DEMAND & SUPPLYPresented by-

Ankit Singh 1

IMPORTANT INFORMATION This slide is totally self made including the

graphs and diagrams. Resemblance to any slide found on internet will only be a coincidence.

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DEMAND

Meaning of Demand: Demand for a particular commodity refers to

the commodity which an individual consumer or household is willing to purchase per unit of time at a particular price.

Demand for a particular commodity implies:Desire of the customer to buy the product;The customers willingness to buy the product;Sufficient purchasing power in the customers possession to buy the product.

The demand for a particular commodity by an individual consumer or household is known as Individual demand for the commodity and Summation of the individual demand is known as the Market demand. 3

DEMANDFactors Determining Demand: General Factors:

Price of the product Taste and Preference Income Prices of the related goods

Additional Factors: (Luxury Goods & Durables) Consumer’s Expectation of future price. Consumer’s Expectation of future income.

Additional Factors:( Market Demand) Population Social, Economic & Demographic distribution of

Consumer’s.

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DEMANDDemand Function: A Mathematical relationship between

quantity demanded of the commodity and its determinants is known as Demand Function.

When this relationship relates to the demand by an individual consumer it is known as Individual demand function and while it relates to the market its known as market demand function.

Individual Demand Function :Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey. Ep, U)

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DEMANDQdx = Quantity demanded for product X.Px = Price of product XY = Level of Income P1..Pn-1 = Prices of all other productsT = Taste of the consumerA = AdvertisementEy = Expected future incomeEp = Expected future priceU = Other determinants not covered in the list of determinants.

Market Demand Function:Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey, Ep, P, D, U, P)

P = PopulationD = Distribution of consumers.

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DEMANDDemand Schedule: A demand schedule is a numerical tabulation

that shows the quantity of demanded commodity at different prices.

The demand schedule may be of 2 types :• Individual demand Schedule • Market demand Schedule.Demand Curve: The demand curve is a graphic presentation of

quantities of a good demanded by the consumer at various possible prices in a period of time.

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DEMANDLaw of Demand: Law of demand expresses the

relationship between the Quantity demanded and the Price of the commodity.

The law of demands states that,“Ceteris Paribus, (other things remaining constant) the lower the price of a commodity the larger the quantity demanded of it and vice versa.”

In simple terms other things remain constant, if the price of the commodity increases, the demand will decrease and if the price of the commodity decreases, the demand will increase.

P Qd1 602 503 404 30

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PRICE

DEMAND

DEMAND

Assumptions: No change in taste and preference. Income of the consumer is constant. No change in customs, habit, quality of

goods. No change in substitute products, related

products and the price of the product. No complementary goods.

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DEMANDExceptions of Law of Demand:

In certain cases the slope of Demand Curve is upward i.e. positively sloped, it is known as the exceptions of Law of Demand.These exceptions are as follows:

Giffen Goods (Giffen Paradox) Emergency (War etc…) Conspicuous necessities (Car, Fancy Cloths

etc…) and Conspicuous Consumption (Fancy Diamonds, High price shoes, pens etc…)

Depression ( Price and quantity demand is low) Ignorance Effect (High priced commodity is

better in quality) Speculation (Future change in price)

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ELASTICITY OF DEMANDElasticity of Demand: Elasticity of demand is defined as the

percentage change in quantity demanded caused one percent change in each of the determinants under consideration while the other determinants are held constant.

Ed = % change in quantity demanded / % change in the determinant.

There are mainly three types of Elasticity of Demand :

Price Elasticity of demand Income Elasticity of demand Cross Elasticity of demand

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ELASTICITY OF DEMAND

Price Elasticity of Demand : Price Elasticity of Demand measures the degree of

responsiveness of the quantity demanded of a commodity due to a change in its own price.

Ep = (% change in quantity demanded) / ( % change in the Price).

Here we ignore the –ve sign as the relation between price and the quantity demanded is opposite & we are interested in magnitude of responsiveness.

Price Elasticity of Demand are of 5 types :1. Perfectly elastic demand2. Perfectly / Absolutely inelastic demand3. Relatively Elastic demand4. Relatively Inelastic demand5. Unitary Elastic demand 12

PERFECTLY ELASTIC DEMAND

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P

R

I

C

E

y

0 x

Perfectly elastic demand curve

P

When the demand for a product changes, increases or decreases even when there is no change in price, it is known as perfect elastic demand.

Infinity

D1 D2

RELATIVELY ELASTIC DEMAND

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Relatively elastic demand curve

P

R

I

C

E

demand0 x

y

P1

When the change in demand is more than the changes in price, it is known as relatively elastic demand.

P2

D1 D2

UNITARY ELASTIC DEMAND

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Elasticity of demand equal to utility curve

y

x0 demand

P

R

I

C

E

D

D

When the change in demand is equal to changes in price, it is known as unitary elastic demand

P1

P2D1 D2

RELATIVELY INELASTIC DEMAND

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Relatively inelastic demand curve

XO

Y

demand

D

D

P

R

I

C

E

When the change in demand is less than the changes in price, it is known as relatively inelastic demand

P1

P2

D1 D2

PERFECTLY INELASTIC DEMAND

17demand

D

D

Perfectly inelastic demand curve

0

Y

X

P

R

I

C

E

When a change in price, howsoever large, change no changes in quality demand, it is known as perfectly inelastic demand

P1

P2

P3

ELASTICITY OF DEMANDIncome Elasticity of Demand: Income Elasticity of Demand measures the degree

of responsiveness of the quantity demanded of a commodity due to a change in income of the consumer.

Em = (% change in quantity demanded) / ( % change in the Money Income).

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POSITIVE INCOME ELASTICITY OF DEMAND

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Y

PA

D

D

B SO XQuantity Demanded

Inco

me

ELASTICITY OF DEMANDCross Elasticity of Demand: Income Elasticity of Demand measures

the degree of responsiveness of the quantity demanded of one commodity due to a change in price of some related goods.

Exy = - (% change in quantity demand of goods Y) /

( % change in the price of goods X).

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CROSS ELASTICITY OF DEMAND FOR SUBSTITUTES

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Pric

e of

Y

Demand for X

O

Y

X

D

D

CROSS ELASTICITY OF DEMAND FOR COMPLEMENTARY PRODUCTS

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Pric

e of

Y

O

Y

XD

D

Demand for X

ELASTICITY OF DEMANDFactors affecting the Elasticity of Demand : Nature of the product Availability of the substitute product Uses of the commodity Income Levels Proportion of Income spent Postpone consumption Price levels Time period Durability Taste & Preference Demonstration Effect Advertisement Special Demand (Medicine) Complementary Goods Expectation of the future price etc… 23

ELASTICITY OF DEMANDImportance or Significance of Elasticity of

Demand: Production Planning Theory of Pricing Theory of distribution Theory of Foreign exchange Theory of International Trade Theory of Public Finance Declaration of Public Utilities Theory of Forecasting of Demand Plenty of Paradox Monopoly Market and limits of monopoly power Determinants of the status of the commodity,

complementary or substitute.

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A shift in demand is the graphical representation of the effect of anything other than price on demand.

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Shifts in Demand Versus Movements Along a Demand Curve

D0

D1

SHIFT IN DEMAND

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Price

Quantity demanded

1

100

B A

Change in demand(a shift of the curve)

150

A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded.

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Shifts in Demand Versus Movements Along a Demand Curve

CHANGE IN DEMAND

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D1

Change in quantity demanded(a movement along the curve)

B

0

Price

Quantity demanded 100

2

1

200

A

THANK YOU

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