1. Theory Of
Demand

2. Introduction
• A market economy functions through:
» Demand
» Supply.
• Market is an arrangement by which buyers and sellers
contact each other to make any transaction.
• People demand goods because they satisfy their wants.
• The amount of satisfaction which a person derives from
consuming a commodity is called as Utility.
• The greater the utility he expects from the commodity, the
greater his desire for that commodity

3. Definition of Demand
“ Quantities of a good or services that people are
ready to buy at various prices within some given
time period, other factors besides price held
constant.”
it Implies:
• The consumers have a desire to purchase
• Ability to pay for the goods and services.
• Sometimes the quantity demanded is not necessarily
equal to quantity bought by the consumer.
• It is flow concept i.e- its measured by the amount the
consumers wish to buy per unit of time.

4. The Law of Demand
The Law of Demand “It expresses the functional relationship
between price and quantity demanded.”
• There is an inverse relationship between price and
quantity demanded, If the other things being equal
Other things –
Taste or preferences
Income
Price of related goods.

5. Demand Curve
Demand Curve:
It is graphic statement or presentation of quantities demanded
by the consumer at various possible prices in a period of time.
(Demand curve does not tell us the price of the product)
6
Y
D
PRICE & DEMAND
(Rs)
Quantity
Demanded
(Units)
5
4
2
3
5
4
PRICE
Price
3
2
1
3
4
0
2
6
1
10
2
3
4
QUANTITY
6
10

6. Market Demand
Market Demand:
It is sum total of demands of all consumers in the market
for a commodity at various prices.
Price
QD1
QD2
QD3
MD
1
16
11
15
42
2
11
7
12
30
3
7
5
10
22
4
4
4
7
15
5
2
3
5
10
6
1
2
2
5
P
O
a1
b1
c1
Q

7. Reason for the Law of Demand
Why does the demand curve slope downwards?
Income Effect:
– With the fall in price of commodity the
consumer can buy more of the commodity with
his given income.
– Fall in prices leads to consumers purchasing
power to increase.
Substitution Effect:
– When the price of commodity falls it becomes
relatively cheaper than other commodities.
– So consumer substitute the commodity and the
quantity demanded rises.
No of consumer Increases:
– Fall in prices leads more number of consumer
to demand the commodity and hence rise in
quantity demanded.

8. Exception to The Law of
Demand
1. Veblen Effect: Conspicuous Consumption
» Goods having prestige value
» Some consumers measure the utility of a
commodity by its price i.e
greater the price , greater the utility.
2. The Giffen Case:
» When the price of essential goods
increases, it demands also increases.
» A fall in its price, quantity demanded
decreases.
3. Speculative Market
» Rise in prices is followed by larger
purchases and fall in price by smaller
purchases.

9. Factors determining Demand
1.
Tastes and Preferences of the consumers:
 Goods for which the tastes and preferences are
greater , the demand would be large and
demand curve will lie at a higher level.
 Consumers tastes keeps on changing and as
result there is a change in demand for them.
2.
Income of the people:
 Greater the income greater the demand
(purchasing power)
• Change in income also lead to change in
demand curve for Normal and Inferior Goods

10. Normal and Inferior Goods
D
D’
D
D’
P
P
D’
D
D
O
Q
Q’
Effect of Increase in Income
on Demand for a Normal
Good
D’
Q’
Q
Effect of Increase in Income
on Demand for a Inferior
Good

11. Factors determining Demand
3. Changes in the prices of the related Goods
Demand for goods also changes with the change in
prices of “other” goods
a)
Substitute Goods –
Different goods that, at least partly, satisfy the same
needs of the consumers and, therefore, can be
used to replace one another.
– The rise in prices causes the increase in
demand of another goods
– Good A is a substitute of Good B if a rise /
fall in the price of good B causes increase /
decrease in the demand for good A
respectively.

12. Substitute Goods
D
D’
D’
D
P
P
D
D’
D
O
Q
Q’
D’
O
Q’
Q
Quantity Demanded
Quantity Demanded
Rightward Shift
with rise in price of Substitute
goods
Leftward Shift
with fall in price of Substitute
goods

13. Factors determining Demand
b)
Complementary Goods –
Goods whose use is interrelated with the use of an
associated or paired good such that a demand for one
(tyres) generates demand for the other (gasoline).
– The change in prices causes the change in
demand of another goods
– Good A is complement of Good B if a rise / fall
in the price of good B causes decrease /
increase respectively in the demand for good A

14. Complementary Goods
D
D’
D’
D
P
P
D
D’
D
O
Q
Q’
D’
O
Q’
Q
Quantity Demanded
Quantity Demanded
Rightward ShiftFall in price of
complementary goods
Leftward ShiftRise in price of
complementary goods

15. Factors determining Demand
4.
The Number of Consumers in the Market.


5.
Consumer Expectations


6.
Greater the number of consumers of a good, greater
the market demand
Increase in consumers is dependent upon growth in
population and exploration of new markets
Demand is dependent upon what is the consumer
expectation about the future.
If buyers are expecting the price to increase in future,
the current demand increases.
Income Distribution


Distribution of income in the society also effects
demand
If distribution is equal, the propensity to consume of
the society would be high, so demand would be high.

16. Movement along Demand
curve
Extension or Contraction in Demand:
• When the quantity demanded rises/ falls as a
result of changes in price and we move along a
given demand curve.
• The other determinants remain constant. (Demand
curve remain the same)
• Extension : When quantity demanded rise due to
fall in price.
• Contraction: When quantity demanded fall due to
rise in prices.

17. Movement along Demand
curve
Contraction
P”
Expansion
P
P’
O
L M
N
As a result of changes in price of a good the consumers
move along the given demand curve.
The demand curve remains the same and does not change
its position.
A shift in demand curve happen by change in factors other
than in its own price.

18. Shifts in Demand
Shift in Demand curve:
When the demand changes due to the factor other than price.
a)
Increase in Demand:
With the other factor increasing say income, it will cause a
shift in demand curve.
The consumers demand more of the commodity than
before
D’
D
P3
P2
P1
D
Q1
Q2
Q3
D’

19. Shifts in Demand
B)
Decrease in Demand:
It there are adverse changes in the factors
It will cause a shift in demand curve to the left
The consumers demand less of the commodity than
before
D’
D
P3
P2
P1
D
D’
Q3
Q2
Q1

20. Demand Function
Qd = f ( Px, I, Pr, T, A)
Where
Px = Own price of the commodity X
I = Income of the Individual
Pr = Prices of related commodities
T = Tastes and preferences of the individual consumer
A = Advertising expenditure made by the producers of the product
Keeping other factor as constant
Qd = f (Px)
It implies that quantity demanded of good X is function of its own price. Other
determinants remaining constant

21. Demand Function
• The level / position of demand curve depends on the
other factors
• To show how much quantity demanded changes with a
unit change in price
Qd = a- bPx
where
a= Constant intercept term on the X- axis
b = Co-efficient showing the slope of the demand curve
Px = Independent Variable
Qd = Dependent variable

22. Theory Of
Supply

23. SUPPLY
• Supply refers to the schedule of the quantities of a good
that the firms are able and willing to offer a various
prices.
How much of a commodity the firms are able to
produce depends on:
– The resources available
– Technology they employ
– Profits they expect to make

24. Definition of Supply
“ Quantities of a good or services that people are ready
to sell at various prices within some given time period,
other factors besides price held constant.”
• Sometimes the quantity supplied is not necessarily equal to
quantity actually sold by the consumer.
• It is flow concept i.e- its measured by the amount of a
commodity that the firm produces and offer for sale in the
market per period of time.

25. Supply Function
Qs = S ( Px, F1, Pr, W,E )
Where
Px = Own price of the commodity X
F1= Price of Inputs
Pr = Prices of other products related in production
W = Weather, strikes and other short –run forces
E = Firms expectation about future prospects for
prices, cost, sales and state of economy
Keeping other factor as constant
Qs = f (Px)

26. Supply Function
• The level / position of supply curve depends on the other
factors
• To show how much quantity supply changes with a unit
change in price
Qs = a + bPx
where
a= Constant intercept term on the X- axis
b = Co-efficient showing the slope of the supply curve

27. The Law of Supply
The Law of Supply –
“It expresses the functional relationship between
price and quantity demanded.”
There is an direct relationship between price and
quantity supplied, If the other things being equal

28. Supply Curve
Supply Curve:
It is graphic statement or presentation of quantities
supplied by the firm at various possible prices in a period
of time.
Y
560
Price & Supply
PRICE
510
500
490
480
470
100
150
200
225
QUANTITY
250
275
150
200
530
520
100
520
530
Quantity
Supplied (Units)
510
540
Price
(Rs)
500
550
225
540
275

29. Reason for the Law of Supply
Why does the Supply curve slope Upwards?
• Firms are driven by profit motive
– Higher the price of the product, more profitable
to produce them.
– Greater the incentives of the firm to produce
– It also depends upon possibilities of substitution
– More production also leads to more profits

30. Factors determining Supply
1.
Production Technology
2.
Price of Inputs
3.
Prices of Related products
4.
Number of producers (or firms)
5.
Future price expectations
6.
Taxes and Subsidies

31. Shifts in Supply
Shift in Supply curve:
When the Supply changes due to the factor other than price.
a)
Increase in Supply:
With the increase in other factor
The producers supply more of the commodity
S
P3
P2
P1
Q1
Q2
Q3
S’

32. Shifts in Supply
B)
Decrease in Supply :
It there are adverse changes in the factors
It will cause a shift in Supply curve to the left
The producers supply less of the commodity
S’
S
P3
P2
P1
Q1
Q2
Q3

33. Market Equilibrium
P
Surplus
S
P1
Shortage
D
Q1
Q
Equilibrium Price: The price that Qd = Qs
Equilibrium Quantity:
The amount that people are willing to buy and
seller are willing to offer.
Shortage:
Qd > Qs
Surplus:
Qd < Qs