Demand, Supply and Elasticity
Demand and supply explain price formation in a market, and elasticity measures how strongly quantity responds. Numerical elasticity questions are standard in HSC papers, so practise the percentage method until it is automatic.
Core rules
- Law of demand: other things equal, price and quantity demanded move in opposite directions (ceteris paribus).
- Movement along the curve = price change; shift of the curve = change in income, tastes, price of related goods, population or expectations.
- Exceptions: Giffen goods, Veblen (conspicuous) goods, speculation and expectations of further price change.
- Law of supply: price and quantity supplied move together, other things equal.
- Types of elasticity: perfectly elastic (∞), perfectly inelastic (0), unitary (=1), relatively elastic (>1), relatively inelastic (<1).
- Total outlay method: if price falls and total expenditure rises, demand is elastic; unchanged, unitary; falls, inelastic.
Worked example
Price falls from ₹10 to ₹8; quantity demanded rises from 100 to 140 units. %ΔQ = (40/100) × 100 = 40%. %ΔP = (−2/10) × 100 = −20%. Ed = 40/(−20) = −2, so |Ed| = 2 → relatively elastic demand. A price cut raises total revenue from ₹1,000 to ₹1,120, confirming elasticity above one.
Traps that cost marks
- Dropping the negative sign silently; state |Ed| explicitly.
- Using the new or average price as the base when the paper specifies the original-value percentage method.
- Confusing elasticity with slope - a flatter curve is not automatically more elastic at every point.
- Treating an increase in demand and an increase in quantity demanded as the same thing.