DEMAND, SUPPLY AND MARKET EQUILIBRIUM

1) LAW OF DEMAND
i) Meaning of Demand ii) Determinants of Demand . iv) Law of Demand. vi) Diagram iii) Demand Function. v) Demand Schedule ix) Exceptions. Meaning of Demand: In the ordinary language demand means Desire suppose a person desires to have a car, it is called Demand in ordinary usage. But in Economics, a more desire cannot become demand. A desire which is barked up by ability to buy and willingness to pay the

vii) Causes for downward slopping. viii) Assumptions.

price is called Demand Demand will always be at a price. Thus, the

quantity of a commodity purchased at a given price at a given time in a given market is called Demand.

DEFINITIONS:
The concepts of Demand is defined by different economists in different ways. The Demand for any thing at a given price the amount of which it will be bought per unit of time at that price. - Benham. Demand means that various quantities of goods that would be purchased per time period at different prices in a given market. 2) DETERMINANTS OF DEMAND: a) Price of the product. b) Incomes of the consumers.

c) Prices of other related goods.

e) Tastes and habits of consumers factors (or) Unspecified factors.

d) Number of consumers.
f) Other factors (or) unknown

3) DEMAND FUNCTION: It the determinates of demand is expressed in terms of an equation then it is called demand Function. Dx = f (Px, Py, Pz Pn, Y, T, N, U)
Here, Dx =Demand for commodity x F = Functional relation. Px = Price of commodity x Py, Pz, Pn = Price of other related goods.

Y = Incomes of the consumer.

T = Tastes and habits of the consumer N= Number of consumers.

U= Unspecified variables.
Except price, all other factors are assumed to remain the same. => Dx = f (Px)

LAW OF DEMAND DEFINITIONS :

The amount demanded increases with a fall in prices and diminishes with a rise in price. - Alfeed Marshall Law of Demand states that people will buy more at lower prices and buy less at higher prices, other things remain the same - Paul Samuelson DEMAND SCHEDULE:
Prices of manages (in Rs. Per kg) Amount Demanded (per week in kgs)

30

25
20

4
6

15
10

10
16

Diagram :

DOWNWARD SLOPPING:
1) Law of Diminishing Marginal Utility. 2) New Buyers 3) Less Urgent uses 4) Substitution effect. 5) Income effect.

Assumptions:
1) Income of the consumer is constant. 2) Prices of other goods are constant.

3) No change in the tastes and habits of the consumers.

4) No advertisement effect. 5) No unknown variables.
EXCEPTIONS: 1) Veblen goods. 2) Giffen goods 3) Speculation 4) Differences in quality.

2) TYPES OF DEMAND:
i) Price Demand vi) Autonomous Demand vii) Derived Demand viii) Industry Demand ix) Company Demand x) Joint Demand ii) Income Demand iii) Cross Demand iv) Individual Demand v) Market Demand

DIAGRAMS RELATING TO TYPES OF DEMAND: i) Price Demand:

II. Income Demand :

a) Superior Goods

b) Inferior Goods

III. Cross Demand :

a) Substitute Goods

b) Complementary Goods

I)

Changes in quantity demand (or)

Movement along a demand curve i) Extension of demand ii) Contraction of demand P P D D

1) Upward movement on Demand curve suggests contraction of demand.

2) Downward movement on demand curve suggests extension of demand.

II) Changes in demand (or) Shift in the demand curve.

 Reasons for changes in demand

1) Changes in income. 2) Changes in Taste, habit and preference.

3) Changes in Fashions and customs.

4) Change in the distribution of wealth. 5) Change in substitutes. 6) Change in Complementary goods 7) Change in population Eg:- If children are more, then more toys and chordates are demanded. In case of male and females the demand for dresses and sarees increase. In the same way the demand will be more for the walking sticks, spectators etc incase of old age people.

 Reasons for changes in demand

1) 2) 3) 4) 5) 6) 7) Changes in income. Changes in Taste, habit and preference. Changes in Fashions and customs. Change in the distribution of wealth. Change in substitutes. Change in Complementary goods Change in population

Eg:-If children are more, then more toys and chordates are demanded. In case of male and females the demand for dresses and sarees increase. In the same way the demand will be more for the walking sticks, spectators etc incase of old age people. 8) Advertisement 9) Change in level of taxation. 10) Expectation of future changes in prices.

 Elasticity of Demand
1) Meaning of Ed. i) 2) Types of Ed. 3) Measurement 4) Factors determining ed. 5) Importance of ed.,

MEANING OF ELASTICITY OF DEMAND: The relationship between the relative change in price and the relative change in demand is called elasticity of demand. Elasticity in the degree of change in demand as a result of a change in price. - (Samnelson) % D ed= -----------% P (or)

Percentage change in Demand Ed= ----------------------------------------Percentage change in price

2)

TYPES OF ELASTICITY OF DEMAND i) Price elasticity of Demand ii) Income Elasticity of Demand iii) Cross Elasticity f demand
i) % change in Demand Price ed = -----------------------------% change in price

ii)

% change in Demand Income ed = -----------------------------% change in income

iii) Cross Elasticity of Demand: % change in Demand for X commodity ed = ---------------------------------------------------% change in price of y commodity

KINGS OF PRICE ELASTICITY OF DEMAND

1) 2) 3) 4) 5) 1) Perfectly Elastic Demand (ed = 00) Perfectly Inelastic Demand (ed = 0) Relatively Elastic Demand (ed > 1) Relatively inelastic demand (ed < 1) Unitary Elastic demand (ed = 1)

PERFECTLY ELASTIC DEMAND : A small change brings about infinite change in demand then it is called perfectly elastic demand.

2) PERFECTLY INELASTIC DEMAND:

If a change in price does not bring a change in demand, it is called perfectly inelastic demand.

3) RELATIVELY ELASTIC DEMAND:

If % change in demand in more than % change in price, it is called relatively elastic demand.

4) RELATIVELY INELASTIC DEMAND

If % change in demand is less than % change in price then it is called relatively inelastic demand .

5) UNITARY ELASTIC DEMAND

If % change in demand is equal to the % change in price then it is called Unitary elastic demand .

ii) INCOME ELASTICITY OF DEMAND:Meaning:- The concept of income elasticity expresses the relationship between change in income and consequent change in the demand of a commodity. Income elasticity of demand shows the way in which a consumers purchase of any good changes as a result of change in his income. % change in Demand ey = -------------------------% change in Income DQ DY DQ Y ey = ------ ------ = ----- x ---Q Y Dy Q Stonier and Hague.

Degrees of Income Elasticity of Demand. 1) Positive income elasticity. 2) Income elasticity is unity. 3) Income elasticity is greater than one. 4) Income Elasticity is less than one. 5) Negative income elasticity. 6) Zero income elasticity. iii) CROSS ELASTICITY OF DEMAND:
Meaning: Cross elasticity is a measure of relative change in the quantity demanded of a commodity due to a relative change in the price of its substitute of complement. % change in demand for x Qx Py exy = -----------------------------exy = ------- x ---% change in price of y py Qx

Measurement of Elasticity of Demand: 1) Percentage or Proportional Method. 2) Total expenditure / Total outplay method. 3) Point method. Percentage / Proportional Method: Q P e = ----- x ---Q P It is also known as Ratio Method %P %D 1% (perfectly elastic) 1% o (perfectly inelastic) 1% 5% (Relatively elastic) 1% % (Relatively inelastic) 1% 1 % (Unitary elastic)

TOTAL EXPENDITURE / TOTAL QUTLAY METHOD:

Elasticity of demand can be measured from the changes in total expenditure of consumers on a commodity. This method is suggested by Alfred Marshal. Total Expenditure of consumers = Total revenue of firms. a) If demand is elastic, a given fall in price causes a relatively large increase in the quantity purchased. Hence, a fall in price leads to a decrease in money expenditure. Then the elasticity of demand is greater than -1.

b) If demand is inelastic, a fall in price causes a relatively small

increase in the quantity purchased. A fall in price may cause

consumers to spend less money on the commodity. A rise in

price causes consumers to spend more money on the

commodity. Elasticity of demand is less than -1.

c) If demand is unitary elastic, a change in price causes no

change in expenditure. Total expenditure remains the same.

Price 5 4 5

Quantity Demanded
200 300 200

Total Expenditure
1000

Nature of Elasticity

Elastic Demand 1200 1000 Inelastic Demand

4
5

240
200

960
1000

250

1000

Unitary Elastic Demand

iii) POINT METHOD:

Marshal also suggested another method called the point elasticity method or geometrical method for measuring price

elasticity at a point on the demand curve.

Lower segment of the demand curve below the given point. --------------------------------------------Upper segment of the demand curve above the point.

Point Elasticity =

L PB e = ---- = ----- . U PA

1. If lower segment is longer than upper segment, it is called

elastic demand. 2. If lower segment is shorter than the upper segment then it is called inelastic demand. 3. If lower segment is equal to upper segment it is called Unitary Elastic Demand. FACTORS INFLUENCING ELASTICITY OF DEMAND: 1) Nature of the commodity.

Necessaries Inelastic Demand

Comforts Elastic demand and Luxuries.

2) Availability of Substitutes:
Substitutes-Elastic Demand; No substitutesInelastic Demand 3) Number of uses: Many uses-Elastic Demand; Only one use-Inelastic Demand. 4) Proportion of Expenditure:

Small amount in total income Inelastic Demand.

Larger amount in total income Elastic Demand. 5) Possibility of postponement. Possibility of postponement Elastic. Immediately required Inelastic Demand.

6) Influence of Habit and customer.

Eg:- Mangal Sutra to a Hindu Bride. (or) cigarettes to a smoker have inelasticity of demand. 6) Consumers income. 7) Complementary goods.

IMPORTANCE OF ELASTICITY OF DEMAND: 1) Finance Minister. 2) Monopoly Price. 4) International Trade 5) Trade unions.

3) Pricing under Discriminating monopoly.