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and Supply
Analysis
Demand ?????
The process to satisfy human wants/ needs/desires.
Want: having a strong desire for something
Need: lack of means of subsistence
Desire: an aspiration to acquire something
Demand: effective desire
Demand is that desire which is backed by willingness and
ability to buy a particular commodity.
Demand is the quantity of a commodity/goods/service
which consumer/buyer are willing and able to buy at a
given price for a particular unit of time.
Types of Demand
Direct(Autonomous) and Derived Demand
Direct demand is for the goods as they are such as Consumer
goods (Own sake by final consumer)
Derived demand is for the goods which are demanded to
produce some other commodities; e.g. Capital goods (for
production of Other Products)
Dx = f(Px)
Dx = a - bPx
Other things remaining constant, (ceteris paribus) when the price of a commodity
rises, the demand for that commodity falls or when the price of a commodity falls,
the demand for that commodity rises.
Price bears a negative relationship with demand
Reasons behind the Law
Price effect
Substitution Effect : When the price of a commodity falls (rises), its substitutes
become more (less) expensive assuming their price has not changed.
Income Effect: When the price of a particular commodity falls, the consumer’s real
income rises, hence the purchasing power of the individual rises.
Law of Diminishing Marginal Utility: as a person consumes successive units of a
commodity, the utility derived from every next unit (marginal unit) falls.
The Law of Demand
• The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity
of a good demanded
and its price.
• This means that
demand curves slope
downward.
Demand in Output Markets
• A demand schedule
ANNA'S DEMAND
SCHEDULE FOR is a table showing
TELEPHONE CALLS how much of a given
PRICE
QUANTITY
DEMANDED
product a household
(PER (CALLS PER would be willing to
CALL) $ MONTH)
0 30 buy at different
0.50 25
3.50 7
prices.
7.00
10.00
3
1 • Demand curves are
15.00 0 usually derived from
demand schedules.
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
• The demand curve is
TELEPHONE CALLS a graph illustrating
QUANTITY
PRICE
(PER
DEMANDED
(CALLS PER
how much of a given
$
CALL)
0
MONTH)
30
product a household
0.50
3.50
25
7
would be willing to
7.00
10.00
3
1
buy at different
15.00 0
prices.
Demand Schedule and Individual
Demand Curve
Point on e
Demand Price (Rs Demand 35
Curve per cup) (‘000 cups) d
a 15 50 30
c
b 20 40 25
c 25 30 b
20
d 30 20 a
15
e 35 10
O
10 20 30 40 50
Quantity of coffee
Change in Demand
Shift in demand curve from D0 to
D1
More is demanded at same price.
Price D1
Increase in demand caused by:
D0
A rise in the price of a
D2
substitute
A fall in the price of a
complement
A rise in income
A redistribution of income
towards those who favour the
commodity
A change in tastes that favours
the commodity
0 Shift in demand curve from D0 to
Quantity
D2
Less is demanded at each price.
Movements Along and Shifts of The
Demand Curve
Price
Entire demand curve shifts
rightward when:
• income or wealth ↑
• price of substitute ↑
• price of complement ↓
• population ↑
• expected price ↑
• tastes shift toward ↑
D2
D1
Quantity
Movements Along and Shifts of The
Demand Curve
Price
Entire demand curve shifts
leftward when:
• income or wealth ↓
• price of substitute ↓
• price of complement ↑
• population ↓
• expected price ↓
• tastes shift toward ↓
D1
D2
Quantity
Exceptions to the Law of Demand
Law of demand may not operate due to the following
reasons:
Giffen Goods – display direct price demand relationship –
Rice (inferior goods)
Snob Appeal – veblen goods - Diamond
Demonstration Effect - items of luxury, fashion
Future Expectation of Prices (Panic buying)
Goods with No Substitutes
Life saving drugs, petrol and diesel
Insignificant proportion of income spent
Match box, Salt
Market Demand
Market: interaction between sellers and buyers of a good (or service)
at a mutually agreed upon price.
Market demand
Aggregate of individual demands for a commodity at a particular price
per unit of time.
Sum total of the quantities of a commodity that all buyers in the market
are willing to buy at a given price and at a particular point of time
(ceteris paribus)
Market demand curve: horizontal summation of individual demand
curves
Supply?????
• Indicates the quantities of a good or service that the seller/producer
is willing and able to provide at a price, at a given point of time, other
things remaining the same.
• Supply of a product X (Sx) depends upon:
– Price of the product (Px)
– Cost of production (C)
– State of technology (T)
– Government policy regarding taxes and subsidies (G)
– Other factors like number of firms (N)
• Hence the supply function is given as:
Sx = (Px, C, T, G, N)
Law of Supply
Law of Supply states that other things remaining the same, the higher the
price of a commodity the greater is the quantity supplied.
Price of the product is revenue to the supplier; therefore higher price
means greater revenue to the supplier and hence greater is the incentive
to supply.
Supply bears a positive relation to the price of the commodity.
Quantity
Changes in Supply and in Quantity
Supplied
Price
Entire supply curve shifts S2
leftward when: S1
• price of input ↑
• price of alternate good ↓
• number of firms ↓
• expected price ↑
• unfavorable weather
Quantity
Market Equilibrium
Market Equilibrium
• Equilibrium occurs at the price where the quantity
demanded and the quantity supplied are equal to each
other.
• For prices below the equilibrium, quantity demanded
exceeds quantity supplied (D>S). Pulling price upward.
• For prices above the equilibrium, quantity demanded is
less than quantity supplied (D<S). Pushing price
downward.
Supply Demand
Price S Price (‘000 cups (‘000 cups /
(Rs) / month) month)
E
25
15 10 50
20 15 40
25 30 30
D 30 45 15
O 35 70 10
30 Quantity
Market Equilibrium
E
4. until price reaches its
$3.00
equilibrium value of $3.00
.
H
1.00 J
Excess Demand
D
25,000 50,000 75,000 Number of pens per
1. At a price of $1.00 per
Month
apple an excess demand
of 50,000 apple . . .
25
Excess Demand
• Excess demand
– At a given price, the excess of quantity demanded
over quantity supplied
• Price of the good will rise as buyers compete
with each other to get more of the good than
is available
26
Excess Supply and Price Adjustment
D
35,000 50,000 65,000 Number of pens per
Month
27
Excess Supply
• Excess Supply
– At a given price, the excess of quantity supplied
over quantity demanded
• Price of the good will fall as sellers compete
with each other to sell more of the good than
buyers want
28
Changes in Market Equilibrium
(Shifts in Supply Curve)
The original point of equilibrium is
at E, the point of intersection of
curves D1 and S1, at price P and
quantity Q
Price S0
An increase in supply shifts the
supply curve to S2. D1 S1
Price falls to P2 and quantity rises S2
to Q2, taking the new equilibrium E0
P0
to E2 . E
P E2
A decrease in supply shifts the P2 S0
supply curve to S0. Price rises to S1
P0 and quantity falls to Q0 taking S2 D1
the new equilibrium to E0
O
Thus an increase in supply raises Q0 Q Q2 Quantity
quantity but lowers price, while a
decrease in supply lowers
quantity but raises price; demand
being unchanged.
Changes in Market Equilibrium
(Shifts in Demand Curve)
• The original point of equilibrium
is at E, the point of intersection of
curves D1 and S1, at price P and
quantity Q
Price
D2 • An increase in demand shifts the
D1
S1 demand curve to D2 .
• Price rises to P1 and quantity rises to Q1
D0 taking the new equilibrium to E1
P1 E1
E • A decrease in demand shifts the
P demand curve to D0.
P* E2
D2 • Price falls to P* and quantity falls to Q* taking
the new equilibrium to E2.
S1 D0 D1 • Thus, an increase in demand
O Q* raises both price and quantity,
Q1
Quantity
while a decrease in demand
lowers both price and quantity;
when supply remains same.
Change in Both Demand and Supply
Whether price will rise, or remain
at the same level, or will fall, will
depend on:
D2 the magnitude of shift and
Price D1 the shapes of the demand
S1 and supply curves.
S2
P1 E1
Therefore, an increase in both
P2
E2 supply and demand will cause
the sales to rise, but the effect on
price can be:
S1 D2 Positive (D increases more
S2
D1
than S)
O Negative (S increases more
Q1 Q2 Quantity
than D)
No change (increase in
D=increase in S)
Increases in Demand and Supply