
Expectations
Of
Producers
Number
Of
Producers
Prices of
Related
Goods and
Services
Factors that Shift Supply
When costs go up, profits go down, so that
the incentive to supply also goes down.

Price of Inputs (Resource Prices)
Advances in technology reduce the
number of inputs needed to produce a
given supply of goods.
Costs go down, profits go up, leading to
increased supply.
Technology
If suppliers expect prices to rise in the
future, they may store today's supply to
reap higher profits later.
Expectations
As more people decide to supply a good
the market supply increases (Rightward
Shift).
Number of Suppliers
The market supply curve is derived by
horizontally adding the individual supply
curves of each supplier.
Individual and Market Supply Curves

Quantities
Supplied
A
B
C
D
E
F
G
H
I
(1)
Price
(per DVD)
(2)
Ann's
Supply
(5)
Market
Supply
(4)
Charlie's
Supply
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
0
1
2
3
4
5
6
7
8
0
0
1
2
3
4
5
5
5
0
0
0
0
0
0
0
2
2
0
1
3
5
7
9
11
14
15
(3)
Barry's
Supply
From Individual Supplies to a Market Supply
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
P
r
i
c
e

p
e
r

D
V
D

Charlie Barry
Ann
Quantity of DVDs supplied (per week)
$4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0
I
H
G
F
E
D
C
B
A
Market Supply
C
A

From Individual Supplies to a Market Supply
Aggregation of Supply (I)
Aggregation of Supply (II)
The opportunity cost of producing and
selling any good is the forgone opportunity
to produce another good.
If the price of alternate good changes then
the opportunity cost of producing changes
too!
Example Mc Don selling Hamburgers vs.
Salads.
Price of Related Goods or Services
When taxes go up, costs go up, and profits
go down, leading suppliers to reduce
output.
When government subsidies go up, costs
go down, and profits go up, leading
suppliers to increase output.
Taxes and Subsidies
Decrease in Supply
Increase in Supply
Change in Supply vs.
a Change in the Quantity Supplied
Elasticity of Supply: a measure of the
way suppliers respond to a change in
price
Elastic: sensitive/responsive to change in
price (greater than 1)
Inelastic: not sensitive or not responsive
to a change in price (less than 1)
Unitary: Equal change in price to equal
change in supply (= to 1)
Elasticity of Supply
A measure of the extent to which the quantity supplied of
a good changes when the price of the good changes,
and all other influences on sellers plans remain the
same (cateris paribus)

Price Elasticity of Supply (Es)
= % Change in Qs
% Change in Price


Price Elasticity of Supply

Percentage change in quantity supplied
Percentage change in price

If Price Elasticity of Supply > 1, Supply is elastic
If Price Elasticity of Supply = 1, Supply is unit elastic
If price elasticity of supply< 1, Supply is inelastic
Computing Price Elasticity of Supply
Perfectly Elastic Supply When the quantity supplied
changes by a very large percentage in response to an
almost zero increase in price
Elastic Supply When the % change in the quantity
supplied > the % change in the price
Unit Elastic Supply When the % change in the quantity
supplied = the % change in price
Inelastic Supply When the % change in the quantity
supplied is < the % change in price
Perfectly Inelastic Supply When the quantity supplied
remains the same as the price changes
Price Elasticity of Supply
Supply curves with different price elasticity of supply
Cont..
A suppliers responsiveness to a price change
is called _________________
(think like a supplier/seller)
3 Factors that will determine a products
elasticity
1. Availability of resources required to make the
product
2. Amount of time required to make the product
3. Skill level of the worker needed to make the
product
A product has elastic supply when a price
change causes a significant change in the
quantity supplied. (What would have to be true
(of a product) to allow a seller to quickly
increase production if the market price goes
up?)
1. Abundance of resources required to make the
product
2. Product can be made quickly
3. Low skill level of workers required
Elastic Supply
Remember, if the price changes, the quantity supplied
changes a lot. This creates a flatter curve.
P
Q
P1
Q1
P2
Q2
s
Slope of an Elastic supply curve
A price change causes very little change in the
quantity supplied= Inelastic. This happens
because
1.The product requires scarce resources
2. It takes a long time to make
3. It requires a high skill level of workers
examples?
Hand crafted furniture
diamonds
Inelastic Supply
If the market price goes up but the supplier
cannot increase production very much,
then this creates a steeper curve.
P
Q
s
P1
Q1
P2
Q2
Slope of an inelastic supply curve
Figure 7 Shifts in the Supply Curve
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream Cones
0
Increase
in supply
Decrease
in supply
Supply curve, S
3
curve,
Supply
S
1
Supply
curve, S
2
Equilibrium price and quantity = market clearing
price and quantity
Disequilibrium prices and quantities
Shortage Excess Demand
Surplus Excess Supply
Comparative static analysis: changes in
equilibrium prices and quantities
Shifts in curves versus movement along revisited
Changes in demand and supply
Market Equilibrium
Figure 8 The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
13
Equilibrium
quantity
Equilibrium price
Equilibrium
Supply
Demand
$2.00
December 10, 2013 Vidya Suresh
113
Figure 9 Markets Not in Equilibrium
Price of
Ice-Cream
Cone
0
Supply
Demand
(a) Excess Supply
Quantity
demanded
Quantity
supplied
Surplus
Quantity of
Ice-Cream
Cones
4
$2.50
10
2.00
7
Figure 9 Markets Not in Equilibrium
Price of
Ice-Cream
Cone
0
Quantity of
Ice-Cream
Cones
Supply
Demand
(b) Excess Demand
Quantity
supplied
Quantity
demanded
1.50
10
$2.00
7 4
Shortage
Figure 10 How an Increase in Demand Affects the
Equilibrium
Price of
Ice-Cream
Cone
0 Quantity of
Ice-Cream Cones
Supply
Initial
equilibrium
D
D
3. . . . and a higher
quantity sold.
2. . . . resulting
in a higher
price . . .
1. Hot weather increases
the demand for ice cream . . .
2.00
7
New equilibrium $2.50
10
Figure 11 How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream
Cone
0 Quantity of
Ice-Cream Cones
Demand
New
equilibrium
Initial equilibrium
S
1

S
2

2. . . . resulting
in a higher
price of ice
cream . . .
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
3. . . . and a lower
quantity sold.
2.00
7
$2.50
4

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Unit II: Demand and Supply

Demand theory and analysis

Arc elasticity of demand

The ratio of percentage change in the quantity demanded of a

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