The document discusses why demand curves slope downward. It provides four reasons: 1) the income effect, as lower prices increase purchasing power and demand, 2) the substitution effect, as consumers substitute cheaper goods, 3) new consumers can now afford the good at lower prices, and 4) alternative uses of goods increase as prices fall. Equilibrium in markets occurs where the supply and demand curves intersect, establishing an equilibrium price and quantity.

1. Demand
2nd
presentation

2. Why the slope of the Demand
curve is negative
• As we have discussed above, that when
the price decrease quantity demanded
increase, and when price increase
quantity demanded decrease. Now we
discuss that why the demand curve has
downward slope,

3. • The first reason or the factor behind the
downward slope of the demand curve is income
effect. Suppose the price of the commodity
decreases, now consumer have some money
left in his or her pocket or he can purchase more
with the same amount. Now it is clear that
because of decrease in price the real income or
the purchasing power of the consumer will
increase, and this increase in real income
induces the consumer to purchase more. This
effect is known as income effect.

4. • The second reason or the factor behind the
downward slope of demand curve is substitution
effect. Because of the decrease in price,
consumers shift their consumption from other
commodities to this commodity. This decrease in
price induces the customers to substitute the
commodities with the cheaper one. According to
Prof, Marshall Substitution effect is more
important than income effect in determining the
downward slope of demand curve.

5. • The third factor or the reason behind the
downward slope of demand curve is new
consumers. With a lower price now some
new consumers can also afford that
particular commodity that they cannot
purchase at previous price. That’s why the
slope of demand curve is downward.

6. • The fourth reason behind the downward
slope of demand curve is the alternative
uses of a commodity. When the price of
the commodity decreases consumers can
use that commodity for different uses, it is
also a reason behind the downward slope
of demand curve.

7. • There are many factors which can change the
demand of a commodity. Some of the main
factors are given below,
• 1. Change in the real income;
• As we know that the meaning of real income is
purchasing power. If the price of a commodity
decreases a consumer can purchase more units
of that particular commodity with the same
money income. In other words when price
decreases real income increases, and when real
income or purchasing power increases demand
will also increases.
Causes of change in Demand;

8. • 2. Distribution of the income;
• It should be noted that the Marginal Propensity
to Consume (MPC), of the poor people are high
in comparison with rich person. It means that the
share of the increased income spent on
consumption is more in case of poor people in
comparison with rich people. If there is an equal
distribution of national income than the demand
will increase.

9. • 3. Change in weather;
• Change in weather also affects the
demand of some particular commodities
like, in summer the demand for soft drink
and ice cream increases significantly. On
the other hand in the season of winter the
demand of woolen cloths and hot drinks
increases.

10. • 4. Size of Population;
• Size of the population also affects the
demand of the commodity. If the
population is large than the demand will
also large, on the other hand if the
population is less than the demand of a
particular commodity will also less.

11. • 5. Increase in Money supply;
• Money supply also affects the demand of
a commodity. If the money supply
increases, people have more money in
their pockets to spend. Increase in money
supply will increase the purchasing power
of the consumers; hence the demand will
also increase.

12. • 6. Change in the price;
• As we know that according to the law of
demand, there is a negative relationship
between price and the quantity demanded
(other factors are constant). It means,
lower the price, the greater is the demand,
and vice-versa.

13. • 7. Price of the related goods;
• Related goods can be further divided into
two parts,
• (a) Substitute goods, and
• (b) Complimentary goods

14. • Substitute Goods;
• As we know that the increase in the
consumption of one commodity will lead to
a decrease in the demand for the other
substitute commodity. When a decline in
the price of one good results in a decline
in the demand for other goods, those
goods are considered as substitute goods.

15. • Complimentary goods;
• If the price of one commodity and the
demand for other commodity are inversely
related, these goods can be considered as
complimentary goods.

16. Supply
• The Qs is the amount of a good that is
offered in a market for sale in a given
period of time is known as quantity
supplied. There are several factors which
can influence the quantity supplied; the
main factors are as follows;

17. • 1. The price of the particular commodity
• 2. The price of the inputs
• 3. The prices of related goods
• 4. Future price of the product
• 5. Number of the firms in production
process.

18. • Supply depends upon several factors, in a
functional form;
• Qs = f(P, Py, Pf, T, Pe, F)
•
• Quantity supplied is a function of price,
price of the inputs, future price, level of
technology and the number of firms.

19. Supply schedule
Price Quantity Supplied
60 700
55 650
50 600
45 550
40 500
35 450
30 400

20. • Table shows that at the price of 60 Rs, the
quantity supplied was 700, and when the
price decreases from 60 to 25, the
quantity supplied also decreased to 350
units from 600 units. We can show it
graphically;

21. Y
X
O
Quantity Supplied
Price
30
35
40
45
50
55
60
400 450 500 550 600 650 700
s
s

22. • When all the factors are constant except
the price of the commodity, there is a
positive relationship between price and the
quantity supplied. When the price was Rs,
30 the quantity supplied was only 400, as
the price increases from 30 to 60 Rs, the
quantity supplied also increase from 400
units to 700 units. This concept is known
as increase in demand.

23. Equilibrium with the help of
demand and supply
• Where, the demand curve and supply
curve intersect each other that point is
known as equilibrium point. In other words
equilibrium is a situation of market in
which a consumer can buy all of a good
they wish and producers can sell all of the
goods they wish. At the equilibrium price is
known as equilibrium price and the
quantity is known as equilibrium quantity.

24. Y
X
O
Quantity Supplied
Price
30
35
40
45
50
55
60
400 450 500 550 600 650 700
s
s
D
D
E

25. • In the above figure we have assumed
quantity supplied on X axis and Price of
the commodity on Y axis. The demand
and the supply curves have been shown
as DD and SS, respectively. It is clear
from the figure that point E is equilibrium
point, at which demand curve and supply
curve intersect each other. And Rs, 45 is
the equilibrium price and 550 units are
equilibrium quantity.