Demand, Supply and Price Elasticity Fundamentals
Demand is simply how much of something consumers are willing and able to buy at a specific price and time. It's not just wanting something - you need the cash to back it up too.
Several factors beyond price affect demand. When substitute products get pricier, demand for alternatives rises. Your income matters too - earn more money and you'll likely buy fewer budget brands (inferior goods). Fashion trends, population changes, weather, and even external shocks like terrorism can shift what people want to buy.
Supply represents how much producers can offer at given prices and times. Production costs heavily influence this - expensive raw materials mean less supply. Technology improvements, government taxes (like VAT), subsidies for merit goods, and external shocks (think oil price changes or crop failures) all impact what suppliers can provide.
Key Insight: Markets constantly balance what consumers want with what producers can deliver - and price isn't the only player in this game.
Price Elasticity of Demand (PED) measures how responsive quantity demanded is to price changes. The formula is: % change in demand ÷ % change in price. Elastic demand means small price changes cause big demand shifts - think luxury items or products with lots of substitutes. Inelastic demand means price changes barely affect buying behaviour - essential goods like petrol fall into this category.
Income Elasticity of Demand (YED) shows how demand responds to income changes. Normal goods see increased demand when you earn more, inferior goods see decreased demand, and luxury goods experience the biggest demand increases when incomes rise.