Elasticity

1. Describe Marshallian Demand and Supply Theory:
Demand is the quantity of a good buyers wish to purchase at each conceivable price (Begg, 1984, p.45).
Supply is the quantity of a good sellers wish to purchase at each conceivable price (Begg, 1984, p.45)
According to Mathews (2005, p.55), there is the law of demand: “Other things remain the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded.”
Mathews (2005, p.60) also states the law of supply: “Other things remain the same, the higher the price a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.”
However, demand and supplies are not distinct, it works together in a market. Mankiw & Taylor (2006, p.63) defined market is “a group of buyers and sellers of a particular good or service”. In other words, the market brings producers and consumers get together and exchange goods or services. Ideally, all what are supplied should be consumed. At that time, the market is equilibrium.
Price
Equilibrium Price
Equilibrium Quantity
Quantity
Demand
Supply
Equilibrium

Figure 1: The equilibrium of supply and demand

The point at which demand curve cuts supply curve is called the market’s equilibrium. According to Mankiw & Taylor (2006, p.74), “the equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the market has been satisfied: buyers have bought all they want to buy, and sellers have sold all they want to sell”
However, demand and supply are affected by many other elements, such as, price of substitute goods, technology, consumers’ income, therefore, market is often not equilibrium.
Figure 2:
Excess supply
Surplus (Excess supply)
Demand
Supply
Price
Quantity
When the supply exceeds demand, there is surplus of supply in the market. There are many products produced but consumers do not...