DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY,

VISAKHAPATNAM.

ECONOMICS-I
PROJECT:
A COMPARATIVE STUDY OF DEMAND
AND SUPPY

-SWAPNIL SRIVASTAVA
SEMESTER: III
SECTION: B
ROLL NO. 2012113
 DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY
VISAKHAPATNAM

PROJECT CONSULTATION REPORT

Name of the Student: Swapnil Srivastava

Semester: IIIrd Section: B

Roll No. : 2012113

Subject: Economics-I

Name of the Subject Faculty: Prof.G.Ramachandrudu

Project Topic: A Comparative Study of Demand and Supply

Signature Remarks

1st Consultation

2nd Consultation

Final Submission by
Subject Faculty

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 DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM

CERTIFICATE

This is to certify that Mr.Swapnil Srivastava with Reg. No. 2012113 of IIIrd Semester
prepared the project on “A Comparative Study of Demand and Supply” in partial fulfilment
of his semester course in the subject Economics-I during the academic year 2013-2014 under
my supervision and guidance.

Signature of the Faculty

Date:23rd October, 2013

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 TABLE OF CONTENTS
1) Acknowledgment.....................................................................................Page No. 6
2) Abstract....................................................................................................Page No. 7
3) Introduction.............................................................................................Page No. 8
4) Meaning of Demand................................................................................Page No. 9
5) Individual Demand vs. Market Demand.................................................Page No. 9
6) Law of Demand.......................................................................................Page No. 10
7) Assumptions of Law of Demand.............................................................Page No.11
8) Demand Schedule....................................................................................Page No. 11
9) Elasticity of Demand...............................................................................Page No. 11
10) Price Elasticity.........................................................................................Page No. 12
11) Factors Affecting the Price Elasticity of Demand..................................Page No. 12
12) Classification of Price Elasticity-Degrees of
Price Elasticity of Demand......................................................................Page No. 12-15
 Perfectly Inelastic........................................................................Page No. 13
 Unitary Elastic.............................................................................Page No. 13
 Highly Elastic..............................................................................Page No. 14
 Inelastic/Less Elastic...................................................................Page No. 14
 Perfectly Elastic or Infinite Elastic.............................................Page No. 15
13) Measurement of Price Elasticity of Demand..........................................Page No. 15-17
 Point Elasticity............................................................................Page No. 15
 Arc Elasticity..............................................................................Page No. 16
 Percentage or Proportionate Method..........................................Page No. 16
 Total Expenditure Method.........................................................Page No. 17
14) Meaning of Supply.................................................................................Page No. 18
15) Individual vs. Market Supply.................................................................Page No. 18
16) Law of Supply........................................................................................Page No. 19
17) Assumptions of Law of Supply..............................................................Page No. 19
18) Supply Schedule.....................................................................................Page No. 20
19) Elasticity of Supply................................................................................Page No. 20
20) Price Elasticity of Supply.......................................................................Page No. 21
21) Categories (Degrees) of Elasticity of Supply.........................................Page No. 21-23
 Perfectly Elastic or Infinite Elasticity.........................................Page No. 22
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  Perfectly Inelastic.......................................................................Page No. 22
 Unitary Elastic............................................................................Page No. 23
 Highly Elastic.............................................................................Page No. 23
 Less Elastic or Inelastic..............................................................Page No. 23
22) Determinants of Elasticity of Supply.....................................................Page No. 24
23) Measurement of Elasticity of Supply.....................................................Page No. 24
 Percentage Method.....................................................................Page No. 24
 Geometric Method or Point Method..........................................Page No. 25
24) Bibliography...........................................................................................Page No.26

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 ACKNOWLEDGEMENT

I have made my project titled “A Comparative Study of Demand and Supply” under the
supervision of Prof.G.Ramachandrudu, Lecturer of Economics, Damodaram Sanjivayya
National Law University. I find no words to express my sense of gratitude for Economics Sir
for providing the necessary guidance at every step during the completion of this project.  

I am grateful to my mother who helped and encouraged me every moment during the
completion of this project. The pains taken by her in checking the rough draft of the project
and find out the loopholes in it helped me to no extent.

I am also grateful to the office, librarian and library staff of DSNLU, Visakhapatnam for
allowing me to use their library whenever I needed to. Further I am grateful to my learned
teachers for their academic patronage and persistent encouragement extended to me.  I am
once again highly indebted to the office and Library Staff of DSNLU for the support and
cooperation extended by them from time to time. I cannot conclude with recording my thanks
to my friends for the assistance received from them in the preparation of this project.

-Swapnil Srivastava
Semester: III
Section: B
Roll No. 2012113

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 A COMPARATIVE STUDY OF DEMAND AND SUPPLY

ABSTRACT

The fundamental question which economic theory explains is: why is that goods have prices
and why some goods are expensive while others are cheaper. The broad answer is that goods
have prices because, on the one hand, they are useful and, on the other hand, they are scarce
in relation to the amount which people will like to have. People will not be prepared to pay
the price for the goods unless they are useful to them. Usefulness expresses itself in the form
of demand of buyers, and scarcity expresses itself in the form of supply by sellers. Therefore,
prices of goods and services in a free enterprise economy are determined by the interaction of
forces of demand and supply. Demand and Supply are the two important tools of economic
analysis. In this project I will explain the various facets of demand and supply. Further to this
will explain the relationship between the price and the quantity supplied and demanded of a
commodity in terms of law of supply and demand.

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 A COMPARATIVE STUDY OF DEMAND AND SUPPLY

INTRODUCTION
The fundamental question which economic theory explains is: why is that goods have prices
and why some goods are expensive while others are cheaper. The broad answer is that goods
have prices because, on the one hand, they are useful and on the other hand, they are scarce in
relation to the amount which people will like to have. People will not be prepared to pay a
price for the goods unless they are useful to them. Similarly, goods may be useful, but if they
are freely available in an unlimited amount, they cannot command a price. For example, air is
very useful to us, but it is not scarce and hence it cannot command a price. Goods like air,
which are the gifts of nature, are known as ‘free goods’ and they do not have a price. By
contrast, economic goods are scarce and command a price. Thus, economic goods have a
price because they are useful as well as scarce in availability. It is only because economic
goods are useful that they are demanded by buyers, and only because they are scarce that
sellers are prepared to sell them at a price.

But usefulness and scarcity are only the underlying factors. Usefulness expresses itself in the
form of demand of buyers and scarcity expresses itself in the form of supply by sellers.
Therefore, prices of goods and services in a free enterprise economy are determined by the
interaction of forces of demand and supply. In fact, demand and supply are the two important
tools of economic analysis. That is why it was said long time back that you can turn even a
parrot into an economist, all he must learn are the two words ‘demand and supply’.1 While
not literally true, it does point how central the concepts of demand and supply are to
economic analysis.

MEANING OF DEMAND
1
D.K. Sethi and U Andrews, Frank ISC Economics, Frank Bros. & Co. 10th Edition (2010), page 13.

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“Demand for a commodity refers to the amount of a commodity that can be purchased at
particular price during a particular period of time.” It is desire backed by the willingness
and ability to pay. Thus Demand in economics is always at a price and is always expressed
with reference to a particular time period.2

INDIVIDUAL DEMAND vs. MARKET DEMAND

Demand can be one individual’s or the market’s as a whole. The demand for a commodity by
a single consumer is known as individual’s demand. An individual consumer is called a
‘household’ in economics. Therefore, an individual’s demand is the same thing as
household’s demand.

The sum total of demand by all the households or individuals is known as market demand.
Thus, market demand refers to the total quantity of a commodity that all the households are
prepared to buy at a given price during a specified period of time.

Demand for any particular commodity is influenced by a large variety of factors, viz, price of
the commodity, price of the other commodities, consumer’s income, the taste of the
consumers, demonstration effect, expectation regarding future price, size of population,
wealth, distribution of income, government policy, etc.

The demand for a commodity depends on a large variety of factors. This can be expressed in
the form of a demand function. Demand function states the functional relationship between
demand for a product and its determinants.3

Dn = f(Pn , P1… Pn-1 , Y, T, E, H, Y0, G…)

Dn= demand for the commodity ‘n’

f= the functional relationship between the demand for a commodity ‘n’ and other factors.
Pn= price of the commodity ‘n’
P1 to Pn= price of all the commodities
Y= income of the consumer
T= taste of consumer.
E= expectations regarding future prices
2
S.A. Siddiqui and A.S. Siddiqui, Comprehensive Economics, 1st Edition, page 44.
3
T.R. Jain and V.K. Ohri, Introductory Microeconomics and Macroeconomics, 2nd Edition, page 61.

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H= size of the population
Y0= distribution of income
G= government policy related to taxation.

LAW OF DEMAND

“The Law of Demand states that other things/ other factors remaining constant the quantity
demanded for a commodity increases with the fall in price and decreases with the rise in
price.” Thus, it shows that quantity demanded and prices are inversely proportional to one
another. According to Prof. Marshall has explained the law of demand is these words, “The
amount demanded increases with a fall a price and diminishes with a rise in price.”4

The Demand Curve is Negatively Inclined or it is slopes downward to the right. Whereas the
Exceptional Demand Curve is Upward Sloping from left to right or Positively Inclined.

There are certain exceptions to the Law of Demand. In other words there are several reasons
for an upward sloping demand curve.

 Giffens Goods
 Articles of Snob Appeal
 Expectations regarding future prices
 Emergencies
 Quality-price relationship

ASSUMPTIONS OF LAW OF DEMAND

4
S.A. Siddiqui and A.S. Siddiqui, Comprehensive Economics, 1st Edition, page 53.

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The law of demand assumes that ‘other things remain unchanged’ i.e., assumption of ceteris
paribus order. As stated above, demand for a commodity depends not only on its price, but
also on many other factors, eg., consumer’s income, price of the related good, consumer’s
tastes and preferences, etc. These other factors influencing the demand are assumed to be
constant or unchanged. Thus, the law of demand is based on the following main assumptions:

 There should be no change in the income of the consumer.

 There should be no change in the taste and preferences of the consumers.
 Prices of the related commodities should remain unchanged.
 Size of population should not change.
 The distribution of income should not change.
 The commodity should be normal commodity.

DEMAND SCHEDULE

A Demand Schedule is a tabular presentation which shows the different quantities of a

commodity what would be demanded at different prices. It shows how quantity demanded
increases with the fall in price and vice-versa. Demand Schedule is of two types, Individual
Demand Schedule and Market Demand Schedule.

Individual Demand Schedule is a table which shows the various quantities of a commodity
that would be purchased at different prices by a household. Whereas Market Demand
Schedule is a table which shows the various quantities of a commodity that would be
purchased by all the buyers at different prices during a given time period.

ELASTICITY OF DEMAND

Elasticity of Demand refers to the Degree of Responsiveness of the quantity demanded of a

commodity to change in any of its determinants, like price, income, prices of related
commodities.

PRICE ELASTICITY
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The degree of responsiveness of the quantity demanded of a commodity in response to the
changes in the price level.

Elasticity (ep) = D (Change in quantity demanded)

--------------------------------------------
P (Change in price level)

ep= Price elasticity of demand.

D= Percentage change in quantity

P= Percentage change in price.

FACTORS AFFECTING THE PRICE ELASTICITY OF DEMAND

Price elasticity of demand is different for the different commodities. It is important to know
why demand for some goods is more elastic while for others it is less elastic. There are many
factors which determine the elasticity of demand. The main factors are:

 Availability of Substitutes
 Nature of the Commodity
 Proportion of the income spent
 The number of uses of a commodity
 Time factor
 Postponement of consumption
 Price Range
 Habits of consumers

CLASSIFICATION OF PRICE ELASTICITY- Degrees of Price Elasticity

of Demand

The degree of responsiveness of the demand for a commodity to a change in its price may
differ. To explain this phenomenon of degree of elasticity, economists’ express price
elasticity of demand may be expressed in terms of its numerical value. The numerical value
of price elasticity of demand ranges from zero to infinity. In terms of its numerical value (i.e.,
degree of elasticity), there are five kinds of price elasticity of demand.

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  Perfectly Inelastic/ Zero Elastic
 Unitary Elastic or EY= 1
 Highly Elastic or EY > 1
 Inelastic/ Less Elastic or EY < 1
 Perfect Elasticity or Infinite EY

PERFECTLY INELASTIC

When demand does not respond to the changes in the price level, or responds in a negligible
manner, it is known as perfectly inelastic or zero elastic demand. The Demand curve is
vertical straight line running parallel to the Y-axis.

UNITARY ELASTIC OR EY = 1

When the change in demand is equi-proportionate to the changes in the price level, it is
known as unitary elastic demand. The demand curve is Rectangular Hyperbola in shape.

HIGHLY ELASTIC OR EY > 1

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When the change in demand is more than proportionate to the change in its price level, it is
known as highly elastic demand. The demand curve is Flattish Dish Shaped.

INELASTIC/ LESS ELASTIC OR EY < 1

When the change in demand is less than proportionate to the change in price level, it is
known as less elastic or inelastic demand. The demand curve is Highly erect.

PERFECT ELASTIC OR INFINITE ELASTIC

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When the demand increases infinitely at the same price. It is a hypothetical situation because
price cannot remain constant over a very long period of time. The demand curve is Horizontal
and running parallel to the X-axis.

MEASUREMENT OF PRICE ELASTICITY OF DEMAND

Elasticity of demand for different goods is different. It is important to measure elasticity of

demand in order to compare elasticity of demand for different goods. The measurement of
elasticity of demand can be looked at from two view-points: (i) Point elasticity (ii) Arc
elasticity.

i. POINT ELASTICITY

When elasticity of demand is measured on different points on the demand curve it is known
as point method of measuring elasticity of demand. Point elasticity can be measured by using
the following formulae:

ep= Lower line segment

Upper line segment

ii. ARC ELASTICITY

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When elasticity of demand is measured over a finite range or ‘arc’ of a demand curve, it is
called arc elasticity of demand. The arc elasticity of demand can be measured by Percentage
Method and Total Expenditure Method.

iii. PERCENTAGE OR PROPORTIONATE METHOD

In this method, price elasticity of demand is measured by the ratio of percentage change in
quantity demanded to percentage change in price of the commodity. Thus,

ep= Percentage change in quantity demanded

Percentage change in price

Change in Quantity Demanded X 100

Initial Quantity
= -------------------------------------------------
Change in Price X100
Initial Price
▲Q X100
Q
= ----------------
▲P X100
P

= ▲Q ÷ ▲P = ▲Q X P
Q P Q ▲P

= ▲Q X P
▲P Q

Thus:

ep= ▲Q X P
▲P Q

iv. TOTAL EXPENDITURE METHOD

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One of the methods of measuring the price elasticity of demand suggested by Marshall is the
Total Expenditure Method.5 Total expenditure method or Total Outlay is the expenditure
incurred by households on the purchase of a commodity. It is the product of the price of a
commodity and the quantity demanded at that price, i.e., TE= P x Q, where TE stands for
Total Expenditure, P and Q stand for price and quantity respectively.

According to expenditure method, elasticity of demand can be measured by considering the

change in total expenditure as a result of change in the price of the commodity. Categories of
Price elasticity of demand in terms of Total Expenditure

i. When TE falls with a fall in price or rises with a rise in price, the relationship
between TE and price is directly proportional, hence ey < 1.
ii. When TE remains the same irrespective of a rise or fall in price, ey = 1.
iii. When TE rises with a fall in price and vice versa, the relationship between price
and TE is inversely proportional, so, ey > .

MEANING OF SUPPLY

5
D.K. Sethi and U Andrews, Frank ISC Economics, Frank Bros. & Co. 10th Edition (2010), page 84.

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“Supply is the total amount of goods that a producer is willing to sell in the market at a
particular price that is prevailing in the market in a particular period of time.” 6 There are
three important aspects which need to be noted in the definition of supply.

 Supply is a desired quantity, i.e., how much producers are willing to sell and not how
much they actually sell.
 The second thing to note about supply is that supply is always expressed with
reference to price.
 Like demand, supply is a flow variable. Therefore, supply refers to the amount which
producers or sellers are willing to sell during a specific period of time- per day, per
week, per month.

INDIVIDUAL vs. MARKET SUPPLY

Quantity of a commodity which one producer is willing to produce and offer for sale is
known as individual supply. A single producing unit or a producer is called a ‘firm’ in
economics. Therefore, individual supply refers to the quantity of a commodity which a firm is
willing to produce and offer for a sale at a particular price during a specified period.7

All the firms producing a commodity constitute an industry. The quantity that all the
producers are willing to produce and offer for sale at a particular price during a specified
period is known as market supply or industry’s supply. Therefore, industry’s or market
supply is the sum total of supply of a commodity offered for sale by individual firms.8

LAW OF SUPPLY

6
.R. Jain and V.K. Ohri, Introductory Microeconomics and Macroeconomics, 2nd Edition, page 173.
7
D.K. Sethi and U Andrews, Frank ISC Economics, Frank Bros. & Co. 10th Edition (2010), page 110.
8
Ibid.

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“The Law of Supply states that supply increases with the rise in price and falls with the fall
in prices other factors remaining constant in the ceteris paribus order.” According to
Meyers, “Supply as a schedule of the amount of a goods that would be offered for sale at all
possible prices at anyone instant of time or during any one period of time” 9 The Law of
Supply therefore specifies the positive or directly proportional relationship between price and
quantity supplied.

The determinants of Supply of a commodity are:

 Price of the commodity

 Goals of firms
 Input Prices
 Prices of related commodities
 Techniques of production
 Nature of the commodity
 Policy of taxation and subsidy
 Expectation of future prices
 Natural factors
 Agreement among producers
 Transport and communication facilities.

The important determinants of supply can be expressed in the form of a “Supply Function”.
The supply function is a statement which states the relationship between the quantity
supplied of a commodity and its determinants. The supply function may be written as:

Sn = f(Pn, P1, ... Pn-1, Gf, Fi, ... Fm, T, E, Gt, N, Mt... )

ASUMPTIONS OF LAW OF SUPPLY

The Law of Supply can operate only when the following conditions are fulfilled:

 The price of related goods

 Prices of inputs
 Goals of the firm
 Means of Transport
9
Meenakshi Dev Sharma, Principle of Economics (For Law Students), Central Law Agency, 1st Edition (2011)
page 87.

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  Government Policy related to taxation should remain constant when the law is
operational.

SUPPLY SCHEDULE

“A supply schedule is a tabular statement showing various quantities which are producers
are willing to produce and sell at various alternative prices during a given period of time.” It
states the relationship between the price of a commodity and the quantity that would be
supplied. Supply Schedule is of two types:

 Individual Supply Schedule

 Market Supply Schedule

An Individual Supply Schedule is defined as the table which shows various quantities of a
commodity that an individual producer or a firm would offer for sale at different prices
during a given period.

Market Supply Schedule of a good is the table which shows various quantities of the good
that all the firms are willing to supply at each market price during a specified time period,
assuming that factors other than the price of the good are given.

ELASTICITY OF SUPPLY

Elasticity of Supply refers to degree of changes in the quantity of supply in relation to

changes in price. Quantity of different goods supplied responds in a different fashion with
reference to changes in prices. Normally increases in price increases supply but the
percentage of increase in supply may be equal to more or less than the percentage increase in
price. It can be defined as the degree of responsiveness of supply to a change in the price of a
commodity.10 In the word of Samuelson, “Elasticity of supply is the degree of the
responsiveness of supply of a commodity to a change in its price.”11

PRICE ELASTICITY OF SUPPLY

10
S.A. Siddiqui and A.S. Siddiqui, Comprehensive Economics, 1st Edition, page 135.
11
Ibid. Page 135.

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Law of supply tells us in which direction supply will change as a result of change in price,
but it does not give us the magnitude of change in supply. Price elasticity of supply gives us
information with regard to magnitude of change in supply in response to change in supply to
change in price. 12

Price Elasticity of supply measures the degree of responsiveness of the quantity supplied of a
commodity to a change in its price. More precisely, price elasticity of supply is defined as the
proportionate change in quantity supplied of a commodity divided by a given proportionate
change in its price.

es= Proportionate Change in Quantity Supplied

Proportionate Change in Price

CATEGORIES (DEGREES) OF ELASTICITY OF SUPPLY

To describe the various degrees of price elasticity of supply, economists have been grouped
them into five categories:

 Perfectly Elastic or Infinite Elasticity: es = ∞

 Perfectly Inelastic: es = 0
 Unitary Elastic: es = 1
 Highly Elastic: es > 1
 Less Elastic or Inelastic: es < 1

PERFECTLY ELASTIC OR INFINITE ELASTICITY OR ES = ∞

When the supplier supplies any amount at the same price but nothing at the lower price it is
known as Perfectly Elastic or Infinite elasticity. The supply curve is Horizontal and parallel
to X-axis.

12
D.K. Sethi and U Andrews, Frank ISC Economics, Frank Bros. & Co. 10th Edition (2010), page 130.

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PERFECTLY INELASTIC OR ES = 0

When the supply does not respond to the changes in the price level it is known as Perfectly
Inelastic supply. The supply curve is vertical and parallel to Y-axis.

UNITARY ELASTICITY OR ES = 1

When the change in supply is equi proportionate to the changes in the price level it is known
as Unitary Elastic Supply.

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HIGHLY ELASTIC OR ES > 1

When the change in supply is more than proportionate to the changes in price, it is regarded
as highly elastic supply. The supply curve is Flattish Dish Shaped.

LESS ELASTIC OR INELASTIC SUPPLY OR ES < 1

When the change in supply is less than proportionate to the changes in price, it is known as
less elastic or inelastic supply. The supply curve is Erect.

DETERMINANTS OF ELASTICITY OF SUPPLY

Elasticity of supply depends upon a number of factors, some factors are as follows:

 Behaviour of Cost of Production

 Time Element
 Nature of the Commodity

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  Availability of facilities for expanding output
 Nature of inputs
 Risk- Taking
 Expectation of future prices

MEASUREMENT OF ELASTICITY OF SUPPLY

Elasticity of supply is measured by two methods, viz,

 Percentage Method
 Geometric Method or Point Method.

PERCENTAGE METHOD

The percentage method of measuring the price elasticity of supply is based on the definition
of elasticity, i.e., the ratio of proportionate change in quantity supplied of a commodity to a
given proportionate change in its price. Thus, the formula for measuring price elasticity of
supply is:

es = Percentage Change in Quantity Supplied

Percentage Change in Price

▲Q x 100
Q
es=__________
▲P x 100
P

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= ▲Q x P = ▲Q x P
Q ▲P ▲P Q

Thus, the formula for measuring price elasticity of supply is:

es= ▲Q x P
▲P Q

es = elasticity of supply
Q = initial quantity
▲Q = change in quantity supplied
P= initial price
▲P= change in price.

GEOMETRIC OR POINT METHOD

Geometric Method is used to measure the elasticity of supply at a point on the supply curve.
That is why it is also known as the point method of measuring elasticity of supply.
Geometrically, elasticity of supply depends on the ‘origin’ of the supply curve. 13

BIBLIOGRAPHY

 R. Jain and V.K. Ohri, Introductory Microeconomics and Macroeconomics, 2nd

Edition.

13
.R. Jain and V.K. Ohri, Introductory Microeconomics and Macroeconomics, 2nd Edition, page 189.

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 D.K. Sethi and U Andrews, Frank ISC Economics, Frank Bros. & Co. 10th Edition
(2010).

 S.A. Siddiqui and A.S. Siddiqui, Comprehensive Economics, Laxmi Publications (P)
Ltd, 1st Edition.

 Meenakshi Dev Sharma, Principle of Economics (For Law Students), Central Law
Agency, 1st Edition (2011).

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