# Demand & Supply

DEMAND DEFINED
P \$5 4 3 2 1 QD 10 20 35 55 80
A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices.

LAW OF DEMAND

An inverse relationship exists between price and quantity demanded

 As Price Falls« «Quantity Demanded Rises  As Price Rises« «Quantity Demanded Falls

GRAPHING DEMAND
Price of Corn

P

CORN

\$5

P \$5 4 3 2 1

QD 10 20 35 55 80

Plot the Points

4

3

2

1

o

10 20 30 40 50 60 70 80 Quantity of Corn

Q

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 20 35 55 80 Plot the Points 4 3 2 1 o 10 20 30 40 5055 60 70 80 Quantity of Corn Q .

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 20 35 55 80 Plot the Points 4 3 2 1 o 10 20 30 40 50 60 70 80 35 Quantity of Corn Q .

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 20 35 55 80 Plot the Points 4 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q .

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 20 35 55 80 Plot the Points 4 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q .

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 20 35 55 80 Connect the Points 4 3 2 1 D 10 20 30 40 50 60 70 80 Quantity of Corn o Q .

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 20 35 55 80 4 3 2 What if Demand Increases? D 10 20 30 40 50 60 70 80 Quantity of Corn 1 o Q .

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 30 20 40 35 60 55 80 80 + 4 Increase in Quantity Demanded 3 2 1 Increase in Demand 10 20 30 40 50 60 70 80 Quantity of Corn D¶ D Q o .

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 20 35 55 80 4 3 2 What if Demand Decreases? D 10 20 30 40 50 60 70 80 Quantity of Corn 1 o Q .

GRAPHING DEMAND Price of Corn P CORN \$5 P \$5 4 3 2 1 QD 10 -20 10 35 20 55 40 80 60 4 Decrease in Quantity Demanded 3 2 1 Decrease in Demand 10 20 30 40 50 60 70 80 Quantity of Corn D D¶ Q o .

In other words the rate of total utility decreases as more and more units are consumed .the utility gained from successive units goes on decreasing .Law of Diminishing Marginal Utility  Law± As a consumer increases the consumption of a product .

Law of Diminishing Marginal Utility .

DETERMINANTS OF DEMAND  Tastes  Number of Buyers  Income ± Normal (Superior) & Inferior Goods  Prices of Related Goods ± Substitutes & Complements ± Unrelated Goods  Expectations .

SUPPLY DEFINED CORN Supply is a schedule or a curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices. P \$1 2 3 4 5 QS 5 20 35 50 60 .

LAW OF SUPPLY A direct relationship exists between price and quantity supplied  As Price Rises« «Quantity Supplied Rises  As Price Falls« «Quantity Supplied Falls .

GRAPHING SUPPLY Price of Corn P Plot the Points CORN \$5 4 3 2 1 P \$5 4 3 2 1 20 30 40 50 60 70 80 Quantity of Corn QS 60 50 35 20 5 o 5 10 Q .

GRAPHING SUPPLY Price of Corn P Plot the Points CORN \$5 4 3 2 1 P \$5 4 3 2 1 10 20 30 40 50 60 70 80 Quantity of Corn QS 60 50 35 20 5 o Q .

GRAPHING SUPPLY Price of Corn P Plot the Points CORN \$5 4 3 2 1 P \$5 4 3 2 1 10 20 3035 40 50 60 70 80 Quantity of Corn QS 60 50 35 20 5 o Q .

GRAPHING SUPPLY Price of Corn P Plot the Points CORN \$5 4 3 2 1 P \$5 4 3 2 1 10 20 30 40 50 60 70 80 Quantity of Corn QS 60 50 35 20 5 o Q .

GRAPHING SUPPLY Price of Corn P Plot the Points CORN \$5 4 3 2 1 P \$5 4 3 2 1 10 20 30 40 50 60 70 80 Quantity of Corn QS 60 50 35 20 5 o Q .

GRAPHING SUPPLY Price of Corn P \$5 S CORN 4 P QS \$5 4 3 2 1 60 50 35 20 5 3 2 1 Connect the Points 10 20 30 40 50 60 70 80 Quantity of Corn o Q .

GRAPHING SUPPLY Price of Corn P \$5 S CORN 4 3 2 What if Supply Increases? 10 20 30 40 50 60 70 80 Quantity of Corn P QS \$5 4 3 2 1 Q 1 60 50 35 20 5 o .

GRAPHING SUPPLY Price of Corn P \$5 4 Increase in Supply S S¶ CORN P QS \$5 4 3 Increase 2 in Quantity 1 Supplied Q 3 2 1 60 80 50 70 35 60 20 45 5 30 o 10 20 30 40 50 60 70 80 Quantity of Corn .

GRAPHING SUPPLY Price of Corn P \$5 S CORN 4 3 2 What if Supply Decreases? 10 20 30 40 50 60 70 80 Quantity of Corn P QS \$5 4 3 2 1 Q 1 60 50 35 20 5 o .

GRAPHING SUPPLY Price of Corn Decrease P S¶ S CORN \$5 in Supply 4 P QS \$5 4 3 Decrease 2 in Quantity 1 Supplied 60 45 50 30 35 20 20 0 5 -- 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q .

DETERMINANTS OF SUPPLY  Resource Prices  Technology  Taxes & Subsidies  Prices of Other Goods  Price Expectations  Number of Sellers .

DETERMINANTS OF SUPPLY  Resource Prices  Technology Combining  Taxes & with Subsidies  Prices DemandGoods of Other  Price Expectations  Number of Sellers .

000 16.000 7.000 7.000 x E L L E R S 10.000 1.000 11.000 P QS \$5 4 3 2 1 60 50 35 20 5 MARKET 200 SUPPLY S 12.000 EQUILIBRIUM .MARKET DEMAND & SUPPLY BUSHELS OF CORN P \$5 4 3 2 1 QD 10 20 35 55 80 MARKET BUSHELS OF CORN 200 DEMAND B 2.000 x U Y E R S 4.000 4.

000 1 16.000 4.MARKET DEMAND & SUPPLY Price of Corn CORN MARKET P \$5 S CORN MARKET P QD \$5 2.000 4 4.000 10.000 1.000 o 78 10 12 14 16 Q Quantity of Corn .000 7.000 2 11.000 3 7.000 4 3 2 1 P Market \$5 Clearing Equilibrium 4 3 2 1 D 2 4 6 Q S 12.

000 1 16.000 4 4.000 10.000 7.000 2 11.000 4.000 4 3 2 1 P more is being \$5 supplied than 4 demanded 3 2 1 D 2 4 6 Q S 12.000 1.MARKET DEMAND & SUPPLY Price of Corn CORN MARKET P \$5 Surplus S At a \$4 price CORN MARKET P QD \$5 2.000 o 78 10 12 14 16 Q Quantity of Corn .000 3 7.

000 4 4.MARKET DEMAND & SUPPLY Price of Corn CORN MARKET P \$5 S At a \$2 price CORN MARKET P QD \$5 2.000 1.000 2 11.000 o 78 101112 14 16 Q Quantity of Corn .000 1 16.000 3 7.000 10.000 7.000 4.000 4 3 2 1 P more is being \$5 demanded than 4 3 supplied 2 1 Shortage D 2 4 6 Q S 12.

000 4.000 1.MARKET DEMAND & SUPPLY Price of Corn CORN MARKET P \$5 Surplus S CORN MARKET P QD \$5 2.000 1 16.000 10.000 7.000 o 78 101112 14 16 Quantity of Corn .000 3 7.000 4 4.000 2 11.000 4 3 2 1 Shortage 2 4 6 P \$5 4 3 2 1 D Q Q S 12.

MARKET EQUILIBRIUM Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded  Changes in Supply  Changes in Quantity Supplied     .

Multiple Shifts« Complex Cases  Supply Increases. Demand Decreases ±Prices Decrease ±Quantity Indeterminate  Supply Decreases. Demand Increases ±Price Increases ±Quantity Indeterminate .

Demand Increases ±Prices Indeterminate ±Quantity Increases  Supply Decreases. Demand Decreases ±Price Indeterminate ±Quantity Decreases .Multiple Shifts« Complex Cases  Supply Increases.

Government Set Prices  Price Ceilings ±Shortages ±Rationing Problem ±Black Markets ±Rent Controls  Price Floors ±Surpluses .

 Excess Demand (Shortage) Created by a Price Ceiling . usually set by government.Price Ceiling A maximum price that sellers may charge for a good.

 Black market A market in which illegal trading takes place at market-determined prices. .Price ceiling  Price Rationing :The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.  Ration coupons Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month.

Agricultural Products . Minimum wage A price floor set under the price of labor.PRICE FLOORS Price floor A minimum price below which exchange is not permitted.

However. In fact. the direct demand for a product is not contingent upon the demand for other products. the demand for gas in a fertilizer plant depends on the amount of fertilizer to be produced and substitutability between gas and coal as the basis for fertilizer production. the quantity of demand for the final output as well as the degree of substitutability/complementarty between inputs would determine the derived demand for a given input. derived demand refers to demand for goods which are needed for further production. . machine tools and equipments. its demand depends on the demand for output where the input enters.Direct and Derived Demands Direct demand refers to demand for goods meant for final consumption.  Thus the demand for an input or what is called a factor of production is a derived demand. it is the demand for producers¶ goods like industrial raw materials. readymade garments and houses. By contrast. it is the demand for consumers¶ goods like food items.  For example.

coal has both domestic and industrial demand.  For example.Domestic and Industrial Demands  The example of the refrigerator can be restated to distinguish between the demand for domestic consumption and the demand for industrial use. and the distinction is important from the standpoint of pricing and distribution of coal . this distinction is very meaningful. In case of certain industrial raw materials which are also used for domestic purpose.

its demand is called induced or derived. In the present world of dependence. . all direct demand may be loosely called autonomous. the demand for all producers¶ goods is derived or induced. on the other hand. The demand for butter (sugar) may be induced by the purchase of bread (tea).  Autonomous demand. Consider the complementary items like tea and sugar. is not derived or induced.  For example. there is hardly any autonomous demand.Autonomous and Derived Demand  When the demand for a product is tied to the purchase of some parent product. As stated above. Unless a product is totally independent of the use of other products. Even then. it is difficult to talk about autonomous demand. Nobody today consumers just a single commodity. bread and butter etc. the demand for cement is induced by (derived from) the demand for housing. everybody consumes a bundle of commodities.

. The former refers to final output like bread or raw material like cement which can be used only once. such assets like furniture or washing machine. they are considered to be an addition to stock of assets or wealth. when durable items are purchased. The latter refers to items like shirt. suffer depreciation and thus call for replacement.Perishable and Durable Goods¶ Demands  Both consumers¶ goods and producers¶ goods are further classified into perishable/non-durable/single-use goods and durable/nonperishable/repeated-use goods. So. car or a machine which can be used repeatedly. Because of continuous use.  Non-durable items are meant for meeting immediate (current) demand. but durable items are designed to meet current as well as future demand as they are used over a period of time.

B is a middle-income consumer and C is in the low-income group. You may note that both individual and market demand schedules (and hence curves. A is a high income consumer.Individual and Market Demands  We may distinguish between the demand of an individual buyer and that of the market which is the market which is the aggregate of individuals. For example. when plotted) obey the law of demand. But the purchasing capacity varies between individuals. This information is useful for personalized service or target-group-planning as a part of sales strategy formulation .

an industry¶s demand). In fact.  For example. Thus the firm¶s demand is similar to an individual demand.all these are possible explanatory factors.. You may examine this distinction from the standpoint of both output and input. Similarly. You can appreciate that the determinants of a company¶s demand may not always be the same as those of an industry¶s. a clear understanding of the relation between company and industry demands necessitates an understanding of different market structures. you may think of the demand for cement produced by the Cement Corporation of India (i. ..e. which is an example of demand for an input. market leadership and competitiveness. or the demand for cement produced by all cement manufacturing units including the CCI (i. The inter-firm differences with regard to technology.Firm and Industry Demands  An industry is the aggregate of firms (companies). whereas the industry¶s demand is similar to aggregated total demand.e. financial position. a company¶s demand). market (demand) share. there may be demand for engineers by a single firm or demand for engineers by the industry as a whole. product quality.