Demand & Supply• What is demand?• Law of demand• Exceptions to law of demand• Demand function• Individual and Market demand curves• Types of demand Price, Income & Cross demand• Elasticity of demand• Demand forecasting techniques• Law of Supply, Supply curve & Elasticity of Supply
MEANING OF DEMAND• Demand for a commodity refers to the quantity of the commodity which an individual consumer household is willing to purchase per unit of time at a particular price.• Individual Demand• Household Demand
MEANING OF DEMANDDemand for a commodity impliesDesire of the consumer to buy the productHis willingness to buy the productSufficient purchasing power in his possession to buy the product.
Law of Demand• A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good.• An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.• Note: refer notes for all other things held constant.
• QDx = f(Px)• This the mathematical relationship between the quantity demanded and the price of the product X.• There is a inverse relationship between the quantity demanded and the price of the product.
DEMAND FUNCTION The demand function can be writtenin a simple mathematical languageas: Q = f(Px, Py , Pz ,…..Pn ; I; T; A)
DEMAND FUNCTION The amount demanded (per unit of time) of a commodity X by a consumer (denoted by Qx ) depends upon:• Price of the commodity (Px)• Price of substitutes (Ps) and complements (Pc)• Income of the household (I)• Tastes and preferences of the household (T) and,• The amount annually spent on advertisement of the product (A)
DEMAND FUNCTION In case we are analyzing the demand for goods which are durable, storable and are expensive, we have to add these variables also:• Consumers’ expectations of future prices (Ep) and,• Consumers’ expectations future income (Ey)
DETERMINANTS OF DEMANDThe determinants of demand are:• Price of the commodity• Prices of related commodities• Income of the household• Tastes and preferences• Expectations• Advertisements
Prices of related commodities• The demand for a commodity depends also on the prices of its substitutes and complementary goods.Tea and coffee, pizza and burger, these are the substitutes for which the change in the price will affect the demand of the other in the same direction.
• By definition, the relationship between demand of a product (tea) and the price of its substitute (coffee) is positive is nature. When price of the substitute (coffee) of a product (tea) falls ( or increases), demand for the product falls (or increases).
• A Commodity is deemed to be a complement of another when it complements the use of the other.• When the use of any two goods goes together so that their demand changes (increases or decreases) simultaneously, they are treated s complements.• Example: Milk and sugar, Petrol and car, Tea, razor and blade printer and cartridge, Camera and film
Income of the household• Income is the basic determinant of the quantity demanded of a product as it determines the purchasing power of the consumer. That is why the people with higher current disposable income spend a larger amount on normal goods and services than those wit lower incomes.
Income of the household• For the purpose of income-demand analysis, goods and services may be grouped under four broad categories, viz., (a) essential consumer goods; (b) inferior goods; (c) normal goods and (d) prestige or luxury goods
Income of the household• Essential consumer goods (ECG) Example: food grains, salt, vegetables oils, matches, cooking fuel, a minimum clothing and housing, etc.• Quantity demanded of such goods increases with increase in consumer’s income only upto a certain limit, other factors remaining the same.
• Inferior Goods: bajra is inferior to wheat and rice, Bidi is inferior to cigarette, kerosene stove is inferior to gas-stove, traveling by bus is inferior to traveling by taxi.• The demand for inferior goods increases upto a certain level with the increase in the income and then starts decreasing with further increase in the income beyond a point of income.
• Normal Goods: Technically, normal goods are those which are demanded in increasing quantities as consumers’ income rises. Clothing is the most important example of this.• Demand for such goods increases with the increase in income of the consumer, but at different rates at different levels of income.• Demand for normal goods initially increases rapidly, and later, at a lower rate.
• Prestige or Luxury Goods: These are consumed mostly by the rich section of the society, e.g., luxury cars, stone studded jewellery, costly cosmetics, antiques.• Demand for such goods arises only beyond a certain level of consumer’s income.
Tastes and preferences• These depend on the social customs, religious values attached to a commodity, habits of the people, the general life-style of the society.
Change in Quantity DemandedPrice An increase in price causes a decrease in quantity demanded.P1P0 Quantity Q1 Q0
Change in Quantity DemandedPrice A decrease in price causes an increase in quantity demanded.P0P1 Quantity Q0 Q1
Law of Supply• A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good.• An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.
Change in Quantity Supplied A decrease in price Price causes a decrease in quantity supplied. P0 P1 Quantity Q1 Q0
Change in Quantity Supplied An increase in price Price causes an increase in quantity supplied. P1 P0 Quantity Q0 Q1
Market EquilibriumPrice D0 D1 S0 An increase in demand will cause the marketP1 equilibrium price andP0 quantity to increase. Quantity Q0 Q1
Market EquilibriumPrice D1 D0 S0 A decrease in demand will cause the marketP0 equilibrium price andP1 quantity to decrease. Quantity Q1 Q0
Market EquilibriumPrice An increase in supply D0 S0 S1 will cause the market equilibrium price toP0 decrease andP1 quantity to increase. Quantity Q0 Q1
Market EquilibriumPrice A decrease in supply D0 S1 S0 will cause the market equilibrium price toP1 increase andP0 quantity to decrease. Quantity Q1 Q0
THE LAW OF DEMAND The law of demand states that theamount demanded of a commodity andits price are inversely related, otherthings remaining constant. Exceptions to the Law of Demand: (i) Griffin goods (ii) Commodities which are used asstatus symbols (snob effect) (iii) Expectations of change in the priceof the commodity
INDIVIDUAL AND MARKET DEMAND SCHEDULES A demand schedule at any particular timerefers to the series of quantities theconsumer is prepared to buy at itsdifferent prices. The demand schedule for an individualconsumer is called an individual demandschedule. Likewise, if we have similardemand schedules for all consumers in themarket, we can add up the quantitiesdemanded of the commodity by theseconsumers at each price and get asummed-up schedule called the marketdemand schedule.
INDIVIDUAL DEMAND SCHEDULE FOR ORANGESPrice of oranges Quantity demanded(Rs. Per dozen) of oranges (dozens) 5 1 4 2 3 3 2 4 1 5
MARKET DEMANDSCHEDULE FOR ORANGESPrice of Quantity demanded of Marketoranges oranges by consumers demand of (dozens) oranges (dozens) A B C D 10 1 0 3 0 4 9 3 1 6 4 14 8 7 2 9 7 25 7 11 4 12 10 37 6 13 6 14 12 45
INDIVIDUAL DEMAND CURVE The demand schedule when D represented diagrammaticallyPrice of good X Individual is known as the demand curve. Demand When this diagram is based on Curve an individual demand schedule, we get an individual demand curve. D O Units of good X
Why do Demand Curves Slope Downwards?• Reasons• More uses when the price falls• Raise in real income of consumer• Substitution effect
MARKET DEMAND CURVE Y MAR KET DEPRICE OF GOOD X MAN D CUR VE 10 ∑D 9 8 DC 7 6 DA DD DB O X 4 UNITS OF GOOD X
TYPES OF DEMAND• Derived demand and autonomous demand• Demand for producers’ goods and consumers’ goods• Demand for durable and non-durable goods• Industry demand and firm demand• Total demand and market segment demand• Short-run demand and long-run demand
Derived and Autonomous Demand• Those inputs or commodities which are demanded to help in further production of commodities are said to have Derived demand. Ex raw materials, machines• Autonomous demand, is the one where a commodity is demanded because it is needed for direct consumption. Ex pieces of furniture at household
Demand for producers’ goods and consumers’ goods• The difference in these two types of demand are that consumers’ goods (soft drinks, milk, bread) are needed for direct consumption, while the producers’ goods (Various types of machines, steel, tools) are needed for producing other goods.
Demand for durable and non-durable goods• Non-durable goods are the ones which cannot be used more than once. Eatables, photographic film, soaps. These meet the current need. (Perishable and non- perishable)• Durable goods, on the other hand, are the ones which have repeated uses. Shoes, readymade garments, residential house, electronic domestic appliances. These are the ones which can be stored and whose replacement can be postponed. These meet both the current as well as future need.
Industry demand and firm demand• Firm demand denotes demand for a particular product of a particular firm. Demand for ITC wills branded shirts• Industry demand refers to the total demand for the product of a particular industry. Demand for shirts for all the brands available like, Arrow, Peter England, Provogue, Oxemberg, Louis Pilips, Van-Heusen, Zodiac, Pan America etc.,
Total demand and market segment demand• Demand for market segments is to be studied by breaking the total demand into different segments like geographical areas, sub-products, product use, distribution channels, size of customer group etc., Demand for T-Shirts in India is market demand, which can be based on the segment market like, for kids, youth and old people.