DEMAND SUPPLY

Baby. P.K

What is Demand?
Needs Wants Demand Basic human requirements directed to specific objectives that satisfy needs Backed by ability to pay

Value (profit or utility) + ability to pay

The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price.

What is Demand?
Demand is a multivariate function determined by
..price of the commodity ..prices of other commodities ..consumers income ..tastes

Direct Demand: Demand for consumption products Derived Demand: Demand for inputs used in production

Demand Function
Functional relationship between determinants of demand and quantity demanded QD = f (Px, Py,Y, t, f, PE ) Px = Price of X Py = Price of Y Y = Income of the consumer t = taste f = fashion PE =Price expectations
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Law of Demand
QD = f (Px,) .....when other things remaining constant

Inverse relation between price and Quantity demanded

Q = b0 b1P, linear Q = b0 . Pb1 , non-linear

Demand schedule and Curve

Price 2 4 6 8 11 12 13 18 20 Quantity 50 40 24 20 18 15 10 8
5 0 0 10 20 30 40 50 60 Quantity Demanded Price 25 20 15 10

30

Slope of Demand Curve

Symbolically, the law of Demand is stated as:

Qd = f (P) and
Consider, demand function, Qd = bo - b1 P Qd = 127 50 P
Q 10 = = 50 P 0.20

Qd P
P

< 0

2.30 P 2.10

A B

12 Q

22

Qd

Slope of Demand Curve

Mathematically, the first derivative of the function,
Qd = 127 50 P
P

Qd P

= 50
2.30 P 2.10 A B

Slope is first derivative of the Demand function

12 Q

22

Qd

Market Demand
Horizontal summation of individual demand curves
Price 2 4 6 8 11 12 14 16 18 20 Quantity A 40 30 24 18 14 10 8 6 4 3 Quantity B 4 2 5 7 10 7 5 3 2 0 Quantity C 45 35 30 20 15 13 10 8 0 0 Market Demand 89 67 59 45 39 30 23 17 6 3
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Market Demand Curve

Market Dem and 25

20

15 Price 10 5

B
0 0 20

A
40

C Market Demand
60 Quantity 80 100

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Determinants of Demand
Movement along the Demand curve

A change in price of the commodity, when other things remaining constant

Price D

Movement along the Demand Curve as the price of X changes

P1 P2

D O
X1 X2

Quantity

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Determinants of Demand
Shift in Demand Curve

Price

A change in factors other than price of the commodity, when price remaining constant D3
D2 D1

P1

D3 D1 O
X1 X2 X3

D2 Quantity
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Why demand curves slopes downward?

Law of Diminishing Marginal Utility Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other substitute commodities. This induces the consumer to substitute the commodity whose price has fallen for other commodities, which have now become relatively expensive. Income effect: When the price of a commodity falls, the consumer can buy more quantity of the commodity with his given income, as a result of a fall in the price of the commodity, consumers real income or purchasing power increases.

SUPPLY
Law of supply ..assets that quantity supplied of a good or service is directly related to the selling price, when other things remaining constant.

Qs Qs = f ( P ) and > 0 P
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Supply Schedule and Curve

Price Quantity 2 4 6 8 10 12 14 3 7 14 18 22 28 36
Price 16 14 12 10 8 6 4 2 0 0 10 20 Quantity 30 40

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SupplySupply- Determinants

Qs = f ( P, PL , E , R, PS , PE , F ,.......)
P = Price of the commodity PL= Price of other commodities E = Technology R = Taxes and subsidies PE= Price expectations PS= Profit F = Number of firms in the industry
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Equilibrium price and output:

The Market Demand and Supply of Potatoes (Monthly)

Price of Potatoes
(pence per kilo)

Total Market Demand

(Tonnes: 000s)

Total Market Supply

(Tonnes: 000s)

20 40 60 80 100

700 (A) 500 (B) 350 (C) 200 (D) 100 (E)

100 (a) 200 (b) 350 (c) 530 (d) 700 (e)

The determination of market E 100 equilibrium (potatoes: monthly)

80

e Supply

SURPLUS (330 000)

C

Price (Rs. per kg)

60

b
40

a
20

Demand
0 0 100 200 300 400 500 600 Quantity (tonnes: 000s) 700 800

The determination of market E equilibrium (potatoes: monthly) 100

D

e Supply

80

Price (Rs. per kg)

Cc

60
b

SHORTAGE (300 000)

40

a
20

Demand
0 0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

The determination of market E 100 equilibrium (potatoes: monthly)

D

e Supply

80

Price (Rs. per kg)

60

b
40

a
20

Demand
0 0 100 200 300
Qe

400

500

600

700

800

Quantity (tonnes: 000s)

The Market Mechanism

P D
Excess supply

QD= 25 3P Qs= 10 + 2P P=3 Q = 16

Px

Excess Demand

S O Qx

D Q
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Effect of a shift in the demand S curve

Initial equilibrium at point g

g

Pe1

D1

Qe 1

Effect of a shift in the demand S curve

Effect of an increase in demand

g

Pe1

D1

Qe 1

Effect of a shift in the demand S curve

Pe1

D2 D1

Qe 1

Effect of a shift in the demand S curve

i

Pe2
g h

New equilibrium at point i

Pe1

D2 D1

Qe 1

Qe 2

Effect of a shift in the demand S curve

Effect of an decrease in demand

g

Pe1

D2

D1

Qe 1

Effect of a shift in the demand S curve

Pe1 Pe2
n

D2

D1

Qe 2

Qe 1

Demand Analysis
The demand for housing is often described as being highly cyclical and very sensitive to housing prices and interest rates. rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or housing. decrease the quantity demanded or the demand for housing. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along a given demand curve or involves an outward or inward shift in the relevant demand housing. answers. curve for housing. Explain your answers. A. An increase in housing prices B. A fall in interest rates C. A rise in interest rates D. A severe economic recession E. A robust economic expansion 28

Thank You

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