DEMAND

MEANING :It is the quantity of Click to edit Master subtitle style a commodity which consumers are willing to buy at a given price for a particular unit of time

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Demand curve

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TYPES OF DEMAND
1)Direct and derived demand : When a commodity is demanded for it own sake by the final consumer it is known as comsumer good and its demand is direct demand. e.g.,refrigerator, TV, furniture. When a commodity is demanded for using it as a raw material or as an intermediary for value addition it is 3/21/12 known as capital good and its demand

2) Recurring and replacement demand : Consumable goods have recurring demand. e.g. food twice a day, read newspaper everyday. Durable goods purchased to be use for a long time but they need replacement. e.g. television,cars,bike,mobile phone.
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3) Complementary & competing demand : Goods which create joint demand are complementary goods.e.g.cars & petrol. Goods that compete with each other to satisfy any particular want are called substitute.e.g. coke & pepsi,saving A/c in SBI or ICICI.
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4)Individual & market demand : Demand for an individual consumer is individual demand. Market demand is the demand for the product produced by all the firms in the industry. e.g.your demand for indica car is an example of individual demand while total sale of indica in a year is the 3/21/12 annual market demand.

Market demand curve

Market demand is the horizontal summation of individual consumer demand curves

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DETERMINANTS OF DEMAND
1) Price of the product : Normally, price has a negative effect on demand. e.g. sale or a discount being offered at pantaloons or shoppers stop or koutons, we flock in large number to purchase these goods at lower price.

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2) Income of the consumer : Normally, income bears a positive relationship with demand. Normal goods have a positive relation between their demand and income. Inferior goods have a negative relation between their demand and income.

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3)Price of related goods : An increase in the price of a commodity increases the demand for its substitute and reduces the demand for its complement.e.g tea and coffee.

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4) Tastes and preferences : Tastes and preference have such effect that in spite of a fall in price, demand may not increase if the good has gone out of fashion & in spite of increase in price, demand may not decrease because of the product being in fashion.e.g. Cards and gifts industry has gained significantly due to internationalization of events like 3/21/12

5) Advertising : The primary motive behind advertising is to stimulate demand for its own brand.e.g.the slogan kuch meetha ho jai of the product dairy milk.

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6) Consumers expectation of future income and price : If future income rise or price falls, the demand will be postponded. If we expect price to increase in future we will hasten the purchase.e.g.purchase of cars & other durables increases before the budget is announced if consumers fear that prices may rise after budget. 3/21/12

7) Population : If the population of a country is constantly increasing, more food items and other goods and services will be needed to satisfy the needs of the people.e.g. if the population is youth,then there would be more demand of education,employment opportunity & Designer Apparels.
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8) Growth of economy : If an economy is growing, it will have increasing demand for goods of better quality.

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DEMAND FUNCTION
Mathematical relationship between demand & its determinant is known as demand function.Thus it can be said that demand for a product X(DX) is a function of :
1) price of commodity X(Px) 2) Income of the consumer (Y) 3)Price of related commodities(P0) 4)Taste & preference of the consumer(T)
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LAW OF DEMAND
It state that other thing remaining same, demand for a product is inversely proportional to its price. Dx = f(Px)

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Change in quantity demanded vs. change in demand ( Shift of the Change in quantity demanded Change in demand Demand Curve)

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Prices of related goods

substitute goods an increase in the price of one results in an increase in the demand for the other(ex: butter and margarine ) . complementary goods an increase in the price of one results in a decrease in the demand for the other.(ex: cars and gas).
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Change in the price of a substitute good

Price of coffee rises:

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Income and demand: normal goods

A good is a normal good if an increase in income results in an increase in the demand for the good.

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Income and demand: inferior goods

A good is an inferior good if an increase in income results in a reduction in the demand for the good.

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Expectations

A higher expected future price will increase current demand. A lower expected future price will decrease current demand. A higher expected future income will increase the demand for all normal goods. A lower expected future income will reduce the demand for all normal goods.
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Main ideas:

Demand meaning Law of demand Curve of demand Determinants of demand Shifts & movements of the demand curve Change in the quantity demanded vs. Change in demand Complementary & substitute goods Expectations of buyers

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EXCEPTION TO THE LAW OF DEMAND

Giffen Goods : Quantity demanded of inferior goods increase with increase in its price. Snob appeal : Veblen goods have snob value, for which the consumer measures the satisfaction derived not by their utility value, but by social status.
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SUPPLY
Meaning : Supply refers to the quantities of a good or service that the seller is willing and able to provide at a price, at a given point of time, ceteris paribus.

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Supply

the relationship that exists between the price of a good and the quantity supplied in a given time period, ceteris paribus.

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DETERMINANTS OF SUPPLY
1)Price of the commodity : Supply is positively related to price of the commodity.

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2) Cost of production : Supply is reduced if the cost of production rises.e.g.Consider a company that manufactures cotton shirts.If the price of raw cotton rises, this will lead to rise in the cost of production & thereby a reduction in the supply of shirt.
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3)Technological improvements

Technological improvements (and any changes that raise the productivity of labor) lower production costs and increase profitability.

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4) Number of firms : With increase in the number of producers of a particular product, the supply of the product in the market will increase.

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5) Government policies : Govt.Policies related to taxes and subsidies on certain products also have an effect on supply as they increase or decrease the cost. Such effects may be either negative(in case of taxes) or positive(in case of subsidies)
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SUPPLY FUNCTION
The mathematical relation between supply and its determinants is termed supply function.The supply of a product X(Sx) is a function of : 1) Price of the product (Px) 2) Cost of production(C ) 3) State of technology (T) 4)Govt. policies
3/21/12 5) Number of firms (N)

Law of supply

A direct relationship exists between the price of a good and the quantity supplied in a given time period, ceteris paribus.

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Change in supply vs. change in quantity supplied

Change in supply Change in quantity supplied

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Individual firm and market supply curves

The market supply curve is the horizontal summation of the supply curves of individual firms. (This is equivalent to the relationship between individual and market demand curves.)

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Market equilibrium

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Price above equilibrium

If the price exceeds the equilibrium price, a surplus occurs(excess supply):

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Price below equilibrium

If the price is below the equilibrium a shortage occurs(excess demand) :

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Changes in market equilibrium

CHANGE IN DEMAND : An increase in demand with no change in supply results in a rise in equilibrium price and quantity.

Fig. 3/21/12 :Change in demand at constant supply.

CHANGE IN SUPPLY :An increase in supply, with demand remaining same, increases the sale of the product but at lower price.

Fig.:Change in supply at constant demand.

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CHANGE IN BOTH DEMAND & SUPPLY: Increase in both supply & demand will cause the sales to rise, but the effect on price can be positive, negative or equal to zero depending on the extent of the shifts in the curve

Fig.:Increase in both supply and demand. 3/21/12

Price ceiling

Price ceiling - legally mandated maximum price Purpose: keep price below the market equilibrium price Examples:

rent controls price controls during wartime gas price rationing in 1970s

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Price ceiling (continued)

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Price floor

price floor - legally mandated minimum price designed to maintain a price above the equilibrium level examples:

agricultural price supports minimum wage laws

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Price floor (continued)

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