Theory of demand

Meaning of demand
Demand is different amount of a product that a buyer would be willing & able to buy at different prices over a given period of time Demand for a commodity implies1. Desire to buy 2. Willingness to pay 3. Able to pay Demand is made because of its utility.

 1. 2. 3. 4. 5. 6. 7.

Demand may be Individual demand Household demand Market demand Autonomous demand Derived demand Durables demand Non- Durables demand

Determinants of Demand
Price of the commodity Consumer preference Income of the buyer of the commodity

Price of related goods

Consumer expectation of future prices
Consumer expectation of future income

Demand function
Demand function is the mathematical expression of the relationship between quantity demanded & its determinants. It may be 1. Individual Demand function 2. Market Demand function

Law of demand
Law of demand states that as price increases ,quantity demanded decreases & vice versa, other factors remaining constant
Law of demand in terms of : Substitution effect Income effect

Market Demand
Market Demand is the sum of all individuals demand
Market Demand Schedule

Response of amount demanded to changes in prices of a commodity

Price of x per Quintal (in Rs) Quantity Demanded by Buyer A Quantity Demanded by Buyer B Total market Demand

50

10

15

40
30

15
25

20
30

35
55

Demand Curve: Graphical representation of Demand Schedule

DA
50 Price (Rs) Price (Rs) 50 40

DB
50 Price (Rs) 40

40

30

DA
5 15 25

30

DB
10 20 30

D
30

15

35

55

A Demand

B Demand

Market Demand

Figure: Individual and market demand curve

fig

Exception to law of demand

Status symbols commodities Giffen goods Expectation of further change in price of the commodity

Movements along the demand curve and shifts in the demand curve
change in price

movement along Demand curve

change in any other determinant of demand shift in Demand curve
increase in demand rightward shift decrease in demand leftward shift

Movement along demand curve

P1

Price

P0

P2

D1
O Q1 Qo Q2 Quantity

An increase in demand

P Price

D0
O Q0 Q1 fig 2.2 Quantity

D1

An decrease in demand

P Price

D1
O Q1 Qo Quantity

D0

Demand Theory
The primary objective of demand theory is to identify & analyze the determinants of consumer needs & wants.

constrained optimisation problem

price as opportunity cost

Supply Theory

Theory of supply
Amount of a commodity that firms are able & willing to offer for sale at a particular price is called quantity supplied. Quantities of a commodity that firms are able & willing to offer for sale at all possible prices during a period of time is called supply.

Market supply schedule for carrots:

Price of carrots(Rs per kg) 20 40

Quantity supplied (kg per month) 5 30

60
80 100 120

50
75 90 115

Market supply curve

market supply curve for carrots
140

120

100

price(Rs per kg)

80

60

40

20

0 5 30 50 75 90 115 quantity supplied (kg per month)

Determinants
Price of the commodity Prices of factors of production Prices of related goods produced State of technology Future expectation regarding prices No. of firms producing & selling the commodity. Taxes & subsidies

Law of supply
When prices rises ,quantity supplied of it in the market increases & vice versa other factors determining supply are constant. Supply curve is upward sloping. 1. Profit incentive 2. Possibility of substitution of one product for an other. 3. Higher cost of producing more output.

SUPPLY
Movements along and shifts in the supply curve
change in price
movement along S curve

change in any other determinant of supply

shift in S curve
increase in supply rightward shift

decrease in supply leftward shift

Shifts in the supply curve

P
S0 S1

Increase

fig

Shifts in the supply curve

P
S2 S0 S1

Decrease

Increase

fig

Supply and Demand

Price and output

determination

Equilibrium price and output:

The Market Demand and Supply of Tomatoes (Monthly)
Price of Tomatoes (Rs 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 equilibrium

(Tomatoes: monthly)
E

100
D

e Supply d

80

Price (Rs per kg)

Cc

60

40

b
a

20

Demand
0 0 100 200 300 400 fig 500 600 700 800

Quantity (tonnes: 000s)

The determination of market equilibrium

(Tomatoes: monthly)
E

100
D

e Supply d

80

Price (Rs per kg)

Cc

60

40

b
a

SHORTAGE (300 000)

20

Demand
0 0 100 200 300 400 fig 500 600 700 800

Quantity (tonnes: 000s)

The determination of market equilibrium

(Tomatoes: monthly)
E

100

e Supply

80

SURPLUS (330 000)

Cc

Price (Rs per kg)

60

40

a
20

Demand
0 0 100 200 300 400 fig 500 600 700 800

Quantity (tonnes: 000s)

The determination of market equilibrium

(Tomatoes: monthly)
E

100
D

e Supply d

80

Price (Rs per kg)

60

40

a
20

Demand
0 0 100 200 300

Qe 400 fig

500

600

700

800

Quantity (tonnes: 000s)

Effect of a shift in the demand curve

P

i
Pe2

g
Pe1

D2
D1
O Q e1
fig

Q e2

Effect of a shift in the supply curve

P

S2 S1 k
Pe3

j
Pe1

D
O Q e3
fig

Q e1