BASIC ELEMENTS OF DEMAND AND SUPPLY

Sir Rizwan ul Hassan

Meaning of Demand

It is the willingness to purchase and ability to purchase a commodity.

Demand = Desire + Ability to purchase

Law of Demand

If price of a commodity falls, its quantity demanded increases and if price rises then quantity demanded decreases while other conditions remain same.

Demand Curve
30 25 20 Price 15 10 5 0 0 100 200 Quantity Demanded 300 D D

DEMAND SCHEDULE
Pairs A B C D E Price 5 10 15 20 25 Quantity Demanded 200 150 120 100 90

Why does law of demand operate?

Income Effect Substitution Effect Mathematical expression of law of demand

Qd

a ---bP where a is x intercept , b is

slope

Individual & Market Demand

Quantity demanded of a single person or a household is called individual demand. The sum of quantities demanded of all individual demands in a particular area is called market demand.

Factors affecting demand

Average income Population Price of related goods Tastes or fashions Special influences

Shift in Demand

When quantity demanded changes due to change in any factor affecting demand while prices remain same is called shift in demand.

Demand & Quantity Demanded

If demand curve shifts due to change in income or fashion or speculation it is called change in demand. If there is change due to price it is called change in quantity demanded

Meaning of supply

It is the quantity of a commodity which the producers or sellers are willing to sell at a given price.

Law of supply

The quantity supplied of a commodity increases when price rises and quantity supplied decreases when price falls while other conditions remain same.

Supply Curve
60 50 S E D C S A 0 0 500 1000 1500 Quantity Supplied (QS) 2000 B

40
Price 30 20 10

SUPPLY SCHEDULE Pairs Price QS

A B C D E 10 20 30 40 50 0 700 1200 1600 1800

Mathematical Explanation

In linear supply function we use following equation to express supply curve. Qs = c+dP According to diagram Qs = ---100+20P

Factors Affecting Supply

Technology Input prices Prices of related goods Government policy Special influences

Shift in Supply

When quantity supplied changes due to change in any factor affecting supply while price remains same it is called shift in supply or change in supply

Supply & Quantity Supplied

If supply curve shifts forward or backward due to change in technology or input costs or over production or it is called change in supply. If there is movement along the supply curve due to change in price it is called change in quantity supplied.

Market Equilibrium

Mathematical Equilibrium

If we equalize quantity demanded and supplied by equation we can determine and predict any price or quantity demanded or supplied
Qs

=Qd or c+dP =abP

Change in Market Equilibrium

Demand increases, price and quantity increases Demand decreases, price and quantity decreases

Supply increases, price decreases and quantity increases

Supply decreases, price increases and quantity decreases