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For Classroom Use Only

ANNEXURE

Individual Demand and Market demand

The market demand consists of the total quantity demanded by each individual in the

market. Conceptually, the market demand curve is formed by computing the

horizontal summation of the individual demand curves for all consumers. The table-2and figure: 02 below illustrate this process.

Table 2 ( Demand of X in liters)

Price of X(Rs)

Buyer A Buyer B Buyer C MarketDemand

(All Buyers)

5 5 10 0 154 8 12 4 23

3 12 15 7 34

2 20 19 12 51

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This diagram illustrates a simple case in which there are only three consumers,

Person A, Person B and Person C. Notice that the total quantity demanded in the

market is just the sum of the quantities demanded by each individual. In this

diagram, Person A wished to buy 12 units, person B wishes to buy 15 units and

person C wishes to buy 7 units of commodity ‘X’ when the price is tk.3. Thus, at a

price of tk.3, the total quantity demanded in the market is 34 (=12+15+7) units of

this commodity.

Of course, this example is highly simplified since there are many buyers in most real-

world markets. The same principle though would hold: the market demand curve is

derived by adding together the quantities demanded by all consumers at each and

every possible price.

CATEGORIES OF DEMAND

(a) DEMAND FOR CONSUMERS’ GOODS AND PRODUCERS’ GOODS

Consumers’ goods are goods used for final consumption, e.g. food items, readymade

clothes, houses. Producers’ goods are used for production of other goods,

consumers’ or producers’, e.g. machines, tools, raw-materials. Demand for

consumers’ goods is also termed as direct demand, for these goods are used directly

for final consumption. Demand for producers’ goods are demanded not for final

consumption but for the production of other goods. The distinction between

consumers and producers goods is somewhat arbitrary, for whether a good is a

consumers’ good or producers’ good depends upon its use. For example, if wheat is

used to make eatables in a kitchen, it is a consumer good while if the same wheat is

used for making bread in a bakery, then it is a producers’ good. However, this

distinction is useful because, among other factors, demand for a consumer good

depends on consumers’ income while that for a producers’ good depends on the

outputs of the industries using this product as an input.

(b) PERISHABLE AND DURABLE GOODS’ DEMAND

Both consumers’ and producers’ goods are further divided into perishable (non-

durable) and durable goods. Perishable goods are those, which can be consumed

only once, while durable goods are those, which can be used more than once over a

period of time. For example, sweets, bread, and milk are perishable consumers’

goods; consumables like coal, oil and raw materials are non-durable producers’ goods; furniture, refrigerator, and car are durable consumers goods; and machines,

tools, and factory buildings are durable producers’ goods. This distinction is useful

because non-durable products present more complicated problems for demand

analysis than durable products. Sales of non-durables are made largely to meet

current demand, which depends on current conditions. Sales of durables, on the

other hand, add to the stock of existing goods, whose services are consumed over a

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period of time. Thus, they have two kinds of demand: replacement of old products

and expansion of total stock. Their demands fluctuate with business conditions.

Speculations and price expectations may exert an influence on their demands.

Labour is a highly perishable Producers’ goods.

(c) DERIVED AND AUTONOMOUS DEMANDS

When the demand for a product is tied to the purchase of some parent product, its

demand is called derived. For example, the demand for cement is a derived demand,

for it is needed not for its own sake but for satisfying the demand for buildings. In

this sense, demand for all producers’ goods is derived. So is the demand for money.

Autonomous demand, on the other hand, is not derived. It is hard to find a product

today whose demand is wholly independent of all other demand. However, the

degree of this dependence varies widely from product to product. For example, the

demand for automotive batteries is fully tied up with the demands of vehicles using

these batteries, while the demand for sugar is loosely tied up with the demand for

drinks. Thus, the distinction between derived and autonomous demands is more of degree than of kind. Demand for labour is called a derived demand as it depends

significantly on the production level or scale.

(d) FIRM AND INDUSTRY DEMAND

Generally, more than one firm produces a Good and so there is a difference between

the demand facing by an individual firm and that facing by an industry. (All firms

producing a particular good constitute an industry engaged in the production of that

good.) For example, demand for Fiat car alone is a firm’s demand and demand for all

kinds of cars is industry’s demand.

DETERMINANTS OF DEMAND

• Changes in the price of a good inversely affect the demand for the

commodity. Consumers are willing and able to buy more of a good at the

lower price of that and would buy less quantity at the higher price of the good,

subject to holding all other factors constant.

So, Price and quantity demanded are negatively (inversely) related and main

causes of that are (i) diminishing marginal utility, (ii) income effect, (iii)

substitution effect, (iv) less urgent use of commodity as it becomes cheaper.

• Changes in income positively affect the demand for the commodity.

Changes in income can either increase or decrease demand, depending on

whether the good is normal or inferior. If an increase in income causes

consumers to demand more of a good, when all other variables in the

generalized demand function are held constant, we refer to such a commodity

as a normal good. A good is also a normal good if a decrease in income causes

consumers to demand less of the good, all other things held constant.

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There are some goods and services for which an increase in income would

reduce consumer demand, other variables held constant. This type of

commodity is referred to as an inferior good. In the case of inferior goods,

rising income causes consumers to demand less of the good, and falling income

causes consumers to demand more of the good.

• Changes in the prices of related product: Changes in prices of related

goods can cause demand to increase or decrease depending on whether the

related goods are substitutes or complements.

(i) Changes in the prices of substitute1 commodity positively affect

the demand for the commodity. For substitute goods, an increase

(decrease) in the price of one of the goods causes consumers to demand more

(less) of the substitute good, holding all other factors constant.

(ii) Changes in the prices of complements2 inversely affect the

demand for the commodity. IT works as similar as the own price of any

product or service with varying degree. For complementary goods, an increase

(decrease) in the price of one of the goods causes consumers to demand less

(more) of the other good, holding all other factors constant.

• Consumer taste and preference: It is also a very significant influencing

factor of demand for any thing but hard to measure, for example, young

generation’s preference on fast food items boosts up demand for such items in

some selected areas of Dhaka city.

• Changes in the size and age distribution of the general population:

Demand for a product depends positively upon the number of consumers that

varies directly with the size of population. Furthermore, the spread of

consumers over regions, and urban-rural areas, and their composition in terms

of children and adults, male and female, rich and poor, etc. also effect the

demand for a particular commodity. For example, baby food is needed for

children and not for adults; the demand for cosmetics is more from women

than from men, and luxury and semi-luxury items are consumed by the rich

and not by the poor.

• Consumer expectation also influences demand. People tend to maintain high

levels of consumption when they feel confident about their continuing

employment in the future. If people, for whatever reason, feel less confident

about the future, they tend to decrease consumption and increase saving.

• Weather has different effects on demand of different types of commodities.

The effect of seasonality is easily understandable on demand of various types

of commodities, such as, winter wears, umbrella or ice cream.

• Some other factors also have various effect on quantity demanded of some

product, such as,

1 Two goods are substitutes if an increase (decrease) in the price of one of the goods causes consumers to

demand more (less) of the other good, holding all other factors constant.

2 Goods are said to be complements if they are used in conjunction with each other.

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Changes in interest rates and the general availability of credit,

Advertisement and changes in fashion,

Changes in technology, and so on.

DETERMINANTS OF SUPPLY• Changes in the price of a commodity positively affect the supply of the

commodity. Produces are willing produce and sell more of a good at the

higher price of that because the think that a higher price yield more incentive

for them.

• Costs of the various factors of production inversely affect the supply of

a commodity. The producer cannot supply the same amount at the same price

if the costs of the various factor of production are increased. Higher costs of

inputs cause higher production cost and thus cut off amount of offering for sale

at every price.

•

Improved techniques of production (technological advancement)positively affect the supply of the commodity usually by bringing up more

productivity in the production process or reducing the cost of production.

• Improvement in the means of transport and communication positively

affect the supply of the commodity mainly by increasing the mobility of

factor of production and facilitating the supply management.

• Number of Sellers in the market and the nature of competition among

them has an obvious effect on supply of commodities. For example, a

single firm has full control over the price-output decision of the monopoly

market, where as, a single firm has a vary little of that in a monopolistic

market.• Goals set by the producing firms is also a determinant of supply of any

good or service. For example, nature of supply and pricing of a state owned

firm like WASA or Pertobangla differ much with those of a profit-driven firm.

• Weather affects the supply of different commodity, specially the

agricultural products, in different ways. Optimum rainfall would increase

supply of an agricultural product. On the country, shortage of rains, floods,

fires, dust storms earthquakes, etc would decrease the supply of that.

• Some other factors also have various effect on supply of some product,

such as,

Political Disturbances or War International Agreements among Producers

Taxation system and so on.

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STOCK & SUPPLYStock is the total volume of commodity, which can be brought into the market for

sale at any short notice. But supply means the quantity that is actually brought in

the market i.e., the amount of any commodity already offered for sale. Stock can be

defined as storage of immediate potential supply. For perishable goods stock and

supply are considered to be the same. For non-perishable goods stock can be holdback by the sellers with an expectation of price increase.

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