UNIT-3

What is Demand in Economics?

Demand is an economic principle can be defined as the quantity of a product that a consumer desires to purchase
goods and services at a specific price and time. Demand refers to the willingness or effective desire of individuals to
buy a product supported by their purchasing power.

Types of Demand- In economics, Demand is generally classified based on various factors, such
as the number of consumers for a given product, the nature of products, the utility of products, and the
interdependence of different demands. Different types of demand in economics can be explained as follows

1. Price demand
2. Income demand
3. Cross demand
4. Individual demand and Market demand
5. Joint demand
6. Composite demand
7. Direct and Derived demand
Types of Demand

Price demand
Price Demand is a demand for different quantities of a product or service that consumers intend to purchase at a
given price and time period assuming other factors, such as prices of the related goods, level of income of consumers,
and consumer preferences, remain unchanged.
Price demand is inversely proportional to the price of a product or service. As the price of a product or service rises,
its demand falls and vice versa. Therefore, price demand indicates the functional relationship between the price of a
product or service and the quantity demanded.
Price demand can be mathematically expressed as follows:
DA = f (PA) where,
DA = Demand for product A
f = Function
PA =Price of product A
Income demand
Income demand is a demand for different quantities of a commodity or service that consumers intend to purchase at
different levels of income assuming other factors remain the same.
Generally, the demand for a commodity or service increases with an increase in the level of income of individuals
except for inferior goods. Therefore, demand and income are directly proportional to normal goods whereas the
demand and income are inversely proportional to inferior goods.

Relationship between demand and income can be mathematically expressed as follows:

DA = f (YA ), where,
DA = Demand for commodity A
f = Function
YA = Income of consumer A
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Cross demand
Cross demand refers to the demand for different quantities of a commodity or service whose demand depends not
only on its own price but also the price of other related commodities or services.
For example, tea and coffee are considered to be the substitutes of each other. Thus, when the price of coffee
increases, people switch to tea. Consequently, the demand for tea increases. Thus, it can be said that tea and coffee
have cross demand.
Mathematically, cross demand can be expressed as follows:
DA = f (PB), where,
DA = Demand for commodity A
f = Function
PB = Price of commodity B
Individual demand and Market demand
This is the classification of demand based on the number of consumers in the market. In dividual demand refers to
the quantity of a commodity or service demanded by an individual consumer at a given price at a given time period.

For example, the quantity of sugar that an individual or household purchases in a month is the individual or
household demand. The individual demand of a product is influenced by the price of a product, income of customers,
and their tastes and preferences.
On the other hand, Market demand is the aggregate of individual demands of all the consumers of a product over a
period of time at a specific price while other factors are constant.
For example, there are four consumers of sugar (having a certain price). These four consumers consume 30
kilograms, 40 kilograms, 50 kilograms, and 60 kilograms of sugar respectively in a month. Thus, the market demand
for sugar is 180 kilograms in a month.
Joint demand
Joint demand is the quantity demanded for two or more commodities or services that are used jointly and are, thus
demanded together.
For example, car and petrol, bread and butter, pen and refill, etc. are commodities that are used jointly and are
demanded together. The demand for such commodities changes proportionately. For example, a rise in the demand
for cars results in a proportionate rise in the demand for petrol.
However, in the case of joint demand, rise in the price of one commodity results in the fall of demand for the other
commodity. In the above example, an increase in the price of cars will cause a fall in the demand of not only of cars
but also of petrol.

Law of Demand
Composite demand
Composite Demand is the demand for commodities or services that have multiple uses. For example, the demand for
steel is a result of its use for various purposes like making utensils, car bodies, pipes, cans, etc.
In the case of a commodity or service having composite demand, a change in price results in a large change in the
demand. This is because the demand for the commodity or service would change across its various usages.
In the above example, if the price of steel increases, the price of other products made of steel also increases. In such a
case, people may restrict their consumption of products made of steel.

Direct and Derived demand

Direct demand is the demand for commodities or services meant for final consumption. This demand arises out of
the natural desire of an individual to consume a particular product.
For example, the demand for food, shelter, clothes, and vehicles is direct demand as it arises out of the biological,
physical, and other personal needs of consumers.
Derived demand refers to the demand for a product that arises due to the demand for other products. For example,
the demand for cotton to produce cotton fabrics is derived demand.
Derived demand is applicable to manufacturers’ goods, such as raw materials, intermediate goods, or machines and
equipment. Apart from this, the factors of production (land, labour, capital, and enterprise) also have a derived
demand. For example, the demand for labour in the construction of buildings is a derived demand.

Also R

What are Determinants of Demand?

Determinants of demand are the factors that influence the decision of consumers to purchase a product or service.
It is essential for organisations to understand the relationship between the demand and its each determinant to
analyse and estimate the individual and market demand for a commodity or service.

The quantity demanded for a commodity or service is influenced by various factors, such as price, consumers’
income and preferences, and growth of population.

For example, the demand for apparel changes with changes in fashion and tastes and preferences of consumers.
This can be expressed as follows:

DA = f (PA, PO,………I, T)
where,
PA = Demand for commodity A
f = Function
PO = Price of other related products
I= Income of consumers
T= Tastes and preferences of consumers

Determinants of Demand
• Determinants of Individual Demand
o Price of Commodity
o Price of Related Goods
o Income of Consumers
o Tastes and Preferences of Consumers
o Consumers Expectations
o Credit Policy
• Determinants of Market Demand
o Size and composition of Population
o Income Distribution
o Climatic Factors
o Government Policy

I.Factors Influencing(determinants ) of Individual Demand

When an individual intends to purchase a particular product, he may take into consideration various factors, such as
the price of the product, the price of substitutes, level of income, tastes and preferences, and the features of the
product.

These considerations determine the individual demand of the product. The factors that influence individual demand
are as follows:

1.Price of a commodity
The price of a commodity or service is generally inversely proportional to the quantity demanded while other factors
are constant. As per the law of demand, it implies that when the price of the commodity or service rises, its demand
falls and vice versa.
2.Price of related goods
The demand for a good or service not only depends on its own price but also on the price of related goods. Two items
are said to be related to each other if the change in price of one item affects the demand for the other item. Related
goods can be categorised as follow

• Substitute or competitive goods: These goods can be used interchangeably as they serve the same purpose;
thus, are the competitors of each other.

For example, tea and coffee, cold drink and juice, etc. The demand for a good or service is directly proportional to
the price of its substitute.
• Complementary goods: Complementary goods are used jointly; for example, car and petrol.

There is an inverse relationship between the demand and price of complementary goods. This implies that an
increase in the price of one good will result in fall in the demand of the other good.

For example, an increase in the price of mobile phones not only would lead to fall in the quantity demanded but
also lower the demand for mobile cover or scratch guards.
3.Income of consumers
The level of income of individuals determines their purchasing power. Generally, income and demand are directly
proportional to each other. This implies that rise in the consumers’ income results in rise in the demand for a
commodity.
However, the relationship depends on the type of commodities, which are listed below:

Let us discuss different types of commodities in detail.

• Normal goods: These are goods whose demand rises with an increase in the level of income of consumers.

For example, the demand for clothes, furniture, cars, mobiles, etc. rises with an increase in individuals’ income.

• Inferior goods: These are goods whose demand falls with an increase in consumers’ income.

For example, the demand for cheaper grains, such as maize and barley, falls when individuals’ income increases
as they prefer to purchase higher quality grains. These goods are known as Giffen goods in economic parlance,
• Inexpensive goods or necessities of life: These are basic necessities in an individual’s life, such as salt,
matchbox, soap, and detergent. The demand for inexpensive goods rises with an increase in consumers’ income
until a certain level after that it becomes constant.
4.Tastes and preferences of consumers
The demand for commodity changes with changes in the tastes and preferences of consumers (which depend on
customers’ customs, traditions, beliefs, habits, and lifestyles).

For example, the demand for burqas is high in gulf countries. In such countries, there may be less or no demand for
short skirts.
5.Consumers expectations
Demand for commodities also depends on the consumers’ expectations regarding the future price of a commodity,
availability of the commodity, changes in income, etc. Such expectations usually cause rise in demand for a product.

For example, if a consumer expects a rise in the price of a commodity in the future, he/she may purchase larger
quantities of the commodity in order to stock it. Similarly, if a consumer expects a rise in his/her income, he/she may
purchase a commodity that was relatively unaffordable earlier.
6.Credit policy
It refers to terms and conditions for supplying various commodities on credit. The credit policy of suppliers or banks
also affects the demand for a commodity. This is because favourable credit policies generally result in the purchase
of commodities that consumers may not have purchased otherwise.

Favourable credit policies generally increase the demand for expensive durable goods such as cars and houses.

For example, easy home and car loans offered by banks have led to a steep rise in the demand for homes and cars
respectively.

II.Factors Influencing Market Demand

Market demand is the sum total of all household (individual) demands. Therefore, all the factors that affect
individual demand also affect market demand as well. However, there are certain other factors that affect market
demand, which is as follows:

1.Size and composition of the population

Population size refers to the actual number of individuals in a population. An increase in the size of a population
increases the demand for commodities as the number of consumers would increase.

Population composition refers to the structure of the population based on characteristics, such as age, sex, and race.
The composition of a population affects the demand for commodities as different individuals would have different
demands.

For example, a population with more youngsters will have higher demand for commodities like t-shirts, jeans,
guitars, bikes, etc. compared to the population with more elderly people.
2.Income distribution
Income distribution shows how the national income is divided among groups of individuals, households, social
classes, or factors of production. Unequal distribution of income results in differences in the income status of
different individuals in a nation.

For example, luxury goods will have higher demand. On the other hand, nations having evenly distributed income
would have higher demand for essential goods.
3.Climatic factors
The demand for commodities depends on the climatic conditions of a region such as cold, hot, humid, and dry.

For example, the demand for air coolers and air conditioners is higher during summer while the demand for
umbrellas tends to rise during monsoon.
4.Government policy
This includes the actions taken by the government to determine the fiscal policy and monetary policy such as
taxation levels, budgets, money supply, and interest rates. Government policies have direct impact on the demand for
various commodities.

For example, if the government imposes high taxes (sales tax, VAT, etc.) on commodities, their prices would
increase, which would lead to a fall in their demand.

On the contrary, if the government invests in building of roads, bridges, schools, and hospitals, the demand for
bricks, cement, labour, etc., would rise.

What is the Law of Demand?

The law of demand is given as, “If the price of a product falls, its quantity demanded increases and if the price of the
commodity rises, its quantity demanded falls, other things remaining constant.”
Law of Demand

Law of Demand
Demand Example: Take the example of an individual, who needs to purchase soft drinks. In the market, a pack of
three soft drinks is priced at ₹120 and the individual purchases the pack. In the next week, the price of the pack is
reduced to ₹105. This time the individual purchases two packs of soft drinks. In the third week, the price of the pack
has risen to ₹130.
This time the individual does not purchase the pack at all. It is a common observation that consumers purchase a
commodity in greater quantities when its price is low and vice versa.

This inverse relationship between the demand and price of a commodity is called the law of demand.
Law of Demand Definition
The following are some popular definitions of the law of demand given by experts:
Robertson defines law of demand as “Other things being equal, the lower the price at which a thing is offered, the
more a man will be prepared to buy it.”
Marshall defines law of demand as “The greater the amount to be sold, the smaller must be the price at which it is
offered in order that it may find purchasers; or in other words, the amount demanded increases with a fall in price
and diminishes with a rise in price.”
Ferguson defines law of demand as “Law of Demand, the quantity demanded varies inversely with price.”
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Law of Demand Meaning

The law of demand represents a functional relationship between the price and quantity demanded of a commodity
or service.

The law states that the quantity demanded of a commodity increase with a fall in the price of the commodity and vice
versa while other factors like consumers’ preferences, level of income, population size, etc. are constant.

Demand is a dependent variable, while the price is an independent variable.

Therefore, demand is a function of price and can be expressed as follows:

D= f (P)

Where,
D= Demand
P= Price
f = Functional Relationship

Assumptions of Law of Demand

The law of demand follows the assumption of ceteris paribus, which means that the other factors remain
unchanged or constant.
As mentioned earlier, the demand for a commodity or service not only depends on its price but also on several other
factors such as price of related goods, income, and consumer tastes and preferences.

In the law of demand, other factors are assumed to remain constant while only the price of the commodity changes.

Following are the assumptions of law of demand:

No expectation of future price changes or shortages

The law requires that the given price change for the commodity is a normal one and has no speculative
consideration. That is to say, the buyers do not expect any shortages in the supply of the commodity in the market
and consequent future changes in the prices. The given price change is assumed to be final at a time.

No change in consumer’s preferences

The consumer’s taste, habits and preferences should remain constant. 4. No change in the fashion: If the commodity
concerned goes out the fashion the buyer may not buy more of it even at a substantial price is reduced.

No change in the price of related goods

Prices of other goods like substitutes and supportive, i.e., complementary or jointly demanded products remain
unchanged. If the prices of other related goods change, the consumer’s preferences would change which may
invalidate the law of demand.

No change in consumer’s income

Throughout the operation of the law, the consumer’s income should remain the same. If the level of a buyer’s income
changes, he may buy more even at a higher price, invalidating the law of demand.

No change in size, age composition and sex ratio of the population

For the operation of the law in respect of total market demand, it is essential that the number of buyers and their
preferences should remain constant. This necessitates that the size of population as well as the age structure and sex
ratio of the population should remain the same throughout the operation of the law.

Otherwise, if the population changes, there will be additional buyers in the market, so the total market demand may
not contract with a rise in price.

No change in the range of goods available to the consumers

This implies that there is no innovation and arrival of new varieties of product in the market which may distort
consumer’s preferences.

No change in government policy

The level of taxation and fiscal policy of the government remains the same throughout the operation of the law.
Otherwise, changes in income-tax, for instance, may cause changes in consumer’s income or commodity taxes and
may lead to distortion in consumer’s preferences

The law of demand can be understood with the help of certain concepts, such as demand schedule, demand curve,
and demand function.
What is Demand Schedule?
Demand schedule is a tabular representation of different quantities of commodities that consumers are willing to
purchase at a specific price and time while other factors are constant.

Demand Schedule Definition

A full account of the demand, or perhaps we can say, the state of demand for any goods in a given market at a given time
should state what the volume (weekly) of sales would be at each of a series of prices. Such an account, taking the form of
a tabular statement, is known as a demand schedule.

Types of Demand Schedule

Two types of demand schedule are:

1. Individual Demand Schedule

2. Market Demand Schedule
Individual demand schedule
Individual demand schedule: It is a tabular representation of quantities of a commodity demanded by an
individual at a particular price and time, provided all other factors remain constant.
Market demand schedule
Market demand schedule: There is more than one consumer of a commodity in the market. Each consumer has
his/her own individual demand schedule. If the quantities of all individual demand schedules are consolidated, it is
called market demand schedule.
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Demand Schedule Example

Let us understand the concept demand schedule with the help of a demand schedule example:
Assume that there are two individuals A and B in the market. They have a particular individual demand for Apple.
The individual demand schedules for A and B and the consequent market demand are shown in Table

PRICE PER QUANTITY QUANTITY TOTAL MARKET

DOZEN DEMANDED BY A DEMANDED BY B DEMAND
(IN ₹ PER (IN DOZENS PER (IN DOZENS PER (A + B)
DOZEN) WEEK) WEEK) (IN DOZENS PER
WEEK)

(1) (2) (3) (4)

80 2 4 2+4=6

70 4 6 4 + 6 = 10

60 6 10 6 + 10 = 16
 PRICE PER QUANTITY QUANTITY TOTAL MARKET
DOZEN DEMANDED BY A DEMANDED BY B DEMAND
(IN ₹ PER (IN DOZENS PER (IN DOZENS PER (A + B)
DOZEN) WEEK) WEEK) (IN DOZENS PER
WEEK)

50 9 15 9 + 15 = 24

40 14 22 14 + 22 = 36
In Table, the individual demand schedule of A and B are depicted in the columns (2) and (3) at different price levels
shown in column (1). Column (4) depicts the market demand schedule, which is the sum total of the individual
demands of A and B. As shown in Table, at a price level of ₹80 per dozen of apple, individual demand by A and B are
2 dozens per week and 4 dozens per week respectively.

The market demand (assuming there are only two individuals in the market) is the sum total of individual demands
i.e. 6 dozens a week.

The law of demand can also be represented graphically with the help of a Demand Curve.

Demand Curve
In economics, Demand curve is a graphical presentation of the demand schedule. It is obtained by plotting a
demand schedule.
The demand schedule can be converted into a demand curve by graphically plotting the different combinations of
price and quantity demanded of a product.

Types of Demand Curve

Similar to demand schedule, there are two types of demand curve.
2 Types of Demand Curve are:
1. Individual demand curve
2. Market demand curve
Individual demand curve
Individual demand curve: It is the curve that shows different quantities of a commodity which an individual is
willing to purchase at all possible prices in a given time period with an assumption that other factors are constant.
Refer to Table 1 below, the individual demand schedules of A and B, when plotted on a graph, will represent the
individual demand curves, which are shown in Figures:

Individual Demand Curve

An individual demand curve slopes downwards to the right, indicating an inverse relationship between the price
and quantity demanded of a commodity.
Market demand curve
Market demand curve: This curve is the graphical representation of the market demand schedule. A market
demand curve shows different quantities of a commodity which all consumers in a market are willing to purchase at
different price levels at a given time period, while other factors remaining constant.
A market demand curve can be plotted by consolidating individual demand curves. Therefore, market demand curve
is the horizontal summation of individual demand curves.

Therefore, market demand curve is the horizontal summation of individual demand curves. In the example given in
Table 1 below, plotting the price of eggs (column 1) against the summation of quantities demanded by A and B
(column 4) would represent a market demand curve. This is shown in Figure below:
 Market Demand Curve

A market demand curve, just like the individual demand curves, slopes downwards to the right, indicating an inverse
relationship between the price and quantity demanded of a commodity.

The negative slope of a demand curve is a reflection of the law of demand

However, it is important to understand the reasons why the demand curve slopes downward to the right.

Why the demand curve slopes downward?

Generally, the demand curves slope downwards. It signifies that consumers buy more at lower prices. We shall
now try to understand why the demand curve slopes downward?
Different explanations have been given different economists for the operation of the law of demand. These are
explained below:
Factors that cause a demand curve shifts are:
Law of diminishing marginal utility
Consumers purchase commodities to derive utility out of them.

The law of diminishing marginal utility states that as consumption increases, the utility that a consumer derives
from the additional units (marginal utility) of a commodity diminishes constantly.
Therefore, a consumer would purchase a larger amount of a commodity when it is priced low as the marginal utility
of the additional units decreases.

Income effect
A change in the demand arising due to change in the real income of a consumer owing to change in the price of a
commodity is called income effect.
A change in the price of a commodity affects the purchasing power of a consumer.

For example, if an individual buys two dozens of apples at 40 per kg, he/she spends 80. When the price of apples
falls to 30 per kg, he/she spends 60 for purchasing two kg of apples. This results in a saving of 20 for the individual,
which implies that the real income of the individual has increased by 20
The amount saved may be utilised by the individual in purchasing additional units of apples. Thus, the demand for
apples increased due to a change in real income.

Substitution effect
The change in demand due to change in the relative price of a commodity is called the substitution effect.
The relative price of a commodity refers to its price in relation to the prices of other commodities.
Consumers always switch to lower-priced commodities that are substitutes of higher-priced commodities in order to
maintain their standard of living. Therefore, the demand for relatively cheaper commodities increases.

For example, if the price of pizzas comes down, while the price of burgers remains the same, pizzas will become
relatively (burgers) cheaper. The demand for pizzas will increase as compared to burgers.
Change in the number of consumers
When the price of a commodity decreases, the number of consumers of the commodity increases. This leads to a rise
in the demand for the commodity.

For example, when the price of apples is 120 per kg, only a few people purchase it. However, when the price of
apples falls down to 60 per kg, more number of people can afford it.
Multiple uses of a commodity
There are certain commodities that can serve more than one purpose. For example, milk, steel, oil, etc. However,
some uses are more important over others. When the price of such a commodity is high, it will be used to serve
important purposes. Thus, the demand will be low.

On the other hand, when the price of the commodity falls, it will be used for less important purposes as well. Thus,
the demand will increase.

For example, when the price of electricity is high, it is used only for lighting purposes, whereas when the price of
electricity goes down, it is also used for cooking, heating, etc.

Exception of Law of Demand

There are certain exceptions to the law of demand that with a fall in price, the demand also falls and there is an
increase in demand with an increase in price.
In case of exceptions, the demand curve shows an upward slope and referred to as exceptional demand curve.
Figure shows an exceptional demand curve:
 Exceptional Demand Curve
Exception to law of demand refers to conditions where the law of demand is not applicable.

Giffen goods
Giffen good is a commodity that is unexpectedly consumed more as its price increases. Thus, it is an exception to the
law of demand. In the case of Giffen goods, the income effect dominates over the substitution effect.

After the Irish Famine (1845), the potato crop failed due to plant disease, late blight, which destroys both the leaves
and the edible roots, or tubers, of the potato plant. Due to this, the price of potatoes increased tremendously.

Despite the fact that the price increase made people to find substitutes of potatoes, they moved away from luxury
products so that their overall consumption of potatoes increased.

Articles of distinction goods

Named after economist, Thorstein Veblen, these commodities satisfy the desires of the upper-class people in society.
Veblen goods include those commodities whose demand is proportional to their price and thus, they are exceptions
to the law of demand.
These articles are purchased only by a few rich people to feel superior to the rest. For example, diamonds, rare
paintings, vintage cars, and antique goods are examples of Veblen goods.

Consumers ignorance
Consumer ignorance is another factor that motivates people to purchase a commodity at a higher price, which
violates the law of demand. This results out of the consumer biases that a high-priced commodity is better in quality
than a low-priced commodity.

Situations of crisis
Crisis such as war and famine negate the law of demand. During crisis, consumers tend to purchase in larger
quantities with the purpose of stocking, which further accentuates the prices of commodities in the market. They
fear that goods would not be available in the future.

On the other hand, at the time of depression, a fall in the price of commodities does not induce consumers to demand
more.

Future price expectations

When consumers expect a rise in the prices of commodities, they tend to purchase commodities at existing high
prices. For example, speculation of market strategists on an increase in gold prices in the future induces consumers
to purchase higher quantities in order to stock gold.

On the contrary, if consumers expect a fall in the price of a commodity, they postpone the purchase for the futur

Characteristics of Law of Demand

The following are the main characteristics of law of demand:
Inverse Relationship
According to this law there is an inverse relationship between the quantity demanded and the price of a commodity.
If the price of a commodity increases the quantity demanded decreases and if the price decreases the quantity
demanded increases.

Price independent and Demand dependent variable

Price of a commodity is an independent variable. The law of demand explains the change in demand of a commodity
due to change in its price. In mathematical terms price is an independent variable and demand is a dependent
variable.

Other things being equal

This law holds good only when the other things remain the same. This ‘other things remaining the same’ is called the
assumptions of the law of demand.

Qualitative statement
The law of demand is a qualitative statement which tells us that a fall in the price of a commodity will lead to an
increase in the quantity demanded and a rise in price will lead to a fall in the quantity demanded. But it does not tell
us how much change in price will bring how much change in quantity demanded.

Movement along Demand Curve and Shift In Demand

Curve
In economics, change in quantity demanded and change in demand are two different concepts.

1. Expansion and Contraction of Demand(change in quantity demanded)

2. Increase and decrease in demand(change in demand)
Expansion and Contraction of Demand
The change in the quantity demanded of a product with change in its price, while other factors are at constant, is
called expansion or contraction of demand.
Expansion and contraction are represented by the movement along the same demand curve. Let us discuss the
expansion and contraction of demand as follows:

Expansion or Extension of Demand

Expansion or extension of demand: It is an increase in the demand of a commodity due to decrease in its prices,
while other factors are constant.
For example, in Table, when the price of apple falls from 60 per dozen to 50 per dozen, its quantity demanded rises
from 6 dozens to 9 dozens by individual A. Therefore, the demand for apple is expanded or extended.

Contraction of Demand
Contraction of demand: It is a decrease in the demand of a commodity due to increase in its price, while other
factors remain unchanged.
For example, when the price of apple rises from 60 per dozen to 80 per dozen, its quantity demanded falls from 6
dozens to 2 dozens by individual A. Therefore, the demand for apple is contracted.

PRICE PER QUANTITY QUANTITY TOTAL MARKET

DOZEN DEMANDED BY A DEMANDED BY B DEMAND
(IN ₹ PER (IN DOZENS PER (IN DOZENS PER (A + B)
DOZEN) WEEK) WEEK) (IN DOZENS PER
WEEK)

(1) (2) (3) (4)

 PRICE PER QUANTITY QUANTITY TOTAL MARKET
DOZEN DEMANDED BY A DEMANDED BY B DEMAND
(IN ₹ PER (IN DOZENS PER (IN DOZENS PER (A + B)
DOZEN) WEEK) WEEK) (IN DOZENS PER
WEEK)

80 2 4 2+4=6

70 4 6 4 + 6 = 10

60 6 10 6 + 10 = 16

50 9 15 9 + 15 = 24

40 14 22 14 + 22 = 36
Let us consider the graph shown in Figure
 Movement along the Demand Curve
In the demand curve, when the price of commodity X is OP1, quantity demanded is OQ1. If the price of commodity X
decreases to OP2, the quantity demanded increases to OQ2.

The movement of the demand curve from A1 to A2 in the downward direction is called the extension of the
demand curve.
On the other hand, if the price of the commodity X rises from OP1 to OP3, the quantity demanded of commodity X
falls from OQ1 to OQ3. This movement along the demand curve in the upward direction is called the contraction of
demand.
Increase and decrease in demand
Increase and decrease in demand takes place due to changes in other factors, such as change in income,
distribution of income, change in consumer’s tastes and preferences, change in the price of related goods. In this
case, the price factor remains unchanged.
Increase in demand
Increase in demand refers to the rise in demand for a product at a specific price,
Decrease in demand
Decrease in demand is the fall in demand for a product at a given price.
When other factors change, the demand curve changes its position which is referred to as a shift along the demand
curve, which is shown in Figure.

Demand Curve Shift

Demand curve D2 is the original demand curve of commodity X. At price OP2, the demand is OQ2 units of commodity
X.

When the consumer’s income decreases owing to high income tax, he/she is able to purchase only OQ1 unit of
commodity X at the same price OP2. Therefore, the demand curve, D2 shifts downwards to D1.

Similarly, when the consumer’s disposable income increases due to a reduction in taxes, he/she is able to purchase
OQ3 units of commodity X at the price OP2. Therefore, the demand curve, D2 shifts upwards to D3. Such changes in
the position of the demand curve from its original position are referred to as a shift in the demand curve.

Factors that cause a demand curve shifts

Why the demand curve slopes downward? There are several factors that cause a demand curve shift. Some of
them are given as follows:
Law of diminishing marginal utility
Consumers purchase commodities to derive utility out of them.

The law of diminishing marginal utility states that as consumption increases, the utility that a consumer derives
from the additional units (marginal utility) of a commodity diminishes constantly.
Therefore, a consumer would purchase a larger amount of a commodity when it is priced low as the marginal utility
of the additional units decreases.

Income effect
A change in the demand arising due to change in the real income of a consumer owing to change in the price of a
commodity is called income effect.
A change in the price of a commodity affects the purchasing power of a consumer.
For example, if an individual buys two dozens of apples at 40 per kg, he/she spends 80. When the price of apples
falls to 30 per kg, he/she spends 60 for purchasing two kg of apples. This results in a saving of 20 for the individual,
which implies that the real income of the individual has increased by 20
The amount saved may be utilised by the individual in purchasing additional units of apples. Thus, the demand for
apples increased due to a change in real income.

Substitution effect
The change in demand due to change in the relative price of a commodity is called the substitution effect.
The relative price of a commodity refers to its price in relation to the prices of other commodities.
Consumers always switch to lower-priced commodities that are substitutes of higher-priced commodities in order to
maintain their standard of living. Therefore, the demand for relatively cheaper commodities increases.

For example, if the price of pizzas comes down, while the price of burgers remains the same, pizzas will become
relatively (burgers) cheaper. The demand for pizzas will increase as compared to burgers.
Change in the number of consumers
When the price of a commodity decreases, the number of consumers of the commodity increases. This leads to a rise
in the demand for the commodity.

For example, when the price of apples is 120 per kg, only a few people purchase it. However, when the price of
apples falls down to 60 per kg, more number of people can afford it.
Multiple uses of a commodity
There are certain commodities that can serve more than one purpose. For example, milk, steel, oil, etc. However,
some uses are more important over others. When the price of such a commodity is high, it will be used to serve
important purposes. Thus, the demand will be low.

On the other hand, when the price of the commodity falls, it will be used for less important purposes as well. Thus,
the demand will increase.
For example, when the price of electricity is high, it is used only for lighting purposes, whereas when the price of
electricity goes down, it is also used for cooking, heating, etc.

Types of Elasticity of Demand

Elasticity of demand is classified into three types based on the many elements that influence the quantity desired
for a product: price elasticity of demand (PED), cross elasticity of demand (XED), and income elasticity of demand
(IED) (YED).

1)Price Elasticity of Demand (PED)

The quantity requested for a product is affected by any change in the price of a commodity, whether it be a drop
or an increase. For example, as the price of ceiling fans rises, the quantity requested decreases.

The Price Elasticity of Demand is a measure of the responsiveness of quantity sought when prices vary (PED).

The mathematical formula for calculating Price Elasticity of Demand is as follows:

• PED = %Change in Quantity Demanded % / Change in Price.

• The formula's output determines the magnitude of the influence of a price adjustment on the amount required
for a commodity.
2). Income Elasticity of Demand (YED)
Consumer income levels have a significant impact on the amount requested for a product. This may be seen in
the contrast between commodities sold in rural marketplaces and those sold in urban markets.

The Income Elasticity of Demand, commonly known as YED, refers to the sensitivity of the quantity requested for
a certain commodity to changes in real income (the income generated by a person after accounting for inflation)
of the consumers who buy this good, while all other variables remain constant.

The formula for calculating the Income Elasticity of Demand is as follows:

• YED = % Change in Quantity Demanded% / Change in Income

The formula's output may be used to assess if a product is a need or a luxury item.
3. Cross Elasticity of Demand (XED)
In an oligopolistic market, numerous companies compete. Thus, the amount desired for a commodity is affected
not only by its own price, but also by the prices of other items.
Cross Elasticity of Demand (XED) is an economic term that assesses the sensitivity of quantity requested of one
good (X) when the price of another item (Y) changes, and is also known as Cross-Price Elasticity of Demand.

The formula for calculating the Cross Elasticity of Demand is as follows:

• XED = (% Change in Quantity Demanded for one good (X)%) / (Change in Price of another Good (Y))

The result for a substitute good would always be positive since anytime the price of an item rises, so does the
demand for its alternative. In the case of a complementary good, however, the outcome will be negative.

Here Ec represents cross elasticity of demand while qx is the original demand of

commodity X and Δqx is the change in demand of X, py is the original price of commodity Y, and
Δpy is the change in price of Y.
 I. What Is Price Elasticity of Demand?
Price elasticity of demand is a measurement of the change in the consumption of a product in relation to a
change in its price. Expressed mathematically, it is:

Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in Price
Economists use price elasticity to understand how supply and demand for a product change when its price
changes. Like demand, supply also has an elasticity, known as price elasticity of supply. Price elasticity of
supply refers to the relationship between change in supply and change in price. It’s calculated by dividing
the percentage change in quantity supplied by the percentage change in price. Together, the two
elasticities combine to determine what goods are produced at what prices.

• Price elasticity of demand is a measurement of the change in consumption of a product in relation to

a change in its price.
• A good is perfectly elastic if the price elasticity is infinite (if demand changes substantially even with
minimal price change or no price change at all).
• If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic.
• If a good’s price elasticity is 0 (no amount of price change produces a change in demand), it is
perfectly inelastic.
• If price elasticity is exactly 1 (price change leads to an equal percentage change in demand), it is
known as unitary elasticity.
• The availability of a substitute for a product affects its elasticity. If there are no good substitutes and
the product is necessary, demand won’t change when the price goes up, making it inelastic.

Economists have found that the prices of some goods are very inelastic. That is, a reduction in price does
not increase demand much, and an increase in price does not hurt demand, either. For example, gasoline
has little price elasticity of demand. Drivers will continue to buy as much as they have to, as will airlines, the
trucking industry, and nearly every other buyer.
Other goods are much more elastic, so price changes for these goods cause substantial changes in their
demand or their supply.

Not surprisingly, this concept is of great interest to marketing professionals. It could even be said that their
purpose is to create inelastic demand for the products that they market. They achieve that by identifying a
meaningful difference in their products from any others that are available.

If the quantity demanded of a product changes greatly in response to changes in its price, it is elastic. That
is, the demand point for the product is stretched far from its prior point. If the quantity purchased shows a
small change after a change in its price, it is inelastic. The quantity didn’t stretch much from its prior point.

Factors That Affect Price Elasticity of Demand

1. Nature of commodity:
Elasticity of demand of a commodity is influenced by its nature. A commodity for a person may be
a necessity, a comfort or a luxury.

i. When a commodity is a necessity like food grains, vegetables, medicines, etc., its demand is
generally inelastic as it is required for human survival and its demand does not fluctuate much
with change in price

ii. When a commodity is a comfort like fan, refrigerator, etc., its demand is generally elastic as
consumer can postpone its consumption.
iii. When a commodity is a luxury like AC, DVD player, etc., its demand is generally more elastic
as compared to demand for comforts.

iv. The term ‘luxury’ is a relative term as any item (like AC), may be a luxury for a poor person but
a necessity for a rich person.

2. Availability of substitutes:
Demand for a commodity with large number of substitutes will be more elastic. The reason is that
even a small rise in its prices will induce the buyers to go for its substitutes. For example, a rise in
the price of Pepsi encourages buyers to buy Coke and vice-versa.

Thus, availability of close substitutes makes the demand sensitive to change in the prices. On the
other hand, commodities with few or no substitutes like wheat and salt have less price elasticity of
demand.

3. Income Level:
Elasticity of demand for any commodity is generally less for higher income level groups in
comparison to people with low incomes. It happens because rich people are not influenced much
by changes in the price of goods. But, poor people are highly affected by increase or decrease in
the price of goods. As a result, demand for lower income group is highly elastic.

4. Level of price:
Level of price also affects the price elasticity of demand. Costly goods like laptop, Plasma TV, etc.
have highly elastic demand as their demand is very sensitive to changes in their prices. However,
demand for inexpensive goods like needle, match box, etc. is inelastic as change in prices of such
goods do not change their demand by a considerable amount.

5. Postponement of Consumption:
Commodities like biscuits, soft drinks, etc. whose demand is not urgent, have highly elastic
demand as their consumption can be postponed in case of an increase in their prices. However,
commodities with urgent demand like life saving drugs, have inelastic demand because of their
immediate requirement.

6. Number of Uses:
If the commodity under consideration has several uses, then its demand will be elastic. When
price of such a commodity increases, then it is generally put to only more urgent uses and, as a
result, its demand falls. When the prices fall, then it is used for satisfying even less urgent needs
and demand rises.

For example, electricity is a multiple-use commodity. Fall in its price will result in substantial
increase in its demand, particularly in those uses (like AC, Heat convector, etc.), where it was not
employed formerly due to its high price. On the other hand, a commodity with no or few
alternative uses has less elastic demand.
7. Share in Total Expenditure:
Proportion of consumer’s income that is spent on a particular commodity also influences the
elasticity of demand for it. Greater the proportion of income spent on the commodity, more is the
elasticity of demand for it and vice-versa.

Demand for goods like salt, needle, soap, match box, etc. tends to be inelastic as consumers spend
a small proportion of their income on such goods. When prices of such goods change, consumers
continue to purchase almost the same quantity of these goods. However, if the proportion of
income spent on a commodity is large, then demand for such a commodity will be elastic.

8. Time Period:
Price elasticity of demand is always related to a period of time. It can be a day, a week, a month, a
year or a period of several years. Elasticity of demand varies directly with the time period.
Demand is generally inelastic in the short period.

It happens because consumers find it difficult to change their habits, in the short period, in order
to respond to a change in the price of the given commodity. However, demand is more elastic in
long rim as it is comparatively easier to shift to other substitutes, if the price of the given
commodity rises.

9. Habits:
Commodities, which have become habitual necessities for the consumers, have less elastic
demand. It happens because such a commodity becomes a necessity for the consumer and he
continues to purchase it even if its price rises. Alcohol, tobacco, cigarettes, etc. are some examples
of habit forming commodities.

9.Urgency

The less discretionary (urgent)a product is, the less its quantity demanded will fall with
rise in prices. Inelastic examples include luxury items that people buy for their brand
names. Addictive products are quite inelastic, as are required add-on products.

One thing all these products have in common is that they lack good substitutes. If you
really want an Apple iPad, then a Kindle Fire won’t do. Addicts are not dissuaded by higher
prices.

The more discretionary a purchase is, the more its quantity of demand will fall in response
to price increases. That is, the product demand has greater elasticity.

Say you are considering buying a new washing machine, but the current one still works; it’s
just old and outdated. If the price of a new washing machine goes up, you’re likely to forgo
that immediate purchase and wait until prices go down or the current machine breaks
down.

10.Duration of Price Change

The length of time that the price change lasts also matters. Demand response to price
fluctuations is different for a one-day sale than for a price change that lasts for a season or
a year.

Finally it can be concluded that elasticity of demand for a commodity is affected by number of
factors. However, it is difficult to say, which particular factor or combination of factors
determines the elasticity. It all depends upon circumstances of each case.

Types of Price Elasticity of Demand

Price elasticity of demand can be categorized according to the number calculated by dividing the
percentage change in quantity demanded by the percentage change in price. These categories include the
following:
If the percentage change in quantity It is
demanded divided by the percentage known Which means:
change in price equals: as:
Perfectly Changes in price result in
Infinity
elastic demand declining to zero
Changes in price yield a
Greater than 1 Elastic
significant change in demand
Changes in price yield
1 Unitary equivalent (percentage)
changes in demand
 Changes in price yield an
Less than 1 Inelastic insignificant change in
demand
Perfectly Changes in price yield no
0
inelastic change in demand
Example of Price Elasticity of Demand
As a rule of thumb, if the quantity of a product demanded or purchased changes more than the price
changes, then the product is considered to be elastic (for example, the price goes up by 5%, but the
demand falls by 10%).

If the change in quantity purchased is the same as the price change (say, 10% ÷ 10% = 1), then the product
is said to have unit (or unitary) price elasticity.

Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10% change in
price), then the product is deemed inelastic.

Most Important Methods of Measuring Price

Elasticity of Demand
There are four methods of measuring elasticity of demand. They are the percentage method, point
method, arc method and expenditure method.
(1) The Percentage Method:
The price elasticity of demand is measured by its coefficient Ep. This coefficient Ep measures the
percentage change in the quantity of a commodity demanded resulting from a given percentage
change in its price: Thus
Where q refers to quantity demanded, p to price and ∆ to change. If Ep> 1, demand is elastic. If
Ep < 1, demand is inelastic, it Ep = 1 demand is unitary elastic
With this formula, we can compute price elasticities of demand on the basis of a demand
schedule.

Demand Schedule:
Combination Price (Rs.) Quantity Kgs. of X
per Kg. of X

A 6 0

В 5 ————-► 10

С 4 20

D 3 ————-► 30
 E 2 40

F 1 ————► 50

G 0 60

Let us first take combinations В and D.

(i) Suppose the price of commodity X falls from Rs. 5 per kg. to Rs. 3 per kg. and its quantity
demanded increases from 10 kgs. to 30 kgs. Then

This shows elastic demand or elasticity of demand greater than unitary.

Note: The formula can be understood like this:

∆q =q2 –q1 where <72 is the new quantity (30 kgs.) and q1 the original quantity (10 kgs.)
∆p – p2– P1 where p2 is the new price (Rs. 3) and <$Ep sub 1> the original price (Rs. 5)
In the formula, p refers to the original price (p,) and q to original quantity (q1). The opposite is the
case in example (ii) below, where Rs. 3 becomes the original price and 30 kgs. as the original
quantity.
(ii) Let us measure elasticity by moving in the reverse direction. Suppose the price of X rises from
Rs. 3 per kg. to Rs. 5 per kg. and the quantity demanded decreases from 30 kgs. to 10 kgs. Then

This shows unitary elasticity of demand

Notice that the value of Ep in example (ii) differs from that in example (i) depending on the
direction in which we move. This difference in the elasticities is due to the use of a different base
in computing percentage changes in each case.

Now consider combinations D and F.

(iii) Suppose the price of commodity X falls from Rs. 3 per kg. to Re. 1 per kg. and its quantity
demanded increases from 30 kgs. to 50 kgs. Then

This is again unitary elasticity.

(iv) Take the reverse order when the price rises from Re. 1 per kg. to Rs. 3 per kg. and the quantity
demanded decreases from 50 kgs. to 30 kgs. Then

This shows inelastic demand or less than unitary.

The value of Ep again differs in this example than that given in example (iii) for the reason stated
above.
(2) The Point Method:
Prof. Marshall devised a geometrical method for measuring elasticity at a point on the demand
curve.
With the help of the point method, it is easy to point out the elasticity at any point along a
demand curve. Suppose that the straight line demand curve DC in Figure is 6 centimetres. Five
points L, M, N, P and Q are taken oh this demand curve. The elasticity of demand at each point
can be known with the help of the method of dividing the lower segment of the demand curve
with the upper segment. Let point N be in the middle of the demand curve. So elasticity of
demand at point.
We arrive at the conclusion that at the mid-point on the demand curve the elasticity of demand is
unity. Moving up the demand curve from the mid-point, elasticity becomes greater. When the
demand curve touches the Y-axis, elasticity is infinity. Ipso facto, any point below the mid-point
towards the X-axis will show elastic demand.
Elasticity becomes zero when the demand curve touches the X-axis.

(3) The Arc Method:

We have studied the measurement of elasticity at a point on a demand curve. But when elasticity
is measured between two points on the same demand curve, it is known as arc elasticity. In the
words of Prof. Baumol, “Arc elasticity is a measure of the average responsiveness to price change
exhibited by a demand curve over some finite stretch of the curve.”

Any two points on a demand curve make an arc. The area between P and M on the DD curve in
Figure 11.4 is an arc which measures elasticity over a certain range of price and quantities. On any
two points of a demand curve the elasticity coefficients are likely to be different depending upon
the method of computation. Consider the price-quantity combinations P and M as given in Table
below
Table 11.2: Demand Schedule:
Point Price (Rs.) Quantity (Kg)

P 8 10

M 6 12

If we move from P to M, the elasticity of demand is:

If we move in the reverse direction from M to P, then

Thus the point method of measuring elasticity at two points on a demand curve gives different
elasticity coefficients because we used a different base in computing the percentage change in
each case.

On the basis of this formula, we can measure arc elasticity of demand when there is a movement
either from point P to M or from M to P.

From P to M at P, p1 = 8, q1, =10, and at M, P2 = 6, q2 = 12

Applying these values, we get

Thus whether we move from M to P or P to M on the arc PM of the DD curve, the formula for arc
elasticity of demand gives the same numerical value. The closer the two points P and M are, the
more accurate is the measure of elasticity on the basis of this formula. If the two points which
form the arc on the demand curve are so close that they almost merge into each other, the
numerical value of arc elasticity equals the numerical value of point elasticity.
(4) The Total Outlay Method:
Marshall evolved the total outlay, total revenue or total expenditure method as a measure of
elasticity. By comparing the total expenditure of a purchaser both before and after the change in
price, it can be known whether his demand for a good is elastic, unity or less elastic. Total outlay
is price multiplied by the quantity of a good purchased: Total Outlay = Price x Quantity
Demanded. This is explained with the help of the demand schedule in Table

(i) Elastic Demand:

Demand is elastic, when with the fall in price the total expenditure increases and with the rise in
price the total expenditure decreases. Table 11.3 shows that when the price falls from Rs. 9 to Rs.
8, the total expenditure increases from Rs. 180 to Rs. 240 and when price rises from Rs. 7 to Rs.
8, the total expenditure falls from Rs. 280 to Rs. 240. Demand is elastic (Ep > 1) in this case.
(ii) Unitary Elastic Demand:
When with the fall or rise in price, the total expenditure remains unchanged; the elasticity of
demand is unity. This is shown in the Table when with the fall in price from Rs. 6 to Rs. 5 or with
the rise in price from Rs. 4 to Rs. 5, the total expenditure remains unchanged at Rs. 300, i.e., Ep =
1.
(iii) Less Elastic Demand:
Demand is less elastic if with the fall in price the total expenditure falls and with the rise in price
the total expenditure rises. In the Table when the price falls from Rs. 3 to Rs. 2 total expenditure
falls from Rs. 240 to Rs. 180, and when the price rises from Re. 1 to Rs. 2 the total expenditure
also rises from Rs. 100 to Rs. 180. This is the case of inelastic or less elastic demand, Ep < 1.

The table below summarizes these relationships:

Total Outlay Method:

Price ТЕ Ep

Falls Rises >> 1

Rises Falls
 Falls Unchanged =1

Rises Unchanged

Falls Falls

Rises Rises << 1

Figure illustrates the relation between elasticity of demand and total expenditure. The rectangles
show total expenditure: Price x quantity demanded. The figure shows that at the midpoint of the
demand curve, total expenditure is maximum in the range of unitary elasticity, i.e. Rs. 6, Rs. 5 and
Rs. 4 with quantities 50 kgs., 60 kgs. and 75 kgs.
Total expenditure rises as price falls, in the elastic range of demand, i.e. Rs. 9, Rs. 8 and Rs. 7 with
quantities 20 kgs., 30 kgs. and 40 kgs. Total expenditure falls as price falls in the elasticity range,
i.e. Rs.3, Rs. 2 and Re. 1 with quantities 80 kgs., 90 kgs. and 100 kgs. Thus elasticity of demand is
unitary in the AB range of DD, curve, elastic in the range AD above point A and less elastic in the
BD1 range below point B. The conclusion is that price elasticity of demand refers to a movement
along a specific demand curve.

What makes a product elastic?

If a price change for a product causes a substantial change in either its supply or its demand, it is
considered elastic. Generally, it means that there are acceptable substitutes for the product. Examples
would be cookies, luxury automobiles, and coffee.

What makes a product inelastic?

If a price change for a product doesn’t lead to much, if any, change in its supply or demand, it is considered
inelastic. Generally, it means that the product is considered to be a necessity or a luxury item for addictive
constituents. Examples would be gasoline, milk, and iPhones.

UNIT-4
What is Supply?
Supply is an economic principle can be defined as the quantity of a product that a seller is willing to offer in the
market at a particular price within specific time.
The supply of a product is influenced by various determinants, such as price, cost of production, government
policies, and technology. It is governed by the law of supply, which states a direct relationship between the supply
and price of a product, while other factors remaining the same.
A market is a place where buyers and sellers are engaged in exchanging products at certain prices.
In a market, the two forces demand and supply play a major role in influencing the decisions of consumers and
producers.

The behaviour of buyers is understood with the help of the concept of demand. On the other hand, the behaviour
of sellers is analysed using the concept of supply.

Concept of Supply
What is Supply Concept? In economics, supply refers to the quantity of a product available in the market for sale at
a specified price and time.
In other words, supply can be defined as the willingness of a seller to sell the specified quantity of a product within a
particular price and time period. Here, it should be noted that demand is the willingness of a buyer, while supply is
the willingness of a supplier.

Meaning of Supply
What does Supply Mean?
Supply has three important aspects, which are as follows:
1. Supply is always referred in terms of price

The price at which quantities are supplied differs from one location to the other.
For example, fast moving consumer goods (FMCG) are usually supplied at different prices in different prices.
2. Supply is referred in terms of time

This means that supply is the amount that suppliers are willing to offer during a specific period of time (per day,
per week, per month, bi-annually, etc.)

3. Supply considers the stock and market price of the product

Both stock and market price of a product affect its supply to a greater extent. If the market price of a product is
more than its cost price, the seller would increase the supply of the product in the market. However, a decrease in
the market price as compared to the cost price would reduce the supply of product in the market.

Supply Definition
What is Supply Definition? Economist has given different supply definition but the essence is same.
Supply may be defined as a schedule which shows the various amounts of a product which a particular seller is willing
and able to produce and make available for sale in the market at each specific price in a set of possible prices during a
given period. McConnell
Supply refers to the quantity of a commodity offered for sale at a given price, in a given market, at given time. Anatol
Murad
Supply Example
What is Supply? Let us understand the concept of supply with an example.
For example, a seller offers a commodity at 100 per piece in the market. In this case, only commodity and price are
specified; thus, it cannot be considered as supply.
However, there is another seller who offers the same commodity at 110 per piece in the market for the next six
months from now on. In this case, commodity, price, and time are specified, thus it is supply.

Classification of supply
What is Supply Classification? Supply can be classified into two categories, which are individual supply and
market supply.
1. Individual supply is the quantity of goods a single producer is willing to supply at a particular price and time in
the market. In economics, a single producer is known as a firm.

2. Market supply is the quantity of goods supplied by all firms in the market during a specific time period and at a
particular price. Market supply is also known as industry supply as firms collectively constitute an industry.
Also Read: Movement and Shift along Supply Curve

Determinants of Supply
Determinants of supply are:
Price of a product
The major determinants of the supply of a product is its price. An increase in the price of a product increases its
supply and vice versa while other factors remain the same.

Cost of production
It is the cost incurred on the manufacturing of goods that are to be offered to consumers. Cost of production and
supply are inversely proportional to each other.

Natural conditions
The supply of certain products is directly influenced by climatic conditions. For instance, the supply of agricultural
products increases when the monsoon comes well on time.

Transportation conditions
Better transport facilities result in an increase in the supply of goods. Transport is always a constraint to the supply
of goods. This is because goods are not available on time due to poor transport facilities.

Taxation policies
Government’s tax policies also act as a regulating force in supply. If the rates of taxes levied on goods are high, the
supply will decrease. This is because high tax rates increase overall productions costs, which will make it difficult for
suppliers to offer products in the market.

Production techniques
The supply of goods also depends on the type of techniques used for production. Obsolete techniques result in low
production, which further decreases the supply of goods.

Factor prices and their availability

The production of goods is dependent on the factors of production, such as raw material, machines and equipment,
and labour.
Price of related goods
The prices of substitutes and complementary goods also influence the supply of a product to a large extent.

Industry structure
The supply of goods is also dependent on the structure of the industry in which a firm is operating. If there is
monopoly in the industry, the manufacturer may restrict the supply of his/her goods with an aim to raise the prices
of goods and increase profits.

Supply Function
Supply function is the mathematical expression of law of supply. In other words, supply function quantifies the
relationship between quantity supplied and price of a product, while keeping the other factors at constant.

The law of supply expresses the nature of the relationship between quantity supplied and price of a product, while
the supply function measures that relationship.
The supply function can be expressed as:

Qs = f (Pa, Pb, Pc, T, Tp)

Where,
Qs = Supply
Pa = Price of the good supplied
Pb = Price of other goods
Pc = Price of factor input
T = Technology
Tp = Time Period
According to the supply function, the quantity supplied of a good (Qs) varies
with the price of that good (Pa), the price of other goods (Pb), the price
of factor input (Pc), the technology used for production (T), and time period
(Tp)

What is the Law of Supply?

The law of supply states that the relationship between price and supply of a product.
According to the law of supply, the quantity supplied increases with a rise in the price of a product and vice versa
while other factors are constant. The other factors may include customer preferences, size of the market, size of
population, etc.

Law of Supply Example

For example, in the case of rise in a product’s price, sellers would prefer to increase the production of the product to
earn high profits, which would automatically lead to an increase in supply.
Similarly, if the price of the product decreases, the supplier would decrease the supply of the product in the market
as he/ she would wait for a rise in the price of the product in the future.

Thus, the law of supply states a direct relationship between the price of a product and its supply. Therefore, both
price and supply moves in the same direction.

Law of Supply Definition

The law of supply defined as: “Other things remaining unchanged, the supply of a good produced and offered for
sale will increase as the price of the good rises and decrease as the price falls.”
To understand the law of supply, it is important to discuss the concepts of demand schedule and demand curve.

Assumptions of Law of Supply

Like the law of demand, the law of supply also follows the assumption of ceteris paribus, which means that ‘other
things remain unchanged or constant’.
As mentioned earlier, the supply of a commodity is dependent on many factors other than price, such as consumers’
income and tastes, price of substitutes, natural factors, etc.

All the factors other than the price are assumed to be constant. The law of supply works on certain
assumptions which are given as follows:
Assumptions of Law of Supply are:
• The income of buyers and sellers remains unchanged.
• The commodity is measurable and available in small units.
• The tastes and preferences of buyers remain unchanged.
• The cost of all factors of production does not change over a period of time.
• The time period under consideration is short.
• The technology used remains constant.
• The producer is rational.
• Natural factors remain stable.
• Expectations of producers and the government policy do not change over time.

The law of supply can be explained through a supply schedule and a supply curve.

What is Supply Schedule?

In economics, a Supply schedule is defined as a tabular representation of the law of supply. It represents the
quantities of a product supplied by a supplier at different prices and time periods, keeping all other factors constant.

Types of Supply Schedule

There can be two types of supply schedules and those are explained below:
1. Individual supply schedule
2. Market supply schedule
Types of Supply Schedule

Individual Supply Schedule

Individual supply schedule: This schedule represents the quantities of a product supplied by an individual firm or
supplier at different prices during a specific period of time, assuming other factors remain unchanged.
Example
Let us understand the individual supply schedule with the help of an example. Table shows the supply schedule of a
firm supplying commodity A:

PRICE OF THE PRODUCT QUANTITY SUPPLIED OF COMMODITY A

(₹ PER KG) (KG PER WEEK)

5 3,000

10 8,000

15 12,000

20 15,000
From Table, it is clear that the firm is supplying 3,000 kg per week of commodity A at a price of 5 per kg. As the price
rises from 5 to 10 per kg, the firm also increased the supply to 8,000 per kg. Therefore, the individual supply
schedule shown in Table indicates that the quantity supplied increases with a rise in price.
Market supply schedule
Market supply schedule: This schedule represents the quantities of a product supplied by all firms or suppliers in
the market at different prices during a specific period of time, while other factors are constant.
In other words, market supply schedule can be defined as the summation of all individual supply schedules. Table
shows the market supply schedule of two firms X and Y for commodity A:

Example
PRICE OF QUANTITY SUPPLIED BY QUANTITY SUPPLIED BY MARKET
PRODUCT FIRM X FIRM Y SUPPLY
A (1000 KG PER WEEK) (1000 KG PER WEEK) (1000 KG PER
(₹ PER KG) WEEK)

5 3 7 10

10 8 12 20

15 12 15 27

20 15 17 32
In Table 3.2, market supply is calculated by combining the quantities supplied by firm X and Y. It also shows when
the commodity is priced at ₹5 per kg, the market supply of commodity A is 10,000 kg per week. When the price rises
to ₹10 per kg, the market supply also increases to 20,000 per kg. So it can be observed, that a rise in price of the
commodity A increases the market supply.

What is Supply Curve?

Supply Curve definition: In economics, supply curve is a graphical representation of supply schedule is
called supply curve.
In a graph, the price of a product is represented on Y-axis and quantity supplied is represented on X-axis.
Types of Supply Curve
In, economics, Supply curve can be of two types, individual supply curve and market supply curve. These two types
of supply curves are explained as follows:
Types of Supply Curve are:

1. Individual supply curve

2. Market Supply curve
Types of Supply Curve

Individual supply curve

Individual supply curve: It is the graphical representation of individual supply schedule.
The individual supply schedule of commodity A represented in Table when plotted on a graph will provide the
individual supply curve, which is shown in Figure.

PRICE OF THE PRODUCT QUANTITY SUPPLIED OF COMMODITY A

(₹ PER KG) (KG PER WEEK)

5 3,000

10 8,000

15 12,000

20 15,000
 Individual Supply Curve
The slope moving upwards to the right in individual supply curve shows the direct relationship between supply and
price, i.e. increase in supply along with the rise in prices.

Market Supply curve

Market Supply curve: It is the graphical representation of market supply schedule.
The market supply schedule of commodity A (supplied by Firm X and Firm Y) represented in Table, when plotted on
the graph will provide the market supply curve, which is shown in Figure.

Example
PRICE OF QUANTITY SUPPLIED BY QUANTITY SUPPLIED BY MARKET
PRODUCT FIRM X FIRM Y SUPPLY
A (1000 KG PER WEEK) (1000 KG PER WEEK) (1000 KG PER
(₹ PER KG) WEEK)

5 3 7 10

10 8 12 20
 PRICE OF QUANTITY SUPPLIED BY QUANTITY SUPPLIED BY MARKET
PRODUCT FIRM X FIRM Y SUPPLY
A (1000 KG PER WEEK) (1000 KG PER WEEK) (1000 KG PER
(₹ PER KG) WEEK)

15 12 15 27

20 15 17 32

Market Supply Curve

Exceptions of Law of Supply

According to the law of supply, if the price of a product rises, the supply of the product also rises and vice versa.

However, there are certain conditions where the law of supply is not applicable. These conditions are known as
exceptions to the law of supply. In such cases, the supply of a product falls with the increase in the price of a product
at a particular point of time.

For example, there would be a decrease in the supply of labour in an organisation when the rate of wages is high.
The exception to the law of supply is represented on the regressive supply curve or backward sloping curve. It is
also known as an exceptional supply curve.
Exceptions of Law of Supply are:
1. Agricultural products
2. Goods for auction
3. Expectation of change in prices
4. Supply of labour
Exceptions of Law of Supply
Let us discuss important exceptions to the law of supply in detail.
Agricultural products
The law of exception is not applicable to agricultural products. The production of these products is dependent on so
many factors which are uncontrollable, such as climate and availability of fertile land.

Thus, the production of agricultural products cannot be increased beyond a limit. Therefore, even a rise in price
cannot increase the supply of these products beyond a limit.

Goods for auction

Auctions goods are offered for sale through bidding. Auction can take place due to various reasons, for instance, a
bank may auction the assets of a customer in case of his failure in paying off the debts over a period of time.

Thus, supply of these goods cannot increase or decrease beyond a limit. In case of these goods, a rise or fall in price
does not impact the supply.

Expectation of change in prices

Law of supply is not applicable under the circumstances when there is an expectation of change in the prices of a
product in the near future.

For instance, if the price of wheat rises and is expected to increase further in the next few months, sellers may not
increase supply and store huge quantities in the hope of achieving profits at the time of a price rise.

Supply of labour
The law of supply fails in the case of labour. After a certain point, the rise in wages does not increase the supply of
labour. At higher wages, labour prefers to work for lesser hours. This happens due to change in preference of labour
for leisure hours.

Shifts and Movement along Supply Curve

In economics, like demand, change in quantity supplied and change in supply are two different concepts.

1. Expansion and Contraction of Supply(Change in quantity supplied )

2. Increase and Decrease In Supply (Change in supply )

what causes a shift in the supply curve

1.Change in quantity supplied occurs due to rise or fall in product prices while other factors are constant.
• It can be measured by the Movement along Supply Curve.
• The term, Change in quantity supplied refers to expansion or contraction of supply.
2.Change in supply refers to increase or decrease in the supply of a product due to various determinants of supply
other than price (in this case, price is constant).
• It is measured by shifts in supply curve.

Expansion and Contraction of Supply

Expansion or Extension of Supply
Expansion or extension of Supply: When there are large quantities of a good supplied at higher prices, it is known
as expansion or extension of supply. Contraction of Supply: When there are lesser quantities of a good supplied at
lower prices, it is known as contraction of supply.

Figure shows the movement of the supply curve:

 Expansion and Contraction of supply
In Figure, quantity supplied at price OP1 is OQ1. When the price rises to OP2, the quantity supplied also increases to
OQ2, which is shown by the upward movement from A1 to A2 (it is pointed by the direction of the arrow between A1
to A2). This upward movement is known as the expansion of supply.
Contraction of supply occurs when smaller quantities of goods are supplied even at reduced prices.
On the contrary, a fall in price from OP1 to OP3 results in a decrease in supply from OQ1 to OQ2. This movement
from A1 to A3 shown by the arrow pointed downwards is known as the contraction of supply. Thus, the movement
from A1 to A3 is the representation of the expansion and contraction of the quantity supply

Increase and Decrease In Supply

Increase In Supply
An increase in supply takes place when a supplier is willing to offer large quantities of products in the market at the
same price due to various reasons, such as improvement in production techniques, fall in prices of factors of
production, and reduction in taxes.
Decrease In Supply
A decrease in supply occurs when a supplier is willing to offer small quantities of products in the market at the
same price due to increase in taxes, low agricultural production, high costs of labour, unfavourable weather
conditions, etc.What is Supply Schedule?

Supply curve shifts

A shift takes place in supply curve due to the increase or decrease in supply, which is shown in Figure.

Increase and Decrease in Supply

In Figure, an increase in supply in indicated by the shift of the supply curve from S1 to S2. Because of an increase in
supply, there is a shift at the given price OP, from A1 on supply curve S1 to A2 on supply curve S2. At this point, large
quantities (i.e. Q2 instead of Q1) are offered at the given price OP.
On the contrary, there is a shift in supply curve from S1 to S3 when there is a decrease in supply. The amount
supplied at OP is decreased from OQ1 to OQ3 due to a shift from A1 on supply curve S1 to A3 on supply curve S3.
However, a decrease in supply also occurs when producers sell the same quantity at a higher price (which is shown
in Figure) as OQ1 is supplied at a higher price OP2.

The Elasticity of Supply Definition

The price elasticity of supply is a measure of the degree of responsiveness of the quantity supplied to the
change in the price of a given commodity. It is an important parameter in determining how the supply of a
particular product is affected by fluctuations in its market price. It also gives an idea about the profit that could be
made by selling that product at its price difference. In this article, we will discuss the elasticity of the supply
formula, different types of elasticity of supply, the supply curve characteristics, and many more.

The price elasticity of supply refers to the response to a change in a good or service's price by the supply of that
good or service. According to basic economic theory, the supply of goods decreases when its price increases.

Similarly, one can also study the price elasticity of demand. This illustrates how easily the demand for a product
can change based on changes in price. Price changes fairly rapidly if the price of a product changes. This is known
as price elasticity of demand.

Price Elasticity of Supply Formula

After having understood the elasticity of supply definition in economics, we now move to the elasticity of supply
formula which is based on its definition.
Here ES denotes the elasticity of supply which is equal to the percentage change in quantity supplied divided by
the percentage change in the price of the commodity.
Types of Elasticity of Supply
Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit elastic supply, less than unit
elastic, and perfectly inelastic. Read below to know them in more detail.
1. Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is infinite.
This means that even for a slight increase in price, the supply becomes infinite. For a perfectly elastic supply,
the percentage change in the price is zero for any change in the quantity supplied.
2. More than Unit Elastic Supply: When the percentage change in the supply is greater than the percentage
change in price, then the commodity has the price elasticity of supply greater than 1.
3. Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its quantity supplied
is proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to 1.
4. Less than Unit Elastic Supply: When the change in the supply of a commodity is lesser as compared to
the change in its price, we can say that it has a relatively less elastic supply. In such a case, the price
elasticity of supply is less than 1.
5. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the percentage change in
the quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply
applies to exclusive items. For example, a designer gown styled by a famous personality.
The point to be noted is that the elasticity of supply is always a positive number. This is because the law of supply
states that the quantity supplied is always directly proportional to the change in the price of a particular commodity.
This means that the supply of a product either increases or remains the same with the increase in its market price.

Determinants of Price Elasticity of Supply

• Marginal Cost- As the cost of producing one more unit is rising with output or Marginal Costs (which are
the increased costs related to each additional unit produced) are rising rapidly with output, then the rate of
output production will be limited, i.e Price Elasticity of Supply will be inelastic., which means that the
percentage of quantity supplied changes less than the change in price. However, if Marginal Cost rises
slowly, then Supply will be elastic.
• Time- As the price elasticity of supply increases over time, producers would increase the quantity supplied
by a greater percentage than the price increases.
• Number of Firms- It is more likely that the supply will be elastic when there are a large number of firms.
This occurs because other firms can step in to fill the supply gap.
• Mobility of Factors of Production- When the factors of production are mobile, then the price elasticities of
supply are higher. This means that labor and other manufacturing inputs may be imported from other regions
to quickly increase production.

The Elasticity of Supply Curves

We have previously inferred the elasticity of supply definition, the elasticity of supply formula, and its various types.
Let us now have a look at how these different values of the price elasticity of the supply formula are plotted on the
graph.
Keeping the quantity supplied on the X-axis and the price of the commodity on the Y-axis, we can draw certain
conclusions from the different values of elasticity of the supplied formula.

The graphs below show us the relationship between the different types of elasticity of supply and helps in
understanding the elasticity of supply definition better.
Alfred Marshall, a British economist, gave the concept of elasticity of demand and supply in his book “Principles
of Economics” in 1890. He was the one to define the elasticity of supply and deduced the price elasticity of the
supply formula. He also explained that the prices of some goods such as medications, salt, gasoline, etc. can
increase without reducing their demand in the market, which means that their prices are inelastic. This is because
these goods are crucial to the everyday lives of consumers.