 So, in continuation to our last session on theory of demand where we discuss about demand supply and market equilibrium, today we will start our session on this again demand supply market equilibrium particularly how the equilibrium changes when there is a change in the demand and supply or when there is a simultaneous change in the demand and supply. And the later part of the session we will introduce the concept of elasticity of demand which is in the second part of this model theory of demand and we will cover different type of price different type of elasticity of demand like price elasticity of demand, income elasticity of demand and cross price elasticity of demand. So, to start with let us have a quick recap what we did in the last session or what we did we cover in the last session. We discuss about the change in the demand. So, change in demand either due to change in the price or due to change in the non-price determinants then we introduce the second market forces that is supply then we cover the law of supply and taking the demand forces and market forces we analyze the condition of market equilibrium and how the market equilibrium changes when there is change in the demand or change in the supply. So, today we are going to look at what happens when there is a simultaneous shift in the both the demand both the market forces that is demand and supply forces. So, in the previous class if you remember we discuss about change in the demand or change in the supply. So, we will say we will check in this case when there is a shift in both supply and demand what happens to the equilibrium price and what happens to the equilibrium quantity. So, if you look at initially the demand curve is D 1 supply curve is S 1 the equilibrium quantity is Q 1 and equilibrium price is P 1. In the y axis we are considering the price of ice cream cone ice cream cone is the goods over here and in the x axis we are considering the quantity of ice cream cone. So, if you look at when there is a change in the demand the demand curve moves from D 1 to D 2 and when there is a change in the supply there is a its movement from S 1 to S 2. So, in this case there is a increase in the demand that leads the demand curve from D 1 to D 2 and there is a decrease in the supply that leads the demand curve from S 1 to S 2. Corresponding to the new level of demand and new level of supply that is D 2 and S 2 we get the new equilibrium price as P 2 the point corresponding to y axis and we get the new quantity as Q 2 the point corresponding to x axis. Now, if you look at here the increase in the demand is greater than the decrease in the supply. So, demand and supply both are changing both are changing in the opposite direction demand is increasing supply is decreasing and that leads to a scenario where at the new equilibrium there is both increase in the price and increase in the quantity. So, we can say that when there is a increase in the demand and decrease in the supply the equilibrium price and quantity both increases, but point to remember here is that increase in the demand is more than decrease in the supply. Similarly, if you take a case where there is a change in the supply and also there is a change in the demand. So, if you look at here there is a increase in the demand from D 1 to D 2 and decrease in the supply is from S 1 to S 2. Initial equilibrium is initial equilibrium price is P 1 initial equilibrium quantity is Q 1 increases in the demand the leads the demand curve from D 1 to D 2 decreases in the supply leads the decrease in the supply from S 1 to S 2. That leads to increase in the price equilibrium price from P 1 to P 2 P 2 corresponding to the new equilibrium between S S 2 as the supply curve and D 2 is the demand curve. However, in this case if you look at there is a decrease in the quantity demanded even if there is a increase in the demand. The reason what we can cite over here is that the decrease in the supply is greater than increase in the demand and that leads to the fact that with a new equilibrium new equilibrium point the equilibrium quantity is decreasing from Q 1 to Q 2. So, when supply is decreasing demand is increasing and the decrease in the supply is greater than increase in the demand in this case at the point of new equilibrium, equilibrium price increases. However, there is a decrease in the quantity demanded. So, this is two cases these are two cases what we discussed in the when there is a simultaneous shift in the both demand and supply. So, how we are going to summarize this either in what direction the price changes or in what direction the quantity changes. But we cannot predict the direction for both the price and quantity when there is a simultaneous shift in the demand and supply. So, to simplify this how we can put it we can say that when there is a both decrease or increase in the demand and supply in that case we can only predict what will be the change in the quantity when the demand and supply moves in this direction or what will be the change in the price when the demanded supply moves in a particular direction. So, the change in the equilibrium price or quantity sent is said to be indeterminate when the direction of change depends upon the relative magnitude by which demand and supply shift. So, we cannot say if demand increases supply decreases price has to be this or price has to be that till the time the increase in the demanded or decrease in the supply is not uniform. Since there is a there is a change in the relative magnitude by which the demand is decreasing or the supply is increasing it happens that the equilibrium price and equilibrium quantity becomes indeterminate. So, quickly if you can summarize that what happens to price and quantity when supplier demand shift and this particular table if you look at we have summarized all the scenario where the when there is a change in the demand either in the increasing direction or decreasing direction or when there is a change in the supply either increasing or decreasing what happens to price and quantity. So, price is is referred here as p and quantity referred here as q. So, if you look at the first column and first row there is no change in the demand the first box that is no change in the demand no change in the supply p remains same q remains same. Then coming to the second row again the first box it is come an increase in the demand no change in the supply price is increases and quantity also increases. A decrease in the demand no change in the supply price is decreasing quantity is also decreasing. There is no change in the demand, but there is a increase in the supply that leads to increase in decrease in the P and increase in the Q. But if you look at interestingly the middle box with which where we are going to analyze what happens when there is a increase in the supply and also increase in the demand. In this case only we can predict the equilibrium price or equilibrium quantity we cannot predict both. And in this case it has happened that P remain ambiguous and Q is increasing. And similarly when there is a increase in the supply and decrease in the demand P decreases and Q remain ambiguous. Similarly, if you come to the third row and here there is no change in the demand a decrease in supply P is increasing Q is decreasing. But when there is a simultaneous change in the both demand and supply if you look at the last row second box there is a decrease in the supply and increase in the demand we can only we can only predict what will happen to P here and P is increasing and there is a ambiguity regarding the change in the Q. That happens in the last box the last row last column when there is a decrease in supply and increase in demand that leads to ambiguity for the change of P but the Q generally decreases. So to summarize this we can say that when there is a when there is both demand and supply changing either we can predict about P that is the price or we can predict about quantity and the other variable there is ambiguity regarding the other variable we cannot predict both in which direction they are going to change. But when there is only change in one market process either demand or supply we can predict about both the price and quantity in which direction they are going to move. So, till now we discussed about if you remember this when we started this model theory of demand we started our discussion on like what is the need for the market typically the market forces what is the need and if you look at the requirement or the mechanism how the market was that depends upon the demand forces and supply forces that is the main justification when we introduce the concept for the demand forces and the supply forces. So, if you will quickly summarize what we discussed in the last two session typically on market demand market supply and market equilibrium and the first point is demand curve shows how the quantity of good depends upon the price. According to law of demand the price of good decreases the quantity demanded increases and that is the reason demand curve slopes downward or in other word we can say other things remain in constant there is a inverse relationship between the price and quantity demanded that is the reason the slope of the demand curve is negative. In addition to price there are few other factor also which influence the demand like income of the consumer the prices of complements and substitutes the taste and preference of the consumer expectations and the number of bias in the market. And whenever there is a change in any of this factor apart from price the demand curve shift, but whenever there is a change in the demand due to change in the price the change in the demand curve is reflected only movement from one point to another point in the demand curve. Then we introduce the concept of supply curve supply. Supply curve shows how the quantity of good supply depends upon the price and according to law of supply the price of the product and quantity supply of the product they are positively related and that is the reason the slope is positive and supply curve is one upwards sloping. Then in this case also apart from price there are some other determinants which influence the supply like the input price, the technology or the technological advances, the expectation of future price of the products and the number of sellers those are operating in the market these are the other factor that influence the supply. And whenever there is a change in the price again it gets reflected in the supply curve through the movement from one point to another point in the supply curve. However if there is a change in the other factor then that leads to change in the supply generally the supply curve shift to the right if it is a case of increase or shift to the left if it is a case of decrease. Then we identified the condition for market equilibrium and if you remember the market equilibrium is determined by the intersection of the demand curve and the supply curve. At the equilibrium price or the so called market clearing price the quantity demanded of the market is exactly equal to the quantity supplied. And even if there is a mismatch at any point of time if the demand is more than supply that leads to shortage and if the supply is more than demand that leads to surplus and even if in a such scenario the behavior of the buyers and sellers it naturally drives the market towards their equilibrium in term of change in price and change in the quantity demanded. Then we will come to the second part of this module that is theory of demand the second part of this module is elasticity of demand. If you look at till now what we have explained we have explained that there is a negative relationship between the price and quantity demanded. So, when price increases quantity demanded decreases when price decreases quantity demanded increases. But elasticity of demand is bring something bring something more in depth the relationship between the price and quantity demanded. It measures by what quantity or by which magnitude the demand changes when there is a change in the price. So, if you look at from the managerial point of view. So, the knowledge of nature of relationship between the products demand and its determinant is not sufficient. It is not about only the demand and its determinant what is more important is the degree of responsiveness or demand to change in the unit. So, like if I take a example that if 2 percent change in the price leads to 6 percent change in the quantity demanded this is through the elasticity of demand. But in general what is the relationship between the demanded price? Price increases demand decreases, but in case of elasticity of demand we also check what is the responsiveness of the consumer due to for the change in the price. If it is increases by 2 percent suppose the price increases by 2 percent what should be or what is the exact change in the quantity demanded whether 2 percent whether it is less than 2 percent, but it is more than 2 percent that generally we check in the that we generally get to know through the elasticity of demand. So, as we mentioned maybe before couple of minutes that what is more important is what is the degree of responsiveness of demand due to change in its determinant whether its price whether its income whether the price of the other product when there is a change in all this factor what is the degree of responsiveness of the quantity demanded. So, that we will check today in through the price elasticity of demand income elasticity of demand and cross price elasticity of demand. So, as we mentioned elasticity of demand generally allows us to analyze the demand in greater precision and it is a measure of how much buyers and sellers respond to change in the market condition. If there is a change in the price what happens to the buyers behavior what happens to the seller behaviors if there is a change in the income what happens to the buyers behavior what happens to the seller behaviors if there is a change in the maybe the future price of the product whether it is a substitute goods whether it is related good or whether it is complementary goods how they are change in the buying behavior of the buyer or the selling behavior of the seller. So, elasticity of demand, it measures the degree of responsiveness of the quantity demanded of a commodity to a given change of any of the determinants of the demand. So, as we mentioned there are number of determinants of demand and when there is change in the any of this determinant, what is the degree of responsiveness of the quantity demanded of a commodity, whether it increases, whether it decreases, if it is increases by which measurement, by which percent is, by which proportion, if it is decreases by again by which proportion. So, elasticity of demand generally measures the degree of responsiveness of the quantity demanded of a commodity to a given change in any of the determinants of the demand. There are three types of elasticity of demand. One is price elasticity of demand, second one is the income elasticity of demand and third one is cross price elasticity of demand. We will start our discussion with the first kind of price elasticity, first kind of elasticity of demand that is price elasticity of demand. So, price elasticity of demand is a measure of how much quantity demanded of a good respond to a change in the price of that good. All other things remaining constant, there is certain variables, there is no change in any of the variable, what is the change in the quantity demanded when there is a change in the price, generally price elasticity of demand measures that. So, this we can say this is generally the percentage change in the quantity demanded given a percentage change in the price. So, as we said this is the percentage change in the quantity demanded and percentage change in the price, e we can identify as the elasticity of demand or we can take e as the short form of elasticity of demand, the percentage change in the q that is tell q change in q and percentage change in the p that that gives us the price elasticity of demand, here q is the quantity demanded, p is the price. So, p is the dependent variable, q is the independent variable because the change in the q is happening because of change in the p. As we know price and quantity demanded, they are inversely related that is through our law of demand. So, if there is if both the variables they are inversely related, obviously when there is a change in the one variable on a positive direction, the other variable change in the negative direction. For example, if p increases, if 2 percent increase in p leads to may be 2 percent decrease in the quantity demanded or may be 1 percent decrease in the quantity demanded or 6 percent decrease in the quantity demanded. So, that is the reason the value of elasticity is always negative for the price elasticity of demand if the quantity demanded for the product in question is become a normal goods. So, the larger the absolute value of e more sensitive buyers are to change in price. So, more is the elasticity, it is known as more is the sensitive buyers because they are reacting to the change in the price, small change in the price and accordingly they buying behavior is getting change. So, larger the absolute value of e more sensitive buyers are to the change in the price. Now, we will see what are the different degree of price elasticity of demand. Two extreme one is inelastic demand, second one is elastic demand. Inelastic demand is one where quantity demanded does not respond strongly to the price changes. So, even if there is a change in the price, still quantity demanded is not changing much as compared to change in price and in which situation generally happens if whatever the product if it is a necessity product suppose if you take a case of your medicine or whatever your food you require for your basic survival in this case even if the price changes still you are not going to change whatever the quantity demanded you are consuming for the product. You cannot change the doses of medicine if there is a change in the price, you cannot change whatever your intake food intake in the day if there is a increase in the price. So, in this case the demand is inelastic because the responsiveness of the buyers to change in the price is generally less or generally low. Elastic demand quantity demanded responds strongly to the change in the price and in which case it is happened when you may be we can postpone the product or may be there are number of other products available in the market of the similar type the substitute goods are more in the market. So, in this case the quantity demanded responds strongly to the change in the price likes if you are taking a taking a example of a cloth of a if it is a shirt if it is a any other accessory you know the whatever available in the market is more. So, if you do not have a brand loyalty if you are not very particular of a typical brand in this case if in the typical range you will get many more choices. So, if you are going to a shop and if there is a increase in the price if you always look for the alternates. So, if there even if there is a small change in the price may be it is 5 percent may be it is 10 percent still you look for the alternates available and you move your buying behavior from that product to the other product that is the reason if you look at when there are number of substitutes or more the demand is more elastic in the market. Then degree of price elasticity of demand in this case again we will see perfectly elastic and perfectly elastic. So, perfectly elastic is one where quantity demanded does not respond to price change and perfectly elastic is quantity demanded changes infinitely with any change in the price. So, in this case if you look at one is perfectly elastic there is not a small change in the quantity demanded even if there is a change in the price and if it is a perfectly elastic any small change in the price there is a greater change in the quantity demanded. So, previous example when we are saying that it is a case of your medicine or if it is a case of your food intake for the elastic you will always say what is the less range food available if price is going on a higher side, but in case of a perfectly elastic you are not going to change even if there is a change in the price. Similarly, perfectly elastic is one any small change in the price since the options available in the market are more you always move your you always change your buying behavior and that is the reason the responsiveness to the change in the price in case of a perfectly elastic demand is much more as compared to any other scenario. The fifth one what is the degree of price elasticity of demand is the unit elastic and what is unit elastic quantity demanded changes by the same percentage as the price. So, if you look at this kind of elasticity of demand when it is a case of unit elasticity may be it is very difficult to get an example for this in real life because in this case what it happens that if there is a 2 percent increase in the price that always leads to 2 percent decrease in the quantity demanded. But if you look at may be it is bit difficult to find this type of evidence in the real world because it never changes exactly if 2 percent increase in price that never leads to 2 percent decrease in the quantity demanded. So, unit elasticity is one where there is a percentage change in the quantity demanded is exactly equal to the percentage change in the price. Then we will see graphically the different type of elasticity of demand typically the different degree of price elasticity of demand. So, in the first case if you look at it is a case of a perfectly elastic and in this case the value of elasticity or elasticity of demand is equal to infinite because what even if there is may be the even if there is no change in the price very very small change in the price it goes on infinitely the change in the quantity demanded. So, price we are considering here if you look at the first graph price we are considering here in the y axis quantity again on the x axis and demand curve which horizontal parallel to x axis it means quantity is changing even if its price remain fixed or very small change in the price that leads to a situation of perfectly elastic where elasticity takes the value which is equal to infinite. Similarly, if you look at the second graph here again price is taken and the y axis and quantity is taken on the x axis it is a case of your perfectly inelastic demand curve is vertical to y axis and here the elasticity of value takes equal to 0 and y takes a value equal to 0 because even if there is a change in the price look at the demand the demand remain constant. So, it is a kind of like life survival drugs where you will if you look at whatever the change in the price you are not going to change in the demand the buyers they are not going to change their buying pattern or the buying behavior that is the reason the demand quantity demanded remain constant whatever the change in the price and if you look at there are different level of price the price is increasing decreasing but still there is no change in the quantity demanded. So, to extreme one when there is a small change in the price or there is absolutely insignificant change in the price leads to may be more change in the quantity demanded the buyers is more responsive to change in price and this is the case of your perfectly elastic. Second case is one where even if the price is changing the buyers is not at all responsive to change in the quantity demanded and this is the case of your perfectly inelastic. In the first case the value of elasticity of demand is infinite in the second case the value of price elasticity of demand is 0. Then we will come to the case of inelastic demand and we also interchangeably use this type of degree of price elasticity of demand as relatively inelastic where e takes a value which is less than 1. So, elasticity of demand which takes the value which is less than 1. So, it is the case of your inelastic demand inelastic demand where the demand curve what we have taken it is a non-linear demand curve it is in a curve format. So, initially if you look at the price is 4 rupees and the quantity demanded is 100 units if there is a increase in the price from 4 rupees to 5 rupees what is the increase in price there is a what is the proportionate increase in price the percentage increase in the price is 25 percent price increases from 4 rupees to 5 rupees what happens to quantity demanded quantity demanded decreases from 100 units to 90 units. So, in this case what is the decrease in the quantity demanded 10 percent decrease in the quantity demanded 25 percent increase in price leads to 10 percent decrease in the quantity demanded. So, percentage change in the price is greater than percentage change in the quantity demanded or in other words the percentage change in the quantity demanded is less than the less than the percentage change in the price and that is the reason this is the case of your relatively inelastic because the buyers they are less response to the change in the price and which takes the value of elasticity which is less than 1. Then it is a case of your unit elastic demand and in case of unit elastic demand again we take the same example, if the price increases from 4 rupees to 5 rupees the quantity demanded decreases from 100 rupees to 100 units to 75 units. So, in this case what is the percentage increase in price? The percentage increase in price is 25 percent. What is the percentage decrease in the quantity demanded? The percent decrease in the quantity demanded is 25 percent. So, 25 percent increase in price leads to 25 percent decrease in the quantity demanded. So, the proportionate change in the quantity demanded is just equal to proportionate change in the price and that is the reason this is the evident of unit elasticity of demand, where elasticity of demand takes a value which is equal to 1. Then, we will take the case of elastic demand that is relative elastic demand. In this case, when the price increases from 4 rupees to 5 rupees, the quantity demanded decreases from 100 units to 50 unit. The increase in price is 25 percent, the decrease in price is, decrease in quantity demanded is 50 percent. The percentage change in the price is less than the percentage change in the quantity demanded. It means the 50 percent change in the quantity demanded is due to 25 percent change in the price and the buyers, they are more sensitive to change in the price that is the reason the elasticity of demand takes the value which is greater than 1. So, if you look at, if you can summarize all this degree of price elasticity of demand, it is generally there are 5 degree, degree of price elasticity of demand. When change in the quantity demanded, proportionate change in the quantity demanded is greater than proportionate change in the price. This is the case of relatively elastic and e takes a value which is greater than 1. The proportionate change in the quantity is less than proportionate change in the price. This is the case of your relatively inelastic where e takes a value which is less than 1. When proportionate change in the q is equal to proportionate change in the p, in this case e takes a value which is equal to 1 and proportionate change in the q is basically 0. In this case elasticity is equal to 0 and proportionate change in the q is infinite. This is the case elasticity is equal to infinite. So, this we are considering as relatively elastic. This is relatively inelastic. This is unit elastic. This is the case perfectly inelastic and this is perfectly elastic. So, these are 5 degrees of price elasticity of demand that generally the basis for this is on the basis of what is the proportionate change in the quantity demanded due to proportionate change in the price.