Demand analysis & supply analysis

Meaning of Demand
› The term demand implies a desire for a commodity
backed by the ability and willingness to pay for it.
› Demand is the Mother of Production.
› According to Prof. Bober, “By demand we mean the
various quantities of a given commodity or service
which consumers would buy in one market in a
given period of time at various prices or at various
incomes or at various prices of related goods.”
› Demand is a relationship between the price and
quantity demanded other things of constant.

Three Things are essential for desire a
commodity to become effective demand
Desire a commodity
Willingness to pay
Ability to pay for the
commodity

The Three Alternative way to
expression of demand
A
Demand
Function
A
Demand
Schedule
A
Demand
Curve

A Demand Function
Demand Function is a function that describe how much
of a commodity will be purchased at the prevailing
prices of that commodity and related commodities,
alternatives income levels, and alternative values of
other variables affecting demand.
• Price is not the only factor which determines the level
of demand for a good.
• Other important factor is Income. The rise of income
will lead to an increase in demand for a normal
commodity.
• A few goods are named as inferior goods for which the
demand will fall, when income rises.

Factors affect the demand for a good

A Demand Schedule
The demanded schedule is generally represented by a table
which shows how show quantity demanded of goods varies
the price other things remain constant.
Price of Bread Qty. of Demand
50 1
45 2
40 3
35 5
30 7
25 9
20 12
15 15
10 20

A Demand Curve
A graphical representation of the demand schedule is
the demand curve as shown in figure.
Demand Curves generally have a negative gradient
indicating the inverse relationship between quantity
demanded and price.
There are at least three accepted explanations of why
demand curve slope downwards:
• The law of diminishing marginal utility
• The income effect
• The substitution effect

Types of Demand
Demand for Consumer Goods v/s Producer Goods
Autonomous Demand v/s Derived Demand
Demand for Durable Goods v/s Perishable Goods
Firm Demand v/s Industry Demand
Short Run Demand v/s Long Run Demand
New Demand V/s Replacement Demand
Total Market v/s Segment Market Demand

Types of Demand
1. Demand for Consumer Goods v/s Producer Goods: The
different in these two types of demand are that
consumer goods are needed for direct consumption,
while the producer goods are needed for producing other
goods, soft drink, milk, bread, etc. are the examples of
consumer goods, while the various types of machine,
tools, etc.
2. Autonomous Demand v/s Derived Demand:
Autonomous Demand refers to the demand for products
and services directly. The demand for the services of a
super specialty hospital can be considered as
autonomous whereas the demand for the hotels around
the hospital is called as Derived Demand.

Types of Demand
3. Demand for Durable Goods v/s Perishable Goods: Here the
demand for goods is classified based in their durability.
Durable goods are these goods which gives services relatively
for a long period. The use of perishable goods is very less may
be in hours or days. Durable goods meet the both the current
as well as future demand whereas perishable goods meet only
the current demand. Example of perishable goods: Milk,
Vegetables, Fish, etc. Example of durable goods: Wheat, Rice,
Sugar, Pulses, etc.
4. Firm Demand v/s Industry Demand: The firm is a single
business unit whereas industry refers to the group of firm
carrying on similar activity. The quantity of goods
demanded by single is called firm demand and the quantity
demanded by industry as a whole is called as industry
demand.

Types of Demand
5. Short Run Demand v/s Long Run Demand: The short
run and long run cannot be clearly defined other than in
terms of duration of time. The demand for particular
product/service in a given region for a particular day can
be viewed as long run demand. Short run refers to a period
of shorter duration and long run refers to the relatively
period of longer duration.
6. New Demand v/s Replacement Demand: New Demand
refers to the demand of the new products and it is the
addition to the existing stock. In replacement demand, the
item is purchased to maintain the asset in good condition.
Replacement demand may also refer to the demand
resulting out of replacing the existing assets with the new
assets.

Types of Demand
7. Total Market v/s Segment Market Demand: The
total demand of sugar in the region is the total
market demand. The demand for the sugar from
the sweet making industry from this region is the
segment market demand. The aggregate demand
for all segment market is called the total market
demand.

Factor affecting of Demand
1. Price of the
Commodity
2. Income of the
Consumer
3. Prices of Related Goods
4. Tastes of the
Consumers
5. Wealth
6. Population
7. Government Policy
8. Expectations
Regarding the Future
9. Climate & Weather
10. State of Business

Factors affecting of Demand
1. Price of the commodity: The most important factor
affecting amount demanded is the price of the commodity.
The amount of a commodity demanded at a particular
price is more properly called Price Demand. The relation
between price and demand is called the Law of Demand. It
is not only the existing price but also the expected changes
in price, which affect demand.
2. Income of the Consumer: The demand for goods also
depends upon the income of consumers. With an increase
in income, the consumer’s purchasing power increases,
because he is in now in a position to buy more goods.
Consequently, the consumer’s demand for goods increases.

Types of goods for each of which the
effect of income differs:
› Normal Goods: Increase in income has effect on the demand
for goods. Generally, income of the people is directly related to
their demand. That is why “I” goes up, demand for Normal
goods goes up and when “I” falls. Example, Laptop, etc. Thus
there is a relationship between income and demand of normal
goods.
› Necessity Goods: For certain goods called necessities, demand
is not related to income, salt, petrol and LPG are considered
necessity goods. Demand for salt does not increase with the
increase in income and does not decrease with the decrease in
income. It means that it is irrespective of income.
› Inferior Goods: Goods are said to be inferior goods if its
demand falls with increase in income of the consumer.

3. Prices of Related Goods: The demand for a commodity is also
affected by the changes in prices of the related goods also. Related
Goods can be of two types :
(i) Substitutes: which can replace each other in use; for example, tea
and coffee are substitutes. The change in price of a substitute has
effect on a commodity’s demand in the same direction in which
price changes. The rise in price of coffee shall raise the demand for
tea.
(ii) Complementary: foods are those which are jointly demanded, such
as pen and ink. In such cases complementary goods have opposite
relationship between price of one commodity and the amount
demanded for the other. If the price of pen goes up, their demand is
less as a result of which the demand for ink is also less. The price &
demand go in opposite direction. The effect of changes in price of a
commodity on amounts demanded of related commodities is called
Cross Demand.

4. Tastes of the Consumers: The amount demanded also
depends on consumer’s taste. Tastes include fashion, habit,
customs, etc. A consumer’s taste is also affected by
advertisement. If the taste for a commodity goes up, its
amount demanded is more even at the same price. This is
called increase in demand. The opposite is called decrease
in demand.
5. Wealth: The amount demanded of commodity is also
affected of wealth as well as its distribution. The wealthier
are the people, higher is the demand for normal
commodities. If wealth is more equally distributed, the
demand for necessaries and comforts is more. On the other
hand, if some people are rich, while the majorities are
poor, the demand for luxuries is generally higher.

6. Population: Increase in population increases demand
for necessaries of life. The composition of population also
affects demand. Composition of population means the
proportion of young and old and children as well as
ratio of men and women. A change in composition of
population has an effect on the nature of demand for
different commodities.
7. Government Policy: Government policy affects the
demands for commodities through taxation. Taxing a
commodity increases its price and demand goes down.
Similarly, financial help from the government increases
the demand for a commodity while lowering its price.

8.Expectation Regarding the Future: If consumers
expect changes in price of commodity in future, they
will change the demand at present even when the
present price remains the same. Similarly, if
consumers expect their incomes to rise in the near
future they may increase the demand for a
commodity just now.
9. Climate & Weather: The climate of an area and the
weather prevailing there has a decisive effect on
consumer’s demand. In cold areas woolen cloth is
demanded. During hot summer days, ice is very much
in demand. On a rainy day, ice cream is not som nuch
demanded.

10. State of Business: The level of demand
for different commodities also depends upon
the business conditions in the country. If the
country is passing through boom conditions,
there will be a marked increase in demand.
On the other hand, the level of demand goes
down during depression.

Law of Demand
› The law of demand expresses a relationship between the
quantity demanded and its price.
› The law refers to the direction in which quantity
demanded changes with a change in price.
› It may be defined in Marshall’s words as “the amount
demanded increases with a fall in price and diminishes
with a rise in price.”
› According to Prof. Samuelson, “When the price of goods
is raised (at the same time that things are held constant)
less of the demanded or if a great quantity of a goods is
put in the market then other things being equal it can be
sold only at a lower price.”

Assumptions of Law of Demand
› There is no change in the tastes and preferences of the
consumer.
› The income of the consumer remains constant.
› There is no change in customs.
› The commodity to be used should not confer distinction
on the consumer.
› There should not be any substitutes of the commodity.
› There should not be any change in the prices of other
products.
› There should not be any change in the quality of the
products.

Reason for law of Demand
Law of Diminishing
Marginal Utility
Substitute Effect
Income Effect

Reason for law of Demand
➢Law of Diminishing Marginal Utility: The law of
demand is based on the law of diminishing marginal
utility which defines that as the consumer purchase
more and more units of commodity the utility
reduce from each successive unit goes on decreasing.
➢Substitute Effect: Substitute effect also affect the
demand curve to slope from left to right. As the
price of commodity falls price of its substitute goods
remain the same.
➢Income Effect: If the price of commodity falls the
real income of consumer goes up.

Exception Law of Demand
› Consumer Ignorance
› Necessary Goods
› Conspicuous &
Consumption
› Speculation
› Giffen Goods
› Emergencies
› Change in Fashion
› Snob Effect
› Seasonal Goods
› Goods in Short Supply
› Demonstration Effect

› Law of Demand indicates the inverse
relationship between price and quantity
demanded of a commodity.
› It is generally valid in most of the situations.
› But there are some situations under which there
may be direct relationship between price and
quantity demanded of a commodity.
› These exceptions are known as Exceptions to the
Law of Demand.

1. Customer Ignorance: Consumer’s Ignorance induce them to
buy/purchase more in the costly market. Sometimes they think like
high price commodity is better in the quality. Thus with the increase
in price, demand increases.
2. Necessary Goods: There are some commodities which are not
necessities / necessary but have become necessities because of their
constant use of fashion. For example, LPG Gas, Petrol, etc. Prices of
such commodities increases, demand does not show any tendency to
contract and it negatives the law.
3. Conspicuous and Consumption: If consumers measure the desired
ability of the utility of a commodity, solely by its price and nothing
else, then they lend to buy more of the commodity at higher price and
less of it at lower price. Hence, there is a direct relationship between
price & quantity demanded.

4. Speculation: If people expect the price of good to rise in
near future, they demand more even at higher price. And
if they expect the price to fall in near future, they demand
less of it even at lower price. Thus, more quantity of goods
is demanded at rising prices and less quantity of goods is
demanded at falling prices. This seems contrary to law of
demand.
5. Giffen Goods: These are special type of inferior goods
named after Sir Robert Giffen. According to him, when
price of inferior goods increases, demand increases & when
price falls, demand falls. So, there is direct relationship
between price and demand.

6. Emergencies: During emergencies like war, famine, etc.
households behave in an abnormal way. Households accentuate
scarcities and induce further price rise by making increased
purchases even at higher prices because of the apprehension
that they may not be available. On the other hand during
depression, fall in prices is not a sufficient condition for
consumers to demand more if they are needed.
7. Change in Fashion: A change in fashion and tastes affects the
market for a commodity. When a digital camera replaces a
normal manual camera, no amount of reduction in the price of
the latter is sufficient to clear the stocks. Digital Camera on the
other hand, will have more customers even though its price may
be going up. The law of demand becomes ineffective.

8. Snob Effect: Some buyers have a desire to own unusual
or unique products to show that they are different from
others. In this situation, even when the price rises the
demand for the commodity will be more.
9. Seasonal Goods: Goods which are not used during the off-
season (seasonal goods) will also be subject to similar
demand behavior.
10. Goods in Short Supply: Goods that are available in
limited quantity or whose future availability is uncertain
also violate the law of demand.
11. Demonstration Effect: It refers to a tendency of low
income groups to imitate the consumption pattern of high
income groups.

Extension of Demand
When there is decrease in price in commodity, there is in
increase in demand of that commodity. This is called
extension of demand.

Contraction of Demand
When there is increase in price of a commodity, there is
decrease in the demand for that commodity. This is called
Contraction of demand.

Supply Analysis
✓Supply of a commodity refers to the various
quantities of the commodity which a seller is
willing and able to sell at different prices in a
given market at a point of time, other things
remaining the same.
✓Supply is what the seller is able and willing to
offer for sale.
✓The Quantity supplied is the amount of a
particular commodity that a firm is willing and
able to offer for sale at a particular price suring
a given time period.

The Law of Supply
The Law of supply states that a firm will produce and offer
to sell greater quantity of product service at the price of
product or service rises, Other thing be equal.
Law of Supply states that other factors remaining
constant, price and quantity supplied of a good are
directly related to each other. In other words, when the
price paid by buyers for a good rises, then suppliers
increase the supply of that good in the market.
Law of supply depicts the producer behavior at the time of
changes in the prices of goods and services. When the price
of a good rises, the supplier increases the supply in order to
earn a profit because of higher prices.

Explaining the Law of Supply
› The Law of Supply states that “When the market price rises following
an increase in demand, it becomes more profitable for businesses to
increase their output.
› In short P Qs
1. The Profit Motive: When the market price rises following an
increase in demand, it becomes more profitable for businesses to
increase their output.
2. Production & Costs: When output expands, a firm production costs
tend to rise therefore a higher price is needed to cover these extra
costs of production.
3. New Entrants Coming into the Market: Higher prices may create
an incentive for other businesses to enter the market leading to an
increase in total supply.

Interpreting changes Price & Quantity
Demand and Supply Shifted Effect on Price &
Quantity
If Demand
Rises
The Demand
Curve Shifts to the
Right
Both Price & Qty.
Increases
If Demand
Falls
The Demand
Curve Shifts to the
Left
Both Price & Qty. Falls
If Supply
Rises
The Supply Curve
Shifts to the Right
Price Falls but Qty.
Increases
If Supply
Falls
The Supply Curve
Shifts to the Left
Price Increases but Qty.
Decreases

Assumptions
No change in Cost of Production
No change in Technology
No change in Climate
No change in Prices of Substitutes
No change in Price of Capital Goods
No change in Natural Resources
No change in Political Situation
No change in Tax Policy

Assumptions
1. No change in Cost of Production: It assumed that there is no
change in cost of production because of the profit decreases
with the increase in cost of production and causes the
decrease in supply.
2. No change in Technology: It is also assumed that technique
of production does not change. If better methods of
production are invented, profit increases at the previous
price.
3. No change in Climate: It is also assumed that there is no
change in climatic situation.
4. No change in Price of Substitutes: If the prices of substitutes
of a commodity fall then the tendency of consumers diverts
to substitutes therefore, the supply of a commodity falls
without any change in price.

Assumptions
5. No change in Natural Resources: If the quantity of natural
resources(minerals, gas, coal, oil, etc.) increases, the cost of
production decreases. It causes to increase in quantity supplied.
6. No change in Price of Capital Goods: The capital goods are
raw materials, machinery, tools, etc. The cost of production
increases due to increase in prices of capital goods. It can lead to
decrease in quality supplied.
7. No change in Political Situation: The amount of investment is
affected by the change in political situation of a country. The
production of goods decreases due to decrease investment.
8. No change in Tax Policy: It is also assumed that the taxation
policy of government does not change. The increase in taxes
effects the investment and production and supply of goods
decreases.

Factors that Shift the Demand Curve
Change in Consumer Incomes
Population Change
Consumer Preferences
Prices of Related Goods

1. Change in Consumer Incomes: An increase in income
shifts the demand curve to the right. Because a
consumer’s demand for goods and services is
constrained by income, higher income level relax
somewhat that constraint, allowing the consumer to
purchase more products.
2. Population Change: An increase in population shifts the
demand curve to the right. Imagine a college town
bookstore in which most students return home for the
summer. Demand for books shifts to the left while the
students are away. When they return, demand for
books increases even if the price are unchanged.

3. Consumer Preferences: If the preferences for a
particular good increases, the demand curve for that good
shifts to the right. Fads provide excellent examples of
changing consumer preferences.
4. Prices of Related Goods: If the prices of related goods
change, the demand curve for the original good can
change as well. Related goods can either be substitutes or
complements.
Substitutes are goods that can be consumed in place of one
another.
Complements are goods that are normally consumed
together. Pen and ink are complements.

Exception Supply of Law
› It explain only static situation.
› Hope of change in price of commodity in
Near future.
› It does not apply on agricultural products.
› It does not apply on artistic goods.
› It does not apply on the goods of auction.
› It does not apply on the supply of labor in
under Developed Countries.

Elasticity of Supply
› Elasticity of Supply is defined as the percentage change
in quantity supplied divided by percentage change in
price. Price & Quantity Supplied, in usual cases, move in
the same direction, the coefficient of ES is positive.
› According to Lipsey, “Elasticity of supply is the ratio of
percentage change in quantity supplied over the
percentage change in price.”
› In the words of Prof. Bilas, “Elasticity of supply is defined
as the percentage change in quantity supplied divided by
percentage change in price.”
› Price Elasticity of supply measures the relationship
between the change in quantity supplied and a change in
price.

Formula for Price Elasticity of Supply
PES = Percentage change in quantity supplied
Percentage change in price
The value of elasticity of supply is positive,
because an increase in price is likely to increase
quantity supplied to the market and vice versa.

Types of Elasticity of Supply
Unit Elastic
Supply
Highly Elastic
Supply Curve
Less Elastic
Supply or
Inelastic Supply
Perfectly
Inelastic Supply
Perfectly
Elastic Supply

Unit Elastic Supply
When change in price of X brings about exactly
proportionate change in its quantity supplied then supply
is unit elastic i.e. elasticity of supply is equal to one, e.g. if
the price rises by 10% and supply expands by 10% then,
change in the quality supplied the supply is relatively
inelastic or elasticity of supply is less than one.
ES = % change in Quantity Supplied of X
% change in Price of X

Highly Elastic Supply Curve
Ratio of change in quantity supplied is greater
than the change in price. As a result, when we put
their values in the above mathematical
expression, we get Price Elasticity Supply > 1.

Less Elastic Supply or Inelastic Supply
When change in price brings about more than
proportionate change in the quantity supplied,
then supply is relatively elastic or elasticity of
supply greater than one.

Perfectly Inelastic Supply
When a change in price has no effect on the
quantity supplied then supply is perfectly inelastic
or the elasticity of supply is zero.

Perfectly Elastic Supply
When a negligible change in price brings about an
infinite change in the quantity supplied, then
supply is said to be perfectly elastic or elasticity of
supply is infinity.

Supply & Demand
Alfred Marshall published his books “Principle of
Economics” which define how supply & demand interacted
to determine of Price. The price level of goods essentially is
determined by the point at which quality supplies equal
quantity of demand.

Multiple Choice Questions
1. Which one of the following formula will be used for the
computing the price elasticity of demand?
A. % change in quantity demanded
% change in price
B. Change in quantity demanded
National Income
C. % change in quantity demanded
100
D. % change in price
% change in supply

1. Which one of the following formula will be used for the
computing the price elasticity of demand?
A. % change in quantity demanded
% change in price
B. Change in quantity demanded
National Income
C. % change in quantity demanded
100
D. % change in price
% change in supply

2. Elastic demand is –
A.Greater than one
B. Less than one
C. Equal to one
D.Zero

3. Economic goods are goods which –
A.Obey the laws of economics
B. Are scarce and limited in supply
C. Are intangible
D.Are exceptional to the law of economics

4. The nature of cross elasticity of demand
in case of complementary products will be –
A.Positive
B. Negative
C. Both A & B
D.Zero

5. Which of the following has the lowest
elasticity of supply?
A.Luxury Items
B. Necessities
C. Perishable Goods
D.Items that have the least budgetary
allocation

6. Price discrimination is profitable and
possible if the two markets have –
A.Equal elasticity of demand
B. Different elasticity of demand
C. Inelastic demand
D.Highly demand

7. What will be value of MR when P = Rs.80
and demand function is QD = 145 – P?
A.10
B. 15
C. 20
D.86

8. The profit maximizing output is
determined by the point where marginal
revenue equals –
A.Marginal Cost
B. Cost
C. Fixed Cost
D.Total Cost

9. Total production will be maximum when
–
A.Marginal production is maximum
B. Average production is maximum
C. Marginal production is zero
D.Average production is equal to the
marginal production

10. Which of the following is the approaches
to Consumer Demand Analysis?
A.Cardinal Utility Approach
B. Ordinal Utility Approach
C. Both A & B
D.None of the above

Demand analysis & supply analysis

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