LAW OF DEMAND

“A RISE IN THE PRICE OF A COMMODITY OR

SERVICE IS FOLLOWED BY A REDUCTION IN
THE QUANTITY DEMANDED & FALL IN THE
PRICE IS FOLLOWED BY A EXTENSION IN
QUANTITY DEMANDED, WITH OTHER
CONDITIONS REMAINING THE SAME.”
EXCEPTIONS TO THE LAW OF DEMAND

• INFERIOR GOODS
• Price of bajra
• PRESTIGIOUS GOODS
• Price of Diamonds
• HIGH PRICE COMMODITIES
• Price of superior products
• FEAR OF SHORTAGE
EXTENSION & CONTRACTION IN DEMAND

• Buying more quantity of commodity at a lower

price (EXTENSION)
• Buying less quantity of commodity at higher
price.
• “Change in quantity demanded due to change
in price.”
 SHIFT IN DEMAND
“Change in demand due to change in the values
of other variables influencing demand”

• More demand at the same price or same

demand at higher price.(Increase)

• Less demand at the same price or same

demand at lower price.
 LAW OF DEMAND
• FACTORS AFFECTING DEMAND
• TASTE & PREFERENCES:
• Influenced by fashions, ads ,custom ,habits ,season & population
changes.
• INCOME:
• Changes in the income leads to the shift in demand.
• PRICE OF OTHER RELATED GOODS:
• Substitutes
– Rise in price of one good result in increase in demand for the other good
• Complements
– Rise in price of one good brings down the demand for the other good

.
 LAW OF DEMAND
• HABITS:
• Tobacco
• REGION:
• Demand for high woolen clothing, meat in high
altitude regions.
• SEASON:
• Demand for eggs.
 ELASTICITY OF DEMAND

“The relative change in the quantity demanded

to the relative change in the price”

“Rate at which quantity demanded changes

because of change in price”
 ELASTICITY OF DEMAND
• TYPES:
• Price elasticity of demand(Ed)

• Income elasticity of demand(Ei)

• Cross elasticity of demand(Exy)

 ELASTICITY OF DEMAND
• PRICE ELASTICITY OF DEMAND(Ed)

• It shows the responsiveness of quantity demanded of a

commodity when the price of that commodity changes.

» Ed = % change in quantity demand / % change in PRICE

» Ed = change in quantity ÷ initial quantity x 100 / change in price ÷
initial price x 100
 ELASTICITY OF DEMAND
• INCOME ELASTICITY OF DEMAND (Ei):
• It shows the responsiveness of quantity demanded
due to change in the income.

» Ei = % change in quantity demand / % change in INCOME

» Ei = change in quantity ÷ initial quantity x 100 / change in income
÷ initial income x 100
 ELASTICITY OF DEMAND
• CROSS ELASTICITY OF DEMAND(Exy)
• Demand for one good (X) is influenced by the price of
other related good (Y).
• Substitute or Complements.
» Exy = % change in quantity demand of commodity (X) / %
change in price of related commodity (Y)

» Exy = change in quantity (X) ÷ initial quantity (X) x 100 /

change in income (Y) ÷ initial income (Y) x 100
 DEGREES OF ELASTICITY OF DEMAND
• PERFECTLY ELASTIC DEMAND
• A slightest change in price of a commodity leads to an
indefinite change in quantity demanded.
• Demand in such a situation is said to be perfectly elastic.
• Parallel to X-axis
• PERFECTLY INELASTIC DEMAND
• Change in price of a commodity leaves the quantity
demanded unaffected.
• Demand in such a situation is said to be
inelastic(Insensitive)
• Vertical to X-axis
 DEGREES OF ELASTICITY OF DEMAND

• RELATIVELY ELASTIC DEMAND:

• A small proportionate fall in the price is accompanied
by a larger proportionate increase in demand.
• RELATIVELY INELASTIC DEMAND:
• A large proportionate fall in the price is accompanied
by a smaller proportionate increase in demand.
• UNITARY ELASTIC DEMAND:
• A given proportionate fall in the price is followed by a
same proportionate increase in demand.
 FACTORS DETERMINING ELASTICITY OF
DEMAND
• TYPE OF GOOD
• Demand is inelastic for necessaries & elastic for luxuries.
• GOODS HAVING SAVERAL USES
• Demand is elastic.
• EXISTENCE OF SUBSTITUTES
• Demand is elastic
• POSSIBILITIES OF POSTPOENMENT
• Demand is elastic
• RANGE OF PRICES
• Demand is inelastic
 SUPPLY
• SUPPLY:
• Quantity of good or service offered by a producer for
sale at different unit prices in a given market at a point
of time.

• A schedule which shows the various amount of a

product which a producer is willing to & able to
produce & make available for sale in a market at each
specific price in a set of possible prices during some
given period.
 STOCK
• Stock is the amount of output that exists in
market.
• Depending on the demand for commodity
stock is converted into supply.
• Stock & supply for perishable commodities are
same.
• Stock & supply for durable commodities are
different.
 INDIVIDUAL SUPPLY
• Supply schedule depicts the list of quantities-
price relationships of a commodity in a market
at a specific point of time by an individual
seller.
PRICE(Rs/Q) QUANTITY SUPPLIED (Q)
300 30
325 40
350 50
375 60
400 70
 MARKET SUPPLY
• It is the sum of quantity of commodity that is
brought into a market for sale by sellers at a
specific point of time.

PRICE SELLER’S SELLER’S SELLER’S MARKET

(Rs/Q) SUPPLY (A) SUPPLY (B) SUPPLY (C) SUPPLY
300 30 35 0 65
325 40 50 0 90
350 50 65 50 165
375 60 80 70 210
400 70 95 90 255
425 80 110 110 300
 LAW OF SUPPLY

“As the price of commodity rises its supply

extends & as the price falls its supply
contracts, with other things remaining the
same”
 LAW OF SUPPLY
• As price increases sellers are committed to
increase their sales.

• When a supply schedule plotted on a graph it

becomes a supply curve.
 LAW OF SUPPLY
• CHANGE IN QUANTITY SUPPLIED:

Movement of product supply on the same

supply curve
• EXTENSION
» Offering more quantity for sale at higher price
• CONTRACTION
» Offering less quantity for sale at lower price
 LAW OF SUPPLY
• SHIFT IN SUPPLY:
• INCREASE
» More supply at the same price
• DECREASE
» Less supply at the same price.