Demand, supply and elasticity
Introduced| English | Meaning |
|---|---|
| demand/dɪˈmænd/ | The quantity of a good or service that buyers are willing and able to purchase at different prices over a period. |
| supply/səˈplaɪ/ | The quantity sellers are willing and able to offer at different prices over a specified period. |
| equilibrium/ˌiːkwɪˈlɪbrɪəm/ | A state in which opposing influences balance so there is no tendency for the relevant quantities to change. |
| quantity demanded/ˈkwɒntɪti dɪˈmændɪd/ | The amount buyers are willing and able to purchase at a particular price over a specified period. |
| price elasticity of demand/praɪs ɪlæˈstɪsɪti ɒv dɪˈmænd/ | The percentage change in quantity demanded divided by the percentage change in price. |
| elastic/ɪˈlæstɪk/ | Describing demand or supply whose percentage response exceeds the percentage change in its determining price or income. |
| inelastic/ɪnɪˈlæstɪk/ | Describing demand or supply whose percentage response is smaller than the percentage change in its determining price or income. |
| revenue/ˈrevənjuː/ | Income received by a business from selling goods or services before costs are deducted. |
The market sets the price
- A firm would love to charge whatever it likes — but the market has the final say, through demand 需求 and supply 供给.
- Understanding how they interact is the foundation of pricing and forecasting.
The equilibrium price is where:
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Equilibrium clears the market.
Demand, supply and equilibrium 均衡
- Demand falls as price rises; supply rises as price rises.
- The market settles at the equilibrium price, where the two are equal.
The equilibrium price is where quantity demanded 需求量 equals quantity supplied.
Demand, supply & elasticity
Price is set where demand meets supply.
Price rises 10% and quantity demanded falls 25%. What is the size of PED?
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PED = 25% / 10% = 2.5 (elastic).
A product with many close substitutes tends to have inelastic demand.
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False. Close substitutes let customers switch easily when the price rises, so demand is price elastic.
When quantity demanded responds strongly to price, demand is said to be ______.
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Elastic demand has PED greater than 1.
Price elasticity of demand 需求价格弹性
- PED measures how much quantity demanded responds to a price change.
- Elastic 富有弹性 (PED > 1): quantity is sensitive to price; inelastic 缺乏弹性 (PED < 1): it is not.
If demand for a product is inelastic, raising its price will:
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With inelastic demand, quantity falls little, so revenue rises.
Why elasticity matters for revenue 营业收入
- If demand is inelastic, raising price raises revenue.
- If demand is elastic, raising price lowers revenue — so a firm may cut price to sell far more.
Know your elasticity before changing price. A price rise helps revenue only if demand is inelastic. For an elastic product, the same rise drives customers away and revenue falls.
Worked examples
1. Formula: $\text{PED} = \dfrac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}$. A café raises a coffee from 20 to 22 (up 10%) and daily sales fall from 1000 to 950 (down 5%): $\text{PED} = -5/10 = -0.5$, inelastic. Revenue rises from $20 \times 1000 = 20\,000$ to $22 \times 950 = 20\,900$.
2. If instead PED were $-2$ (elastic), a 5% price cut would raise quantity by 10%; revenue changes by a factor of $0.95 \times 1.10 = 1.045$, a 4.5% rise. With elastic demand, cutting the price raises revenue.
Price rises by 8 percent and quantity demanded falls by 12 percent. What is the size of PED, and should the firm expect revenue to rise if it raises price again?
12 divided by 8 is 1.5, which is elastic.
What is the size of PED?
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The percentage quantity change over the percentage price change is 1.5. Other options — 2.5 (the lesson example's PED); 0.67 (the price change divided by the quantity change).
You've got it
- price settles at equilibrium, where demand meets supply
- PED measures demand's sensitivity to price (elastic >1, inelastic <1)
- inelastic → raise price to raise revenue; elastic → the opposite
Write from a PED of 1.5
- Price rises by 8 percent and quantity demanded falls by 12 percent.
- Find the size of PED and say what that means for a further price rise.