Concept of demand & supply

CONCEPT OF DEMAND

By
SHRUTI SATIJA

Managerial Economics Unit-I CONCEPT OF
1 DEMAND (Batch 2012-14) 10/25/2012

DEMAND
 Desire backed by ‘willingness’ and ‘ability’ to pay
for a commodity.

 It implies:
 Desire to acquire it
 Willingness to pay for it
 Ability to pay for it.

2 DEMAND (Batch 2012-14) 10/25/2012

Demand by Market Segment and
Total Market.

 Geographical spread
 Product uses
 Distribution channel
 Customer size
 Product variety

3 DEMAND (Batch 2012-14) 10/25/2012

TYPES OF DEMAND
1. Consumer goods and Producer goods
 Consumer goods- Goods & services used for final
consumption.
 Producer goods- Goods used for production of other
goods.
2. Perishable and Durable goods.
3. Autonomous and Derived demand
 Autonomous- Goods whose demand is not tied up with
the demand for some other goods.
4. Individual’s demand & Market demand
 Mkt dd is the summation of dd for a good by all individual.
 Price of X and dd by buyer1,2,3 and all buyers market dd.
4 DEMAND (Batch 2012-14) 10/25/2012

5. Firm & Industry demand
 All firms producing a particular good.
 Eg.- DD for Hyundai car and all types of car.
6. Demand by market segment and total market.
 Geographical spread
 Product uses
 Distribution channel
 Customer size
 Product variety

5 DEMAND (Batch 2012-14) 10/25/2012

DEMAND FUNCTION
 The DD function is an algebraic expression of the relation
between the demand for a commodity and its various
determinants.

Dx = f(PX , PS, PC, Y, T,E,U )

Dx = Demand for X item
PX = Price of X item
PS = Price of substitute goods
PC = Price of complimentary goods
Y= Income of consumer
T= Taste or preference of consumer
E= Price expectation of the user
U= All other factors
6 DEMAND (Batch 2012-14) 10/25/2012

DETERMINANTS OF DEMAND
 Price of the commodity
 Price of the related commodities
 Substitute goods.
 Complimentary goods.
 Income of the consumer d  y
 Normal goods.
 Necessites.
 Inferior goods.
 Tastes & preferences of consumer.
 Expectations about future price.

7 DEMAND (Batch 2012-14) 10/25/2012

DETERMINANTS OF DEMAND
 Size and regional distribution of population.

 Composition of population.

 Distribution of income.

8 DEMAND (Batch 2012-14) 10/25/2012

CAUSES OF CHANGE IN DEMAND
 INCREASE IN DEMAND:

• In income & wealth of the people.
• In the population.
• In the prices of substitute goods.
• In the prices of complementary goods.
• Expectations of rise in prices in future.
• Changes in tastes, preferences, habit,
customs in favor of a commodity.

9 DEMAND (Batch 2012-14) 10/25/2012

CAUSES OF CHANGE IN DEMAND
 DECREASE IN DEMAND:

• In income & wealth of the people.
• In the population.
• In the prices of substitute goods.
• In the prices of complimentary goods.
• Expectations of fall in prices in future.
• Changes in tastes, preferences, habit,
customs, against a commodity

10 DEMAND (Batch 2012-14) 10/25/2012

CHARACTERISTICS
CONCEPT OF DD DEMONSTRATES THE
FOLLOWING:
 Demand is always with reference to a
price.
 Demand is referred to in a given period
of time.
 Consumer must have the necessary
purchasing power to back his desire for
the commodity.
 Consumer must also be ready to
exchange his money for the commodity
11 DEMAND (Batch 2012-14) 10/25/2012
in question.

LAW OF DEMAND
 The inverse relationship between the price and
quantity demanded of a commodity, other things
remaining the same (ceteris paribus).

 In other words, when the (price of goods) s, dd
s and when p , dd , provided factors other than
the price do not changed.

12 DEMAND (Batch 2012-14) 10/25/2012

Downward sloping in DD
curve

13 DEMAND (Batch 2012-14) 10/25/2012

Reason for downward sloping
Curve
1. Law of diminishing marginal utility.
 As a consumer keeps on consuming successive units of the
same commodity, consumption of other commodities
remaining constant, MU diminishes.
2. Income effect.
3. Substitution effect.
4. Changes in the number of consumers.
5. Diverse uses of commodity.

14 DEMAND (Batch 2012-14) 10/25/2012

EXCEPTIONS TO LAW OF
DEMAND
1. Prestige is directly associated with price of
goods.

2. Giffen paradox

3. Emergency

4. Expectations about future price

15 DEMAND (Batch 2012-14) 10/25/2012

CHANGE IN DEMAND & CHANGE IN
QUANTITY DEMANDED
CHANGE IN DEMAND CHANGE IN QUANTITY
DEMANDED
 Change in demand
essentially happens due to  Change in quantity
a change in the factors demanded happens
affecting demand. essentially due to a change
in the price of that
commodity.
 Change in demand causes
 Change in quantity
a shift in the Demand
demanded causes a
Curve ,i.e., an increase in
movement along the
demand causes the
demand curve.
demand curve to shift
outwards whereas a
16 decrease causes an
DEMAND (Batch 2012-14) 10/25/2012
inward shift.

MOVEMENT ALONG DD
CURVE
 A movement along a demand curve occurs when
the ONLY factor that changes

.

17 DEMAND (Batch 2012-14) 10/25/2012

 It is just an arrow along the demand curve in the
correct direction. As price increases the
movement would be to the left, as price
decreases the movement would be to the right.

If the quantity decreases it is known as
contraction.
If the quantity increases it is known as expansion

18 DEMAND (Batch 2012-14) 10/25/2012

SHIFT IN DD CURVE

19 DEMAND (Batch 2012-14) 10/25/2012

 In this diagram the shift from demand curve D1 to
demand curve D2 is represented by an actual
translation across the plane. This particular
diagram features an inward shift to the left, or a
shrink in demand. An outward shift would be an
increase in demand.

This shift is caused by any actual changes in the
determinants of demand.

20 DEMAND (Batch 2012-14) 10/25/2012

CONCEPT OF SUPPLY

21 DEMAND (Batch 2012-14) 10/25/2012

SUPPLY
 It is the willingness and ability of producers to make
a specific quantity of output available to consumers
at a particular price over a given period of time.
 Supply is the mirror image of demand.

22 DEMAND (Batch 2012-14) 10/25/2012

LAW OF SUPPLY
 There is positive relation between price and
quantity supplied other things remaining constant.

 Variables other than price:
 Money cost of production
 Inter-related supply

23 DEMAND (Batch 2012-14) 10/25/2012

TYPES OF SUPPLY CURVE
 The supply curve is upward sloping.

 There are TWO types of change in supply;
 1. Movement ALONG the supply curve
2. SHIFTS in the supply curve

24 DEMAND (Batch 2012-14) 10/25/2012

A movement ALONG the supply
curve
 A movement along the supply curve is caused by a
change in PRICE of the good or service.
 For instance, an increase in the price of the good
results in an EXTENSION of supply (quantity
supplied will increase), whilst a decrease in price
causes a CONTRACTION of supply (quantity
supplied will decrease).

25 DEMAND (Batch 2012-14) 10/25/2012

A SHIFT in the supply curve
 A shift in the supply
curve is caused by a
change in any non-
price determinant of
supply. The curve can
shift to the right or left.
 A rightward shift
represents an increase
in the quantity supplied
(at all prices) S1 to S2,
whilst a leftward shift
represents a decrease
in the quantity supplied
26 DEMAND (Batch 2012-14) (at all prices). S1 to S3.
10/25/2012

THINGS TO REMEMBER
 The supply curve follows the law f supply when price
and quantity supplied increases and vice versa.
 The horizontal axis-quantity-has time dimension.
 The quantities are of the same quality.
 The vertical axis-price-is a relative price.
 The curve assumes everything else is constant.
 Effects of price is shown by movement and shift in
supply curve.

27 DEMAND (Batch 2012-14) 10/25/2012

MARKET EQUILIBRIUM PRICE
A price that can be maintained
Price SURPLU
Supply E is the state of balance, from
which there is no tendency to
S
change.
E
P

SHORTAG Demand
E

Quantity
Q

THANK YOU

29 DEMAND (Batch 2012-14) 10/25/2012

Concept of demand & supply

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Concept of demand & supply