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## Demand and Supply analysis 2.2

The demand for any commodity is the desire for that commodity backed by ability to pay as well as willingness to pay for it, and is always defined with reference to a particular time and price on which it depends.

So, the demand for a good or service is defined to be the relationship that exists between the price of the good and the quantity demanded in a given time period, ceteris paribus. One way of representing demand is through a demand table/schedule such as the one appearing below:

Table 1(Demand Schedule)

 Price Quantity demanded (per unit) (per week) 2 100 3 85 4 55 5 35

A demand schedule shows how an item’s quantity

demanded would vary with its price, other things

being equal. In other words, a demand schedule is a

list of the quantities of a goods or service the

consumer(s) will buy at each of a series of prices.

The demand for the good is the entire relationship that is summarized by this table. This demand relationship may also be represented by a demand curve when the numerical or tabular form is expressed graphically (as illustrated below).

Figure: 01

Demand Curve
6
D
5
4
3
2
D`
1
0
0
50
100
150
Quantity Demanded
Price of the Goods

The data from demand schedule can be plotted on a graph and it contracts a demand curve.

In this case, Price (per unit) is shown on the

vertical (or 'Y') axis, and the quantity demanded

per unit of time is shown on the horizontal (or 'X')

axis.

In the diagram, we can see this relationship. If the

price of a good is tk.5 per kilogram, consumers will buy 35 kilogram of that per week. If the price of that good falls to tk.4 per kilogram, 55

kilograms of that will be bought per week.

The demand function is algebraic expression of the relationship between price of a product and the quantity demanded for, in relation to the specific period of time. The simplest form of the demand function is as Q d = f(p) , here. ‘Q d stands for quantity demanded and ‘p’ stands for price.

This relationship, between price of a product and quantity demanded of the product under a certain condition, can be expressed in numerical form as demand table/schedule, in graphical form as demand curve or in algebraic form as demand function. These are the different expression of the same relationship. The demand table, curve or function may either shows an individual demand or an market demand. There is no single concept of demand. Furthermore, the determinants of demand as well as their relative

importance vary with the category of good and level of aggregation. Thus, it is necessary to spell out some important ways of categorizing demand. They are:

• (a) Demand for consumers’ goods and producers’ goods,

• (b) Demand for perishable and durable goods,

• (c) Derived and autonomous demands,

• (d) Firm and industry demands.

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## Demand and Supply analysis 2.2

LAW OF DEMAND

From the above discussion it is clear that an inverse relationship exists between the price and the quantity demanded when other factors are held constant. This inverse relationship between price and quantity demanded is so common that economists have called it the law of demand, the law of demand states the inverse relationship between price and quantity demanded. The law says ‘Other things remaining the same, as the price of a commodity falls, demanded quantity rises and as the price rises, demanded quantity falls.

EXCEPTIONS TO THE LAW OF DEMAND:

• 1. When a serious shortage is feared, people get panicky and by more even though the price is rising.

• 2. When the good in question is a luxury item. In case the use of a commodity confers distinction, the

wealthy people will buy more when the price rises, to be included among the few distinguished

personages. Conversely, people tend to cut their purchases, if they believe such commodity tend to be inferior or similar but more expansive/prestigious product /brand is up coming in the market.

• 3. Sometimes people buy more at a higher price in sheer ignorance.

• 4. If the price of necessity of life goes up, the consumer has to readjust his whole expenditure. He may

cut down his expenses on other food articles and in order to make up, more may have to be spent on this particular good. Thus, more of this commodity will be purchased in spite of its high price.

• 5. When the good whose demand is being studied goes out of fashion. With the popularity of VCD player

in Bangladesh, the demand for VCR may very well fall even if VCR has become cheaper. Similarly,

during off-seasons, goods are sold at reduced prices and yet demand is low.

DETERMINANTS OF DEMAND

A Consumers’ demand for a commodity or service depends on several factors, the most important of

which are the following:

• 1. Price of the commodity or service,

• 2. Consumers’ income,

• 3. Prices of related goods or services,

• 4. Consumer tastes and preferences,

In addition to these factors, the total demand for a commodity or service also depends upon:

• 5. Population and its distribution.

• 6. Consumers’ expectations (in case of durable goods).

• 7. Weather

SLOPE OF A DEMAND CURVE:

The Demand curve usually slopes downwards; this is in accordance with the law of diminishing marginal utility. When the price a commodity falls, people ability and willingness to buy that commodity increases and new buyers enter the market and the old buyers will probably buy more, even some people in preference to other commodity may buy the commodity. So based on the law of diminishing marginal utility the demand curve must slopes downwards, for only then the phenomenon of increasing demand with falling price can be represented by the curve.

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## Demand and Supply analysis 2.2

More precisely, we can consider the following reasons to explain the downward slope of the demand curve:

If price falls, a consumer can afford to buy more. He is able and willing to buy more because the thing being cheaper, his real income increases. It is called income effect. When the commodity become cheaper, it tends to be substituted wholly or partly for other commodity. It is called substitution effect. The income and substitution effect combine to increase the ability and willingness of the consumers to buy more of the commodity whose price fallen. A commodity tends to be put more uses and less urgent uses when it become cheaper. For example if water is dear, we shall use it for drinking only; but when it becomes cheaper, we shall use it for washing and other less urgent uses.

SUPPLY AND EQUILIBRIUM ANALYSIS

Supply can be meant as the amount offered for sale at a given price. We can also define Supply as a schedule of amount of goods that would be offered for sale at all possible price at any one instant of time (or, during any period of time), in which other conditions remain the same.

Supply is the relationship that exists between the price of a good and the quantity supplied in a given time period, ceteris paribus. The supply relationship may be represented by a supply schedule or supply curve or supply function:

(Supply Schedule)

 Price Quantity supplied (per unit) (per week) 2 15 3 35 4 60 5 90

A supply schedule shows how an item’s quantity

supplied would vary with its price, other things being

equal. In other words, a supply schedule is a list of the

quantities of a goods or service the supplier(s) will

sell at each of a series of prices.

The supply of a good is the relationship that is summarized by this table. This supply relationship may also be represented by a supply curve when the numerical or tabular form is expressed graphically (as illustrated below).

Supply Curve

S’
S
6
5
4
3
2
1
0
Price
100
40
20
60
80
0

Quantity Supply

Figure: 01

The data from supply schedule can be plotted on a graph and it contracts a supply curve.

In this case, Price (per unit) is shown on the

vertical (or 'Y') axis, and the quantity supplied per

unit of time is shown on the horizontal (or 'X') axis.

In the diagram, we can see this relationship. If the

price of a good is tk.3 per kilogram, supplier(s)

will sell 35 kilogram of that per week. If the price of that good rise to tk.4 per kilogram, 60 kilograms of that will be ready to sell per week.

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## Demand and Supply analysis 2.2

The Supply function is algebraic expression of the relationship between price of a product and the supplied quantity, in relation to the specific period of time. The simplest form of the supply function is as Q S = f(p) , here. ‘Q S stands for supplied quantity and ‘p’ stands for price.

Alike demand, this relationship, between price of a product and supplied quantity of the product under a certain condition, can be expressed as supply table/schedule in numerical form, as supply curve in graphical form or as supply function in algebraic form. These are the different expression of the same relationship. And there are two types of supply schedule: Individual’s Supply Schedules and Supply schedule of the market.

LAW OF SUPPLY A positive relationship exists between the price and the supplied quantity when other factors are held constant. This positive relationship between price and supplied quantity is so generally called the law of supply. The law says ‘Other things remaining the same, as the price of a commodity rises its supply is extended’. The quantity offered for sale varies directly with price, i.e. the higher the price the larger is the supply, and vise versa.

EXCEPTIONS TO THE LAW OF SUPPLY:

1. In cases of rare contribution or unique items like antiques, paintings, historical jewelry, etc. the quantity of supply remain fixed even if the price climbs high to higher. 2. The supply of labour follows the law of supply up to a certain level, but after that level, the supply decreases as the wage (price of labour) increases. It is mainly because of prevalence of stronger substitution effect that offsets income effect at a certain wage rate. 3. The price of agricultural products does not always follow the law of supply for various reasons like effect of seasonality, longer production period, type of soil and so on. 4. An exception to the law of supply also can be leaded by sellers’ expectation for more price hike with in a short period of time.

DETERMINANTS OF SUPPLY

The supply of a commodity or service depends on several factors, the most important of which are the

following:

• 1. Price of the commodity or service,

• 2. Costs of the various factors of production,

• 3. Improved techniques of production,

• 4. Improvement in the means of transport and communication,

• 5. Number of Sellers,

• 6. Goals set by the producing firms,

• 7. Weather.

MARKET EQUILIBRIUM

By watching, individually, either demand curve or supply curve of a commodity we cannot say what would be the price or rate of exchange of the commodity in the market. To find the price, we have to look

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## Demand and Supply analysis 2.2

though the interaction of demand and supply curves and find out the market equilibrium point, where supply meets demand.

Let's combine the market demand and supply curves on one diagram:

It can be seen that the market demand and supply curves intersect at a price of tk.3 and a quantity of 60 units. This combination of price and quantity represents an equilibrium since the quantity demanded equals the quantity supplied. At this price, each buyer is able to buy all that he or she desires and each firm is able to sell all that it desires to sell. Once this price is achieved, there is no reason for the price to either rise or fall (as long as neither the demand nor the supply curve shifts).

If the price is above the equilibrium, a surplus occurs (since quantity supplied exceeds quantity demanded). This situation is illustrated in this diagram. The presence of a surplus would be expected to cause firms to lower prices until the surplus disappears (this occurs at the equilibrium price of tk.3).

If the price is below the equilibrium, a shortage occurs (since quantity demanded exceeds quantity supplied). This possibility is illustrated in this diagram. When a shortage occurs, producers will be expected to increase the price. The price will continue to rise until the shortage is eliminated when the price reaches the equilibrium price of tk. 3.

CHANGE IN EQUILIBRIUM: SHIFTS IN DEMAND AND SUPPLY

Let's examine what happens if demand or supply changes.

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## Demand and Supply analysis 2.2

First, let's consider the effect of an increase in demand. As this diagram indicates, an increase in demand results in an increase in the equilibrium levels of both price and quantity. An increase in income level, increase in the price of the substitute product, favorable seasonal effect, change of consumes’ taste in favour of the commodity, etc may cause such shift in demand and readjustment of the market equilibrium.

A decrease in demand results in a decrease in the equilibrium levels of price and quantity (as illustrated in this diagram). A decrease in income level, price reduction of the substitute product, unfavorable seasonal effect, change of consumes’ taste against of the commodity, etc may cause such shift in demand and readjustment the market equilibrium.

An increase in supply may be propelled by technological advancement, reduction in cost of factor of production, decrease of fuel price, improvement of transportation and communication facilities, etc. which may make such rightward shift of supply curve that is realized by a higher equilibrium quantity and a lower equilibrium price. (Illustrated in this diagram.)

If supply falls, equilibrium quantity will fall and equilibrium price will rise by a leftward shift of supply curve (as illustrated in this diagram). Such shift may be occurred by Increase in input price, natural calamities, distortion of transportation and communication network, and decline in production capacity due to war or political unrest, exhaustation of natural resources, etc.

PRICE CEILINGS AND PRICE FLOORS

A price ceiling is a legally mandated maximum price. The purpose of a price ceiling is to keep the price of a good below the market equilibrium price. Rent controls and regulated gasoline prices are examples of price ceilings. As the diagram below illustrates, an effective price ceiling results in a shortage of a commodity since quantity demanded exceeds quantity

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## Demand and Supply analysis 2.2

supplied when the price of a good is kept below the equilibrium price. This explains why rent controls and regulated gasoline prices have resulted in shortages.

A price floor is a legally mandated minimum price. The purpose of a price floor is to keep the price of a good above the market equilibrium price. Agricultural price supports and minimum wage laws are example of price ceilings. As the diagram below illustrates, an effective price floor results in a surplus of a commodity since quantity supplied exceeds quantity demanded when the price of a good is kept above the equilibrium price.

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MD. TABIUR RAHMAN, Roll-14DH108, PGD (HRM), EVE-02 Email: mtabiur_ku@yahoo.com

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