This is a case study. Case is : As one example of demand and supply analysis, let us assume we have a product with the situation shown in the graph below. The price is Rs.100 per unit.Now the government has imposed 5% tax to the seller which increased the cost of production. Please explain following with the support of graph:   Do the cost of production affects Demand or Supply Will there be a shift or movement along supply Will the cost of production will make the good less profitable In order to make the same profit as before application of tax, how much price the seller should increase presuming that the (i) demand of the product is totally inelastic and (ii) demand of the product is perfectly elastic What are the factors which affects the demand and supply of any product

1. Prepared By:
Devesh Kumar
Manish Kumar
Raghvendra
Narendra

4.  Relation between Cost of production and Demand:
As price increases (moving up along the vertical axis), the demand
from customers decreases (from Right to Left, along the horizontal axis).

5.  Case 1. Essential Goods
• For essential goods, if
the cost of production
increases, Demand as
well as Supply, both will
remain unaffected or it
will vary slightly.
• It is a case of Inelastic
Demand.
 Case 2. Non Essential
Goods
• As in above case, if the
cost of production
increases, Demand as
well as supply, both will
decrease.
• It is a case of Elastic
Demand.

6.  Case 1: Essential Goods
• For essential goods,if
the Cost of Production
increases, the supply
will remain almost
unchanged.
• The more necessary a
good is, the lower the
price elasticity of
supply, as people will
attempt to buy it no
matter the price.
• E.g. Salt, Water etc.
 Case 2. Non essential
Goods
• As in above case, there
is shift in supply curve
i.e. the supply will
decreased with
increase in price.
e.g. Luxury items, Movie
Tickets etc.

7.  As in above case, there is shift along supply curve after taxation.
 Here two cases arise.
 Case 1.
• Essential goods:
• Demand and Supply curves are unaffected for essential goods with
price change.
• Inelastic supply
• It is a market situation in which any increase or decrease in the price
of a good or service does not result in a corresponding increase or
decrease in its supply.
• No shift along supply curve.

8.  Case 2.
• Non Essential Goods:
• Demand and Supply
curve are affected
with price change.
• Elastic Supply.
• Supply of a good or
service that increases
or decreases as the
price of an item goes
down or up.
• Hence, There will be
shifting along supply
curve.

9. Case 1. For same margin
 Let CP is Rs. 100/-
 and let old SP Rs. 110/-
 New SP after 5% taxation
Rs.115.5/- (105+10)
 Now, Because SP is
increased, Demand will be
affected, and profit will not
get affected.
Case 2. For decreased Margin
 Let CP is Rs. 100/-
 and let old SP Rs. 110/-
 New SP after 5% taxation Rs.
110/- (105+5).
 Here, because SP is same,
Demand will not affected and
there will be less profit.

10. (i) Demand of the product is
totally inelastic
(ii) Demand of the product is
perfectly elastic
• There will be no change in Demand.
• Whatever price is set.
• Let CP is 100/-
• Old SP 110/- (100 + 10% of 100)
• After Tax CP 105/-
• New SP 115.5/- (100+5+ 10%of 105).
• The Demand will become zero if price is
increased..
• There can't be change in price of
product.

11.  Price
• Usually viewed as the most important factor that affects demand.
• Products have different sensitivity to changes in price.
• For example, demand for necessities such as bread, eggs and butter
does not tend to change significantly when prices move up or down
 Income levels
• When an individual’s income goes up, their ability to purchase
goods and services increases, and this causes demand to increase.
• When incomes fall there will be a decrease in the demand for most
goods.

12.  Consumer tastes and preferences
• Changing tastes and preferences can have a significant effect on
demand for different products. Persuasive advertising is designed to
cause a change in tastes and preferences and thereby create an
increase in demand. A good example of this is the recent surge in
sales of smoothies!
 Competition
• Competitors are always looking to take a bigger share of the market,
perhaps by cutting their prices or by introducing a new or better
version of a product

13.  Fashions
• When a product becomes unfashionable, demand can quickly fall
away.
 consumers´ tastes:
• when a consumer likes the good more he or she buys it more and
the demand increases
 consumers´ future expectations:
• When consumers expect higher prices in the future, they buy more
goods in order to avoid higher prices and as a result the demand
increases.