Demand & Supply

What is Demand?
• Demand is a ‘desire’ backed by ‘ability’ and ‘willingness’ to
pay for a commodity.

• The demand for anything at a given price is the amount of it

which will be bought per unit of time at that price.
 Demand Curve (Law of Demand)

d
P1
P
P2
d
0 D1 D D2
Generally the demand curve slopes downward from left to right. It
represents the relation between quantity demanded and price, other
things being equal.
The law of demand states that demand varies inversely with price, not
necessarily proportionately.
• The demand for individual consumer is called
individual demand
• The total amount of a commodity that all
households with to purchase is called the
quantity demanded of that commodity.
 What determines quantity demanded?

• Commodity’s own price

• Average household income
• Prices of related commodities
• Tastes
• Distribution of income among households
• Size of the population
 Demand Schedule

• A demand schedule is one way of showing the

relationship between quantity demanded and
price. It is a numerical tabulation showing the
quantity that is demanded at selected prices.
Price (per kg) Quantity Demanded
100 Rs. 10 Kg
70 Rs. 13 kg
50 Rs. 17 kg
25 R. 21 kg
 Shifts in demand curve
A demand curve is drawn on the assumption that everything except the commodity’s
own price is held constant. A change in any of the variables previously held
constant will shift the demand curve to a new position. (Factors like change in
preferences, income, expectation about future rise in price etc )
 Types of goods

• Normal goods
• Substitute goods – A good or service which can be used instead
of another. If the price of substitute goods increases, the demand
curve will shift upward and vice versa.
• Complementary goods – a relation between two goods or
services in which a rise in the price of one decreases demand for
the other. A fall in price of a complementary good will shift a
commodity’s demand curve to the right. More will be purchased
at each price.
• Giffen goods – a good for which quantity demanded falls when
its price falls. A giffen good must be inferior and also have poor
substitutes.
• Increase or decrease in demand curve – means the
complete shift of demand curve.

• Expansion or contraction of demand curve –

means the movement along the same demand curve.
• One reason consumers buy more of a commodity when its
price is lower is because you can increase your total utility or
the amount of ''satisfaction'' you can gain from your income. If
you have a fixed income and you like tomatoes, if the price of
tomatoes falls, then you can buy more of them.
• This is called an income effect. Lower prices mean you have
more purchasing power; effectively, your real income has
effectively risen, because your income can buy more tomatoes.
 Supply

• The amount of a commodity that firms with to sell is

called the quantity supplied of that commodity.
Determinants of quantity supplied
 Commodity’s own price
 Price of inputs
 Goals of firms
 State of technology
A basic economic hypothesis is that, for many commodities, the
higher the price of the commodity, the larger the quantity that
will be supplied, other things being equal.
• Supply schedule shows the quantities that producers would
wish to sell at alternative prices of the commodity.
• A supply curve is the graphical representation of the supply
schedule. It represents the relation between quantity supplied
and price, other things being equal.
• A movement along the supply curve indicates a change in the
quantity supplied in response to a change in the price of the
commodity. A change in price causes a contraction or
expansion of supply. These, as you will recall, are movements
along a given supply curve.
 Shift in supply
• A shift in supply curve means that at each price a
different quantity will be supplied than previously.
 How do the two forces interact to determine price?
The concept of Equilibrium

Equilibrium occurs where the quantity demanded equals quantity

supplied – where there is neither excess demand not excess
supply. The price at which the quantity demanded equals the
quantity supplied is called the equilibrium price.