Demand & Supply

DEMAND DEFINED

P QD A schedule or a curve that shows the

$5 10 various amounts of a product that
4 20 consumers are willing and able to
3 35 purchase at each of a series of possible
2 55 prices.
1 80
LAW OF DEMAND
An inverse relationship exists
between price and quantity
demanded
• As Price Falls…
…Quantity Demanded Rises
• As Price Rises…
…Quantity Demanded Falls
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 5055 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 50 60 70 80
35 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD Plot the Points

4
$5 10
4 20 3
3 35
2 55 2

1 80
1

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD
Connect the Points
4
$5 10
4 20 3
3 35
2 55 2

1 80
1
D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD What if
4
$5 10
4 20 3
Demand
3 35 Increases?
2 55 2

1 80
1
D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P Increase
CORN $5

P QD in Quantity
$5 1030
4
Demanded
4 2040 3
3 3560
2 5580 2 Increase
1 80 + in D’
1
Demand D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P
CORN $5

P QD What if
4
$5 10
4 20 3
Demand
3 35 Decreases?
2 55 2

1 80
1
D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING DEMAND
Price of Corn
P Decrease
CORN $5

P QD in Quantity
4
$5 10-- Demanded
4 2010 3
3 3520
2 5540 2 Decrease
1 8060 in
1
Demand D
D’
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
 Law of Diminishing Marginal
Utility
• Law– As a consumer increases the
consumption of a product ,the utility gained
from successive units goes on decreasing
,In other words the rate of total utility
decreases as more and more units are
consumed
Law of Diminishing Marginal Utility
 DETERMINANTS OF
DEMAND
• Tastes
• Number of Buyers
• Income
– Normal (Superior) & Inferior Goods
• Prices of Related Goods
– Substitutes & Complements
– Unrelated Goods
• Expectations
 SUPPLY DEFINED
CORN
P QS
Supply is a schedule or a curve showing the
amounts of a product that producers are
$1 5
willing and able to make available for sale 2 20
at each of a series of possible prices. 3 35
4 50
5 60
 LAW OF SUPPLY
A direct relationship exists
between price and quantity
supplied
• As Price Rises…
…Quantity Supplied Rises
• As Price Falls…
…Quantity Supplied Falls
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 5 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 10 20 3035 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Plot the Points
$5 CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P
$5 S CORN
P QS
4
$5 60
3 4 50
3 35
2
2 20
1
1 5
Connect the Points
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P
$5 S CORN
P QS
4
What if $5 60
3
Supply 4 50
3 35
2
Increases? 2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P Increase S’
$5 S CORN
in P QS
4
Supply $5 6080
3 4 5070
3 3560
2
Increase 2 2045
1 in Quantity
1 530
Supplied
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn
P
$5 S CORN
P QS
4
What if $5 60
3
Supply 4 50
3 35
2
Decreases? 2 20
1
1 5

o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
GRAPHING SUPPLY
Price of Corn Decrease
P S’
$5 in S CORN
Supply P QS
4
$5 6045
3 4 5030
3 3520
2 Decrease 2 20 0
in Quantity 1 5 --
1
Supplied
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn
 DETERMINANTS OF
SUPPLY
• Resource Prices
• Technology
• Taxes & Subsidies
• Prices of Other Goods
• Price Expectations
• Number of Sellers
 DETERMINANTS OF
SUPPLY
• Resource Prices
• Technology
Combining
• Taxes & with
Subsidies
• Prices of Other Goods
Demand
• Price Expectations
• Number of Sellers
 MARKET DEMAND &
SUPPLY
BUSHELS BUSHELS
OF CORN OF CORN
MARKET MARKET
P QD 200 DEMAND P QS 200 SUPPLY

$5 10 B 2,000 $5 60 S 12,000

4 20
3 35 x U 4,000
Y 7,000
E
4 50
3 35 x E
L
L
10,000
7,000
2 55 11,000 2 20 4,000
R E
1 80 16,000 1 5 1,000
S R
S
l l y…
ica
EQUILIBRIUM a ph
Gr
 MARKET DEMAND &
SUPPLY
Price of Corn
CORN P CORN
MARKET
$5 S MARKET
P QD P Q
4
$5 2,000 Market $512,000
S
Clearing
4 4,000 3
Equilibrium 410,000
3 7,000 3 7,000
211,000 2
2 4,000
116,000 1 1,000
1
D
o 2 4 6 78 10 12 14 16 Q
Quantity of Corn
 MARKET DEMAND &
SUPPLY
Price of Corn
CORN P CORN
MARKET
$5
Surplus S MARKET
P QD At a $4 price P Q
4
$5 2,000 more is being $512,000
S

4 4,000 3 supplied than 410,000

3 7,000 3 7,000
demanded
211,000 2
2 4,000
116,000 1 1,000
1
D
o 2 4 6 78 10 12 14 16 Q
Quantity of Corn
 MARKET DEMAND &
SUPPLY
Price of Corn
CORN P CORN
MARKET
$5 S MARKET
P QD P Q
At a $2 price
4
$5 2,000 more is being $512,000
S

4 4,000 3 410,000
demanded than
3 7,000 3 7,000
supplied
211,000 2
2 4,000
116,000 Shortage 1 1,000
1
D
o 2 4 6 78 101112 14 16 Q
Quantity of Corn
 MARKET DEMAND &
SUPPLY
Price of Corn
CORN P CORN
MARKET
$5
Surplus S MARKET
P QD P Q
4
$5 2,000 $512,000
S

4 4,000 3 410,000
3 7,000 3 7,000
211,000 2
2 4,000
116,000 Shortage 1 1,000
1
D
o 2 4 6 78 101112 14 16 Q
Quantity of Corn
MARKET EQUILIBRIUM
• Equilibrium Price & Quantity
• Rationing Function of Prices
• Changes in Demand
• Changes in Quantity
Demanded
• Changes in Supply
• Changes in Quantity Supplied
 Complex Cases
Multiple Shifts…
• Supply Increases;
Demand Decreases
– Prices Decrease
– Quantity Indeterminate
• Supply Decreases;
Demand Increases
– Price Increases
– Quantity Indeterminate
 Complex Cases
Multiple Shifts…
• Supply Increases;
Demand Increases
– Prices Indeterminate
– Quantity Increases
• Supply Decreases;
Demand Decreases
– Price Indeterminate
– Quantity Decreases
Government Set Prices
• Price Ceilings
–Shortages
–Rationing Problem
–Black Markets
–Rent Controls
• Price Floors
–Surpluses
 Price Ceiling
•A maximum price that sellers may charge for a
good, usually set by government.

• Excess Demand
(Shortage)
Created by a
Price Ceiling
 Price ceiling
• Price Rationing :The process by which the market system
allocates goods and services to consumers when quantity
demanded exceeds quantity supplied.
• Ration coupons Tickets or coupons that entitle
individuals to purchase a certain amount of a given
product per month.
• Black market A market in which illegal trading takes
place at market-determined prices.
•PRICE FLOORS

•Price floor A minimum price

below which exchange is not
permitted.
•Minimum wage A price floor
set under the price of labor.

•Agricultural Products
Direct and Derived Demands
Direct demand refers to demand for goods meant for final consumption; it is
the demand for consumers’ goods like food items, readymade garments
and houses. By contrast, derived demand refers to demand for goods
which are needed for further production; it is the demand for producers’
goods like industrial raw materials, machine tools and equipments.
• Thus the demand for an input or what is called a factor of production is a
derived demand; its demand depends on the demand for output where
the input enters. In fact, the quantity of demand for the final output as
well as the degree of substitutability/complementarty between inputs
would determine the derived demand for a given input.
• For example, the demand for gas in a fertilizer plant depends on the
amount of fertilizer to be produced and substitutability between gas and
coal as the basis for fertilizer production. However, the direct demand
for a product is not contingent upon the demand for other products.
 Domestic and Industrial Demands
• The example of the refrigerator can be restated to
distinguish between the demand for domestic
consumption and the demand for industrial use. In case
of certain industrial raw materials which are also used
for domestic purpose, this distinction is very
meaningful.
• For example, coal has both domestic and industrial
demand, and the distinction is important from the
standpoint of pricing and distribution of coal
Autonomous and Derived Demand
• When the demand for a product is tied to the purchase of some parent
product, its demand is called induced or derived.
• For example, the demand for cement is induced by (derived from) the
demand for housing. As stated above, the demand for all producers’
goods is derived or induced. Consider the complementary items like
tea and sugar, bread and butter etc. The demand for butter (sugar) may
be induced by the purchase of bread (tea).
• Autonomous demand, on the other hand, is not derived or induced.
Unless a product is totally independent of the use of other products, it
is difficult to talk about autonomous demand. In the present world of
dependence, there is hardly any autonomous demand. Nobody today
consumers just a single commodity; everybody consumes a bundle of
commodities. Even then, all direct demand may be loosely called
autonomous.
Perishable and Durable Goods’ Demands
• Both consumers’ goods and producers’ goods are further classified
into perishable/non-durable/single-use goods and durable/non-
perishable/repeated-use goods. The former refers to final output like
bread or raw material like cement which can be used only once. The
latter refers to items like shirt, car or a machine which can be used
repeatedly.
• Non-durable items are meant for meeting immediate (current) demand,
but durable items are designed to meet current as well as future
demand as they are used over a period of time. So, when durable items
are purchased, they are considered to be an addition to stock of assets
or wealth. Because of continuous use, such assets like furniture or
washing machine, suffer depreciation and thus call for replacement.
Individual and Market Demands

• We may distinguish between the demand of an individual buyer and

that of the market which is the market which is the aggregate of
individuals. You may note that both individual and market demand
schedules (and hence curves, when plotted) obey the law of demand.
But the purchasing capacity varies between individuals. For example,
A is a high income consumer, B is a middle-income consumer and C
is in the low-income group. This information is useful for personalized
service or target-group-planning as a part of sales strategy formulation
Firm and Industry Demands
• An industry is the aggregate of firms (companies). Thus the firm’s
demand is similar to an individual demand, whereas the industry’s
demand is similar to aggregated total demand. You may examine this
distinction from the standpoint of both output and input.
• For example, you may think of the demand for cement produced by the
Cement Corporation of India (i.e., a company’s demand), or the demand
for cement produced by all cement manufacturing units including the CCI
(i.e., an industry’s demand). Similarly, there may be demand for engineers
by a single firm or demand for engineers by the industry as a whole,
which is an example of demand for an input. You can appreciate that the
determinants of a company’s demand may not always be the same as
those of an industry’s. The inter-firm differences with regard to
technology, product quality, financial position, market (demand) share,
market leadership and competitiveness- all these are possible explanatory
factors. In fact, a clear understanding of the relation between company and
industry demands necessitates an understanding of different market
structures.