Introduction Introduction of Demand and Supply. Every business firm is interested in its own sales or profits. The sales & profits depend, to some extent, on the demand for its product. Demand is one of the important requirements for the existence of any business firm. Demand & Supply are the two forces that determine the price of the product in the market.
Demand Demand is the desire to own anything and the ability to pay and willingness to pay for it. Demand refers to the quantities of a commodity that the consumers are able and willing to buy at each possible price during a given period of time, other things being equal.
Difference between Demand andQuantity Demanded. Demand is the quantities that buyers are willing and able to buy at alternative prices during a given period of time. Whereas the quantity demanded is a specific amount that buyers are willing and able to buy at one price. Example: the consumer’s ability and willingness to buy 4 ice creams at the price of Rs 10 per ice cream is an instance of quantity demanded. Whereas the ability and willingness of consumer to buy 4 ice creams at Rs 10, 3 ice creams at Rs 20 and 2 ice creams at Rs 30 is an instance of demand.
Law Of Demand According to Marshall, “The Law of demand states that amount of quantity demanded increases with a fall in price and diminishes when the price increases, other things being equal.” There is an inverse relationship between price of the commodity and demand for a commodity. Law of Demand holds good when “other things remain the same.” it means factors influencing demand, other than price, are assumed to be constant. Like Income of the consumer, price of related goods, tastes and preferences, etc.
Assumptions of the Law: Consumers’ income should not change. consumers’ tastes and preferences should not change. Prices of other products (substitutes and complements) should not change. Consumer does not expect any change in the price of the commodity in the near future.
Demand schedule Demand schedule is a table that shows different prices of a good Price per Quantity unit (Rs) demanded and the quantity of that 1 4 good demanded at each 2 3 of these prices. 3 2 Example: 4 1
Demand CurveDemand curve is a curve that showsdifferent quantities of a commoditydemanded by at different prices. Y-axisThe demand curve slopes downward from 4left to right this is because when the price ishigh, the demand is low and when the price 3is low , the demand is high. 2 Price ofNow on the X- axis we have the 1 commodity.quantity of a commodity andon the Y-axis we have the price 1 2 3 4 0 X-axisof the commodity.As the price increases from P1 Quantity in unitslevel to P2 level, the demandfor quantity decreases from Q2level to Q1 level.
Determinants of Demand Price of the commodity. Price of the related goods. Income of the consumer. Taste and preferences. Expectation of price change of the commodity.
Price of the Commodity If the price of the commodity rises, price demands of the P1 commodity falls, vice P2 versa. Q1 Q2 quantity
Price of the Related Goods Substitute goods : substitute goods are those goods which can be substituted for each other, such as tea and coffee. Price of tea P1 Q1 Q2 Demand of Coffee
Complementary goods : complementary goods are those goods which complete the demand for each other, such as car P1 and petrol. P2 Q1 Q2
Income of the consumer An increase in income would cause an increase in demand, such as P0 normal goods. Q1 Q2
Taste & Preference A favorable change in consumers in tastes & preferences to a product means that more will be demanded at each price, & vice-versa.
Expectation of the price change ofthe commodity If consumers expect a rise in prices in future, they will buy more even if the present high prices & vice-versa.
Types of Goods Relationship between income of consumer & demand for a commodity is discussed with reference to:1. Normal Goods2. Inferior Goods3. Giffen Goods4. Necessity Goods
Marginal utility refers to the change in satisfaction which results when a little more or little less of that good is consumed
According to the law of diminishing marginalutility when a person consumes more and more units ofa good his total utility increases while the extra utilityderived from consuming successive units of the gooddiminishes
Thirsty person takes 5 bottles of cold drink continuously Consumption of first bottle gives him utility Second bottle gives less utility but his total utility increases Third bottle gives him still less utility but increases total utility Utility derived from fourth bottle may be 0 as he is no more thirsty Fifth bottle may cause uneasiness and thus give negative utility i.e. total utility may actually go down
total utility/marginal 30 25 20 utility 15 total utility 10 marginal utility 5 0 -5 0 2 4 6 no. of bottles
Meaning of Supply Supply is the willingness & ability of producers to make a specific quantity of output available to consumers at a particular price over a given period of time.
Law of Supply The law of supply states that “other things remaining constant, the supply of a product rises as its price rises & falls as its price falls.”
Assumptions of the law There should not be any change in the cost of production. There in no change in the level of technology used in the production process. There should not be any kind of government intervention. There is no change in competitors’ actions on product differentiation.
Supply Schedule The law of supply can be Example: explained with the help Price Quantity of a supply schedule. Supplied Supply schedule is 1 12 showing how much of a 2 28 3 42 product is supplied in a 4 52 particular market at 5 60 different price.
Supply Curve Supply curve is a curve sloping upwards from left to right. In short, supply curve is only a graphical representation of supply schedule.
Supply Curve Shifts Important shift in factors of supply are Changes in the prices of inputs used in production of a good Changes in technology Changes in suppliers expectations Changes in taxes & subsidies Each of these factors will cause a shift in supply, whereas a change in price causes a movement along the supply curve.
Supply Function In economics, we say that the supply of a product is a function of the product, price of related products, price of inputs, technology, time periods, government policy, nature etc.
Determinants of SupplyThe various determinants of supply are as follows:1. Price of the Product2. Prices of related Products3. Prices of Inputs4. Change in technology5. Time Periods6. Government Policy7. The Nature