Supply and demand

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DemandThe demand for a commodity refers to the

amount of it which will be bought per unit of time at a particular price.

Demand in economics means effective demand for a commodity. that is, one should have desire to buy a commodity, he must be willing to pay its price and he should have the money to be paid.

Demand implies the following 3 conditions:

I. Desire for a commodity or serviceII. Willingness to pay its priceIII. Ability to pay its price Example-A person may have desire for a TV but unless

he has enough money to buy it, his desire cannot be said to be a demand.

Types of demand:Individual demand

Market demand

Individual demand:Individual demand refers to the demand for a commodity from the individual point of view. That quantity of a good a consumer would buy at a given price during a given period of time is his individual demand for that particular good.

Market demand:Market demand refers to a total demand of all the

buyers taken together.

Factors affecting demandNature of the demand:if the good is a basic

commodity ,it will lead to a higher demand.population:if the population grows this means

that demand will also increase.Personal disposable income:in most cases,the

more disposable income a person has the more likely that person is to buy.

Consumer’s expectations:a consumer’s expectation’s about the future change is the price of a given commodity also may effect its demand.

Types of demand situations

Negetive demand:if the market response to a product is negetive,it shows that people are not aware of the features of the service and the benefits offered under such circumstances,the marketing unit of service firm has to understand the psych of the potential buyers and find out the prime reason for the rejection of the service.

No demand:If people are unaware,have insufficient

information about a service or due to consumer’s indifference this type of demand situation could occur.the marketing unit of the firm should focus on promotional campaigns and communicating reasons for potential customer’s to use firm’s services.

Latent demand:

At any time it is impossible to have a set of services that offer total satisfaction to all the needs and wants of society.

Seasonal demand:Some services do not have an all

year round demand,they might be required only certain period of time.

The general tendency of consumer’s behavior in demanding a commodity in relation to the changes in its price is described by the law of demand.

Explanation of the law.The law of demand is usually refered to the

market demand. The law of demand can be illustrated with the

help of a market demand schedule i.e., as the price of a commodity decreased the corresponding quantity demanded for that commodity increases and vice versa.

A market demand schedule for wheat.Price of wheat per kg.(in Rs)

Quantity demanded(kgs per week)

54321

1020304050

The table represents a hypothetical demand schedule for wheat. We can see from this table that with a fall in price at each stage, demand tends to rise. There is an inverse relationship between price and quantity demanded .the demand curve is shown in the figure.

Assumptions of the lawNo change in consumer’s income : throughout the

operation of the law, the consumer’s income should remain the same. If the level of a buyer’s income changes , he may buy more even at a higher price , invalidating the law of demand

No change in consumer’s preferences : the consumer’s tastes , habits and preferences should remain constant

No change in fashion : if the commodity concerned goes out of fashion, a buyer may not buy more of it even at a substantial price reduction

No change in weather conditions: it is assumed that climatic and weather conditions are unchanged in affecting the demand for certain goods.

No change in government policy: The level of taxation and fiscal policy of the government remain the same throughout the operation of the law.

Otherwise, the changes in income tax, for instance may cause changes in consumers income or commodity taxes may lead to distortions in consumers preferences.

Cont.

ExceptionsIt is almost universal phenomenon of the law

of demand that when the price falls, the demand expands and it contracts when the price rises.

But sometimes, it may be observed, though, of course, very rarely, that with a fall in price, demand also falls and with a rise in price, demand also rises.

Cases in which this tendency is observed are referred to as exceptions to the general law of demand.

The demand curve for such cases will be typically unusual.

Cont.There are few such exceptional cases, which

may be categorized as follows: Giffen goods: In case of certain inferior goods

called Giffen goods, when the price falls, quite often less quantity will be purchased than before because of the negative income effect and people’s increasing preference for a superior commodity with the rise in their real income.

Few appropriate examples may be listed, such as cheap potatoes, cheap bread, vegetable ghee, etc., as against superior commodities like good potatoes, cake, and pure ghee.

Commodities which are used as status symbols:

Some expensive commodities like diamonds, expensive cars, etc., are used as status symbols to display one’s wealth.

The more expensive these commodities become, the higher their value as a status symbol and hence, the greater the demand for them.

The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price.

Also known as a Veblen good

Expectation of change in the price of commodity:

If a household expects the price of a commodity to increase, it may start purchasing a greater amount of the commodity even at the presently increased price.

Similarly, if the household expects the price of the commodity to decrease, it may postpone its purchases.

Thus, some argue that law of demand is violated in such cases. In this case, the demand curve does not slope down from left to right; instead it presents a backward slope from the top right to down left.

This curve is known as an exceptional demand curve.

Exceptional Demand Curve.

• The demand curve slopes upward suggesting a rise in demand with rising price.

Elasticity of demand

supply

In economics , supply during a given period of time means quantities of goods which are offered for sale at a particular prices.

The supply of a commodity may be defined as the amount of the commodity which the seller or the producer are able and willing to offer for sale at a particular price during a certain period of time.

Supply is a relative term.

It is always referred to in relation to price and time.

A statement of supply without reference to price and time conveys no economic sense.

EX: a statement such as ‘the supply of milk is 500 litres is really meaningless in economics.

One must say, the supply at such and such a price and during a specific period.

Hence, the above statement becomes meaningful if it is said at the price of Rs.6 per litre , a dairy farm’s daily supply of milk is 500 litres.’

Here both price and time are reffered to with the quantity of milk supplied.

Supply is what the seller is able and willing to offer for sale. Ex: star CJ alive ,ebay , quiker etc

However, it depend on the stock available with him.

Thus, stock is the determinant of supply.

The elasticity of supply of commodities depends on a number of factors such as:

1. TIME PERIOD: Time period involved in the process of

production basically determines the elasticity of supply of a product.

in a functional sense, time period may be devided into market period or very short period ,short period and long period.

In the short period, the stock can be varied by producing with the existing size of the plant . Thus, in the short period, supply becomes relatively inelastic.

In the long run, the stock can be adjusted to a greater extent by producing with a changing scale of production , i.e. by changing the size of the plant. Thus, in the long period, supply tends to be relatively elastic.

PRODUCER’S RESPONSE: The elasticity of supply for a product

depends on the producers responsiveness to the change in its price.

The quantity of commodity supplied will not change if the producers do not react positively to the increase in price.

Producers do not always increase the quantity of commodity supplied to a rise in price.

He may not raise supply in response to the rise in price.

in some developed countries, agricultural producers meet their fixed money income by selling smaller quantities of food grain.

Thus with further rise in price they produce and sell smaller quantities rather that more.

3)SIZE OF THE FIRM AND THE NUMBER OF PRODUCTIONS PRODUCED:

When a big firm produce a variety of products at a time, they can be easily transfer the resources from one product to the other so that the supply may become more elastic.

4) NATURAL FACTORS: Natural factors like climate ,

monsoon ,fertility of soil , etc., considerably affect the elasticity of supply of agricultural goods.

The supply of agricultural goods tends to be relatively inelastic because these natural factors are beyond the control of man.

5) NATURE OF PRODUCTION:By its very of production , certain goods are

inelastic in supply. Examples : art works like painting.

THE DETERMINANTS OF SUPPLY

The law of supply expresses a relationship between price and quantity supplied of a commodity on the assumption that the conditions of supply remain constant .The supply of commodity depends not only on the price of commodity but also on several other factors such as

The cost of factors of production :-

The cost of production of a commodity depends on the prices of the various factors of production such as raw materials,labour etc . When the prices of the extensive factors of production such as raw materials rises the cost of production will increase and if the prices of extensive factors decrease the cost of production will aslo get reduced . Supply will be affected in both the cases.

The state of technology :-

The supply of a commodity also depends on the methods of production. Advances in technology and sciences are the most powerful forces influencing the productivity of factors of production. New inventions and innovations in chemistry, electronics etc have greatly contributed to increased supplies of commodities at lower costs with better quality.

For example:- The development of more effective wireless technology increases the supply of cell phones.

Change in taxes and subsidies :-

A tax on a commodity or a factor of production raises its cost of production leading to low production and supply. On the other hand, a subsidy provides an incentive to production augments supplies.

For example:- An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education.

Changes in producer expectations :-

When a producer expects that the price of the commodity which is produced by him will increase in the near future, he would decrease his supply so that he can sell the same commodity at higher prices in the near future.

For example:- An expectation of a substantial rise in future log prices decreases the supply of logs today.

Change in the number of suppliers :-

For a particular commodity when there are less number of suppliers the supply of the commodity would be less and vice versa.

For example when there is an increase in the number of tattoo parlors the supply of tattoos will be increased.

Supply function :-

In a supply function, the determinants of supply can be summarized as under :

Sx=f{Px,Pf,Py,……..,Pz,O,T,t,s}Where, Sx=the supply of commodity X Px=the price of X Pf=the set prices of the factor Py,….Pz=the prices of the goods O=factors outside the economic sphere T=technology used t=commodity taxation s=subsidy

SUPPLY SCHEDULE

The supply schedule refers to a table showing the quantity of a commodity supplied at various prices during a given period. There are two types of supply schedules. They are :-1) The individual seller`s supply schedule and2) The market supply schedule.

The Individual Supply ScheduleAn individual supply schedule refers to the

table representing the different quantities of a commodity offered for supply by an individual seller at alternative price.

Price of commodity X

Quantity supplied of commodity X

10 150

15 250

18 400

20 600

25 900

The Market Supply ScheduleThe price-quantity relationship of a

commodity in the market is expressed in terms of the market supply schedule. A market supply is the aggregate supply schedule of all the sellers or producers in the market. It refers to the total quantities of a given commodity which the sellers in the market are willing to offer for sale at various prices. Thus, the market supply schedule is derived as the sum total of the individual supply schedules of every seller in the market.

Price Producer A

Producer B

Producer C

Total or market supply

10 3 2 1 6

12 7 5 4 16

14 10 7 6 23

16 15 12 10 37

18 20 15 12 47

The law of supply states that when the other factors remains the same, the quantity supply increases with the rise in price and decrease with the fall in price .thus quantity supplied by the producer is directly proportional to the price . The relation between price and supply is positive .this relation exist only when there is no change in factors

LAW OF SUPPLY

Law of SupplyAs the price of a good increases, the quantity

supplied of that good increases.

As the price of a good decreases, the quantity supplied of that good decreases.

Does this sound familiar???

Compare the Law of Supply with the Law of Demand

Discuss with your partner the similarities and differences of the two laws.

• Law of Demand, an inverse relationship between price and quantity demanded.

• Law of Supply, a direct relationship between price and quantity supplied

Supply Schedules and Supply Curves

Price Quantity Supplied

$.40 1000

$.60 2000

$.80 3000

$1.00 4000

Typical supply curve: Upward Sloping—a direct relationship

Apples

Supply increaseSupply decrease

P

Qs

P

Qs

At least two assumptions are necessary for the validity of the standard model: first, that supply and demand are independent; and second, that supply is "constrained by a fixed resource" Sraffa's critique focused on the inconsistency (except in implausible circumstances) of partial equilibrium analysis and the rationale for the upward slope of the supply curve in a market for a produced consumption good

conclusion

Aggregate excess demand in a market is the difference between the quantity demanded and the quantity supplied as a function of price. In the model with an upward-sloping supply curve and downward-sloping demand curve, the aggregate excess demand function only intersects the axis at one point, namely, at the point where the supply and demand curves intersect.

The model of prices being determined by supply and

demand assumes perfect competition.

"economists have no adequate model of how individuals and firms adjust prices in a competitive model. If all participants are price-takers by definition, then the actor who adjusts prices to eliminate excess demand is not specified

75

Exhibit 1: Demand Schedule & Demand Curve for Pizza

(a) Demand Schedule

Price per Quantity Demanded Pizza per Week (millions)

a) $15 8b) 12 14c) 9 20d) 6 26e) 3 32

The demand schedule lists possible prices, along with quantity demanded at each price. The demand curve at the right shows each price / quantity combination listed in the demand schedule as a point on the demand curve.

(b) Demand Curve

e

d

c

b

$0

$3

$6

$9

$12

$15

$18

8 14 20 26 32

Millions of Pizzas per week

Pri

ce p

er P

izza

a

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Exhibit 3: Supply Schedule and Curve for Pizzas

12 16 20 24 28

$15

12

9

6

3

0

S

Millions of pizzas per week

The supply curve and the supply schedule both show quantities of pizza supplied per week at various prices by all the pizza makers in the marketPrice and quantity supplied are directly, or positively, related: producers offer more for sale at higher prices than at lower ones: Supply curve slopes upward

Price

Supply Schedule

Price per Quantity Supplied Pizza per Week (millions)

$15 28 12 24 9 20 6 16 3 12

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Exhibit 5: The Market for PizzaWhere supply and demand come together…

bibliographyTutor2.comGoogle.comWikipedia.comBusiness economics-D.M.Mithani

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