MODULE 1

DEMAND
&
SUPPLY

BY:
ANANYA MITRA
CONTENT
THEORY OF DEMAND

TYPES OF DEMAND

FACTORS AFFECTING DEMAND

DATABASE

Why the demand curve slopes downward?

THEORY OF SUPPLY

EQUILIBRIUM & SHIFT

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 INTRODUCTION
Demand:-

“By demand, we mean the

quantity of a commodity that will
be purchased at a particular price
& not merely the desire of a thing”

>Hansen

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Demand constitute of following features:-

1. Willingness to pay,
2. Availability of the product,
3. Ability to pay,
4. Demand is always at appoint of time.

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TYPES OF DEMAND:-

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PRICE DEMAND:-

Others things remaining the same, the various

quantity of goods which the consumer will
purchase per unit of time at a certain price
level.

D=f(P)

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 INCOME DEMAND:-

– NORMAL GOODS
Ceterus –Peribus, the income demand indicates
the relationship between the income level &
the demand for a commodity by a consumer,
usually a direct one.
D=f(Y)
Y↑→D↑, Y↓→D↓
eg:- Dress Material

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INFERIOR GOODS:-

In case of inferior goods the relation between

demand & income is a negative one. After a
certain particular level of subsistence income,
he will reduce his demand for inferior goods
even his income manifolds by multiple times.
D=f(Y)
Y↑→D↑→D↓
eg:- bread

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 CROSS DEMAND:-

The change in the quantity demanded of a

commodity without any change in its price but
due to the change in the price of related
goods. The related goods can either be:-
*Substitute goods:- Tea & Coffee
*Complementary goods:- Ink & Fountain pen.

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 DIRECT & INDIRECT DEMAND:-

The demand for consumer goods which directly

satisfy human wants
eg:-food is direct demand.
On the contrary, the demand for producers
goods, which do not directly satisfy human
wants, but are essential for satisfaction of
human wants,
eg:-machinery are indirect goods.

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 JOINT & COMPOSITE DEMAND:-

The demand for one commodity leading to the

demand of another commodity is known as a
joint demand. Eg:- paper & pen.
A demand is considered composite when a
commodity is demanded for multiplicity of
use. eg:- coal, rubber.

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 ALTERNATIVE DEMAND:-

Demand is known alternative when it is

satisfiable by alternative sources.
Eg:-light from electricity, coal, fuel.

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Price of a common, inverse relation.
A price of related goods, inverse
relation.
Income level, both direct & inverse
relation.
Distribution of wealth, equal (high D) &
vice versa.
Taste & preference.
Govt. policy: Tax↑−D↓, Subside↑−D↑.

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State economy : Boom-↑D↓, Dep-D↓.

Population growth: direct relation.

Future expectation of change in prices.

Business cycles of a company.

Brand power. Advertisement.

Size of market for the common.

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 LAW OF DEMAND:-
“The amount demanded increases with a fall in
price& diminishes with a rise in price.”

:-Marshall
D=f (Px, Py, Y, T).

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 Assumption: - Stigler & Boulding

• Income should remain constant.

• Taste of preference should remain constant.
• Price of related goods should remain constant.
• Commodity should be a normal one.
• Population level remains constant.
• Perfectly competitive market

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The law states that there is inverse
relationship between the price &
demand for a commodity, which can
be explained with the help of:-

Demand schedule

Individual demand schedule.

Market demand schedule.

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 Demand curve.
Individual demand schedule &
curve
Price per unit quantity demanded
10 50
20 40
30 30
40 20
50 10

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Individual demand curve refers to the
quantity demanded by the consumer at
different levels of prices. The points
represent the price & quantity
relationship. The download slope
indicates that there is inverse correlation
between the variables.

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Market demand schedule & curve.
It is defined as the quantities of a given
commodity which al consumers will buy
ay all possible prices ay a given
moment of time.

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Price Per unit Quantity demanded

BY A BY B BY (A+B)
50 10 15 25
40 15 20 35
30 25 30 55
10 30 35 65

Here it is assumed that there are two consumers

A & B in the market facing same prices of the
commodity exercising the individual taste &
preferences.
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WHY THE DEMAND CURVE SLOPES
DOWNWARD?
OR

REASONS FOR THE LAW OF DEMAND?

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 Law of diminishing MU:-

The law states that if a consumer for the satisfaction of

a want constantly consumes the units of a
commodity, the utility which he gets from the
successive units shall go on declining. However, price
is always equalized to the MU. Therefore, the
consumer shall have more units of that commodity
only when he pays less for it & vice versa. This simply
means that demand shall be more when price is less
& vice versa.

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 Income Effect & Substitution effect

• With the change in P, money income

remaining same, real income i.e. purchasing
power is inversely related.
This means consumers can avail more a good
when the prices fall & vice versa.
• Changes in the price of a commodity make it
relatively dearer or cheaper in comparison to
its substitutes, with the result it is demanded
either less or more.

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 Multiple uses of a commodity:-

• Increase in the price of electricity would

restrict its multiple use & vice versa, as such
the demand fluctuates.

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 New consumers:-

• When the price falls, there are new consumers

who get attracted to the good & vice versa
which increases the demand.

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Psychological effect:-

• When prices falls, CETERUS-PERIBUS, there is

a psychological +ve impact which accelerates
the demand.

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 EXCEPTIONS TO THE LAW
• Change in taste or fashion.
• Change in income
• Change in other prices.
• Discovery of substitution.
• Anticipatory change in prices.
• Rare or distinction goods
• Giffen goods
• Commodities which are used as status symbols
• Expectation of change in the price of commodity

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LAW OF SUPPLY

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 Law of Supply
• The law of supply is a fundamental principal of
economic theory which states that, all else equal, an
increase in price results in an increase in quantity
supplied. In other words, there is a direct
relationship between price and quantity: quantities
respond in the same direction as price changes. This
means that producers are willing to offer more
products for sale on the market at higher prices by
increasing production as a way of increasing profits.

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 The determinants of supply are:

• Production costs, how much a good costs to

be produced
• The technology used in production, and/or
technological advances
• Firms' expectations about future prices
• Number of suppliers
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EQUILIBIRIUM

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SHIFT IN CURVES

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1. If demand increases and supply remains
unchanged, a shortage occurs, leading to
a higher equilibrium price.
2. If demand decreases and supply remains
unchanged, a surplus occurs, leading to a
lower equilibrium price.
3. If demand remains unchanged and supply
increases, a surplus occurs, leading to a
lower equilibrium price.
4. If demand remains unchanged and supply
decreases, a shortage occurs, leading to a
higher equilibrium price.

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 CONCLUSION
• The price P of a product is determined by a
balance between production at each price
(supply S) and the desires of those with
purchasing power at each price (demand D).
The diagram shows a positive shift in demand
from D1 to D2, resulting in an increase in price
(P) and quantity sold (Q) of the product

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 THE END

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