NPS INTERNATIONAL CHENNAI

PROJECT

YEAR: 2020-21

NAME : Medha Sai Vadlamaani

GRADE : XII

ROLL NO : 1

SUBJECT : Economics

TOPICS : Supply, Demand, and its determinants

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Supply and Demand and its determinants:

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 NPS INTERNATIONAL, CHENNAI
Perumbakkam, Chennai – 600 100

REG NO: 7350133

CERTIFICATE
Certified that this is a bonafide record of project work
done by
Medha Sai Vadlamaani in the Subject Economics during
the
academic year 2020-2021.

Date: 22.12.2020
Teacher-in-Charge

Submitted to the ISC Board on 21 January 2021

held in NPS International, Chennai.

Principal Examiners
1.
2.

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 ACKNOWLEDGEMENTS

This project was carried out under the guidance of Ms. Rama Devi CV, NPS

International, Chennai. I am grateful for her guidance, valuable suggestions and

constant encouragement.

I owe my gratitude to Ms. Sudha Balan, Principal, NPSI, Chennai, for being a

constant source of inspiration and support.

I humbly extend my gratitude to all the faculty members of the school for their

guidance and help.

I would like to take this opportunity to thank the CISCE Board for giving me an

opportunity to do this project. The entire experience has been insightful and

edifying.

I extend my gratitude to my parents who have guided, supported and encouraged

me in doing this project.

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 DECLARATION

I hereby declare that the project titled ‘Supply, Demand, and its determinants’,

written and submitted by me to the CISCE Board is an authentic record of my

genuine work done under the guidance of Ms. Rama Devi CV.

I further declare that this project has not been submitted and will not be submitted

to any other institute or organization.

Signature:

Date:

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 OBJECTIVES OF STUDY

This project Titled “Supply, demand, and its determinants” is being prepared to:

 Learn about supply, demand, and their different determinants. It is also

prepared to learn about the related graphs.

 To study supply and demand as a case study. To study the cause of the rise

and fall in the prices of gold and the effect of other precious metal’s prices

such as platinum on the price of gold.

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 INDEX

S.No. Heading Pg. No.

1. Introduction to supply and demand 1-2

2. Demand 2

3. Supply 5

4. Determinants of demand 9

5. Determinants of supply 20

6. Difference between supply and demand 28

7. Equilibrium point 29

8. Case Study 34

9. Bibliography 35

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Introduction:

Supply and demand form the most fundamental concepts of

economics. Whether you are an academic, farmer, pharmaceutical

manufacturer, or simply a consumer, the basic premise of supply and

demand equilibrium is integrated into your daily actions. Only after

understanding the basics of these models can the more complicated

aspects of economics be mastered.

Demand is an economic principle referring to a consumer's desire to

purchase goods and services and willingness to pay a price for a

specific good or service. Holding all other factors constant, an

increase in the price of a good or service will decrease the quantity

demanded, and vice versa. Market demand is the total quantity

demanded across all consumers in a market for a given good.

Supply is a fundamental economic concept that describes the total

amount of a specific good or service that is available to consumers.

Supply can relate to the amount available at a specific price or the

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amount available across a range of prices if displayed on a graph.

What is Demand?

Demand is the amount of a commodity that a consumer is willing to

purchase or is ready to purchase from the market at a given price

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during a given period of time. In other words, demand refers to the

quantity of a commodity which a consumer or household is willing to

buy from the market at a particular price during a particular period of

time.

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The Law of demand:

The law of demand states that quantity purchased varies inversely

with price. In other words, the higher the price, the lower the quantity

demanded. This occurs because of diminishing marginal utility. That

is, consumers use the first units of an economic good they purchase to

serve their most urgent needs first, and use each additional unit of the

good to serve successively lower-valued ends.

The demand curve:

In economics, the demand curve is the graph depicting the

relationship between the price of a certain commodity and the amount

of it that consumers are willing and able to purchase at that given

price. It is a graphic representation of a demand schedule. The

demand curve for all consumers together follows from the demand

curve of every individual consumer: the individual demands at each

price are added together.

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Types of Demand:

● Individual or market demand - It refers to the total quantity of a

commodity that all the consumers or households are willing to

buy at a given price within a given period of time.

● Ex-ante and ex-post demand- Ex-ante demand refers to the

amount of goods that consumers want to or willing to buy

during a particular time period. It is the planned or desired

amount of demand. Ex post demand, on the other hand, refers to

the amount of the goods that the consumers actually purchase

during a specific period. It is the amount of the goods actually

bought.

● Joint demand-Joint demand refers to the demand for two or

more goods which are used jointly or demanded together. For

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 example, cars and petrol, butter and bread, milk and sugar, etc.

are the goods which are used together.

● Derived demand-The demand for a commodity that arises

because of the demand for some other commodity is called

derived demand. For instance,demand for

steel,bricks,cement,stoneswood,etc. Is a derived demand -

derived from the demand of building houses and other buildings.

● Composite demand- Demand for goods that have multiple uses

is called composite demand. For example, the demand for steel

arises from various uses of steel such as use of steel in making

utensils, bus bodies, room coolers, cars and so on.

What is Supply?

In economics, supply is the amount of a resource that firms,

producers, labourers, providers of financial assets, or other economic

agents are willing and able to provide to the marketplace or directly to

another agent in the marketplace.Supply is the amount of the good

that is being sold onto the market by producers. At higher prices, it is

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more profitable for firms to increase supply, so supply curve slopes

upward.

The Law of Supply:

The law of supply is the microeconomic law that states that, all other

factors being equal, as the price of a good or service increases, the

quantity of goods or services that suppliers offer will increase, and

vice versa. The law of supply says that as the price of an item goes up,

suppliers will attempt to maximize their profits by increasing the

quantity offered for sale.

The supply curve:

The supply curve is a graphic representation of the correlation

between the cost of a good or service and the quantity supplied for a

given period. In a typical illustration, the price will appear on the left

vertical axis, while the quantity supplied will appear on the horizontal

axis.

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Types of supply:

● Market Supply-market supply is also called very short period

supply. Another name of market supply is ‘day-to-day supply or

‘daily supply’. Under these goods like—fish, vegetables, milk

etc., are included.

● Short-term Supply-in short period supply, the demand cannot be

met as per requirements of the purchaser. The demand is met as

according to the goods available.

● Long-term Supply-in this, if demand has been changed the

supply can also be changed because there is sufficient time to

meet the demand by making manufacturing goods and supplying

them in the market.

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● Joint Supply-joint supply refers to the goods produced or

supplied jointly e.g., cotton and seed; mutton and wool. In joint

supplied products one is the main product and the other is the

by-product of its subsidiary. By-product is mostly the automatic

outcome when the main product is produced.

● Composite Supply-in this, the supply of a commodity is made

from various sources and is called the composite supply. When

there are different sources of supply of a commodity or services,

we say that its supply is composed of all these resources. We

normally get light from electricity, gas, kerosene and candles.

All these resources go to make the supply of light. Thus, the

way of supplying the light is called composite supply.

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Determinants of Demand:

Price:

The law of demand states that when prices rise, the quantity of

demand falls. That also means that when prices drop, demand will

grow. People base their purchasing decisions on price if all other

things are equal. The exact quantity bought for each price level is

described in the demand schedule. It's then plotted on a graph to show

the demand curve.

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Income:

When income rises, so will the quantity demanded. When income

falls, so will demand. But if your income doubles, you won't always

buy twice as much of a particular good or service. There's only so

many pints of ice cream you'd want to eat, no matter how wealthy you

are, and this is an example of "marginal utility."

Marginal utility is the concept that each unit of a good or service is a

little less useful to you than the first. At some point, you won’t want it

anymore, and the marginal utility drops to zero.

The first pint of ice cream tastes delicious. You might have another.

But after that, the marginal utility starts to decrease to the point where

you don't want any more.

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While discussing the relationship between the income of a consumer

and the demand of a commodity, we may distinguish between three

types of goods:

1. Normal goods

2. Inferior goods

3. Inexpensive necessities of life

Normal goods are those goods for which the demand increases with

increase in the income of the consumer and decreases with a fall in

income. As an example, a customer may increase his demand for

clothes,televisions,refrigerators as their income increases.

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Inferior goods are those goods the demand for which falls with

increase in income of the consumer and increases with fall in income.

So, there is an inverse relationship between income of the consumer

and the demand for inferior goods. For example, the demand for

coarse cereals like maize or jowar may decrease when income

increases beyond a particular level because the consumers may

substitute it by a superior cereals like wheat or rice. Coarse cereals,

coarse cloth and black and white television are examples of inferior

goods. Consumers will purchase more of these goods at lower level of

income.

In case of inexpensive necessities of life such as salt and matchbox,

the quantity purchased increases with increase in income up to a

certain level and thereafter it remains constant irrespective of the level

of income. This is in view of the fact that there is an upper limit to the

consumption of such goods.

Income demand:

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This functional relationship between the demand for a commodity and

the level of income is known as income demand. The income demand

shows how much quantity of a commodity a consumer will buy at

different levels of his income.

Prices of related goods or services:

Complementary goods: Complementary goods are those goods

which are complementary to one another in the sense that they are

used jointly or consumed together to satisfy a given want, like car and

petrol, gas and gas stoves.

The price of complementary goods or services raises the cost of using

the product you demand, so you'll want less. For example, when gas

prices rose to $4 a gallon in 2008, the demand for gas-guzzling trucks

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and SUVs fell.2 Gas is a complementary good to these vehicles. The

cost of driving a truck rose along with gas prices.

Substitute goods: Substitute goods are those goods which satisfy the

same type of need and hence can be used in place of one another to

satisfy a given want. Tea and coffee, coke and pepsi are examples of

substitute goods.

The opposite reaction occurs when the price of a substitute rises.

When that happens, people will want more of the good or service and

less of its substitute. That's why Apple continually innovates with its

iPhones and iPods. As soon as a substitute, such as a new Android

phone, appears at a lower price, Apple comes out with a better

product. Then the Android is no longer a substitute.

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Tastes:
When the public’s desires, emotions, or preferences change in favor

of a product, so does the quantity demanded. Likewise, when tastes

go against it, that depresses the amount demanded. Brand advertising

tries to increase the desire for consumer goods.

Expectations:
When people expect that the value of something will rise, they

demand more of it. For instance, if consumers expect a rise in the

price of a commodity in future, they would demand a greater amount

of this commodity today with a view to avoid purchasing it at a higher

price in future.

Consumer-Credit Facilities:
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If consumers are able to get credit facilities or they are able to borrow

from the banks, they would be tempted to purchase certain goods they

could not have purchased otherwise. For instance, the demand for cars

in India has increased partly because people are able to get loans from

the banks to purchase cars. Credit facilities mostly affect the demand

for expensive durable goods.

Demonstration Effect:

Demonstration effect plays an important role in affecting the demand

for a commodity. Demonstration effect refers to the tendency of a

person to emulate the consumption style of other persons such as his

friends,neighbours,etc.

Number of buyers in the market:

The number of consumers affects overall, or “aggregate,” demand. As

more buyers enter the market, demand rises. Market demand for a

commodity depends on the size and composition of the population.

The population size of a country determines the number of

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consumers. The larger the population, the larger is likely to be the

number of consumers. An increase in the size of population will

increase the demand for a commodity by increasing the number of

consumers and, vice versa.

Climatic Factors:

Demand for different goods depends on the climatic factors because

different goods are needed for different climates. For instance, the

demand for ice, fans, air conditioners, cold drinks, cotton cloths, etc.

increases in summer. Likewise, in winter, the demand for heaters,

blowers, hot drinks, woolen cloths, etc. increases.

Government Policy:

Economic policy of the government also influences the demand for

commodities. If the government imposes taxes on various

commodities in the form of GST, excise duties, etc., the prices of

these commodities will increase. As a result, demand for these

commodities will fall. But, on the other hand, if the government

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incurs more expenditure on the construction of roads, bridges, in

setting up industries, etc., the demand for the goods needed for

construction will increase.

In conclusion, the determinants of demand are:

1. Price of the Commodity

2. Income of the Consumer

3. Consumers' Tastes and Preferences

4. Prices of Related Goods

5. Consumers' Expectations

6. Consumer-Credit Facilities

7. Demonstration Effect

8. Size and Composition of Population

9. Distribution of Income

10. Climatic Factors

11. Government Policy

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Determinants of Supply:

Price of the Commodity:

The most important determinant of the supply of a commodity is its

own price. Given other things, larger quantity of a commodity will be

supplied at a higher price and smaller quantity will be supplied at a

lower price. This is so because the higher the price, given the per unit

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cost of production, the higher is the per unit profit. The higher profit

would motivate the existing firms to supply more in order to earn

higher profits.

Goals of the Produces:

The goals or objectives of the firms also determine the supply of a

commodity. The goals of the firms may be 'profit maximisation', 'sales

maximisation' or 'risk minimisation'. Ordinarily, most of the firms try

to earn maximum profits. The higher is the profit from the sale of a

commodity, the higher will be the amount supplied by the firms, and

vice versa. Firms could, however, pursue other objectives sometimes.

At times, the firms may aim to maximise the sales or revenue rather

than profits.

Input Prices:

Another factor influencing the supply of a commodity is the prices of

inputs or factors used in its production such as raw materials, labour,

machines, etc. Input prices determine the cost of production. If the

producers have to pay higher prices to secure the factors of production

needed for producing the commodity, its cost of production will be

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higher. Given the price of the commodity, a higher cost of production

reduces the profit margin. This will lead to a lower amount of output

that firms will produce and offer for sale at a given price level. A fall

in the input prices and, therefore, a fall in the cost of production will

have the opposite effect on supply. In general, supply will change in

the opposite direction of change in input prices.

Techniques of Production:

Techniques of production also exert a significant influence on the

supply of a commodity. An improvement in the technique of

production, the invention of new machines and advanced techniques

reduce the cost of production and increase the profit margin thereby.

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Increased profitability induces the producers to produce more and

increase supply thereby.

Structure of the Industry:

The supply of a commodity also depends on whether the industry is

monopolised or competitive. In case of monopoly, one firm produces

the entire commodity. A monopolist firm will like to restrict the

output so as to raise the market price. But if there is competition

among firms, there will be no tendency to restrict the output. Thus,

the competitive firms are likely to produce and sell more as compared

to monopolised industry.

Expectations about Future Prices:

Producers' expectations about future market prices affect the supply of

any good. If the producers expect an increase in the price of a

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commodity in future, they will supply less today and hoard it so as to

offer a large quantity of the commodity in future at higher prices.

Natural Factors:

Natural factors are particularly important for the supply of agricultural

products. Natural factors like drought, flood, unfavourable climatic

conditions, etc., adversely affect the supply of some commodities.

Heavy rains, flood and drought conditions will lead to decrease in the

supply of agricultural commodities. Adequate rain and favourable

climatic conditions may help in increasing the supply of agricultural

commodities.

Agreement among Producers:

Sometimes producers may form a pool and enter into some agreement

to restrict the supply of a commodity to earn large profits. They will

create artificial scarcity of the commodity and, as a consequence, its

supply will decrease.

Availability of Transport and Communication Facilities:

The supply of a commodity depends upon the types of transport and

communication facilities available in an economy. An improvement

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in the transport and communication facilities will expand the size of

the market. This will motivate the producers to produce and supply

more.

Policy of Taxation and Subsidies:

Indirect taxes ( GST, excise duty, Vat, etc.) are likely to increase the

prices of the commodities. The imposition of heavy taxes on a

commodity is like an increase in its cost of production and will

generally lead to a decrease in supply. A reduction of taxation will

have the opposite effect. It will motivate the producers to increase its

supply. Subsidies also affect the supply of a commodity. The

government pays subsidies to firms to encourage them to produce

certain goods. Subsidies reduce the cost and induce the producers to

increase supply.

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In conclusion, the determinants of supply at a glance are below:

1. Price of the Commodity

2. Goals of the Produces

3. Input Prices

4. Prices of Related Commodities

5. Techniques of Production

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6. Structure of the Industry

7. Policy of Taxation and Subsidies

8. Expectations about Future Prices

9. Natural Factors

10. Agreement among Producers

11. Transport and Communication Facilities

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Difference between Supply&Demand

BASIS FOR
DEMAND SUPPLY
COMPARISON

Meaning Demand is the Supply is the quantity of

desire of a buyer a commodity which is
and his/her ability made available by the
to pay for a producers to its
particular consumers at a certain
commodity at a price.
specific price.

Curve Downward-sloping Upward-sloping

Slope

Relationship with Inverse Direct Relationship

Price Relationship

Represents Customer Firm

Effect of When the demand When the supply

Variations increases but supply increases but demand
remains constant, it remains constant, it leads
leads to shortage to surplus but when the

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 but when the supply decreases and the
demand decreases demand is constant it
and the supply is results in shortage.
constant leads to
surplus.

Determinants Taste and Price of the Resources

other than price Preference and other inputs

Number of Number of Producers

Consumers

Price of Related Price of factors of

Goods production

Consumer Income Taxes and Subsidies

Consumer Technology
Expectations

Equilibrium Point

The equilibrium point is a situation in which the quantity demanded

and quantity supplied intersect, representing equilibrium price. It is

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the point at which the buyers and sellers, both are satisfied. Also

called as the market equilibrium or market-clearing price.

Let’s have a look at the example:

QUANTITY QUANTITY
PRICE
DEMANDED SUPPLIED

10 10 50

8 20 40

6 30 30

4 40 20

2 50 10

Have a look at the graph representing the demand and supply for the

commodity at different price range:

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Here you can see that at point ‘E’ both demand and supply curve

intersect each other.

The equilibrium in the quantity demanded and supplied will help the

firm to stabilize and survive in the market for a longer duration while

the disequilibrium in these will have severe effects on the firm,

markets, other products and the whole economy will suffer as a

whole.

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Case Study:

Demand for gold is a widespread observable fact around the world, in

which India’s share alone comes to around 25%. Hutti gold mine

company located in Karnataka is the only company in India which

produces gold by mining and processing the gold ore. Over the past 5

years; Indians have recycled an average of 105 tons of gold per

annum.

In October 2008, demand for gold increased; celebrations like Diwali

and Akshaya Tritiya were the main factor for this vast increase in

demand. Imports of gold started falling from December 2008 by 83%,

followed by 91% in January 2009.In March 2009 imports were

ZERO. In 2005, demand went up and the price also went up. Indian

people tend to invest in gold because of culture and belief, so the

demand always remains elastic. In 2004, Indians enjoyed a rapid

increase in income, which made the Indians to consume more and

more gold even though the price was increasing.

Certain non-price factors like income of the consumer, prices of

related goods, consumers taste and preferences, population and

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expected future price of the good also effects of the increase in the

price of gold.

Later on in the year 2009, platinum, which is a substitute good for

gold started declining from Rs.35000 to Rs.22000 which made the

people of India to purchase platinum as a substitute good for gold.

In the Microeconomic perspective, Gold is considered to be the

wealth preserver due to its increase in value over a period of time. The

trend precisely shows how it increased the wealth of the

Individual and the economy.

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Conclusion

The market is flooded with several substitutes in each product

category and a sudden rise or fall in the prices will have an impact on

these products and their demand and supply may increase or decrease.

Supply and demand together determine market equilibrium. On a

graph, market equilibrium is the point where the supply and demand

curves intersect. The price at this intersection is the equilibrium price

and the quantity is the equilibrium quantity.In such a situation, an

equilibrium must be maintained in the quantity demanded and the

quantity supplied without neglecting the price factor at which the

product is supplied.

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Bibliography:

https://www.investopedia.com/articles/economics/11/intro-supply-

demand.asp

https://keydifferences.com/difference-between-demand-and-

supply.html#:~:text=Demand%20is%20the%20desire

%20of,consumers%20at%20a%20certain%20price.

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