1. QUESTIONS 1.What do you understand by the term ‘demand’? 2.State the Law of Demand and explain its operation with the help of a graph. 3.Distinguish and differentiate, with the help of diagrams, between ‘movement along the demand curve’ and ‘shift in the position of the demand curve’. 4.Explain, with an illustration, ‘demand schedule’. 5.Equations are the most useful method of representation of demand for analytical purposes. Explain.

2. QUESTIONS 6.What do you understand by the term ‘Q = f(P)’? 7.Distinguish between ‘controllable’ and ‘uncontrollable’ factors affecting demand for a product. Give examples of each kind. 8.State the Law of Supply and explain its operation with the help of a graph. 9.What are the factors that can trigger a fall in supply? 10.Explain ‘market equilibrium’ with the help of a diagram.

3. The concepts of demand and supply are among the most important in all economics.

4. Demand In the economic sense demand refers to the quantities that people are or would be willing to buy at different prices during a given time period, assuming that other factors affecting these quantities remain the same.

5. We can talk about demand curves, schedules, functions, equations, relationships or points.

6. When economists use the single word ‘demand’ they are referring to the relationship that is frequently called the demand curve. In this sense, demand refers to the quantities that people are or would be willing to buy at different prices during a given time period, assuming that other factors affecting these quantities remain the same.

7. There is generally an inverse relationship between the quantity demanded and the price charged, and this is customarily shown in the downward-sloping demand curve, although the relationship can equally be expressed in terms of a function or equation. The demand relationship is determined by many factors, but consumer tastes are fundamental. This applies both to products and to the services of people in the labour market

8. Representation of Demand Tables, graphs and equations

9. Tables are the simplest method of representation. An example of a demand table or schedule is Price of Beverage Bottles sold 30 120 40 100 50 80 60 60 70 40

10. The table shows the general ‘law of demand’, that less is demanded at higher prices. Quantities demanded at various prices are shown as pairs of values. Although they are simple to understand the main problem with tables is that they are not very useful for analytical purposes.

11. DEMAND GRAPH

12. Graphs are much more useful for analysis, Most analysis in introductory microeconomics involves the use of graphs. It can be seen that the demand relationship in this case is both inverse and linear. The difference between the concepts of demand and quantity demanded is illustrated: the former relates to the whole demand curve whereas the latter relates to a single point on the curve.

13. Law of Demand A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good. An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.

14. Change in Quantity Demanded - I Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 An increase in price causes a decrease in quantity demanded.

15. Change in Quantity Demanded - II Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 A decrease in price causes an increase in quantity demanded.

16. Equations These are the most useful method of representation for analytical purposes since they explicitly show the effects of all the variables affecting quantity demanded, in a concise form that at the same time reveals important information regarding the nature of the relationship.

17. Considering the above demand curve we can estimate the equation relating to it in various ways. The general form of the demand function in terms of price and quantity demanded is: Q = f (P)

18. This is the most general way of describing the relationship since it does not involve any specific mathematical form. It can obviously be expanded by including any number of variables on the righthand side of the equation that might affect quantity demanded.

19. for example: Q = f( P, A, Y, Ps,.... ) where A represents advertising expenditure, Y represents average income of the market and Ps represents the price of a substitute product. In the two-variable case the demand function can be expressed in a linear form: Q = a + bP

20. Changes in Demand Change in Buyers’ Tastes Change in Buyers’ Incomes –Normal Goods –Inferior Goods Change in the Number of Buyers Change in the Price of Related Goods –Substitute Goods –Complementary Goods

21. Change in Demand Quantity Price P0P0 Q0Q0 Q1Q1 An increase in demand refers to a rightward shift in the market demand curve.

22. Change in Demand Quantity Price P0P0 Q1Q1 Q0Q0 A decrease in demand refers to a leftward shift in the market demand curve.

23. DETERMINANTS OF DEMAND While identifying factors which affect the quantity demanded of a product, it is useful from a managerial decision-making viewpoint to distinguish between controllable and uncontrollable factors. Controllable in this context means controllable by the firm; the distinction in practice between what can be controlled and what cannot is somewhat blurred, as will be seen. The relevant factors are summarized below:

24. Controllable factors These correspond to what are often referred to as the marketing-mix variables.

25. Price is the amount of money that has to be paid to acquire a given product. Insofar as the amount people are prepared to pay for a product represents its value, price is also a measure of value. So long as they are not artificially controlled, prices provide an economic mechanism by which goods and services are distributed among the large number of people desiring them.

26. They also act as indicators of the strength of demand for different products and enable producers to respond accordingly. This system is known as the price mechanism and is based on the principle that only by allowing prices to move freely will the supply of any given commodity match demand.

27. This function of prices may be analyzed into three separate functions. First, prices determine what goods are to be produced and in what quantities; second, they determine how the goods are to be produced; and third, they determine who will get the goods.

28. Price can also be viewed as the ratio of the quantities of goods that are exchanged for each other. E.g. suppose two people exchange 5 apples for 2 loaves of bread. Then the price of apples could be expressed as 2/5 = 0.4 loaves of bread. Likewise, the price of bread would be 5/2 = 2.5 apples..

29. However in reality prices are usually quoted and paid in currency. Thus it can be argued that the most basic and general definition of price is that expressed in money, and that the exchange ratio between two goods is simply derived from the two individual prices

30. Price is the amount of money that has to be paid to acquire a given product. Insofar as the amount people are prepared to pay for a product represents its value, price is also a measure of value. So long as they are not artificially controlled, prices provide an economic mechanism by which goods and services are distributed among the large number of people desiring them.

31. Product The second is multidimensionality. Products often have many different attributes. This is particularly obvious for expensive and hi-tech products. With mobile phones, for example, a consumer may be looking for a good design, small size and weight, multiple features, a good complementary network, a good brand name, a good warranty, and so on.

32. Even with an inexpensive product like toothpaste, consumers may be looking not just for something to clean their teeth, but also something that whitens their teeth, smells fresh, prevents decay and plaque and comes in a convenient dispenser.

33. Promotion This refers to communication by the firm with its intended customers, aimed at persuading them to buy the product. The main components of the promotion-mix are customarily identified as: advertising, personal selling, publicity and sales promotion. Sometimes other elements are included separately, like direct marketing or packaging. These are usually measured in terms of expenditure and there is a direct relationship with quantity demanded.

35. Law of Supply A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good. An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.

36. Change in Quantity Supplied Quantity Price P1P1 Q1Q1 P0P0 Q0Q0 A decrease in price causes a decrease in quantity supplied.

37. Change in Quantity Supplied Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 An increase in price causes an increase in quantity supplied.

38. Changes in Supply Change in Production Technology Change in Input Prices Change in the Number of Sellers Autonomous fall in femand

39. Change in Supply Quantity Price P0P0 Q1Q1 Q0Q0 An increase in supply refers to a rightward shift in the market supply curve.

40. Change in Supply Quantity Price P0P0 Q1Q1 Q0Q0 A decrease in supply refers to a leftward shift in the market supply curve.

41. If supply is excessive, prices will be low and production will be reduced; this will cause prices to rise until there is a balance of demand and supply. In the same way, if supply is inadequate, prices will be high, leading to an increase in production that in turn will lead to a reduction in prices until both supply and demand are in equilibrium.

42. Market Equilibrium Market equilibrium is determined at the intersection of the market demand curve and the market supply curve. The equilibrium price causes quantity demanded to be equal to quantity supplied.

43. Market Equilibrium Quantity Price P Q D S

44. Market Equilibrium Quantity Price P0P0 Q0Q0 D0D0 S0S0 Q1Q1 P1P1 D1D1 An increase in demand will cause the market equilibrium price and quantity to increase.

45. Market Equilibrium Quantity Price P1P1 Q1Q1 S0S0 Q0Q0 P0P0 D0D0 D1D1 A decrease in demand will cause the market equilibrium price and quantity to decrease.

46. Market Equilibrium Quantity Price P0P0 Q0Q0 D0D0 S0S0 Q1Q1 P1P1 An increase in supply will cause the market equilibrium price to decrease and quantity to increase. S1S1

47. Market Equilibrium Quantity Price P1P1 Q1Q1 D0D0 Q0Q0 P0P0 A decrease in supply will cause the market equilibrium price to increase and quantity to decrease. S1S1 S0S0