ECO105D

Topic: DEMAND, SUPPLY, AND EQUILIBRIUM

Submited By:
Group – 01A:

NAME REGISTRATION NO
SHIMU KHATUN 2021331065
NEHAL HASNAIN ALVI 2021331063
MEHRAB HOSSAIN SIDDIQUE 2021331035
FAHMID HASAN 2021331079
MD.MINHAZUR RAHMAN 2019331115

Submitted to :
Prof. Dr. Sadiqunnabi Chowdhury
Ph.D. (UK)
Professor, Department of Economics,
SUST
 CHAPTER PLAN:
Chapter 1: Demand, Supply, and Equilibrium
1.1 Basic Concept of Economics
• 1.1.1 Definitions
• 1.1.2 Scarcity
(PPF and the Opportunity Cost)
• 1.1.3 Why Study Economics?
1.2 Demand
• 1.2.1 Definition of Demand
• 1.2.2 Law of Demand
• 1.2.3 Determinants of Demand
• 1.2.4 Change in Demand vs. Change in Quantity Demanded
1.3 Supply
• 1.3.1 Definition of Supply
• 1.3.2 Law of Supply
• 1.3.3 Determinants of Supply
• 1.3.4 Change in Supply vs. Change in Quantity Supplied
1.4 Equilibrium
• 1.4.1 Graphical Illustration of Equilibrium
• 1.4.2 Mathematical Model for Equilibrium
1.5 Elasticity of Demand and Supply
• 1.5.1 Definition of Elasticity
• 1.5.2 Types of Elasticity
• 1.5.3 Graphical and Mathematical Representation of Various Elasticities
 CHAPTER 1

1.1 Basic Concepts for Economics

1.1.1: Definitions:

Economics:

Economics is the study of how people allocate limited resources to sa�sfy unlimited wants.
It examines how individuals, businesses, and governments make decisions regarding the
produc�on, distribu�on, and consump�on of goods and services. Since resources such as
land, labor, and capital are finite, economics seeks to understand how these resources can
be used efficiently to meet human needs and desires.

Scarcity:

Scarcity is the fundamental economic problem arising from the fact that resources are limited
while human wants are unlimited. It means that there are not enough resources—such as
land, labor, and capital—to produce everything that people desire. Because of scarcity,
individuals, businesses, and governments must make choices about how to allocate resources
efficiently. This leads to trade-offs, where selec�ng one op�on means giving up another.
Scarcity affects pricing, produc�on, and consump�on decisions, influencing economic systems
and policies. It forces socie�es to priori�ze needs, develop efficient distribu�on methods, and
create mechanisms like markets and government interven�ons to manage resource alloca�on.
1.1.2: PPF and Opportunity cost

PPF (Production Possibility Frontier ):

The Produc�on Possibility Fron�er (PPF) is an economic model that illustrates the maximum
possible output combina�ons of two goods or services that an economy can produce with its
available resources and technology. It represents the trade-offs that an economy faces when
alloca�ng resources between different goods. Any point on the PPF curve signifies efficient
produc�on, while points inside indicate underu�liza�on of resources. The curve also
demonstrates opportunity cost, as producing more of one good results in the sacrifice of
another. An outward shi� in the PPF signifies economic growth, usually due to advancements
in technology or an increase in resources.

Opportunity Cost:

Opportunity cost refers to the value of the next best alterna�ve that is forgone when making a
choice. It represents the benefits that could have been gained from an op�on that was not
selected. In economics, opportunity cost is a fundamental concept used to analyze trade-offs
and decision-making. It applies to individuals, businesses, and governments when alloca�ng
limited resources. For example, if a person chooses to spend money on a vaca�on instead of
inves�ng in educa�on, the opportunity cost is the poten�al knowledge and skills they could
have acquired. Similarly, in produc�on, if a factory uses resources to produce cars instead of
motorcycles, the opportunity cost is the number of motorcycles that could have been
produced. Understanding opportunity cost helps in making more informed and efficient
decisions.

Example Table of Opportunity Cost :

Consider an economy that produces two goods: Cars and Computers.

The table below shows the possible combina�ons of the two goods the
economy can produce with its limited resources.
Graph of PPF:
 1.1.3 1.1.3: WHY STUDY ECONOMICS
1. .

1.Understanding Scarcity and Resource Alloca�on: Economics teaches how resources (like
money, �me, labor, and raw materials) are limited, but human wants and needs are virtually
unlimited. By studying economics, you learn how to make efficient decisions on how to allocate
these scarce resources.
1.

2.Informed Decision-Making: Economics equips people with the tools to make beter decisions
in both personal and professional life. Whether it's budge�ng personal finances, deciding on
investments, or making business decisions, economics helps you understand the trade-offs
involved and the opportunity costs.
2

3.Understanding Market Forces: Economics explains how supply and demand affect prices,
how markets func�on, and the role of compe��on. This understanding is essen�al for
naviga�ng the modern economy, both as a consumer and as a producer.
2.
4. Policy Making and Social Welfare: Economics helps us understand how government policies
(like taxa�on, public spending, and monetary policy) impact the economy and society. It also
explores how to address issues like unemployment, poverty, inequality, and environmental
sustainability.
1.2 Demand
1.2.1: Definition of Demand

Demand:

Demand in economics refers to the quan�ty of a good or service that consumers are willing
and able to purchase at various price levels over a given period of �me. It is influenced by
several factors, including the price of the good, consumer income, tastes and preferences, the
prices of related goods (subs�tutes and complements), and future expecta�ons.

1.2.2: Law of Demand

The Law of Demand states that, all else being equal, when the price of a good or service
increases, the quan�ty demanded decreases, and when the price decreases, the quan�ty
demanded increases. This inverse rela�onship between price and quan�ty demanded occurs
because consumers tend to buy more of a product when it becomes cheaper and less when it
becomes more expensive.
That is,
𝑃𝑃 ↑ qd ↓ , ceteris paribus
𝑃𝑃 ↓ qd ↑ , ceteris paribus

Where 𝑃𝑃 = price and qd = quan�ty demanded

Quantity Demanded:
Quan�ty demanded refers to the specific amount of a good or service that consumers are
willing and able to purchase at a given price within a par�cular �me period. It is a point on the
demand curve that changes in response to price fluctua�ons, while other factors remain
constant. Unlike demand, which represents the en�re rela�onship between price and quan�ty
demanded, quan�ty demanded refers to a single value at a specific price level
So, we can say that, quan�ty demanded is a func�on of price, that is, qd
= f(p), cet. par.

Based on the rela�ons, we can define the demand curve as follows:

The demand equa�on, also known as the DD equa�on, can be expressed by the following
linear equa�on: Qd = 𝑎𝑎 − 𝑏𝑏𝑏𝑏

Where ,

● Qd = Quan�ty demanded.
● 𝑃𝑃 = Price of the commodity.
● 𝑎𝑎 = Intercept of x-axis.
● 𝑏𝑏 = Slope of the demand curve.

1.2.3: Determinants of Demand

Quan�ty demanded is a func�on of price. But price is not the only factor that affects the
quan�ty demanded. There are some other determinants which affect it. Some of the factors
that affect the demand of a quan�ty is men�oned below:

Price of the related products (Pr):

a) Subs�tute Goods
If two goods are subs�tutes (e.g., tea and coffee), an increase in the price of one good increases
the demand for the other:
Qd = f (P ,Pr)
If tea and coffee are subs�tutes:
Example: If the price of tea increases, consumers switch to coffee, so demand for coffee
increases.

b) Complementary Goods
If two goods are complements (e.g., tea and sugar), an increase in the price of one good
decreases the demand for the other:

Example: If the price of tea increases, people buy less tea, and as a result, the demand for sugar
also decreases.
Graphical Representa�on:

Income (Y ):

Income (YYY)

The rela�onship between income and demand depends on the type of good.

a) Normal Goods

For normal goods, demand increases as income increases:

b)Inferior Goods:

For inferior goods, demand decreases as income increases:

Example: As income rises, people shi� from public transport (inferior good) to private cars
(normal good).

Taste or preference of the consumer (T/ Pe ):

Consumer preference refers to the choices individuals make when purchasing goods and
services to maximize their sa�sfac�on or u�lity. These preferences are influenced by factors
such as personal taste, cultural background, social trends, and external informa�on (e.g.,
scien�fic studies, adver�sements).
Consumers have some control over the type of goods they buy, but external influences limit
their ability to always choose freely. For example, even if a consumer enjoys fast food, they
might reduce consump�on if they learn about its nega�ve health effects.

Population (Pop):
Popula�on is a key determinant of demand because the number of people in an economy
directly affects the total market size for goods and services. A larger popula�on typically means
higher demand, while a smaller popula�on results in lower demand.

Seasonal effect (𝑆𝑆):

The seasonal effect refers to the changes in demand for goods and services due to different
seasons, weather condi�ons, fes�vals, or periodic trends. Some products experience higher
demand in certain seasons and lower demand in others.

For example: Ice creams sell more in summer and less in winter and Jackets sell more in
winter and less in summer.
Let us express these factors mathema�cally. Previously we defined the equa�on for the
demand curve to be the following:

q𝑑𝑑 = 𝑎𝑎 − bp
In general, if 𝑄𝑄 is a mul�variable func�on where the variables are the determinants of 𝑑𝑑 the
demand, then 𝑄𝑄 can be expressed as:
𝑄𝑄𝑄𝑄 = 𝑓𝑓 ( 𝑃𝑃− , 𝑃𝑃𝑃𝑃 +/− , 𝑇𝑇/𝑃𝑃𝑃𝑃 + , 𝑃𝑃𝑃𝑃p + , 𝑌𝑌 + , 𝑆𝑆, ...)

Where (+) denotes posi�ve correla�on, (−) denotes nega�ve correla�on, and (+ / −) denotes
both posi�ve and nega�ve correla�on.

1.2.4: Change in Demand VS Change in Quantity Demanded

Change in Quantity Demanded:

A change in quan�ty demanded refers to a varia�on in the amount of a product that

consumers are willing and able to purchase. This shi� in quan�ty demanded occurs as a result
of a change in the price of the product. The graph below illustrates this phenomenon. To
express this mathema�cally, we define quan�ty demanded (Qd) as a func�on of the price (p),
assuming all other factors (denoted as 𝑃𝑃) remain constant. Hence, the func�on can be writen
as:

𝑄𝑄𝑄𝑄 = 𝑓𝑓(p), ceteris paribus.

Change in Demand:

Change in Demand refers to a shi� in the en�re demand curve, meaning that the quan�ty
demanded of a product changes at every price level. Unlike a change in quan�ty demanded,
which is caused by a change in the price of the product, a change in demand is driven by factors
other than price. These factors are known as the determinants of demand.
 1.3 : SUPPLY

1.3.1: Definition of Supply

Supply refers to the quan�ty of a good or service that producers are willing and able to offer for
sale at various prices over a certain period of �me. It represents the rela�onship between the
price of a good and the quan�ty that producers are willing to produce and sell, holding all other
factors constant.

1.3.2: Law of Supply

The Law of Supply states that, all else being equal, as the price of a good or service increases,
the quan�ty supplied increases, and as the price decreases, the quan�ty supplied decreases.
This law reflects a posi�ve rela�onship between price and quan�ty supplied, meaning
producers are more willing to produce and offer more of a good or service when they can sell it
at a higher price, as it leads to higher poten�al profits.
𝑃𝑃 ↑ 𝑄𝑄s ↑

𝑃𝑃 ↓ 𝑄𝑄s ↓ , ceteris paribus

Where 𝑃𝑃 = price and 𝑄𝑄s = quan�ty supplied

Based on the rela�ons, we can define the supply curve as follows:

The supply equa�on, also known as the SS equa�on, can be expressed by the following linear
equa�on:

𝑄𝑄𝑄𝑄 = 𝑐𝑐 + 𝑑𝑑P

Where ,
● 𝑄𝑄s = Quan�ty supplied
● 𝑃𝑃 = Price of the commodity
● 𝑐𝑐 = Intercept of x-axis
● 𝑑𝑑 = Slope of the supply curve
1.3.3: Determinants of Supply

The supply of a good or service is influenced by several factors, which can either increase or
decrease the quan�ty supplied. Some of the key factors that affect supply include:
1. 1. Price of the Product (P):
The supply of a product is directly related to its price. When the price of a commodity
rises, assuming all other factors remain constant, the supply of the product typically
increases. This is because higher prices encourage producers to offer more of the good
in the market.
2. 2. Price of Inputs (Pr):
Inputs such as land, labor, capital, and organiza�on play a crucial role in produc�on. A
rise in the cost of a par�cular input leads to a higher cost of produc�on. The impact of
this rise depends on how much the product relies on the specific input. For instance, an
increase in the price of land will significantly affect the produc�on of crops like wheat,
while the effect on car produc�on may be rela�vely smaller.
3. 3. Technology (T):
Technological advancements o�en enable producers to produce more goods or achieve
beter quality using the same or fewer resources. Improvements in technology can lower
produc�on costs and enhance efficiency, leading to an increase in supply.
4. 4.Taxes and Subsidies (T/S):
Taxes on goods, such as excise du�es, import du�es, and GST, can significantly increase
the cost of produc�on. Higher taxes generally reduce the supply of affected goods unless
prices rise to offset the cost. Conversely, subsidies lower produc�on costs, making it
easier for producers to supply more of the good at lower prices, which usually leads to
an increase in supply.
5. 5.Seasonal Effects (S):
The supply of products can be affected by seasonal changes. For instance, agricultural
products o�en have higher supply during their harvest season, while off-season supply
might be limited. Similarly, some goods or services are more available at certain �mes of
the year due to seasonal demand or produc�on cycles.
6. 6.Natural Calami�es (N):
Natural disasters such as floods, earthquakes, or droughts can dras�cally reduce the
supply of goods. These calami�es can damage produc�on facili�es, disrupt supply
chains, or destroy resources, leading to a significant decrease in the availability of
affected products.
In general, if 𝑄𝑄s is a mul�variable func�on where the variables are the determinants of the
supply, then 𝑄𝑄s can be expressed as:

𝑄𝑄𝑄𝑄 = 𝑓𝑓(𝑃𝑃+ , 𝑃𝑃 𝑖𝑖 +/− , 𝑇𝑇 + , 𝑇𝑇/𝑆𝑆 , 𝑆𝑆, 𝑁𝑁 + ...)

Where (+) denotes posi�ve correla�on, (−) denotes nega�ve correla�on, and (+ / −) denotes
both posi�ve and nega�ve correla�on.

1.3.4: Change in Supply VS Change in Quantity Supplied

Change in Quantity Supplied:

Change in Quan�ty Supplied refers to a change in the amount of a good or service that
producers are willing to sell at a specific price, due to a change in the price of the good or
service itself, while all other factors remain constant (ceteris paribus). A change in quan�ty
supplied is represented by a movement along the supply curve, not a shi� of the en�re curve.
When the price of a good changes, producers will adjust the quan�ty they supply accordingly.
Let us define the quan�ty supplied 𝑄𝑄s as a func�on of the price , while other factors would
remain constant. Therefore, the func�on can be expressed as:

𝑄𝑄s = 𝑓𝑓(𝑃𝑃), cet. Par.

In the graph, an ini�al price 𝑃𝑃1 and its corresponding quan�ty supplied is ploted in q1 the
graph of 𝑃𝑃 vs 𝑄𝑄s . As we can see, if a new price is ploted and its corresponding 𝑃𝑃2 price q2 is
found, the overall change in the quan�ty supplied demonstrates a movement along the supply
curve (from 𝐴𝐴 to

𝐵𝐵).

Change in Supply:

Change in Supply refers to a shi� in the en�re supply curve, meaning that the quan�ty of a
good or service that producers are willing and able to sell changes at every price level, due to
factors other than the price of the good itself. Unlike a change in quan�ty supplied (which is
caused by a change in price), a change in supply happens when other external factors affect the
produc�on of goods.
Let us once again express 𝑄𝑄s as a func�on as a func�on of the price , while other 𝑌𝑌 factors
would remain constant.
Therefore, the func�on can be expressed as: 𝑄𝑄s = f(Y) , cet. Par.

From the graph, we can see that for a change in the supply from an ini�al point 𝑄𝑄1 to a final
point 𝑄𝑄2 is actually a shi� in the en�re supply curve. A posi�ve change is reflected by a
forward shi� of the curve to the right, while a nega�ve change reflects a backward shi� to the
le�. In the graph below, the change denotes a forward shi� of the supply curve.

1.4: Equilibrium
Definition of Equilibrium:

Equilibrium in economics refers to a situa�on where the quan�ty demanded of a good or

service is equal to the quan�ty supplied at a par�cular price. This is the point at which there is
no tendency for the price to change because the forces of demand and supply are balanced.

If we denote 𝑄𝑄d as the quan�ty demanded of a commodity and as the 𝑄𝑄𝑄𝑄 quan�ty supplied of
that commodity, then according to the defini�on, at an equilibrium -

𝑄𝑄 = 𝑑𝑑 𝑄𝑄𝑄𝑄

Or, quan�ty demanded = quan�ty supplied

1.4.1 Graphical Representation of Equilibrium:

The graph below represents an ideal market equilibrium scenario. Based on the men�oned
aspects of the following graph, let us look at some other equilibrium concepts.
Point C represents the equilibrium, as it is the point where the supply curve (SS) intersects with
the demand curve (DD). If the price of the commodity increases from p* to p (above the
equilibrium), which is an example of a posi�ve shock, the quan�ty supplied exceeds the
quan�ty demanded. This situa�on is known as a surplus. The surplus creates downward
pressure on the price, which eventually brings the price back to equilibrium.
On the other hand, if the price decreases from p* to p (below the equilibrium), which is a
nega�ve shock, the quan�ty demanded exceeds the quan�ty supplied. This leads to a shortage
or deficit. A shortage puts upward pressure on the price, which pushes the market back toward
the equilibrium price over �me.
4o mini

1.4.2 Mathematical Model for Equilibrium:

If we denote qd as the quan�ty demanded of a commodity and qs as the quan�ty supplied of
that commodity, then according to the defini�on, at an equilibrium -

𝑄𝑄d = 𝑄𝑄s

From the defini�on of demand and supply, we have two equa�ons:

1) Qd = a - bp
2) Qs = c + bp

To find p* and q*:

We know in equilibrium -

Qs = Qd
→ c + dp* = a - bp*

→ dp* + a - bp* = a - c

→ p* = (a - c) / (b + d)

Again - q* = a - bp*

= a - b(a - c) / (b + d)
= (ad + ba - ba + bc) / (b + d)

So, The Equilibrium Price is given by the expression:

𝑝𝑝 * = (𝑎𝑎−𝑐𝑐)/(𝑏𝑏+𝑑𝑑)

And the Equilibrium Quan�ty is given by the expression:

𝑞𝑞 * = (𝑎𝑎𝑎𝑎+𝑏𝑏𝑏𝑏)/(𝑏𝑏+𝑑𝑑)

1.5: Elasticity of Demand and Supply

1.5.1: Definition of elasticity:
Elas�city in economics refers to the measure of how much the quan�ty demanded or supplied
of a good responds to changes in price or other factors. It reflects the sensi�vity of buyers and
sellers to changes in market condi�ons

1.5.2: Types of elasticity

Types of Elas�city:
Elas�city measures the responsiveness of one variable to changes in another. In economics, the
two primary types of elas�city used are Arc Elas�city and Point Elas�city. Both describe how
demand or supply responds to changes in price or other variables, but they differ in how they
measure this response.
1. Point Elas�city:
Point elas�city refers to the elas�city of demand (or supply) at a specific point on the demand
or supply curve. It is calculated by considering an infinitesimally small change in price (or
quan�ty). This approach assumes the price or quan�ty changes are so small that they don’t
significantly alter the curve's shape.
2. Arc Elas�city:
Arc elas�city is used when the price or quan�ty changes are large enough that a simple point
calcula�on is not suitable. It is an average measure of elas�city over a range of prices and
quan��es, typically between two points on the demand or supply curve. This method takes into
account the average values of price and quan�ty between the two points.

•
Types of arc elasticity and graphical representation of those:

1) Perfectly elastic:
For perfect elas�city -

|ε| = ∞
which is only possible when Δp = 0 (although in real world scenario, Δp → 0 ). This
demonstrates that the quan�ty demanded changes wildly for that product, even for an
extremely small amount of change in pricing.

Elastic:

The price of a product is said to be elas�c, if-

|ε| > 1
Unit elastic:

The price of a product is said to be unit elas�c if its elas�city,

|ε| = 1

In this case, the quan�ty demanded of a product changes propor�onally to the change in
pricing.

Inelastic:

For an inelas�c price,

|ε| < 1
Perfectly inelastic:

If the price is perfectly inelas�c,

|ε| = 0.
All elasticity in 1 graph:

Elasticity of demand:

Elas�city of demand measures how much the quan�ty demanded of a good responds to a
change in its price, income ,and the price of related goods. It helps businesses and policy
makers understand consumer behavior.

There are three types of elas�city of Demand:

1. Price elasticity of demand: Measure how quan�ty demand changes with

price. Own price elas�city, qd = f(p)
cet. par.
|ε| = (p * Δq) / (q * Δp)
*** For own price elas�city we use modulus (||), not for cross or income price elas�city. ***

i. Elastic:

ii. Perfectly Elastic:

iii. Inelastic:

iv. Perfectly inelastic:

v. Unit elastic:

2. Cross-price elasticity: Measures how demand for one good changes when the
price of another good changes

qd = f(Pr) cet. par.

ε = (Pr * Δq) / (q * ΔPr)

ε > 0 ; (When Pr +) ε < 0 ;

(When Pr -)
 3. Income elasticity: Measures how demand changes with income.

qd = f(Y) cet. par.

ε = (Y * Δq) / (q * ΔY)

Elasticity of supply:

Elas�city of supply refers to the responsiveness of the quan�ty supply of a good one service to
a change in its price.

ε = (% change in Δq) / (% change in ΔY)

if
ε < 0; the good is a inferior good
ε > 1; the good is a luxurious good
ε = 0 to 1 ; the good is a necessary good

*** Luxurious and necessary goods are together is normal good***

Example: A black and white TV for a poor person is a luxurious good, when his income
increases, this TV will be his necessary good. When his income increases more, TV becomes
inferior.

Equation :
𝜖𝜖 = (𝛥𝛥𝛥𝛥/𝛥𝛥𝛥𝛥) ∗ (𝑝𝑝/𝑞𝑞 )
= (𝑞𝑞2 − 𝑞𝑞1)/(𝑝𝑝2 − 𝑝𝑝1) ∗ (𝑝𝑝1 + 𝑝𝑝2)/ (𝑞𝑞1 + 𝑞𝑞2)

Graph:
Resources:

1. Class Lectures (RCN)

2. ECN
3. Economics by Roger A. Arnold
4. Economics by Paul A. Samuelson, William D. Nordhaus
5. Internet