Assignment

​ Principles of Economics (ECO105D)

​ Topic: DEMAND, SUPPLY, AND EQUILIBRIUM

Submitted By:

Group - 01B:
​ ​ ​
​ ​ 2021331074- Tayaba Kabir Richee
2021331048- Most. Mayisha Tajnim
2021331016- Jannatul Ferdouse Esha
2021331010- Most.Khadiza Akther
​ 2021331062- Sumaiya Akter
​ ​ 2021331026- Sadia Jaman
2021331078- Nuzhat-E-Rahman​ ​
​ ​
​ ​
​ ​ ​ Session: 2021-22
Department of Computer Science & Engineering
SUST
Submitted To:

Prof Dr. Sadiqunnabi Choudhury

Ph. D(UK)

Professor, Department of Economics,

SUST.

Date of Submission:

26 February, 2025
 CHAPTER 1
DEMAND,SUPPLY AND EQUILIBRIUM

1.1 Basic Concepts for Economics

1.1.1: Definitions:

Economics: The science of scarcity; the science

of how individuals and societies deal with the fact that wants
are greater than the limited resources available to satisfy
those wants.

In other words, Economics is the study of how societies use

scarce resources to produce valuable goods and services
and distribute them among different individuals.
If we think about the definitions, we find two key
ideas that run through all of economics: that goods
are scarce and that society must use its resources efficiently.

For understanding the term ‘Economics’ precisely we need to

learn about some keywords related to the definition-

Scarcity: Scarcity is the condition in which our wants (for

goods) are greater than the limited resources (land, labor,
capital, and entrepreneurship) available to satisfy those
wants.
In other words, we want goods, but there are just not enough
resources available to provide us with all the goods we want.

Resource: Resource is the combination of four things-

1.​Land : All natural resources, such as minerals, forests,

water, and unimproved land.
2.​Labor : The physical and mental talents people
contribute to the production process.
3.​Capital : Produced goods that can be used as inputs for
further production, such as factories, machinery, tools,
computers, and buildings.
4.​Entrepreneurship : The particular talent that some
people have for organizing the resources of land, labor,
and capital to produce goods, seek new business
opportunities, and develop new ways of doing things.

Efficiency: Efficiency denotes the most effective use of a

society’s resources in satisfying people’s wants and needs.

Our wants are infinite, but resources are finite. So, scarcity is
the main problem in the economy. If scarcity didn't exist,
neither would economics. That is, if our wants weren't greater
than the limited resources available to satisfy them, there
could be no field of study called economies.
Basically, efficiency ⇾ Best ways to produce something.
For this, we need some optimizations like,
1. Production
2. Satisfaction
3. Profit
To maximize these factors, we should minimize cost.

Subfields of Economics:

Economics is today divided into two major subfields,

i. Microeconomics
ii. Macroeconomics

Microeconomics: The branch of economics which today is

concerned with the behavior of individual entities such as
markets, firms, and households. Or it can be defined as The
branch of economics that deals with human behavior and
choices as they relate to relatively small units— an individual,
a firm, an industry, a single market.

Macroeconomics: The branch of economics that deals with

human behavior and choices as they relate to highly
aggregate markets (e.g., the goods and services market) or
the entire economy. Or we can easily say, it is concerned with
the overall performance of the economy.

Example - Tiger,Mangrove Trees:

Individually Tiger → Microeconomics
Sundarban as a whole → Macroeconomics
Whole trees → Macroeconomics

Development Economics:
It is the combination of micro and macro (we can call it hybrid)
economics but the study of distribution. Here we study three
factors.
1. Growth → goal
2. Development → Instrument
3. Deprivation (It causes poverty, inequality, etc…)

1.1.2: PPF and Opportunity cost

PPF ( Production Possibility Frontier ): Represents the

possible combinations of two goods that can be produced in a
certain period of time under the conditions of a given state of
technology and fully employed resources. Or, it shows
the maximum quantity of goods that can be efficiently
produced by an economy, given its technological knowledge
and the quantity of available inputs.

Opportunity Cost: The most highly valued opportunity or

alternative forfeited when a choice is made is known as
opportunity cost.
For example, you have chosen to write this note. In making
this choice, you denied yourself the benefits of doing
something else. You would have watched television, written
text messages to a friend, read a novel and so on. Whatever
you would have chosen to do is the opportunity cost of your
writing this note. For instance, if you would have watched
television instead of writing this note, if that was your next
best alternative- then the opportunity cost of reading the
chapter is watching television

Shapes of PPF VS Opportunity Cost:

1. The Straight-Line PPF: Constant Opportunity Cost

combinati computer Tv sets Point in part Sacrifice

on s (b) ratio
A 50,000 0 A 1
B 40,000 10,000 B 1
C 30,000 20,000 C 1
D 20,000 30,000 D 1
E 10,000 40,000 E 1
F 0 50,000 F 1
2. Increasing opportunity cost:

combinations computers Television Opportunity

sets cost
A 50,000 0 -
B 40,000 20,000 0.5
C 25,000 40,000 0.75
D 0 60,000 1.25
Law of increasing opportunity costs: For most goods, the
opportunity cost increases as more of the good is produced.
This is referred to as the law of increasing opportunity cost.

3. Convex PPF: Decreasing Opportunity Cost:

combination computers Television Opportunity
sets cost
A 50,000 0 -
B 25,000 20,000 1.25
C 10,000 40,000 0.75
D 0 60,000 0.5
Scarcity and PPF:

We need to remain inside the PPF line/borders lime. That

makes the resources scarce.
1.1.3 Why study Economics

We need to study economies to understand the following-

1) Understanding the impact of technology and innovation.

How technology and innovation impacts society.

2) Understanding business and entrepreneurship aspire to be

a producer. You can benefit from supply, price, market
strategy, business cycle.

3) Interdisciplinary problem solving. You can learn critical

thinking, analytical ability in the business economic world.

4) Ethical and social implications. That is, if you are an

entrepreneur, your product does not create income inequality,
job displace, digital divide( digitize a group of people, other
group of people are manual)

5) Career opportunity, employability will be higher in

– data analysis
– efficient in financial technology
– you are a good consultant and policy maker.
– Research.
 1.2 Demand

1.2.1: Definition of Demand

Demand: The word demand has a precise meaning in

economics. The definition of demand can be stated as:

The willingness and ability of buyers to purchase

quantities of a good at different prices during a specific time
period.

More concisely, demand is a principle of economics that

captures the consumer’s desire to buy the product or service.

1.2.2: Law of Demand

The law of demand states that as the price of a good rises,

the quantity demanded of the good falls, and as the price of a
good falls, quantity demanded of the good rises. Or simply we
can analyze that, the law of demand states that the price of a
good and the quantity demanded of it are inversely related.

That is,
𝑃 ↑ qd ↓ ,ceteris paribus
𝑃 ↓ qd ↑ ,ceteris paribus

Where 𝑃 = price and qd = quantity demanded

Quantity Demanded:

Quantity demanded is the number of units of a good that

individuals are willing and able to buy at a particular price
during a particular period.

So,we can say that, quantity demanded is a function of price,

that is,
​ ​ ​ qd = f(p), cet. par.

Based on the relations, we can define the demand curve as

follows:
The demand equation, also known as the DD equation, can
be expressed by the following linear equation: qd = 𝑎 − 𝑏𝑃
Where

● qd = Quantity demanded.
● 𝑃 = Price of the commodity.
● 𝑎 = Intercept of x-axis.
● 𝑏 = Slope of the demand curve.

1.2.3: Determinants of Demand

Quantity demanded is a function of price. But price is not the

only factor that affects the quantity demanded. There are
some other determinants which affect it. Some of the factors
that affect the demand of a quantity is mentioned below:

Price of the related products (Pr ):

There are two types of related goods. Which are substitutes

and compliments.

Two goods are substitutes if they satisfy similar needs or

desires. For example: Tea and Coffee. If the price of tea
increases the demand for coffee will increase. That means for
substitutes, if one’s price rises, demand for the second rises
and vice versa.

On the other hand, if two goods are complementary, an

increase in the cost of one commodity will decrease the
demand for a complimentary product. Example: An increase
in the rate of tea will decrease the demand for sugar.

Income (Y ):

As a person’s income changes, that individual's demand for a

particular good may change. Normally, if income rises,
quantity demand rises, if income falls quantity demand falls.

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

Consumer preference is a concept that refers to the choices

consumers make to maximize their satisfaction. Consumers
have some degree of control over the type of goods they buy,
but they cannot always choose what they want. Example: If a
new health study comes out saying that a certain food product
is bad for your health, then it might decrease the demand of
that product..
Population (Pop):

If the population of a certain community of consumers

increases that may or may not have the same preferences,
then overall the demand of a commodity or product increases.
That means, the demand for a good in a particular market
area is related to the number of people in the area. If the
population increases, quantity demand increases.

Seasonal effect (𝑆): Changes in seasons around a year have

a direct impact on the demand of any product that is relevant
to those changes. For example, demand for umbrellas or
raincoats during the summer season is far less than that
during the rainy season, while pullovers and sweaters are
much more popular during the winter season.

So, we can say that quantity demanded (qd) is a multivariable

function where the variables are the determinants of demand.

Let us express these factors mathematically. Previously we

defined the equation for the demand curve to be the following:

q𝑑 = 𝑎 − bp

In general, if 𝑄 is a multivariable function where the variables

are the determinants of 𝑑 the demand, then 𝑄 can be
expressed as:
 𝑄𝑑 = 𝑓(𝑃− , 𝑃𝑟 +/− , 𝑇/𝑃𝑒 + , 𝑃𝑜p + , 𝑌 + , 𝑆, ...)

Where (+) denotes positive correlation, (−) denotes negative

correlation, and (+ / −) denotes both positive and negative
correlation.

1.2.4: Change in Demand VS Change in Quantity

Demanded

Change in Quantity Demanded: A change in quantity

demanded refers to a change in the specific quantity of a
product that buyers are willing and able to buy. This change in
quantity demanded is caused by a change in the price. The
graph below depicts exactly this phenomenon. Let us define
the quantity demanded qd as a function of the price , while
other factors 𝑃 would remain constant. Therefore, the function
can be expressed as:

𝑄𝑑 = 𝑓(p) , ceteris paribus

In the graph, an initial price p1 and its corresponding quantity
demanded is plotted in q1 the graph of p vs qd . As we can
see, if a new price is plotted and its p2 corresponding price q2
is found, the overall change in the quantity demanded
demonstrates a movement along the demand curve (from 𝐴 to
𝐵).

Change in Demand:

A change in demand denotes a change in the demand of a

good that is caused by a variety of direct and indirect factors.
This change is caused by a change in the demand qd by
keeping the price constant, as shown in the graph below. 𝑃
Let us once again express 𝑄d as a function as a function of
the price , while other 𝑌 factors would remain constant.
Therefore, the function can be expressed as:

q𝑑 = 𝑓(𝑌)

From the graph, we can see that a change in the demand

from an initial point q1 to a final point q2 is actually a shift in
the entire demand curve. A positive change is reflected by a
forward shift of the curve to the right, while a negative change
reflects a backward shift to the left. In the graph below, the
change denotes a forward shift.

​ ​

​ ​
1.3 Supply

1.3.1: Definition of Supply

Supply is the amount of goods or services that a producer is

willing and able to sell in the market at a specific price during
a specific period of time.

1.3.2: Law of Supply

There is a direct relationship between price and quantity

supplied. The law of supply states that as the price of a good
rises, the quantity supplied of the good rises, and as the price
of a good falls, the quantity supplied of the good falls,

𝑃 ↑ 𝑄s ↑
𝑃 ↓ 𝑄s ↓ , ceteris paribus

Where 𝑃 = price and 𝑄s = quantity supplied

Based on the relations, we can define the supply curve as
follows:

The supply equation, also known as the SS equation, can be

expressed by the following linear equation:

𝑄𝑠 = 𝑐 + 𝑑P

Where
● 𝑄s = Quantity supplied
● 𝑃 = Price of the commodity
● 𝑐 = Intercept of x-axis
 ● 𝑑 = Slope of the supply curve

1.3.3: Determinants of Supply

Supply is also affected by some other factors. Some of the

factors that affect the supply of a quantity:

Price of the product (𝑃): Supply of the product changes as

per the change in the price of the commodity. With all other
parameters being equal the supply of a product increases if its
price is higher.

Price of inputs (𝑃r ):

Inputs include - land, labour, capital organisation. If there is a

rise in the price of a particular input of production, then the
cost of making goods that use a great deal of those factors
experiences a huge increase. The cost of production of goods
that use relatively smaller amounts of the said factor
increases marginally. For example, a rise in the cost of land
will have a large effect on the cost of producing wheat and a
small effect on the cost of producing automobiles.
Technology (𝑇):

Technological innovations and inventions tend to make it

possible to produce better quality or quantity of goods using
the same resources.

Tax and subsidies (𝑇/𝑆):

Commodity taxes like excise duty, import duties, GST, etc.

have a huge impact on the cost of production. These taxes
can raise overall costs. Hence, the supply of goods that are
impacted by these taxes increases only when the price
increases. On the other hand, subsidies reduce the cost of
production and usually lead to an increase in supply.

Seasonal effects (𝑆):

Changes in seasons around a year have a direct impact on

the supply of any product that is relevant to those changes.

Natural Calamities(𝑁): During natural calamities there is a

huge impact on supply of any product.

We can express these factors mathematically. Previously we

defined the equation for the supply curve to be the following:

𝑄𝑠 = 𝑐 + 𝑑𝑃
In general, if 𝑄s is a multivariable function where the variables
are the determinants of the supply, then 𝑄s can be expressed
as:

𝑄𝑠 = 𝑓(𝑃+ , 𝑃 𝑖 +/− , 𝑇 + , 𝑇/𝑆 , 𝑆, 𝑁 + ...)

Where (+) denotes positive correlation, (−) denotes negative

correlation, and (+ / −) denotes both positive and negative
correlation.

1.3.4: Change in Supply VS Change in Quantity Supplied

Change in Quantity Supplied:

A change in quantity supplied is the change in the quantity a

producer is willing to supply when there has been a change in
the market price of the good or service it sells.This change in
quantity supplied causes movement along with the line. The
graph below depicts exactly this phenomenon.

Let us define the quantity supplied 𝑄s as a function of the

price , while other factors 𝑃 would remain constant. Therefore,
the function can be expressed as:

𝑄s = 𝑓(𝑃), cet. Par.

In the graph, an initial price 𝑃1 and its corresponding quantity
supplied is plotted in q1 the graph of 𝑃 vs 𝑄s . As we can see,
if a new price is plotted and its corresponding 𝑃2 price q2 is
found, the overall change in the quantity supplied
demonstrates a movement along the supply curve (from 𝐴 to
𝐵).
Change in Supply:

Changes in supply for a commodity refers to the increase or

decrease in the supply for the commodity at constant prices,
and other factors remaining the same. A change in supply is a
shift of the entire supply curve in response to something
besides price. the price 𝑃 constant, as shown in the graph
below.

Let us once again express 𝑄s as a function as a function of

the price , while other 𝑌 factors would remain constant.
Therefore, the function can be expressed as:
𝑄s = f(Y) , cet. Par.
From the graph, we can see that for a change in the supply
from an initial point 𝑄1 to a final point 𝑄2 is actually a shift in
the entire supply curve. A positive change is reflected by a
forward shift of the curve to the right, while a negative change
reflects a backward shift to the left. In the graph above, the
change denotes a forward shift of the supply curve.
 1.4: Equilibrium

Definition of Equilibrium:

A market equilibrium comes at the price at which quantity

demanded equals quantity supplied.

If we denote 𝑄d as the quantity demanded of a commodity

and as the 𝑄𝑠 quantity supplied of that commodity, then
according to the definition, at an equilibrium -

𝑄d = 𝑄𝑠

Or, quantity demanded = quantity supplied

Classification of Equilibrium:

Equilibrium can be classified into two categories -

1. Stable Equilibrium -

Stable Equilibrium can be defined in terms of a positive

(or, negative) shock being applied to a market price of a
commodity. In a stable equilibrium, whenever there is a
shock applied on the price, at some point the equilibrium
 can be regained. But if the applied shock is large
enough, then it can also make the equilibrium vanish.

2. Unstable Equilibrium -

Unstable equilibrium presents the opposite scenario of a

stable one. If upon applying the shock on price, the
equilibrium cannot be regained, then it is known as
unstable equilibrium. It is therefore easy to understand
that a very small amount of shock can make an unstable
equilibrium vanish away.

1.4.1 Graphical Representation of Equilibrium:

The graph below represents an ideal market equilibrium

scenario. Based on the mentioned aspects of the following
graph, let us look at some other equilibrium concepts.
Point C here is the equilibrium, as it is the intersection point
between the supply curve SS and demand curve DD. Now if
the price of the commodity increases from p* to p (above the
equilibrium) (i.e. applying a positive shock) as shown in the
graph, then supply becomes greater than demand. This
particular situation is called surplus. Surplus has downward
pressure on the price so that equilibrium is regained again at
some point. Again, if the price of the commodity decrease
from p* to p (below the equilibrium), (i.e. Applying a negative
shock), then demand becomes more than supply.This
situation is known as shortage or deficit. Shortage has upward
pressure on equilibrium.

1.4.2 Mathematical Model for Equilibrium:

If we denote qd as the quantity demanded of a commodity

and qs as the quantity supplied of that commodity, then
according to the definition, at an equilibrium -

𝑄d = 𝑄s

From the definition of demand and supply, we have two

equations:
1) Qd = a - bp
2) Qs = c + dp

To find p* and q*:

​ We know in equilibrium -
Qs = Qd
→ c + dp* = a - bp*
→ dp* + 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:

𝑝 * = (𝑎−𝑐)/(𝑏+𝑑)

And the Equilibrium Quantity is given by the expression:

𝑞 * = (𝑎𝑑+𝑏𝑐)/(𝑏+𝑑)

1.5: Elasticity of Demand and Supply

1.5.1: Definition of elasticity:

Elasticity is a measurement used to measure the change of

quantity demanded of a product in response to change in its
price, other goods’ price, income of the consumers etc.,
usually measures against price changes. Elasticity is an
important concept in Economics because it helps the
producers know how changes in price of their product/income
of the people affect the sale of their product.

One of the types of elasticity is “price elasticity”, which is the

measurement of change in quantity demanded of a product
due to change in pricing, ceteris paribus. It is the most used
concept of elasticity.

1.5.2: Types of elasticity

Types of arc elasticity and graphical representation of

those:

1) Perfectly elastic:

For perfect elasticity -

|ε| = ∞
​ ​ ​

which is only possible when Δp = 0 (although in real world

scenario, Δp → 0 ). This demonstrates that the quantity
demanded changes wildly for that product, even for an
extremely small amount of change in pricing.

2) Elastic:

The price of a product is said to be elastic, if-

|ε| > 1
3) Unit elastic:

The price of a product is said to be unit elastic if its elasticity,

|ε| = 1
In this case, the quantity demanded of a product changes
proportionally to the change in pricing.

4) Inelastic:

For an inelastic price,

|ε| < 1
5) Perfectly inelastic:

If the price is perfectly inelastic,

|ε| = 0.
All elasticity in 1 graph:
Elasticity of demand:

Elasticity of demand measures how much the quantity

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 elasticity of Demand:

1.​Price elasticity of demand: Measure how quantity

demand changes with price.
​ ​ ​ Own price elasticity,
​ ​ ​ ​ ​ qd = f(p) cet. par.
​ ​ ​ ​ ​ |ε| = (p * Δq) / (q * Δp)

*** For own price elasticity we use modulus (||), not for cross
or income price elasticity. ***

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:

Elasticity of supply refers to the responsiveness of the

quantity 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.
Graphs of Elasticity of Supply And relation between c and
elasticity of supply:
Modification:

Resources:
1. Class Lectures (RCN)
2. ECN
3. Economics by Roger A. Arnold
4. Economics by Paul A. Samuelson, William D. Nordhaus
5. Internet