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Demand & SupplyDemand & Supply• What is demand?What is demand?• Law of demandLaw of demand• Exceptions to law of demandExceptions to law of demand• Demand functionDemand function• Individual and Market demand curvesIndividual and Market demand curves• Types of demandTypes of demand

Price, Income & Cross demandPrice, Income & Cross demand• Elasticity of demandElasticity of demand• Demand forecasting techniquesDemand forecasting techniques• Law of Supply, Supply curve & Elasticity Law of Supply, Supply curve & Elasticity

of Supplyof Supply

DEMAND ANALYSISDEMAND ANALYSIS

MEANING OF DEMANDMEANING OF DEMAND• Demand for a commodity refers to

the quantity of the commodity which an individual consumer household is willing to purchase per unit of time at a particular price.

• Individual Demand• Household Demand

MEANING OF DEMANDMEANING OF DEMANDDemand for a commodity implies Desire of the consumer to buy the

productHis willingness to buy the productSufficient purchasing power in his

possession to buy the product.

Law of DemandLaw of Demand• A decrease in the price of a good, all other

things held constant, will cause an increase in the quantity demanded of the good.

• An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.

• Note: refer notes for all other things held constant.

• QDx = f(Px)

• This the mathematical relationship between the quantity demanded and the price of the product X.

• There is a inverse relationship between the quantity demanded and the price of the product.

DEMAND FUNCTIONDEMAND FUNCTION The demand function can be written

in a simple mathematical language as:

Q = f(Px, Py , Pz ,…..Pn ; I; T; A)

DEMAND FUNCTIONDEMAND FUNCTION The amount demanded (per unit of time) of a

commodity X by a consumer (denoted by Qx ) depends upon:

• Price of the commodity (Px)• Price of substitutes (Ps) and complements (Pc)• Income of the household (I)• Tastes and preferences of the household (T)

and,• The amount annually spent on advertisement

of the product (A)

DEMAND FUNCTIONDEMAND FUNCTION In case we are analyzing the

demand for goods which are durable, storable and are expensive, we have to add these variables also:

• Consumers’ expectations of future prices (Ep) and,

• Consumers’ expectations future income (Ey)

DETERMINANTS OF DEMANDDETERMINANTS OF DEMANDThe determinants of demand are:• Price of the commodity• Prices of related commodities• Income of the household• Tastes and preferences• Expectations • Advertisements

Prices of related Prices of related commoditiescommodities

• The demand for a commodity depends also on the prices of its substitutes and complementary goods.

Tea and coffee, pizza and burger, these are the substitutes for which the change in the price will affect the demand of the other in the same direction.

• By definition, the relationship between demand of a product (tea) and the price of its substitute (coffee) is positive is nature. When price of the substitute (coffee) of a product (tea) falls ( or increases), demand for the product falls (or increases).

• A Commodity is deemed to be a complement of another when it complements the use of the other.

• When the use of any two goods goes together so that their demand changes (increases or decreases) simultaneously, they are treated s complements.

• Example: Milk and sugar, Petrol and car, Tea, razor and blade printer and cartridge, Camera and film

Income of the householdIncome of the household• Income is the basic determinant of

the quantity demanded of a product as it determines the purchasing power of the consumer. That is why the people with higher current disposable income spend a larger amount on normal goods and services than those wit lower incomes.

• For the purpose of income-demand analysis, goods and services may be grouped under four broad categories, viz., (a) essential consumer goods; (b) inferior goods; (c) normal goods and (d) prestige or luxury goods

Income of the householdIncome of the household

Income of the householdIncome of the household• Essential consumer goods (ECG) Example:

food grains, salt, vegetables oils, matches, cooking fuel, a minimum clothing and housing, etc.

• Quantity demanded of such goods increases with increase in consumer’s income only upto a certain limit, other factors remaining the same.

• Inferior Goods: bajra is inferior to wheat and rice, Bidi is inferior to cigarette, kerosene stove is inferior to gas-stove, traveling by bus is inferior to traveling by taxi.

• The demand for inferior goods increases upto a certain level with the increase in the income and then starts decreasing with further increase in the income beyond a point of income.

• Normal Goods: Technically, normal goods are those which are demanded in increasing quantities as consumers’ income rises. Clothing is the most important example of this.

• Demand for such goods increases with the increase in income of the consumer, but at different rates at different levels of income.

• Demand for normal goods initially increases rapidly, and later, at a lower rate.

• Prestige or Luxury Goods: These are consumed mostly by the rich section of the society, e.g., luxury cars, stone studded jewellery, costly cosmetics, antiques.

• Demand for such goods arises only beyond a certain level of consumer’s income.

Tastes and preferencesTastes and preferences• These depend on the social customs,

religious values attached to a commodity, habits of the people, the general life-style of the society.

Change in Quantity Change in Quantity DemandedDemanded

Quantity

Price

P0

Q0

P1

Q1

An increase in price causes a decrease in quantity demanded.

Change in Quantity Change in Quantity DemandedDemanded

Quantity

Price

P0

Q0

P1

Q1

A decrease in price causes an increase in quantity demanded.

Law of SupplyLaw of Supply• A decrease in the price of a good, all

other things held constant, will cause a decrease in the quantity supplied of the good.

• An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.

Change in Quantity SuppliedChange in Quantity Supplied

Quantity

Price

P1

Q1

P0

Q0

A decrease in price causes a decrease in quantity supplied.

Change in Quantity SuppliedChange in Quantity Supplied

Quantity

Price

P0

Q0

P1

Q1

An increase in price causes an increase in quantity supplied.

Market EquilibriumMarket Equilibrium

Quantity

Price

P0

Q0

D0 S0

Q1

P1

D1

An increase in demand will cause the market equilibrium price and quantity to increase.

Market EquilibriumMarket Equilibrium

Quantity

Price

P1

Q1

S0

Q0

P0

D0D1

A decrease in demand will cause the market equilibrium price and quantity to decrease.

Market EquilibriumMarket Equilibrium

Quantity

Price

P0

Q0

D0 S0

Q1

P1

An increase in supply will cause the market equilibrium price to decrease and quantity to increase.

S1

Market EquilibriumMarket Equilibrium

Quantity

Price

P1

Q1

D0

Q0

P0

A decrease in supply will cause the market equilibrium price to increase and quantity to decrease.

S1 S0

THE LAW OF DEMANDTHE LAW OF DEMAND

The law of demand states that the amount demanded of a commodity and its price are inversely related, other things remaining constant.

Exceptions to the Law of Demand: (i) Griffin goods (ii) Commodities which are used as status

symbols (snob effect) (iii) Expectations of change in the price of the

commodity

INDIVIDUAL AND MARKET INDIVIDUAL AND MARKET DEMAND SCHEDULESDEMAND SCHEDULES

A demand schedule at any particular time refers to the series of quantities the consumer is prepared to buy at its different prices.

The demand schedule for an individual consumer is called an individual demand schedule. Likewise, if we have similar demand schedules for all consumers in the market, we can add up the quantities demanded of the commodity by these consumers at each price and get a summed-up schedule called the market demand schedule.

INDIVIDUAL DEMAND SCHEDULE FOR ORANGES

Price of oranges (Rs. Per dozen)

Quantity demanded of oranges (dozens)

5 1

4 2

3 3

2 4

1 5

MARKET DEMAND MARKET DEMAND SCHEDULE FOR ORANGESSCHEDULE FOR ORANGES

Price of oranges

Quantity demanded of oranges by consumers (dozens)

Market demand of oranges (dozens)

A B C D

10 1 0 3 0 4

9 3 1 6 4 14

8 7 2 9 7 25

7 11 4 12 10 37

6 13 6 14 12 45

Units of good XO

Pri

ce o

f go

od X

D

D

IndividualDemandCurve

INDIVIDUAL DEMAND CURVE

The demand schedule whenrepresented diagrammaticallyis known as the demand curve.When this diagram is based on an individual demand schedule,we get an individual demand curve.

Why do Demand Curves Slope Why do Demand Curves Slope Downwards?Downwards?

• Reasons • More uses when the price falls• Raise in real income of consumer• Substitution effect

MARKET DEMAND CURVE

MARKET DEMAND CURVE

DC

DA

DDDB

O X

Y

10

9

8

7

6

4

UNITS OF GOOD X

PR

ICE

OF

GO

OD

X

D

TYPES OF DEMANDTYPES OF DEMAND• Derived demand and autonomous demand• Demand for producers’ goods and

consumers’ goods• Demand for durable and non-durable

goods• Industry demand and firm demand• Total demand and market segment

demand• Short-run demand and long-run demand

Derived and Autonomous Derived and Autonomous DemandDemand

• Those inputs or commodities which are demanded to help in further production of commodities are said to have Derived demand. Ex raw materials, machines

• Autonomous demand, is the one where a commodity is demanded because it is needed for direct consumption. Ex pieces of furniture at household

Demand for producers’ goods Demand for producers’ goods and consumers’ goodsand consumers’ goods

• The difference in these two types of demand are that consumers’ goods (soft drinks, milk, bread) are needed for direct consumption, while the producers’ goods (Various types of machines, steel, tools) are needed for producing other goods.

Demand for durable and Demand for durable and non-durable goodsnon-durable goods

• Non-durable goods are the ones which cannot be used more than once. Eatables, photographic film, soaps. These meet the current need. (Perishable and non-perishable)

• Durable goods, on the other hand, are the ones which have repeated uses. Shoes, readymade garments, residential house, electronic domestic appliances. These are the ones which can be stored and whose replacement can be postponed. These meet both the current as well as future need.

Industry demand and firm Industry demand and firm demanddemand

• Firm demand denotes demand for a particular product of a particular firm. Demand for ITC wills branded shirts

• Industry demand refers to the total demand for the product of a particular industry. Demand for shirts for all the brands available like, Arrow, Peter England, Provogue, Oxemberg, Louis Pilips, Van-Heusen, Zodiac, Pan America etc.,

Total demand and market Total demand and market segment demandsegment demand

• Demand for market segments is to be studied by breaking the total demand into different segments like geographical areas, sub-products, product use, distribution channels, size of customer group etc., Demand for T-Shirts in India is market demand, which can be based on the segment market like, for kids, youth and old people.