Demand and supply

1. Presentation on Demand & Supply
Presented By:
Vikash Barnwal
Asst.Professor

2. Demand
 Demand = desire+ ability + willingness to pay
 Demand by a consumer means the quantity of the
goods that he is willing to buy at different prices
within a given time period.
 Demand for a commodity is the quantity that an
household is willing to buy in the market at a given
period of time .
Demand for a particular commodity implies:
a. Desire of the customer to buy the product;
b. The customers willingness to buy the product
c. Sufficient purchasing power in the customers
possession to buy the product

3. Definition
According to Prof. Mayers ,” The demand for a
good is schedule of the amount that buyer would be
willing to purchase at all possible at one instant of
time”
According to Benham “ the demand for anything at a
given price is the amount of it which will be bought
per unit of time at that price”

4.  For Example: You desire to have a Car, but you do
not have enough money to buy it. Then, this desire will
remain just a wishful thinking, it will not be called
demand.
 If inspite of having enough money, you do not want to
spend it on Car, demand does not emerge.
 The desire become demand only when you are ready
to spend money to buy Car.

5. Characteristics of Demand
 Effective desire
 Price
 Time
 Market
 Amount

6.  Effective desire: it means that there must be a
desire backed by the ability and willingness to pay .
Thus there are three essentials of an effective
desire.
a. The person must Have a desire to have a particular
commodity
b. He must have adequate resources to purchase
that commodity
c. He must be ready to spare these resources for that
commodity
 A particular price: We cannot imagine of demand
without specifying some price thus demand always
related to price

7.  Time : Demand has to be stated with reference to a
period of time .
 Market: Market is a place where buyer and seller
come to contact with each other. Demand is always
held in the market
 Amount : Demand is always a specific amount which
a person is willing to purchase. It is not
approximation, but is to be expressed in numbers.

8. Demand schedule
the tabular presentation of data is known as demand
schedule.
Price of Commodity X Quantity Demanded by
person
5 30
12 22
15 15
18 12
25 1o
30 5

9. Demand curve
 The Graphical presentation of demand schedule is
known as Demand curve.

10. Extension and Contraction of Demand
 Movement along the demand Curve
a) Extension Of Demand
b) Contraction Of Demand
 Extension of Demand : Extension of demand is
the increase in demand due to the fall in price, all
other factors remaining constant.
 Contraction Of Demand: Contraction of demand
is the fall in demand due to the rise in price, all
other factors remaining constant.

12. Types of Demand schedule
 Individual Demand schedule
 Market Demand schedule
 Individual Demand: It is a demanding schedule that
depicts the demand of an individual customer for a
commodity in relation to its price.

13. Market Demand schedule
 market .demand is the sum of individual’s demand at
different price level at a particular period of time by
different people.
Price in Rs
Demand of
individual 'A'
Demand of
individual
'B'
Demand of
individual 'C'
Demand of individual A
+ B + C
5 20 30 50 100
4 40 60 100 200
3 60 90 150 300
2 80 120 200 400

14. Market Demand curve
 The demand schedule can be presented graphically.
The graph of demand schedule is called demand
curve. It shows the maximum quantities per unit of
time that all consumers buy at various prices.

15. Types of Demand
 Individual demand: it refers to quantity demanded by
consumer at different possible price level.
 Market Demand: it refers to quantity demanded by
all the consumer in market at different price level
 Derived Demand: if the demand of commodity
depends on the demand of another commodity , it is
called derived demand
 Industry demand: the demand of all the firm of an
industry is known as industry`s demand.

16. Factor which is affecting the Demand
 Dx=f(Px,Ps,Pc,Y,T,F.Pop)
Where Dx= Demand of Commodity X
Px = Price of commodity X
Ps = Price of substitute Goods
Pc = Price of complimentary goods
Y = Income
T = Taste
F = Fashion
Pop = Size of Population

17.  Price of Commodity X : There is inverse relationship exist between
price of the commodity and the quantity demanded. Demand is more
when prices are lower and demand is less when price are more.
 Price of substitute goods: substitute goods are those goods which
can satisfy a given want with equal ease and which can be used in
place of one another
 Example : Tea and Coffee , Pepsi and coca cola they
are competitor to each other ,we find direct relation
Between price and demand of goods.

18.  Price of complimentary goods: complimentary
goods are those which satisfy a particular demand
for example Car and petrol, Bricks and cement, Pen
and ink etc. there exist negative relationship
between price and demand for complementary
goods,if the price of one goods increases ,the
demand of complementary goods will decreases and
vice a versa.

19.  Income of Consumer: An increase in the income of
consumer generally increase in demand for a
commodity because increase in income increases
the purchasing power whereas a fall in income
generally reduces the demand.

20.  Tastes and Preferences: Tastes and preferences of the consumer
directly influence the demand for a commodity. They include changes
in fashion, customs, habits, etc. If a commodity is in fashion or is
preferred by the consumers, then demand for such a commodity
rises. On the other hand, demand for a commodity falls, if the
consumers have no taste for that commodity.
 Fashion : Commodities or which the fashion is out are less in
demand as compared to commodities which are in fashion. In the
same way, change in taste of people affects the demand of a
commodity.
 Size of population: with the increase in population, the number of
households increases and therefore, the market demand also
increases and vice and versa

21. Law of Demand
 The Law of Demand States that, other things being constant
(Ceteris Peribus), the demand for a good extends with a decrease in
price and contracts with an increase in price.
 In other words, there is an inverse relationship between
quantity demanded of a commodity and its price.
 The term other thing being constant implies that income of the
consumer, his taste and preferences and price of other related goods
remains constant.

22. Assumptions Law of Demand
1) Tastes and Preferences of the consumers remain constant.
2) There is no change in the income of the consumer.
3) Prices of the related goods do not change.
4) Consumers do not expect any change in the price of the
commodity in near future

23. Explanation
•
•
The table shows that when the price of say,
orange, is Rs. 5 per unit, 100 units are de-
manded. If the price falls to Rs.4, the demand
increases to 200 units.
Similarly, when the price declines to Re.1, the
demand increases to 600 units. On the contrary,
as the price increases from Re. 1, the demand
continues to decline from 600 units.
 In the figure, point P of the demand curve DD1 shows demand for
100 units at the Rs. 5. As the price falls to Rs.
4, Rs. 3, Rs. 2 and Re. 1, the demand rises to
200, 300, 400 and 600 units respectively.
• This is clear from points Q, R, S, and T. Thus, the
demand curve DD1 shows increase in demand of
orange when its price falls. This indicates the inverse
relation between price and demand.

24. Why More of a Good is Purchased When its Price Falls?
Or
Why Does Demand Curve Slope Downwards?

25. 1) Law of Diminishing Marginal Utility:
 According to this law, as consumption of a commodity increases, the
utility from each successive unit goes on diminishing to a consumer.
 Accordingly, for every additional unit to be purchased, the consumer
is willing to pay less and less price.
 Thus, more is purchased only when price of the commodity falls.

26. 2) Income Effect:
 Income effect refers to change in quantity demanded when real
income of the buyer changes as a result of change in price of the
commodity.
 Change in the price of a commodity causes change in real income
of the consumer.
 With a fall in price, real income increases. Accordingly, demand for
the commodity expands.

27. 3) Substitution Effect:
 Substitution effect refers to substitution of one commodity for the other
when it becomes relatively cheaper.
 Thus, when price of commodity X falls, it becomes cheaper in relation to
commodity Y. Accordingly, X is substituted for Y.
4) Size of Consumer Group : When price of a commodity falls, it
attracts new buyers who now can afford to buy it.
 5) Different Uses:
 Many goods have alternative uses. Milk, for example, is used for making
curd, cheese and butter. If price of milk reduces its uses will expand.
 Accordingly, demand for milk expands.

28. Exceptions to The Law of Demand
 Note that the law of demand holds true in most cases. The price
keeps fluctuating until an equilibrium is created. However, there are
some exceptions to the law of demand. These include the Giffen
goods, Veblen goods, possible price changes, and essential goods.
 Giffen Goods: A Giffen good is a low income, non-luxury product
that defies standard economic and consumer demand theory.
Demand for Giffen goods rises when the price rises and falls when
the price falls.

29.  Veblen : A veblen good is a good for which demand
increases as the price increases, because of its
exclusive nature and appeal as a status symbol. A
Veblen good has an upward-sloping demand curve,
which runs counter to the typical downward-sloping
curve.

30. Elasticity of demand
 Prof. Marshal introduced the concept of elasticity of demand to
measure the change in demand. thus elasticity of demand is
measurement of the change in demand in response to a given
change in the price of a commodity . It measure how much demand
will change in response to a certain increase and decrease in the
price of the commodity.
Definition:
“Elasticity of demand is measure of the responsiveness of quantity to
change in price” E.K Katham
“ the concept relates to the effect of a small change in price upon the
amount demanded” Prof. Benham
“ Elasticity of demand is the capacity of demand to change with least
change in price” Prof. S.K Rudra

32. Types of elasticity of Demand
1. Perfectly inelastic of demand (ed=0)
2. Perfectly elastic demand (ed = ∞)
3. Unitary elastic demand (ed = 1)
4. Relatively inelastic Demand (ed < 1)
5. Relatively elastic Demand (ed > 1)
Perfectly inelastic of demand (ed=0) : the demand is said to be
Perfectly inelastic if the quantity demanded of a commodity remain
unchanged at different prices or where change in price ,
howsoever large , cause no change in quantity demanded
For example : Salt
The shape of demand curve is straight-line vertical line parallel to y
axis

34. Perfectly elastic demand (ed = ∞)
 Demand is said to be perfectly elastic when change in demand in
response to change in price are immeasurable or infinity or where no
reduction in price is needed to cause an increase in demand
For example: Luxuries
The shape of demand curve is a horizontal line parallel to X-axis

35. Unitary elastic demand (ed = 1)
 When proportionate or percentage change in quantity
demanded of a commodity is equal to proportionate or
percentage change in its price .
For example : Comfort Goods
The shape of demand curve is rectangular hyperbola

36. Relatively inelastic Demand (ed < 1)
 When the proportionate change in quantity
demanded of a commodity is less than proportionate
change its price
For example : Perishable Goods like fruits, vegetable
etc.
Or where a decline in price leads to less than
proportionate increase in demand the shape of
demand curve is steep.

37. Relatively elastic Demand (ed > 1)
 When the proportionate change in quantity
demanded of a commodity is greater than
proportionate change in its price. Here shape of
demand curve is flat. In other word where reduction
in price leads to more than proportionate rise in
quantity demanded.

38. Measurement of elasticity of demand
1. Price elasticity
2. Income elasticity
3. Cross elasticity
1. Price elasticity: it measure degree of change in quantity demanded
as a result of change in price
denoted ep = Proportionate change in quantity demanded
Proportionate change in price
 = Change in quantity/ Original quantity
 Change in price/ Original price

39. ep = ∆Q/Q
∆P/P
= ∆Q/∆P * P/Q
Q1. a pen company sells 4200 units at Rs 12 per piece . If price is
lowered by 2 Rs the company would be able to sell 6500 units
calculate the price elasticity of demand.
Solution :
∆P = -2 ∆Q = 2300
Price Quantity
12 4200
10 6500

40.  Note : Price and quantity are inversly related to price elasticity
always –ve
 Income elasticity:- it measure the degree of change in quantity
demanded due to change in the income of consumer . It is denoted
as ey or ei
 ei = Proportionate change in quantity demanded
Proportionate Change in Income
or
change in Quantity
Original Quantity
ei = Change in income
Original income

41. ∆Q ∆Q Y
Q Or Q ∆Q
ei = ∆Y
Y
Income elasticity is always positive
Suppose a consumer income increase from 10000 to 12000 and his
purchase of goods X increase from 2000 to 3000 units what is his
income elasticity For X
Solution: ∆Y= 2000 ∆Q = 1000
ei = 1000/2000
10000/2000

42.  Cross elasticity: it measure the degree of change in
quantity demanded of X as a result of change in
price of Y when X and Y are related goods or
substitute goods it is denoted as ec
denoted ec = Proportionate change in quantity demanded of X
Proportionate change in price of Y
∆Qx PY
Qx ∆PY

43. Supply :

44.  Meaning of Supply:
 In economics, supply during a given period of time
means, the quantities of goods which are offered for
sale at particular prices.
 The supply of a commodity is the amount of the
commodity which the sellers or producers are able
and willing to offer for sale at a particular price,
during a certain period of time.

45.  Supply refers to the quantity of a commodity which
producers or sellers are willing to produce and offer
for sale at a particular price’, in a given market, at a
particular period of time
According to J. L. Hanson – “By supply is meant that
amount that will come into the market over a range
of prices.”

46. Elements of Supply :
 i. Quantity of a commodity
 ii. Willingness to sell
 iii. Price of the commodity
 iv. Period of time

47. Supply Function or Determinants of Supply
 Supply function studies the functional relationship between supply of a
 commodity and its various determinants.
 Sx = f ( PX, PR, NF, G, PF, T, EX, GP)
 Where,
Sx = Supply of a Commodity
PX = Price of the Commodity
PR = Price of the Related Goods NF = Number of Firms
G = Goal of the Firm
PF = Price of factors of Production
T = Technology
EX = Expected Future Price
GP = Government Policy

48. Price of the Commodity- There is a direct relationship between
price of a commodity and its quantity supplied. When price
increases supply also increase because it motivate the firm to
supply more in order to get more profit. When price decreases,
smaller quantity will be supplied as profit decreases.
 Price of Related Goods: Producers always have the tendency of
shifting from the production of one commodity to another commodity. If
the prices of another commodity increases, especially substitute
goods, producers will find it more profitable to produce that commodity
by reducing the production of the existing commodity.
 For Example: Suppose the seller of tea notice that the price of
coffee increases . They may reduce the amount of resources devoted
to the selling of tea in favour of coffee.

49. Number of Firms: Market supply of a commodity depends upon
number of firms in the market.
Increase in the number of firms implies increase in the market supply,
and decrease in the number of firms implies decrease in the market
supply of a commodity.
Goal of the Firm: If goal of the firm is to maximise profits, more quantity
of the commodity will be offered at a higher price.On the other hand, if
goal of the firm is to maximise sale more will be supplied even at the
same price.

50. Price of the Factor of Production: Supply of a commodity is also
affected by the price of factors used for the production of the
commodity.
If the factor price decreases, cost of production also reduces.
Accordingly, more of the commodity is supplied at its existing price.
Conversely, if the factor price increases cost of production also
increases. In such a situation less of the commodity is supplied at its
existing price.
Change in Technology: Change in technology also affects supply of
the commodity.
Improvement in the technique of production reduce cost of
production. Consequently, more of the commodity is supplied at its
existing price.

51.  Expected Future Price: If the producer expects price of the
commodity to rise in the near future, current supply of the commodity
will reduce.
 If, on the other hand, fall in the price is expected, current supply will
increase.

52.  Government Policy: T
axation and Subsidy’ policy of the
government affects market supply of the commodity.
 Increase in taxation tends to reduce supply. On the other hand,
subsidies tend to increase supply of the commodity.

53. Feature of Supply
 1. Supply is a desired quantity:
It indicates only the willingness, i.e., how much the firm is willing to sell and not how
much it actually sells.
 2. Supply of a commodity does not comprise the entire stock of the commodity:
It indicates the quantity that the firm is willing to bring into the market at a particular
price. For example, supply of TV by Samsung in the market is not the total available
stock of TV sets. It is the quantity, which Samsung is willing to bring into the market for
sale.
 3. Supply is always expressed with reference to price:
Just like demand, supply of a commodity is always at a price because with a change
in price, the quantity supplied may also change.
 4. Supply is always with respect to a period of time:
Supply is the quantity, which the firm is willing to supply during a specific period of
time (a day, a week, a month or a year).

54. Supply Schedule and Supply Curve
 Supply schedule shows a tabular representation of law of supply. It
presents the different quantities of a product that a seller is willing to
sell at different price levels of that product.
Supply schedule is two types:
Individual Supply Schedule: Refers to a supply schedule that represents
the different quantities of a product supplied by an individual seller at different
prices.
Price of Milk (Per
liter in Rs)
Quantity
Supplied (1000
per day in liters)
10 10
12 15
14 20
16 25

55.  Market Demand schedule: Refers to a supply schedule that
represents the different quantities of a product.
 that all the suppliers in the market are willing to supply at different
prices
Price
of
Produ
ct X
Individual Supply Market
Supply
A B C
100 750 500 450 1700
200 800 650 500 1950
300 900 750 650 2300
400 1000 900 700 2600

56. Supply Curve
 The graphical representation of supply schedule
is called supply curve.

57. Law of Supply
 ‘Law of supply states that other things remaining the same, the
quantity of any commodity that firms will produce and offer for sale
rises with rise in price and falls with fall in price.’
 i.e. Higherthen price, higher will be quantity supplied and lower the
price smaller will be quantity supplied.
 ‘Other things remaining the same’ means determinants other than
own price such as technology, goals of the firm, government policy,
price of related goods etc. should not change.

58. Price of Rice
(Rs)
Quantity
Supplied (kg)
10 5
11 6
12 7
13 8
14 9
15 10
16 11
SS Slopes upward from left to right.
It shows positive relationship between price of the commodity and its
quantity supplied.
As price rises quantity supplied also rises.

59. Assumptions of the Law of Supply
• There is no change in the prices of the factors of
production.
• There is no change in the technique of production.
• There is no change in the goal of firm.
• There is no change in the prices of related goods.
• Producers not expect change in the price of the
commodity in the near future.

60. Exceptions to the Law of Supply
• The law of supply does not apply strictly to agricultural products
whose supply is governed by natural factors. If due to natural
calamities, there is fall in the production of wheat, then its supply will
not increase, however high the price may be.
• Supply of goods having social distinction will remain limited even if
their price tends to rise.
• Seller may be willing to sell more units of a perishable commodity at
a lower price.

61.  Why More of a Good is Sold When its Price
Increases?
 Or
 Why Does Demand Curve Slope Upwards

62. Thank You