Special class on Demand and Supply

Introduction

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 Consider the following situation
• It is your birthday and your mother gives you 1000 as birthday gift. You
are free to spend the money as you like. What will you do? You have
many option before you, like :

• Option 1 : you give a party to your friends and spend the whole money
on them.

• Option 2 : you can buy yourself a dress for 1000.

• Option 3 : you can go for a movie and eat in some restaurant.

• Option 4 : you can buy yourself a book and save some money.
 It is based on 2 fundamental facts ;

• Human brings have unlimited wants.

• The means of satisfying these wants are
relatively scare.
• Economics is the study of economic icon or
economic problems arising out of the fact that
resource are scare in relation to our needs/
desire and the scare resource have a alternative
uses. It focuses on rational management of scare
resource in a manner such that our economic
gains are maximized.
 Economic has been divided into two
parts :
• Micro economic : Micro economic is the study
of the particular firms, particular household,
individual price, wages, income, individual
industries and particular commodities. In
micro economics we study the economic
behavior of an individual, firm or industry in
the rational economy.
 We mainly study the following in
micro economics :-
• Product pricing
• Consumer behavior
• Factor pricing
• Study of firms
• Location of industry
 Macro economics –
• In this we study the economic behavior of the
large aggregate such as the overall candidates
of the economic such as total production,
total consumption, total saving and total
investment.
 Macro economics –
It includes:

• National profit and output

• General price level
• Balance of trade and payments
• Saving and investment
• Employment and economic growth
 Note :
• it is difficult to distinguish between the two
terms as belonging to water fight
compartment. What is macro from national
stand point is micro from world point of view.
What is micro from a national angle become
macro from a regional angle.
Q. From the national point of view, Which of the
following indicates Micro approach?

A) Per Capita income in India

B) Study of Sales of TISCO
C) Inflation in India
D) Educated unemployment in India
 Central Problem of Economy
• Economy activities includes production,
consumption, investment and exchange.
Resource are scare and choices are many. The
basic economic problem is problem of
choices.
 Central Problem of Economy
It has three aspect –

• What to produce – capital goods or consumer

goods
• How to produce – labor intensive or capital
intensive
• For whom to produce – for rich or poor
 Production Possibility Curve/
Transformation Curve
• Production possibility curve is a curve or
growth that shows the different rate of
production of two goods with given resource
and technique of production.
Production possibility curve is drown
an assumption that :
• Given resource are fully utilized
• Technology remains complaints
Production Possibility Curve/ Transformation Curve
 Reason for Shifting to Production
Possibility Curve :
• Resource are
reduce : if we
decrease the
resource, we can
produces less of
both the goods.
Accordingly, PPC
shifts to left.
 Reason for Shifting to Production
Possibility Curve :
• Resource
increased or
technology
improved :

PPC shifts to
right
 Demand
• Demand refers to the quantity of a goods
service that consumers are willingly and able
to purchase at various prices during a given
period of time. Unless demand is backed by
purchasing power or ability to pay, it does not
constitute demand.
 What Determines Demand :
• Price of the commodity
• Price of related commodities
• Level of income of the household
• Tastes & preference of consumers
• Other facility –
• Composition of popularity
• Distribution of income
 Demand VS Quantity Demanded
• Demand refers to different possible quantities
to be purchased at different possible price of a
commodity. On the other hand, quantity
demanded refer to a specific quantity to
purchased against a specific price of the
commodity.
 Demand Schedule :
• Demand schedule is table relating to price and
quantity demanded.
Demand Schedule :
 Demand curve
• Demand curves : Demand curve is simply a graphic
representation of demand schedule showing how quantity
demanded of a commodity is related to its own price.

• Demand curve slopes download from left to right. It

indicates inverse relationship between own price of the
commodity and its quantity demanded. Higher price lead to
a fall in quantity demanded and Lower price leads to a rise
in quantity demanded of a commodity.
Demand curve
 Slope of Demand Curve :
• It shows the ratio between change in price
corresponding to a unit change a quantity
demanded of a commodity. Demand curve
normally slopes downward, indicating inverse
relationship between price of a commodity
and its quantity demanded.
 Note :
• Slopes of demand curve is constant because
demand curve is straight line. Negative sign
indicates inverse relationship between price
and quantity demanded of commodity.
Slope of Demand Curve :
 Law of Demand :
• The law of demand states that, other things
being equal, quantity demanded increase with
a decrease in own price of the commodity,
and vice versa. We can say, there is an inverse
relation between quantity demanded of a
commodity and its own price, other things
remain constant.
 Exception to the Law of Demand :
Article of distinction : some article are in demand only because their
price are very high. If their prices fall, their demand will shrink.
Example – platinum jewelries, sports car.

• Giffen goods : these are highly inferior goods. When price of such
commodities decreased, their demand also fall.

• Giffen goods are such inferior goods on which the consumer spends
a large part of his income, and any slight change in the price of such
a good can have a huge impact upon the consumer.

• Note : demand curve slopes upward when law of demand fails.

 Movement of Demand curve
• Movement along a demand curve : it means
moving up or down the demand curve. when we
move up the curve, it is a situation of contraction
of demand ( buying less in response to increase
in own price of the commodity). When we move
down the curve, it is a situation of extension of
demand, that means buying more or less price.
• Downward
movement along
the demand curve
(Extension of
demand): extension
of demand refer to
increase in quantity
demanded of a
commodity due to a
fall in own price of
the commodity.
• Upward movement
along the demand
curve ( contraction
of demand ) :
contraction of
demand refers to
decrease in
quantity demanded
of a commodity
due to rise in own
price of the
commodity.
 Shifts in Demand Curve :
• Forward shift in demand curve
– increase in demand : forward
shift in demand curve refer to
increase in demand. In this
situation own price of the
commodity remains constant.
Thus increase in demand occurs
when quantity demanded of a
commodity increase because of
the factors other than own
price of the commodity.
• Backward shift in demand
curve – decrease in demand
: it is a situation when
quantity demanded of a
commodity decrease,
although the own price of
the commodity is constant.
Hence we can say decrease
in demand occurs when
quantity demanded of a
commodity decrease
because of the factors other
than own price of the
commodity.
 Causes of Increase of Demand
(Forward shift to Demand Curve):
• When consumers income increase.
• Price of complementary goods falls.
• Price of substitute of goods rises.
• When availability of commodity is expected to reduce
in near future.
• When taste of the consumer shifts in favour of the
commodity.
1. If price of substitute
goods increases,
demand of commodity
will increase – Demand
curve shift to right
2. If price of
complementary goods
increases, demand of
commodity will
decrease – Demand
curve shift to left
 BASIS FOR COMPARISON MOVEMENT IN DEMAND CURVE
Meaning Movement in the demand curve
is when the commodity
experience change in both the
quantity demanded and price,
causing the curve to move in a
specific direction.
What is it? Change along the curve.
Determinant Price
Indicates Change in Quantity Demanded
Result Demand Curve will move upward
or downward.
SHIFT IN DEMAND CURVE
The shift in the demand curve is
when, the price of the
commodity remains constant, but
there is a change in quantity
demanded due to some other
factors, causing the curve to shift
to a particular side.
Change in the position of the
curve.
Non-price
Change in Demand
Demand Curve will shift
rightward or leftward.
 Price elasticity of demand
Degree of change in quantity demanded in
response to change in its own price of the
commodity is the subject matter of elasticity
of demand.
 Price elasticity of demand
1. Proportionate or Percentage method :

Elasticity of demand = % Change in quantity demanded / %

change in price

2. Geomatric method : It measures price elasticity of demand at

different points on the demand curve.
 Price elasticity of demand
• If Ped = ∞ demand is perfectly elastic - demand changes to zero when the price
slightly changes – the demand curve will be horizontal

• If Ped = 0 demand is perfectly inelastic - demand does not change at all when the
price changes – the demand curve will be vertical.

• If Ped is between 0 and 1 (i.e. the % change in demand from A to B is smaller

than the percentage change in price), then demand is inelastic.

• If Ped = 1 (i.e. the % change in demand is exactly the same as the % change in
price), then demand is unit elastic. A 15% rise in price would lead to a 15%
contraction in demand leaving total spending the same at each price level.

• If Ped > 1, then demand responds more than proportionately to a change in price
i.e. demand is elastic.
 Perfectly Elastic
When a small change in price of
a product causes a major
change in its demand, it is
said to be perfectly elastic
demand. In perfectly elastic
demand, a small rise in price
results in fall in demand to
zero, while a small fall in
price causes increase in
demand to infinity.
 Perfectly Inelastic
A perfectly inelastic demand is
one when there is no
change produced in the
demand of a product with
change in its price. The
numerical value for perfectly
inelastic demand is zero
(ep=0).
 Relative elastic
Relatively elastic demand refers
to the demand when the
proportionate change
produced in demand is
greater than the
proportionate change in
price of a product. The
numerical value of relatively
elastic demand ranges
between one to infinity.
 Relative inelastic
Relatively inelastic demand is one
when the percentage change
produced in demand is less
than the percentage change in
the price of a product. For
example, if the price of a
product increases by 30% and
the demand for the product
decreases only by 10%, then
the demand would be called
relatively inelastic. The
numerical value of relatively
elastic demand ranges
between zero to one (ep<1).
 Unitary elastic
When the proportionate change
in demand produces the
same change in the price of
the product, the demand is
referred as unitary elastic
demand. The numerical
value for unitary elastic
demand is equal to one
(ep=1).
 Supply

• Supply vs. stock : - supplies refer to the part of the

stock that the firm is presently prepared to sell at a
given price.
• Stock of a commodity refer to the total quantity of the
commodity which at any given time is available with
the firm for purpose of sale in the market.
• Supply is measured per unit of time period where as
stock is measured at a point of time.
 Supply and Quantity Supplied:-
• Quantity supplied at refer to Price of Goods Quantity of
specific quantity of a commodity (Rs) Goods supplied
producer are ready to sell at a (Unit)
specific price of the commodity. 5 0

• Supply on the other hand refer to 10 15

the entire schedule showing
various quantities offered for sale 15 30
at different possible price of the
commodity.
20 50
 Supply Schedule : -
• It is a table showing various quantities of a
commodity offered for sale at different
possible prices of that commodity.
 Note: -
• Student need not mug up concepts like supply
schedule. Just understand it. Remember each
and every graph, like supply curve, slope of
supply curve, by heart. That is very important.
 Supply Curve :
• Supply curve is a graphic
presentation of supply
schedule showing various
quantities of a commodity
offered for sale at different
possible price of that
commodity. Higher quantity
is offered at higher price of
the commodity.
 Slope of Supply Curve : -
• Slope of supply curve
refer to the ratio
between change in
price and change in
quantity supplied. It is
constant because
supply curve is a
straight line.
 Factor on which Supply of a
Commodity Depend :
• The supply of commodity mainly depends on
the own price of the commodity, price or
related goods, goal of the firm, number of the
firm in industry, business expiation,
government policy, price of factor of
production and state of technology.
 Law of Supply :
• Law of supply state that, other thing
remaining constant, there is positive
relationship between own price of a
commodity and its quantity supplied. Thus,
more is supplied at higher price and less at the
lower price.
 Assumption of Law Supply :
• 1) No changes in the price of related goods.
• 2) No changes in business expectation.
• 3) No changes in the price of factor of production.
• 4) No changes in the goal of firm.
• 5) No changes in the government policy relate d to price
and production of the commodity.
• 6) No change in the technique of production.
Thus the law of supply assume all determinants of supply of a
commodity, other then own price of the commodity,
remain constant.
 Exceptions of the Law of Supply :
• 1) Goods of social distinction (like diamond
jewelry) supply remains limited even if the price
rises.
• 2) A seller may sell perishable commodity even at
lower price.
• 3) This law does not apply wholly to agriculture
produce whose supply is governed by natural
factor.
Movement Along a Supply Curve :
• If we move down
the supply curve,
supply contract. If
we move up the
supply curve,
supply extends.
 Extension of Supply :
• Extension of supply
occurs when
quantity supplied
of a commodity
increase due to
increase own price
of the commodity.
 Contraction of Supply :
• Contraction of supply
occurs when quantity
supplied of a
commodity decrease
due to decrease in
own price of the
commodity.
 Shift in Supply Curve :
• Shift can be forward shift and backward shift.
• Forward and backward shift are caused by
factors, other then own price of the
commodity.
 Forward Shift in Supply Curve –
• Increase in supply :
in this situation of
forward shift the
quantity supplied of
a commodity is
increase even
though own price of
the commodity
remains constant.
 Backward shift in Supply Curve –
Decrease in Supply :
• In the situation of
backward shift, the
quantity supplied of
a commodity
decrease even
though own price of
the commodity
remains constant.
 Cause of Increase of Supply :
• 1) Improvement in technology which result into falls
in the cost of production.
• 2) Reduction in factor prices, causing a fall in cost of
production.
• 3) High business expectation.
• 4) Increase in number of firm in industry.
• 5) Shift in goal of the firm from price maximization
to sale maximization. Clearance sale.
• 6) Decrease in taxation such as excise duty.
 Price Elasticity of Supply :
• Price elasticity of supply measure the degree of extension or
contraction of supply in a response to a given change in own price
of the commodity.

• Elasticity of supply measures the degree of responsiveness of

quantity supplied to a change in own price of the commodity. It is
also defined as the percentage change in quantity supplied divided
by percentage change in price.

• There are two methods to measure price elasticity of supply:

 Price elasticity of Supply
1. Proportionate or Percentage method :

Elasticity of Supply = % Change in quantity supplied / % change in

price of commodity

2. Geomatric method : Geometrically, Elasticity of supply

depends on the origin of the supply curve
Price elasticity of Supply
 Perfectly Elastic
When without any change
in price, supply may
change to any extent,
then the supply is
perfectly elastic. Here
the supply curve will
be horizontal and
parallel to the x-axis.
 Perfectly Inelastic
Supply is perfectly inelastic
when a change in the
price causes no change
in supply. In other
words, price has no
influence on supply.
Here, the supply curve
will be a vertical line
parallel to the y-axis.
 Unitary elastic
Elasticity of supply is
unitary when the
change in the quantity
supplied is in exact
proportion to the
change in price. The
supply curve SS, which
is a 45° line represents
unitary elastic supply
curve
 Relative elastic
Supply is said to be
relatively elastic when
a small change in price
brings about a large
change in quantity
supplied. A small rise
in price leads to a
great increase in
supply and a small fall
in price brings about a
great decrease in
supply
 Relative inelastic
Supply is said to be
relatively inelastic
when a big change in
price brings about a
small change in supply.
A big fall in price brings
about a small fall in
supply and a big rise in
price brings about a
small rise in supply.
Price elasticity of Supply
Q. The quantity of a good demanded rises from 1000 to 1500
units when the price falls from $1.50 to $1.00 per unit. The
price elasticity of demand for this product is approximately:

A. 1.0
B. 1.6
C. 2.5
D. 4.0
Q. Demand is said to be inelastic when:

A. the percentage change in quantity demanded is greater than the

percentage change in price of a good

B. in a linear demand curve, quantity demanded is close to zero (given the

price) so that the percentage change in quantity demanded will be very
high

C. the percentage change in price exceeds the percentage change in quantity

demanded of a good

D. a relatively small change in price results in a relatively big change in

quantity demanded
Q. The quantity of a good demanded rises from 90 units to 110 units when the
price falls from $1.20 to $.80 per unit. The price elasticity of demand for
this product approximates:

A. .5

B. 1.0

C. 2.0

D. 4.0