# For Classroom Use Only

ANNEXURE
Individual Demand and Market demand The market demand consists of the total quantity demanded by each individual in the market. Conceptually, the market demand curve is formed by computing the horizontal summation of the individual demand curves for all consumers. The table-2 and figure: 02 below illustrate this process. Table 2 ( Demand of X in liters) Price of X (Rs) 5 4 3 2 Buyer A 5 8 12 20 Buyer B 10 12 15 19 Buyer C 0 4 7 12 Market Demand (All Buyers) 15 23 34 51

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This diagram illustrates a simple case in which there are only three consumers, Person A, Person B and Person C. Notice that the total quantity demanded in the market is just the sum of the quantities demanded by each individual. In this diagram, Person A wished to buy 12 units, person B wishes to buy 15 units and person C wishes to buy 7 units of commodity ‘X’ when the price is tk.3. Thus, at a price of tk.3, the total quantity demanded in the market is 34 (=12+15+7) units of this commodity. Of course, this example is highly simplified since there are many buyers in most realworld markets. The same principle though would hold: the market demand curve is derived by adding together the quantities demanded by all consumers at each and every possible price.

CATEGORIES OF DEMAND (a) DEMAND FOR CONSUMERS’ GOODS AND PRODUCERS’ GOODS Consumers’ goods are goods used for final consumption, e.g. food items, readymade clothes, houses. Producers’ goods are used for production of other goods, consumers’ or producers’, e.g. machines, tools, raw-materials. Demand for consumers’ goods is also termed as direct demand, for these goods are used directly for final consumption. Demand for producers’ goods are demanded not for final consumption but for the production of other goods. The distinction between consumers and producers goods is somewhat arbitrary, for whether a good is a consumers’ good or producers’ good depends upon its use. For example, if wheat is used to make eatables in a kitchen, it is a consumer good while if the same wheat is used for making bread in a bakery, then it is a producers’ good. However, this distinction is useful because, among other factors, demand for a consumer good depends on consumers’ income while that for a producers’ good depends on the outputs of the industries using this product as an input. (b) PERISHABLE AND DURABLE GOODS’ DEMAND Both consumers’ and producers’ goods are further divided into perishable (nondurable) and durable goods. Perishable goods are those, which can be consumed only once, while durable goods are those, which can be used more than once over a period of time. For example, sweets, bread, and milk are perishable consumers’ goods; consumables like coal, oil and raw materials are non-durable producers’ goods; furniture, refrigerator, and car are durable consumers goods; and machines, tools, and factory buildings are durable producers’ goods. This distinction is useful because non-durable products present more complicated problems for demand analysis than durable products. Sales of non-durables are made largely to meet current demand, which depends on current conditions. Sales of durables, on the other hand, add to the stock of existing goods, whose services are consumed over a

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period of time. Thus, they have two kinds of demand: replacement of old products and expansion of total stock. Their demands fluctuate with business conditions. Speculations and price expectations may exert an influence on their demands. Labour is a highly perishable Producers’ goods. (c) DERIVED AND AUTONOMOUS DEMANDS When the demand for a product is tied to the purchase of some parent product, its demand is called derived. For example, the demand for cement is a derived demand, for it is needed not for its own sake but for satisfying the demand for buildings. In this sense, demand for all producers’ goods is derived. So is the demand for money. Autonomous demand, on the other hand, is not derived. It is hard to find a product today whose demand is wholly independent of all other demand. However, the degree of this dependence varies widely from product to product. For example, the demand for automotive batteries is fully tied up with the demands of vehicles using these batteries, while the demand for sugar is loosely tied up with the demand for drinks. Thus, the distinction between derived and autonomous demands is more of degree than of kind. Demand for labour is called a derived demand as it depends significantly on the production level or scale. (d) FIRM AND INDUSTRY DEMAND Generally, more than one firm produces a Good and so there is a difference between the demand facing by an individual firm and that facing by an industry. (All firms producing a particular good constitute an industry engaged in the production of that good.) For example, demand for Fiat car alone is a firm’s demand and demand for all kinds of cars is industry’s demand.

DETERMINANTS OF DEMAND • Changes in the price of a good inversely affect the demand for the commodity. Consumers are willing and able to buy more of a good at the lower price of that and would buy less quantity at the higher price of the good, subject to holding all other factors constant. So, Price and quantity demanded are negatively (inversely) related and main causes of that are (i) diminishing marginal utility, (ii) income effect, (iii) substitution effect, (iv) less urgent use of commodity as it becomes cheaper.

Changes in income positively affect the demand for the commodity. Changes in income can either increase or decrease demand, depending on whether the good is normal or inferior. If an increase in income causes consumers to demand more of a good, when all other variables in the generalized demand function are held constant, we refer to such a commodity as a normal good. A good is also a normal good if a decrease in income causes consumers to demand less of the good, all other things held constant.

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There are some goods and services for which an increase in income would reduce consumer demand, other variables held constant. This type of commodity is referred to as an inferior good. In the case of inferior goods, rising income causes consumers to demand less of the good, and falling income causes consumers to demand more of the good.

Changes in the prices of related product: Changes in prices of related goods can cause demand to increase or decrease depending on whether the related goods are substitutes or complements. (i) Changes in the prices of substitute1 commodity positively affect the demand for the commodity. For substitute goods, an increase (decrease) in the price of one of the goods causes consumers to demand more (less) of the substitute good, holding all other factors constant. (ii) Changes in the prices of complements2 inversely affect the demand for the commodity. IT works as similar as the own price of any product or service with varying degree. For complementary goods, an increase (decrease) in the price of one of the goods causes consumers to demand less (more) of the other good, holding all other factors constant.

Consumer taste and preference: It is also a very significant influencing factor of demand for any thing but hard to measure, for example, young generation’s preference on fast food items boosts up demand for such items in some selected areas of Dhaka city.

Changes in the size and age distribution of the general population: Demand for a product depends positively upon the number of consumers that varies directly with the size of population. Furthermore, the spread of consumers over regions, and urban-rural areas, and their composition in terms of children and adults, male and female, rich and poor, etc. also effect the demand for a particular commodity. For example, baby food is needed for children and not for adults; the demand for cosmetics is more from women than from men, and luxury and semi-luxury items are consumed by the rich and not by the poor.

Consumer expectation also influences demand. People tend to maintain high levels of consumption when they feel confident about their continuing employment in the future. If people, for whatever reason, feel less confident about the future, they tend to decrease consumption and increase saving.

Weather has different effects on demand of different types of commodities. The effect of seasonality is easily understandable on demand of various types of commodities, such as, winter wears, umbrella or ice cream.

1

Some other factors also have various effect on quantity demanded of some product, such as,

Two goods are substitutes if an increase (decrease) in the price of one of the goods causes consumers to demand more (less) of the other good, holding all other factors constant.
2

Goods are said to be complements if they are used in conjunction with each other.

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Changes in interest rates and the general availability of credit, Advertisement and changes in fashion, Changes in technology, and so on.

DETERMINANTS OF SUPPLY • Changes in the price of a commodity positively affect the supply of the commodity. Produces are willing produce and sell more of a good at the higher price of that because the think that a higher price yield more incentive for them. • Costs of the various factors of production inversely affect the supply of a commodity. The producer cannot supply the same amount at the same price if the costs of the various factor of production are increased. Higher costs of inputs cause higher production cost and thus cut off amount of offering for sale at every price. • Improved techniques of production (technological advancement) positively affect the supply of the commodity usually by bringing up more productivity in the production process or reducing the cost of production. • Improvement in the means of transport and communication positively affect the supply of the commodity mainly by increasing the mobility of factor of production and facilitating the supply management. • Number of Sellers in the market and the nature of competition among them has an obvious effect on supply of commodities. For example, a single firm has full control over the price-output decision of the monopoly market, where as, a single firm has a vary little of that in a monopolistic market. • Goals set by the producing firms is also a determinant of supply of any good or service. For example, nature of supply and pricing of a state owned firm like WASA or Pertobangla differ much with those of a profit-driven firm. • Weather affects the supply of different commodity, specially the agricultural products, in different ways. Optimum rainfall would increase supply of an agricultural product. On the country, shortage of rains, floods, fires, dust storms earthquakes, etc would decrease the supply of that. • Some other factors also have various effect on supply of some product, such as,    Political Disturbances or War International Agreements among Producers Taxation system and so on.

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STOCK & SUPPLY Stock is the total volume of commodity, which can be brought into the market for sale at any short notice. But supply means the quantity that is actually brought in the market i.e., the amount of any commodity already offered for sale. Stock can be defined as storage of immediate potential supply. For perishable goods stock and supply are considered to be the same. For non-perishable goods stock can be hold back by the sellers with an expectation of price increase.

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