FACTORS OF SUPPLY

AND DEMAND

Law of Demand
 APPLICATION OF SUPPLY

*What is law of Demand?

The Law of Demand states the quantity purchased
varies inversely with price.In other words,”The higher
the price,The lower the quantity demanded.”
The reason for this phenomenon is
that;Consumer’s opportunity cost increases,so they
must give something else up or switch to a “substitute
product.”
 *The law of demand states that other factors being constant
(cetrisperibus), price and quantity demand of any good and service are
inversely related to each other. When the price of a product increases,
the demand for the same product will fall.

What is Law Of Demand - The Economic Times

 SUBSTITUTE PRODUCT

Substitute product
Is a product from
another industry that
offers similar
benefits to the
consumer but low in
price.
 FACTORS OF LAW OF DEMEND

1. Price of the Given Commodity:

It is the most important factor affecting demand for the given
commodity. Generally, there exists an inverse relationship between price
and quantity demanded. It means, as price increases, quantity demanded
falls due to decrease in the satisfaction level of consumers.

For example:If price of given commodity (say, tea) increases,

its quantity demanded will fall as satisfaction derived from tea
will fall due to rise in its price.

Demand (D) is a function of price (P) and can be expressed as: D = f (P). The inverse relationship
between price and demand, known as ‘Law of Demand’, is discussed in Section 3.7.
. Price of the Given Commodity
2. Price of Related Goods:
Demand for the given commodity is
also affected by change in prices of
the related goods. Related goods are
of two types.
TWO TYPES OF RELATED GOODS
(i) Substitute Goods Substitute goods are
those goods which can be used in place of
one another for satisfaction of a particular
want, like tea and coffee. An increase in the
price of substitute leads to an increase in the
demand for given commodity and vice-versa.
For example, if price of a substitute good
(say, coffee) increases, then demand for given
commodity (say, tea) will rise as tea will
become relatively cheaper in comparison to
coffee. So, demand for a given commodity is
directly affected by change in price of
substitute goods .
( Complementary Goods:
ii)
Complementary goods are those
goods which are used together to
satisfy a particular want, like tea and
sugar. An increase in the price of
complementary good leads to a
decrease in the demand for given
commodity and vice-versa. For
example, if price of a
complementary good (say, sugar)
increases, then demand for given
commodity (say, tea) will fall as it will
be relatively costlier to use both the
goods together. So, demand for a
given commodity is inversely affected
by change in price of complementary
goods.
Examples of Substitute and
Complementary Goods:
Substitute Goods
1. Tea and Coffee 2. Coke
and Pepsi 3. Pen and Pencil
4. CD and DVD 5. Ink pen
and Ball Pen 6. Rice and
Wheat
Complementary
goods
1.Tea and Suga
2. Pen and Ink 3. Car and
Petrol
4. Bread and Butter 5. Pen and
Refill 6. Brick and Cement
For detailed discussion on substitute goods and
complementary goods, refer Section 3.11
3. Income of the Consumer:
Demand for a commodity is also affected
by income of the consumer. However, the
effect of change in income on demand
depends on the nature of the commodity
under consideration.
i. If the given commodity is a normal
good, then an increase in income leads to
rise in its demand, while a decrease in
income reduces the demand.
ii. If the given commodity is an inferior
good, then an increase in income reduces
the demand, while a decrease in income
leads to rise in demand
Example:
Suppose, income of a consumer
increases. As a result, the consumer
reduces consumption of toned milk
and increases consumption of full
cream milk. In this case, ‘Toned Milk’
is an inferior good for the consumer
and ‘Full Cream Milk’ is a normal
good.
For detailed discussion on normal goods and
inferior goods, refer Section 3.12 .
4. Tastes and Preferences:
Tastes and preferences of the consumer directly influence the demand
for a commodity. They include changes in fashion, customs, habits, etc.If
a commodity is in fashion or is preferred by the consumers, then demand
for such a commodity rises. On the other hand, demand for a commodity
5. Expectation of Change in the Price in Future:
If the price of a certain commodity is expected to increase in nearfuture,
then people will buy more of that commodity than what they normally
buy. There exists a direct relationship between expectation of change in
the prices in future and change in demand in the current period. For
example, if the price of petrol is expected to rise in future, its present
demand will increase.
falls, if the consumers have no taste for that commodity.
 The equilibrium price is the market price where the
quantity of goods supplied is equal to the quantity of
goods demanded. This is the point at which the
demand and supply curves in the market intersect.

Calculating Equilibrium Price: Definition, Equation & Example - Video ..


Equilibrium price is the
price where the demand for a
product or a service is equal to
the supply of the product or
service. At equilibrium, both
consumers and producers are
satisfied, thereby keeping the
price of the product or the
service stable.
What Does Equilibrium Price Mean ?
At EQ, there is no shortage or surplus
unless a determinant of demand or
a determinant of supply changes. If a
change in the price of a good or a
service creates a shortage, it means that
consumers want to buy a higher quantity
than the one offered by producers. In
this case, demand exceeds supply and
consumers are not satisfied. In contrast,
if a change in the price of a product or a
service creates a surplus, it means that
consumers want to buy less quantity than
the one offered by producers. In this
case, supply exceeds demand and
producers need to lower the price of the
product or the service to avoid excessive
inventory.
In the table above, the quantity demanded is equal to the quantity supplied at the price level of
$60. Therefore, the price of $60 is the equilibrium price. At any other price level, there is either
surplus or shortage. Specifically, for any price that is lower than $60, the quantity supplied is
greater than the quantity demanded, thereby creating a surplus. For any price that is higher than
$60, the quantity demanded is greater than the quantity supplied, thereby creating a shortage.
The equilibrium price can change in case of a technological advancement or lower production
costs that will increase the supply of the product at any price level, thereby lowering the EQ.
Similarly, an increase in the production costs will decrease supply at any price level, thereby
increasing the EQ.
GROUP 1
Capulong Kyla Mae S.
 FINAL

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