UNIT ± 4 DEMAND AND SUPPLY ANALYSIS Definition of Demand Cardinal and Ordinal Approaches of Demand Elasticity of Demand Supply


Demand -Definition
‡The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price . ‡The quantity of a good buyers wish to purchase at each conceivable price. ‡The demand of a product refers to the amount of it which will be brought per unit of time at a particular price.

Demand =Desire + Ability to pay + Will to spend ‡ Demand is always relative to Price and Time ‡ Demand may be viewed Ex-Ante (Potential D) or Ex-post (actual amount purchased) .‡ Demand is the desire or want backed up by money.

Demand can be viewed at two levels Individual Level ²demand for a commodity from the individual point of view. taken together. And Market Level ---The total demand of all buyers. .

Preferences Advertisement Effect Income Rel. prices of other goods² complementary and substitution products ‡ Consumer expectations .Determinants of Individual Demand ‡ ‡ ‡ ‡ ‡ Price Tastes. Habits.

Determinants of Market Demand ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Distribution of Income and Wealth in Community # of Buyers and Population Growth Price Community Common Habits and Scale of Preferences Standard of Living and Sending Habits Age Structure and Sex Ratio of Population Future expectations Tax and Tax Structures Inventions and Innovations Fashion Climate and Weather Customs Advertisement and Sales Propaganda .

Income f(M) and Cross Demand Dx=f(Py) .Types of Demand ‡ ‡ ‡ ‡ ‡ ‡ ‡ Demand for Consumer¶s and Producer¶s Goods Demand for Perishable and Durable Goods Autonomous and Derived Demand Industry and Company Demand S-R Demand and L-R Demand Joint and Composite Demand Price f(P).

the higher the price of a commodity.) Qt. D=f(P) D-demand. f-functional relationship. ‡ ‡ ‡ P of commodity X (in Rs. Indicates inverse relation. Dx= f(Px)---Downward Sloping Demand Curve. p-price. larger the quantity demanded. the smaller is the quantity demanded and lower the price.The Law Of Demand ‡ ‡ Stated by Alfred Marshall. Demanded (in units/week) D 5 4 Price 3 2 1 D 5 4 3 2 1 100 200 300 400 500 100 200 300 400 500 Demand . Ceteris Paribus.

Assumptions ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ No change in income No change in in Preferences No change in Fashion No change in price of related goods No expectation of future Price changes or shortages No change in size. age and Sex ratio of the population No change in range of goods available No change in Govt Policy No change in weather conditions .

demand also rises. D P2 Price P1 D Q1 Demand Q2 .Exceptional Demand Curve (Upward Sloping Demand Curve) Contrary to the Law of Demand. Have upward sloping demand curve. with a fall in price. Demand also falls and a with a rise in price. in some cases. Shows Direct functional relationship.

Cheap Potatoes(good potatoes) Vegetable Ghee( Pure Ghee) Pucca rice (Basmati Rice) ‡ Articles of Snob Appeal ± Certain goods are demanded just coz they are expensive or prestige ± goods and have a snob appeal. Qt. ± Satisfy the aristocratic desire to preserve exclusiveness for unique goods. Diamonds.Few Exceptional Cases ‡ Giffen Goods (named after Robert Giffen) For inferior goods. purchased decreases coz of the -ve income effect and people¶s increasing preferences for a superior commodity with the increase in real income. ± Purchased by fewer rich ad use as status symbol. Rolls Royce. when P increases. .

‡ Consumer¶s Psychological Bias or Illusion When a consumer is wrongly biased against the quality of a commodity with the price change. Stock clearance sale at reduced price.‡ Speculation When people speculate about changes in the price pf a commodity. . they tend to buy more even at the existing high price for the purpose of hoarding. Shares in stock market. he may contract this demand with a fall in price.

Network Externalities in Market Demand ‡ Assumed Individual demand for the product are independent. individual demand may be depending on the demands of the other people in case of some goods. ‡ In reality. Bandwagon Effect Snob or Veblen Effect. which may be +ve or ±ve in effect. ‡ Market demand function is the sum of all individual buyer¶s demand.e. there may be interdependence of demand i. . This situation µNetwork Externality¶.

D a b D1 Small fall in price (PP1) OP. D1 D O Q Q1 Quantity Q2 X . QQ1 is Qt. P P1 e BW Effect 3. The demand curve shifts upwards at D1D1 suggesting rise in demand. D is influenced by the consumption of Y pace setters or trend setters like actors. 3. 2 Demand for certain goods is on account of demonstration or bandwagon effect. models. demanded due to bandwagon effect. Ex: Jeans. group-leaders.New price OQ1 New Qt.Bandwagon Effect ‡ ‡ ‡ 1. DD ± Initial Demand Curve Price ‡ ‡ ‡ ‡ OP Initial Price OQ.Initial Qt. Demanded in absence of BW effect on the fall in price. Barbie Dolls Use of modern media in advertising strategies are meant to produce the bandwagon effect to manipulate market demand. etc. Price is minor consideration. Q1Q2 is the Qt. demand on the same DD curve.

A bottle of Louis Roederer Cristal (1993) Koenigsegg CCX .

. ‡ Thorstein Veblen argued that affluent class demonstrate their superiority of high class by spending on frivolous goods and services. P falls. D shifts downwards. ‡ Network externality of snob effect is ±ve as the luxury/snob good loses its snob effects/prestige when it is available freely.The Snob Effect Or Veblen Effect ‡ The SE refers to the desire of a person (rich) to own exclusive or unique product is called Snob or Veblen good. D shifts upward. In such case even if P falls. ‡ When P rises of these goods. D rises but individual demand of the snobbish buyer decreases.


large quantity production decreases P. Mass appeal to upper middle income groups.Qt is Q2 Reduced P3.Qt is Q4 D P1 Price P2 b P3 P4 a D Q1 Discount Q2 Q3 Q4 Qt/month .Veblen Effect Paradox ‡ ‡ ‡ ‡ ‡ ‡ ‡ In certain branded goods like Ray Ban or Levi¶s product.Qt is Q1 Lowered P2. expanding demand. they are high in demand for the rich.. Hence no exclusivity. When having snob appeal.Qt is Q3 Discounted P4. Loss of appeal of branded goods-competition with unbranded goods Goods disposed off at huge discounts. there is a paradox. ± ± ± ± P1. Demand decreases.

‡ A variation in demand implies extension or contraction of demand on the same demand curve. on account of price change.Change in Qt.Changes in qt. ‡ D extends when P falls (a to b) ‡ D contracts when P rises (a to c). Demanded Versus Change in Demand ‡ Extension & Contraction of Demand ‡ Phrase µchanges in Qt. Demanded . D P2 Price P P1 b D c a Q1 Q Q2 Qt. demanded¶ relates to the Law of demand.

price remaining unchanged. ‡ For a change in demand the changed in other factors other than price is responsible.Change in Demand ‡ Contrary to Law of D. D D1 Increase in D Price a P b D D1 Q Decrease in D D D2 Price c Q1 Demand a D D2 P Q2 Q Demand . Increase or decrease in demand refers to changes in demand caused by the changes in various other determinants of demands. ‡ Shifting the demand curve shows the increase or decrease in D.

same as market demand ± Oligopoly ± Monopolistic Competition ‡ Perfect Competition ± Firm is a price taker ± Firm¶s demand curve is horizontal .Demand Curve Faced by a Firm Depends on Market Structure ‡ Market demand curve ‡ Imperfect competition ± Firm¶s demand curve has a negative slope ± Monopoly .

Demand Curve Faced by a Firm Depends on the Type of Product ‡ Durable Goods ± Provide a stream of services over time ± Demand is volatile ‡ Nondurable Goods and Services ‡ Producers¶ Goods ± Used in the production of other goods ± Demand is derived from demand for final goods or services .

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