Demand

Demand means effective desire or want for a commodity, which is backed up by the ability and willingness to pay for it.
Demand = Desire + Ability to pay + Will to spend

Types of Demand
Demand for consumer goods & producer goods Demand for perishable goods and durable goods Autonomous demand and derived demand Industry demand and company demand Short run demand and long run demand Joint or complimentary demand and composite demand Price Demand, Income demand, Cross demand

Determinants of Demand
Factors influencing individual demand :
Price of products Income Tastes, habits and preferences Relative prices of other goods substitute and complimentary goods Consumers Expectations Advertisement Effect

Factors influencing Market demand :

Price of the product Distribution of income and wealth General standards of living and spending habits of people Number of buyers in the market and growth of population Future expectations Level of taxation & tax structure Climate & weather conditions Advertisement

Demand Function
A demand function in mathematical terms expresses the functional relationship between the demand of the product and its various determining variables : Dx = f (Px, Ps, Pc, Yd, T, A, N, u ) P = The price of the product Ps = Price of substitutes Pc = Price of Complementary goods Yd = Level of disposable income with buyers T = Change in buyers tastes and prefrences A = Advertisement effect N = No. of buyers u= Other unknown determinants of demand for commodity X

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.

Change in Quantity Demanded

Price An increase in price causes a decrease in quantity demanded.

P1
P0

Q1

Q0

Quantity

Change in Quantity Demanded

Price A decrease in price causes an increase in quantity demanded.

P0

P1
Q0 Q1 Quantity

Exceptions to the law of Demand

Giffen Goods (named after Sir Robert Giffen) Articles of Snob Appeal Speculation Consumers Psychological Bias or Illusion

Change in Demand
Price

An increase in demand refers to a rightward shift in the market demand curve.

P0

Q0

Q1

Quantity

Change in Demand
Price

A decrease in demand refers to a leftward shift in the market demand curve.

P0

Q1

Q0

Quantity

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.

Change in Quantity Supplied

Price

A decrease in price causes a decrease in quantity supplied.

P0
P1

Q1

Q0

Quantity

Change in Quantity Supplied

Price

An increase in price causes an increase in quantity supplied.

P1
P0

Q0

Q1

Quantity

Changes in Supply
Change in Production Technology Change in Input Prices Change in the Number of Sellers

Change in Supply
Price An increase in supply refers to a rightward shift in the market supply curve.

P0

Q0

Q1

Quantity

Change in Supply
Price A decrease in supply refers to a leftward shift in the market supply curve.

P0

Q1

Q0

Quantity

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.

Market Equilibrium
Price
D S

Quantity

Market Equilibrium
Price
D0 P1 P0 D1 S0 An increase in demand will cause the market equilibrium price and quantity to increase.

Q0 Q1

Quantity

Market Equilibrium
Price
D1 P0 P1 D0 S0 A decrease in demand will cause the market equilibrium price and quantity to decrease.

Q1 Q0

Quantity

Market Equilibrium
Price
D0 S0 S1

P0 P1

An increase in supply will cause the market equilibrium price to decrease and quantity to increase.

Q0 Q1

Quantity

Market Equilibrium
Price
D0 S1 S0

P1 P0

A decrease in supply will cause the market equilibrium price to increase and quantity to decrease.

Q1 Q0

Quantity