Basics of demand and supply


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Basics of demand and supply

  1. 1. Basics of Demand and Supply Unit 2, Chapter 2
  2. 2. Demand What is demand in economics? People’s want or need of a certain good or service backed by ability and willingness to pay How is this demand any different from any other type of demand? Like Political demand?
  3. 3. Drawing a demand curve Suppose, I will pay you Rs.10/- per hour, how many of you will be willing to work for me? What if I raise this pay to Rs.20/- per hour, If I raise it further to Rs.50/- per hour?
  4. 4. Demand curve  A demand curve requires a demand schedule before it can be drawn  A demand schedule describes the demand for a commodity/ service at any given point of time at various prices offered in the market  Demand curve then plots out the demand schedule on a graph
  5. 5. Key features of Demand curve  Demand curve shows the negative relationship between price and quantity demanded  It slopes downward. Why?  Because the satisfaction that we get by consuming any commodity reduces as we go on consuming that commodity. This is called the law of diminishing marginal utility.
  6. 6. Movement along the demand curve Suppose the price of apples goes down, what happens to the demand of apples? What happens to the demand curve in this case? This case simply shows us the ‘price effect’ in a demand curve i.e. this is a movement along the existing demand curve.
  7. 7. Shift in demand curve  There are other things beside price that affect demand. What are some of these factors?  E.g. there is a change in income i.e. income increases. How would this get reflected on the demand curve of the consumer?  As a result of changes in these other factors, the demand curve shifts either to the left or right.
  8. 8. Factors making demand curve shift Change in income Prices or availability of substitutes Prices or availability of complementary goods Changes in weather, fashion, fad Change in the number of buyers Change in expectations of the availability of the good
  9. 9. Theory into practice There has been talk of the Melamchi Water project for a long time. The Water Corporation definitely hasn’t been able to meet the demand of the residents of Kathmandu Valley. If Melamchi comes then there is talk of water being abundantly available. Until then, we have to rely on the price fixed by the Water Corporation and pay it irrespective of how much is being supplied.
  10. 10. Questions to think over and answer  Does the law of diminishing marginal utility apply to water? If yes, how? If no, why?  Is water substitutable in the ‘economic’ sense? If yes, how? If no, why?  When the price of water goes up, will we start demanding less of it? How/why?  Given the scarcity of water, if my income increases, then I will start buying water from ‘Tankers’. What does this represent in my water demand curve?
  11. 11. Page 56, Q No. 7 To be done and submitted individually in class today