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Demand defined
Demand is the desire, want or need to purchase a good or service at
a given price backed up by the willingness and ability to pay for it
Quantity demanded (normally denoted as Qd) is the amount of a
particular good or service that consumers are willing or able to
purchase at a given price, during a given period of time.
Types of Demand
Determinants of Demand
Price of the commodity
Income of the consumer
Price of related goods - Price of substitutes & Price of
complements
Wealth of the consumer
Price/Income Expectation
Advertisement expenditure
Taste & preferences
Other factors
Demand function
A demand function is given as:
Dx = f (Px, Py, Pz, I, W, E, A, T, O)
Where,
Px price of good X
Py price of substitute
Pz price of complement
I income of the consumer
W wealth of the consumer
E price/income expectation of the consumer
A advertisement expenditure on the good
T taste & preference of the consumer
O other exogenous factors
Law of Demand
All other factor affecting demand for a commodity remaining
constant, if price of the good rises then quantity demanded of the
good falls and vice versa.
Price/unit
Quantity
(unit)
P1
Q1
P2
Q2
p3
Q3
D
O
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Income effect
When the price of a commodity falls, less has to be spent on the
purchase of the same quantity of the commodity. This leads to an
increase in purchasing power of the money with the buyer. This is
referred to an increase in real income of the consumer.
The increase in real income leads to an increase in purchase of the
commodity whose price has fallen. This is referred to as income
effect of a price change.
Px Real income Qx
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Substitution Effect
When price of a commodity falls, its becomes cheaper relative to
other commodities. This leads to substitution of other commodities
(which are now relatively more expensive) by this commodity. Thus
the demand for the cheaper good rises. This is called the
substitution effect.
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A
B
Q1 Q2
The change in demand is
due to
change in price of the
good all
other factors affecting
demand
being constant. This is
referred
to as change in quantity
Q1Q2 Q3
The change in demand is due
to
change in any one of the
other
factors
affecting
demand (say, income), price
of the good remaining the
same. This is referred to as
change
in
quantity
demanded.
If
quantity
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Estimation of demand
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Supply
Quantity supplied of any good or service is the amount that
sellers are willing and able to sell for a price
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Determinants of supply
Input prices
Technology
Expectation of future prices
Number of sellers in the market
Price of substitute or complementary goods
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Supply function
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Price/unit
Quantity
(unit)
P1
Q1
P2
Q2
p3
Q3
S
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P1
P2
A
B
Q1 Q2
The change in supply is
due to
change in price of the
good all
other factors affecting
supply
being constant. This is
referred
to as change in quantity
Q1Q2 Q3
The change in supply is due
to
change in any one of the
other factors affecting
supply(say, technology), price
of the good remaining the
same. This is referred to as
change in supply. If quantity
supplied increases it is
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Law of Supply
All other factor affecting supply of a commodity remaining constant,
if price of the good rises then quantity supplied of the good also
rises.
Market equilibrium
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Excess supply
P2
P1
P3
Excess
demand
Q1
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E
P2
P1
Q1 Q2
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S
S
E
P1
P
E
2
Q1
Q2
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Exercise
Work out effect on equilibrium in the following situations:
When there is a technological up gradation
When income of consumer increases
When input prices rise
When price of substitute rises
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Price controls
These are of two types: Price ceiling and Price floor
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Price Ceiling
When the Regulator (government) feels that the market price (Pm) of a
good is too high and the consumer welfare is at stake then the
government can fix the price at a level lower than the market
equilibrium price. This is referred to as price ceiling.
At the ceiling price (Pc)there is excess demand trying to push the price
back to the higher level determined by market equilibrium. So to
sustain the price ceiling the government increases the supply to match
the increased demand and thereby eliminate the pressure of excess
demand.
To enable suppliers to supply more at lower price, the government
provides subsidies to the suppliers.
Demand Curve
Pm
Pc
Excess demand
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Price Floor
When the Regulator (government) feels that the market price (Pm) of a
good is too less and the producer welfare is at stake then the
government can fix the price at a level higher than the market
equilibrium price. This is referred to as price floor.
At the floor price (Pf)there is excess supply trying to push the price
back to the lower level determined by market equilibrium. So to sustain
the price floor the government increases the demand to match the
excess supply and thereby eliminates the pressure of excess supply.
To increase the demand to match the excess supply, the government
procures these goods and takes initiatives to sell these procured
products itself
Excess supply
Pf
Pm
Supply curve
Demand curve when gov procures
Original demand curve
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Thank You