LAW OF DEMAND AND SUPPLY DEMAND

• Demand refers to how much (quantity) of a product or service is desired by buyers.

The quantity demanded is the amount of a product people are willing to buy at a
certain price the relationship between price and quantity demanded is known as
the demand relationship.
• For the seller demand means that buyers are able and willing to purchase at a
particular price.
The Law of Demand
• The law of demand states that, if all other factors remain equal, the higher the
price of a good, the less people will demand that good.
• In other words, the higher the price, the lower the quantity demanded.
• The amount of a good that buyers purchase at a higher price is less because as the
price of a good goes up, so does the opportunity cost of buying that good.
• As a result, people will naturally avoid buying a product that will force them to
forgo the consumption of something else they value more.
• The graph below shows that the curve is a downward slope.
• A, B and C are points on the demand curve. Each point on the curve
reflects a direct correlation between quantity demanded (Q) and
price (P). So, at point A, the quantity demanded will be Q1 and the
price will be P1, and so on. The demand relationship curve illustrates
the negative relationship between price and quantity demanded. The
higher the price of a good the lower the quantity demanded (A), and
the lower the price, the more the good will be in demand (C).
• The chart below shows that the curve is a downward slope.
Factors Influencing Demand

Factors Influencing Demand

A number of factors help to determine how much a consumer will buy.
Some of the most important factors are:
1. Income of the consumer:
A consumer’s demand is influenced by the size of his income. With
increase in the level of income, there is increase in the demand for
goods and services. A rise in income causes a rise in consumption. As a
result, a consumer buys more.
• For most of the goods, the income effect is positive. But for the
inferior goods, the income effect is negative. That means with a rise in
income, demand for inferior goods may fall.
Price of the commodity:
Price is a very important factor, which influences demand for the commodity.
• Generally, demand for the commodity expands when its price falls, in the
same way if the price increases, demand for the commodity contracts.
• It should be noted that it might not happen, if other things do not remain
constant.
Changes in the prices of related goods:
Sometimes, the demand for a good might be influenced by prices changes
of other goods.
• There are two types of related goods. They are substitutes and
complements. Tea and Coffee are good substitutes.
• A rise in the price of coffee will increase the demand for tea and vice versa.
Bread and butter are complements. A fall in the price of bread will increase
the demand for butter and vice versa.
Tastes and preferences of the consumers:
• Demand depends on people’s tastes, preferences, habits and social customs.
A change in any of these must bring about a change in demand. For
example, if people develop a taste for tea in place of coffee, the demand for
tea will increase and that for coffee will decrease.
Price expectations:
Expectations of people regarding the future prices of goods also influence
their demand.
If people anticipate a rise in the prices of goods in future due to some reasons,
the demand for goods will rise to avoid more prices in future.
Contrarily, if the people expect a fall in price, the demand for the commodity
will fall.
Change in the distribution of income:
• If the distribution of income is unequal, there will be many poor
people and few rich people in society.
• The level of demand in such a society will be low.
• On the other hand, if there is equitable distribution of income, the
demand for necessaries commonly consumed by the poor will
increase and the demand for luxuries consumed by the rich will
decrease.
• However, the net effect of an equitable distribution of income is an
increase in the level of demand effective advertising campaign could
increase the quantity demanded of a particular good.
• It could also decrease the demand for a competing good.
Changes IN Demand
• A change in price will result in a movement along a demand curve.
• A change in a non-price variable will result in a shift in the demand curve.
• An outward shift in demand will occur if income increases, in the case of
a normal good; however, for an inferior good, the demand curve will shift
inward noting that the consumer only purchases the good as a result of
an income constraint on the purchase of a preferred good.
Normal good
• A good for which demand increases when income increases and falls
when income decreases but price remains constant.
Inferior good
• A good that decreases in demand when consumer income rises; having a
negative income elasticity of demand.
• The demand curve is a graphical representation of an economic agent's willingness to
purchase a given quantity of a good or service at a specific price based on
preferences, income, and other prevailing factors at a given point in time.
• Demand curves in combination with supply curves, which depict the price to quantity
relationship of producers, are a representation of the goods and services market.
• Where the two curves (demand and Supply) intersect is market equilibrium, the price
to quantity relationship where demand and supply are equal.

• Shifts in the demand curve are related to non-price events that include income,
preferences and the price of substitutes and complements.
• An increase in income will cause an outward shift in demand (to the right) if the good
or service assessed is a normal good or a good that is desirable and is therefore
positively correlated with income.
• Alternatively, an increase in income could result in an inward shift of demand (to the
left) if the good or service assessed is an inferior good or a good that is not desirable
but is acceptable when the consumer is constrained by income .
THE DEMAND CURVE
Price elasticity of demand

Definition:
• The Price Elasticity of Demand (commonly known as just price
elasticity) measures the rate of response of quantity demanded due
to a price change.
• Formula: PEoD = (% Change in Quantity Demanded)/(% Change in
Price)
Interpreting the Price Elasticity of Demand
• The higher the price elasticity, the more sensitive consumers are to price
changes.
• A very high price elasticity suggests that when the price of a good goes up,
consumers will buy a great deal less of it and when the price of that good
goes down, consumers will buy a great deal more.
• A very low price elasticity implies just the opposite, that changes in price
have little influence on demand
Rule for elasticity of demand
• If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price
changes)
• If PEoD = 1 then Demand is Unit Elastic
• If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price
changes)
supply
• Supply represents how much the market can offer. The quantity
supplied refers to the amount of a certain good producers are willing to
supply when receiving a certain price.
• The correlation between price and how much of a good or service is
supplied to the market is known as the supply relationship. Price,
therefore, is a reflection of supply and demand.
The Law of Supply
• Like the law of demand, the law of supply demonstrates the quantities
that will be sold at a certain price. But unlike the law of demand, the
supply relationship shows an upward slope.
• This means that the higher the price, the higher the quantity supplied.
Producers supply more at a higher price because selling a higher
quantity at a higher price increases revenue.
FACTORS INFLUENCING SUPPLY
1. Goals of the firm:
Generally, the aim of the firm is to maximize profits. Besides, maximum sales,
maximum output and maximum employment are also the goals of the firm.
These goals and change in them affect the supply of the commodity.
2. Price of the substitutes:
The supply of particular goods is inversely related to the price of its substitutes.
3. The price of factors of production:
With the rise in the price of factors of production the cost of production rises.
This result in decrease of supply and vice versa.
4. Change in technology:
A change in technique of production may lead to a change in supply if the
technique of production improves, cost of production will fall. Even at the same
prices, producers will like to supply more.
5. The price of the commodity: The supply of a commodity very much depends on its price.
There is direct and positive relationship between the price of the commodity and its
supply.
6. Expected change in price: In case producers expect an increase in the price, they will
withdraw goods from the market. Consequently, supply will decrease. If price is expected
to fall in future, supply will naturally increase.
7. Taxation policy: The production of the commodity is discouraged if heavy tax on its
production is imposed. On the contrary, tax concessions encourage producers to increase
supply.
8. Number of producers: If the number of producers producing a commodity increases, its
supply will increase. With the exit of producers, the supply would decrease.
9. Natural factors: Natural calamities like flood, drought and cyclone reduce the supply of a
commodity. If natural disasters are absent, production and supply of a good will increase.
10. Means of transport: Goods transport and communication facilitates free and quick
mobility of factors of production to the producing centers and the final products to the
market. Presence of good means of transport and communication thus increases the
supply of a good. The supply curve will shift to left.
Changes in Supply
A change in the price of a good or service, holding all else constant, will
result in a movement along the supply curve.
A change in the cost of an input will impact the cost of producing a
good and will result in a shift in supply; supply will shift outward if costs
decrease and will shift inward if they increase.
A change in the expected demand for a good or service will result in a
shift in supply; supply will shift outward if goods and service will expect
to increase and will shift inward if there is an expectation for consumers
preferences to change in favor of an alternate good or service.
Equilibrium
• When supply and demand are equal (when the supply function and
demand function intersect) the economy is said to be at equilibrium.
• At this point, the allocation of goods is at its most efficient because
the amount of goods being supplied is exactly the same as the
amount of goods being demanded.
• Thus, everyone (individuals, firms, or countries) is satisfied with the
current economic condition.
• At the given price, suppliers are selling all the goods that they have
produced and consumers are getting all the goods that they are
demanding.