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2. THEORY OF DEMAND AND SUPPLY:

THEORY OF DEMAND:
Demand refers to the quantity of a product that consumers are willing and able to buy at a particular
price and over a given period of time. The law of demand states that more is bought at a lower price…

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FACTORS INFLUENCING DEMAND (DETERMINANTS):
There are indeed several factors which affect the quantity demanded for a certain product.
1. Change in the price of the commodity itself:
Changes in the price of the commodity will lead to changes in quantity demanded. For instance, a rise in
the price of…

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5. Changes in population:
When the size of the total population changes, demand for goods and services would generally change.
An increase in total population would generally lead to an increase in demand. However, the pattern of demand
depends on the composition of the population in terms of age…

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MOVEMENTS ALONG AND SHIFTS OF A DEMAND CURVE:
A movement along the demand curve occurs when quantity demanded changes because of a change in
the price of the commodity alone, while other factors in conditions of demand (income, tastes, population, price
of complements and substitutes, etc) remain constant. Thus,…

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Q2 Q Q1

ELASTICITY OF DEMAND:
The law of demand, which expresses an inverse relationship between quantity demanded and price,
shows only the direction of demand. No information is provided as to how much or to what extent will demand
change to a change in any of the variables…

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Price
D

P
25%
P1
D
50%

0 Quantity demanded
Q Q1

On the other hand, demand is said to be inelastic when a percentage change in price brings about a less
than proportionate change in quantity demanded. Hence, an inelastic demand occurs when the percentage
change in quantity…

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25% D

0 Quantity demanded
Q3 Q


Demand can also be perfectly elastic when a small percentage change in price brings about a change in
quantity demanded from zero to infinity. The coefficient of elasticity is equal to infinity.
Price

P D



0 Quantity demanded


Demand is perfectly inelastic…

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E = 0
0 Quantity
The above diagram shows a demand curve for which the price elasticity of demand is different at every price. It
varies according to the level of price. For instance, along the same demand curve, elasticity is unity at price 0P
(midpoint of demand curve),…

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Consumers will be in a position to afford its use even for less important purposes. On the other hand, a product,
which has a single use, has an inelastic demand, for example, toothpaste.

5. Habit:
There are certain goods which people consume because they have developed a habit, for…

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Price TR / TE
D

P1
10%
P
D
25%

0 Quantity 0 Price
Q1 Q
2. Price Inelastic:
Let initial price = £20, initial Quantity = 100
Thus, initial TR / TE = 20 * 100 = £2000
When price = £23 (15% increase), Quantity = 95 (5%…

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