CHAPTER-3

DEMAND AND SUPPLY ANALYSIS

AUTHOR: DR. JASWINDER SINGH

CONCEPT OF DEMAND
Demand can be defined as a quantity of a product an individual is willing to purchase at a specific point of time. The demand for a product is always defined in reference to three key factors, price, point of time, and market place. For example, the demand for milk is 100 litres per day at a price of Rs. 15 per litre in City A . Types of Demand:
Individual and Market Demand Organization and Industry Demand Autonomous and Derived Demand Demand for Perishable and Durable Goods Short-term and Long-term Demand

2012, Dreamtech Press :: Chapter 3

DETERMINANTS OF DEMAND
The demand of a product is influenced by a number of factors: Price of a Product or Service Income Tastes and Preferences of Consumers: Price of Related Goods Expectations of Consumers Ef fect of Advertisements Distribution of Income in the Society Growth of Population Government Policy Climatic Conditions

2012, Dreamtech Press :: Chapter 3

LAW OF DEMAND
The law of demand states that the demand for a product decreases with increase in its price and vice versa, while other factors are at constant. There is an inverse relationship between the price and quantity demanded of a product . Demand is a dependent variable, while price is an independent variable. Therefore, demand is a function of price and can be expressed as follows: D= f (P)

2012, Dreamtech Press :: Chapter 3

DEMAND CURVE
Price of A (per kg in Rs.) 10 Quantity Demanded (per week in kgs) 15

15

10

20

25

30

2012, Dreamtech Press :: Chapter 3

ASSUMPTIONS IN LAW OF DEMAND

Assumes that the consumers income remains same. Assumes that the preferences of consumer remain same . Considers that the fashion does not show any changes Assumes that there would be no change in the age structure, size, and sex ratio of population Restricts the innovation and new varieties of products in the market, which can affect the demand for the existing product

Avoids any type of change fiscal policies of the government of a nation, which reduces the effect of taxation on the demand of product.
2012, Dreamtech Press :: Chapter 3

CHANGE IN QUANTIT Y DEMANDED

Change in quantity demanded refers to change in the quantity purchased due to increase or decrease in the price of a product.
Expansion of demand refers to the period when quantity demanded is more because of the fall in prices of a product. Contraction of demand takes place when the quantity demanded is less due to rise in the price of a product.

2012, Dreamtech Press :: Chapter 3

CHANGE IN DEMAND
Change in demand refers to increase or decrease in demand of a product due to various determinants of demand, while keeping price at constant.
Increase in demand refers to the rise in demand of a product at a given price. Decrease in demand refers to the fall in demand of a product at a given price.

2012, Dreamtech Press :: Chapter 3

CONCEPT OF SUPPLY
Supply refers to the quantity of a product available in the market for sale at a specified price at a given point of time . Supply is always defined in relation to price and time. For example, a seller is willing to sell 500 kgs at the price of Rs. 30 per kg in a week Determinants of Supply
Price Cost of Production Natural Conditions Technology Transport Conditions Factor Prices and their Availability Governments Policies Prices of Related Goods

2012, Dreamtech Press :: Chapter 3

LAW OF SUPPLY
Law of supply states a direct relationship between the price of a product and its supply, while other factors are kept constant. Other things remaining unchanged, the supply of a commodity expands with a rise in its price and contracts with a fall in its price. For example, in case the price of a product increases, sellers would prefer to increase the production of the product to earn high profits and vice versa.

2012, Dreamtech Press :: Chapter 3

SUPPLY CURVE

Price of Milk Quantity (per liter in Rs.) Supplied(1000 per day in liters) 10 10

12

13

14

20

16

25

2012, Dreamtech Press :: Chapter 3

ASSUMPTIONS IN LAW OF SUPPLY

Assumes that the price of a product changes, but the change in the cost of production is constant. Assumes that there is no change in the technique of production Assumes that there is no change in the scale of production Assumes that the policies of the government remain constant Assumes that the transportation cost remain the same Assumes that there is no speculation about prices in future, which otherwise can af fect the supply of a product

2012, Dreamtech Press :: Chapter 3

CHANGE IN QUANTIT Y SUPPLIED

Change in quantity supplied refers to change in the supply of the quantity due to increase or decrease in the price of a product.
Expansion of supply refers to the period when quantity supplied is more because of the rise in prices of a product. Contraction of supply takes place when the quantity supplied is less due to fall in the price of a product.

2012, Dreamtech Press :: Chapter 3

CHANGE IN SUPPLY
Change in supply refers to increase or decrease in supply of a product due to various determinants of supply, while keeping price at constant.
Increase in supply refers to the rise in supply of a product at a given price. Decrease in supply refers to the fall in supply of a product at a given price.

2012, Dreamtech Press :: Chapter 3

MARKET EQUILIBRIUM-DEMAND AND SUPPLY EQUILIBRIUM

Market equilibrium refers to the stage where the quantity demanded for a product is equal to the quantity supplied for the product. The price when the quantity demanded is equal to the quantity supplied for the product is known as equilibrium price.
Prices (in Rs.) Demand (in thousands) 80,000 55,000 40,000 Supply (in thousands) 10,000 28,000 40,000 Market Position Effect on Price

100 200 300

Shortage Shortage Equilibrium

Rise Rise Stable

400
500 600

28,000
20,000 15,000

50,000
55,000 60,000

Surplus
Surplus Surplus

Fall
Fall Fall

2012, Dreamtech Press :: Chapter 3

MARKET EQUILIBRIUM-DEMAND AND SUPPLY EQUILIBRIUM( CONTD.)

Graphical representation of equilibrium of demand and supply If demand > supply there will be shortage If demand < supply there will be surplus

2012, Dreamtech Press :: Chapter 3

RECAP
Demand can be defined as a quantity of a product an individual is willing to purchase at a specific point of time. The law of demand states that the demand for a product decreases with increase in its price and vice versa, while other factors are at constant. Supply refers to the quantity of a product available in the market for sale at a specified price at a given point of time. Law of supply states a direct relationship between the price of a product and its supply, while other factors are kept constant. Market equilibrium refers to the stage where the quantity demanded for a product is equal to the quantity supplied for the product.
2012, Dreamtech Press :: Chapter 3