1. DEMAND & SUPPLY

2. Aims & Objectives
After studying this lesson, you will be able to understand:
The concept of demand
Determinants of demand
Law of demand
Process of demand estimation
Concept of supply and supply function
Determinants of supply
Law of supply

3. Demand defined
Demand is the desire, want or need to purchase a good or service at a given price backed up by the willingness and ability to pay for it
Quantity demanded (normally denoted as Qd) is the amount of a particular good or service that consumers are willing or able to purchase at a given price, during a given period of time.

4. Types of Demand Individual vs Market demand Company vs Industry demand
Market segment vs Total market demand
Domestic vs National demand
Direct vs Indirect demand
Autonomous vs induced demand
New vs replacement demand
Household vs Corporate vs Government demand

5. Determinants of Demand
Price of the commodity
Income of the consumer
Price of related goods - Price of substitutes & Price of complements
Wealth of the consumer
Price/Income Expectation
Advertisement expenditure
Taste & preferences
Other factors

6. Demand function A demand function is given as:
Dx = f (Px, Py, Pz, I, W, E, A, T, O)
Where,
Px → price of good X
Py → price of substitute
Pz → price of complement
I→ income of the consumer
W → wealth of the consumer
E → price/income expectation of the consumer
A → advertisement expenditure on the good
T → taste & preference of the consumer
O → other exogenous factors

7. Market demand function
Market demand function is the summation of all the individual demand functions

8. Law of Demand
All other factor affecting demand for a commodity remaining constant, if price of the good rises then quantity demanded of the good falls and viceversa.

9. Demand schedule & Demand curve
Price/unit
Quantity (unit) P1 Q1 P2 Q2 p3 Q3
A tabular representation of
quantity purchased of a good at
corresponding prices is
referred to as a demand schedule.
A graphical representation of the
demand schedule is the demand
curve P D O Q

10. Slope of a demand curve
The demand curve, each point on which shows the quantity purchased of a good at various prices, is downward sloping as quantity demanded of a good is inversely related to its price
This inverse price-quantity relationship may be explained with the help of the following two concepts:
Income effect
Substitution effect

11. Income effect Px ↓ → Real income ↑→ Qx ↑
When the price of a commodity falls less has to be spent on the purchase of the same quantity of the commodity. This leads to an increase in purchasing power of the money with the buyer. This is referred to an increase in real income of the consumer.
The increase in real income leads to an increase in purchase of the commodity whose price has fallen. This is referred to as income effect of a price change.
Px ↓ → Real income ↑→ Qx ↑

12. Income effect negative or positive?
Px ↓ → Real income ↑→ Qx ↑ ⇒ income effect is positive ⇒ X is a normal good
Px ↓ → Real income ↑→ Qx ↓ ⇒income effect is negative ⇒ X is an inferior good

13. Px ↓→ it is relatively cheaper and hence attractive → Qx ↑
Substitution Effect
When price of a commodity falls, its becomes cheaper relative to other commodities. This leads to substitution of other commodities (which are now relatively more expensive) by this commodity. Thus the demand for the cheaper good rises. This is called the substitution effect.
Px ↓→ it is relatively cheaper and hence attractive → Qx ↑

14. Substitution effect negative or positive?
Substitution effect is always positive.

15. Inferior good vs Giffen good
A good with negative income effect is referred to as inferior good
A good whose negative income effect dominates the positive substitution effect is a Giffen good.
Thus, all Giffen goods are inferior goods but all inferior goods are not Giffen goods

16. Exception to Law of Demand
Giffen paradox: when negative income effect of an inferior good dominates its positive substitution effect, the total effect of a price change of the good on its quantity demanded tends to be positive. That is, as price falls, demand for its falls too & if price rises then demand for its rises too. This results in an upward sloping demand curve.
Other exceptions are: Snob/Veblen effect, Share Market, Demonstration effect P D O Q

17. Shifts & movement along demand curve
Shift of demand curve P1 A P P2 B Q1 Q2 Q1 Q2 Q3
The change in demand is due to
change in price of the good all
other factors affecting demand
being constant. This is referred
to as change in quantity demanded.
If quantity demanded increases it is
called expansion of demand. If quantity demanded decreases it is called contraction of demand
The change in demand is due to
change in any one of the other factors affecting demand (say, income), price of the good remaining the same. This is referred to as change in demanded. If quantity demanded increases it is
called increase of demand. If quantity demanded decreases it is called
decrease of demand

18. Estimation of demand
Involves estimating demand relationship and forecasting demand.
Steps involved are:
Collecting information: consumer surveys, Market information
Data Analysis by statistical estimation of demand relationships

19. Supply
Quantity supplied of any good or service is the amount that sellers are willing and able to sell for a price

20. Determinants of supply
Input prices
Technology
Expectation of future prices
Number of sellers in the market
Price of substitute or complementary goods

21. Supply function Sx = S (Px, Pw, Pv, C, T, E, N, In, Dr) Where
Px denotes price of X
Pw denotes price of substitute
Pv denotes price of complement
C denotes input prices or cost
T denotes technology
E denotes price expectation
N denotes number of sellers
In denotes inventory demand
Dr denotes reservation demand

22. Supply schedule & Supply curve
Price/unit
Quantity (unit) P1 Q1 P2 Q2 p3 Q3
A tabular representation of
quantity supplied of a good at
corresponding prices is
referred to as a supply schedule.
A graphical representation of the
supply schedule is the supply
curve. The supply curve is
upward rising as quantity supplied
of a good is directly related to its
own price P S O Q

23. Shifts & movement along supply curve
Shift of supply curve P1 A P P2 B Q1 Q2 Q1 Q2 Q3
The change in supply is due to
change in price of the good all
other factors affecting supply
being constant. This is referred
to as change in quantity supplied.
If quantity supplied increases it is
called expansion of supply. If quantity supplied decreases it is called contraction of supply
The change in supply is due to
change in any one of the other factors affecting supply(say, technology), price of the good remaining the same. This is referred to as change in supply. If quantity supplied increases it is
called increase of supply. If quantity supplied decreases it is called
decrease of supply

24. Law of Supply
All other factor affecting supply of a commodity remaining constant, if price of the good rises then quantity supplied of the good also rises.

25. Market equilibrium

26. Aims and Objectives
After studying this lesson, you will be able to understand
Concept of market equilibrium
Effect of changes in demand on equilibrium
Effect of changes in supply on equilibrium

27. Market equilibrium/Demand-supply equilibrium & its stability
Excess supply
Market equilibrium occurs when demand for a good matches its supply and the market gets cleared.
An equilibrium is said to be stable when following any deviation from the equilibrium there are some automatic forces which bring the system back to equilibrium P D S P2 E
equilibrium P1 P3
Excess demand O Q1 Q

28. Effect on equilibrium when demand changesP D S
Let demand increase for some reason. New demand curve is D’ now. With same supply there is excess demand at each price. This pushes up the price and the new equilibrium occurs at E’ at a higher price and higher quantity E’ P2 E P1 O Q1 Q2 Q

29. Effect on equilibrium when supply changesD S
Let supply increase for some reason. New supply curve is S’ now. With same demand there is excess supply at each price. This pushes down the price and the new equilibrium occurs at E’ at a higher quantity and lower price S’ E P1 E’ P2 O Q1 Q2 Q

30. Exercise Work out effect on equilibrium in the following situations:
When there is a technological up gradation
When income of consumer increases
When input prices rise
When price of substitute rises

31. Price controls
These are of two types: Price ceiling and Price floor

32. Price Ceiling
When the Regulator (government) feels that the market price (Pm) of a good is too high and the consumer welfare is at stake then the government can fix the price at a level lower than the market equilibrium price. This is referred to as price ceiling.
At the ceiling price (Pc)there is excess demand trying to push the price back to the higher level determined by market equilibrium. So to sustain the price ceiling the government increases the supply to match the increased demand and thereby eliminate the pressure of excess demand.
To enable suppliers to supply more at lower price, the government provides subsidies to the suppliers.
Demand Curve
Original market supply curve
Supply curve after subsidy Pm Pc
Excess demand

33. Price Floor
When the Regulator (government) feels that the market price (Pm) of a good is too less and the producer welfare is at stake then the government can fix the price at a level higher than the market equilibrium price. This is referred to as price floor.
At the floor price (Pf)there is excess supply trying to push the price back to the lower level determined by market equilibrium. So to sustain the price floor the government increases the demand to match the excess supply and thereby eliminates the pressure of excess supply.
To increase the demand to match the excess supply, the government procures these goods and takes initiatives to sell these procured products itself
Excess supply
Supply curve Pf Pm
Demand curve when gov procures
Original demand curve

34. Thank You