Demand

W.P.W Anjalika – (Lecturer – Probationary)

Ocean University of Sri Lanka
Mattakkuliya.
What is Market??

The market is a mechanism by which buyers and sellers interact each

other to purchase or sale of goods and services.

Buyers and Sellers are the key stakeholders in the market.

Buyers demand goods and services from the market.
Sellers supply goods and services for the market.
What is demand?
Demand is defined as the amount of goods and services that the consumers are
willing and able to buy at each possible price during a given period of time.
It further implies that there has to be the ability and willingness to buy a
product.
Assume that you are in a bus.
• Lottery seller sales lotteries in the bus. Are you buy a lottery?
• Decision to buy a lottery implies
• You are willing to purchase it because you like to consume it to satisfy you want
(satisfaction)
• You have ability to purchase it because you have enough money to spend it
(purchasing power)
• Demand decision is taken by a person based on two reasons i.e. satisfaction and
purchasing power.
• Demand is not generated when one aspect is not completed.
Determinants of demand
Demand for a product depends on the following factors;

Price of the commodity which we consider (Px)

Prices of related goods which are related to good x (substitute and
complimentary) (Py)
Income of the Consumer (Y)
Taste of the Consumer (T)
Other factors (climatic, future expectation, advertisement, demographic,
political, economic, social, cultural reasons) (O)
 Substitute Good
product that satisfies the same basic want
as another product. Substitute goods may
be used in place of one another.
Ex; For rice we have many substitute as
Complementary Good
a product that is used or consumed jointly
with another product. Such a good
usually has more value when paired with
its complement than when used
separately.
Demand and Price
Relationship between demand and price can be shown through,

1. Demand Schedule
2. Demand curve
3. Demand Equation
Demand Schedule
• The demand schedule is given below.
Demand Curve and Law of demand

Both the schedule and curve show the inverse relationship between quantity demand
and price. This inverse relationship is called as law of demand.
The law of demand can be stated as all the other things remain constant (Ceteris
Paribus), Qd of a commodity increases when its price decreases and decreases when its
price increases
Demand Function

Quantity Demand () = f (Price of the commodity, Prices of related goods, Prices of

related goods, Income of Consumer, Taste of consumer, Other factors)

= f (, Y, T, O)

A demand function is a statement telling how a number of variables affects

the amount of a product that consumers will buy during some specific time
period.
It is impossible to study at same time all these factors.
It is possible to study the relationship between quantity demand and each of
the factors assuming other factors remain constant (Ceteris Paribus).
What is the meaning of this Equation?

Qd = a - bP

Dependent Qd when price Independent

Slop of the
variable becomes zero variable
Curve
Change in Qd and Change in Demand
Change in Quantity demand (Qd) – law of demand
Quantity demanded is the quantity of a commodity that people are willing
to buy at a particular price at a particular point of time.
• Movement along the demand curve represents the change in Qd.
• Change in Qd takes place due to the change of price.
Change in demand

A change in demand refers to a shift in the entire demand curve, which is caused by a
variety of factors (preferences, income, prices of substitutes and complements,
expectations, population, etc.).
Change in demand takes place due to the change of other factors except price
An increase in demand means that the whole demand curve shifts to the right.
An decrease in demand means that the whole demand curve shifts to the left.
Market Demand
• Market demand for a commodity is the sum of all individual demands
for a the commodity at a given price, per unit of time.
• Market demand curve is horizontal summation of individual demand
curves.
Supply
Supply
• The amount of commodity that a firm is willing and able to offer for
sale is referred as the supply.
• Supply means the quantity of commodity which its producers or
sellers offer for sell at a given price.
• Relationship between price and Qs is given in Supply schedule as
follows;
Law of supply
Qs increases with the increase of price. Positive relationship between
price and Qs is the law of supply.
Determinants of Supply
• Supply of a product is determined by a few factors.
1. Price of goods (Px)
2. Prices of other goods which are produce using same inputs (Py)
3. Input prices (Pi)
4. Government policy, rules and regulations (G)
5. Technology (T)
6. Other (O).
Supply Function = f (Px, Py, Pi, G, T, O).
Supply Function
The supply schedule is given below

Qs = a + bP
Qs = 3 + 1.5P
a= 3
+
 Change in Qs and Change in Supply
Change in Qs
• Movement along a supply curve represents the change of Qs.
• Change in Qs takes place due to the change in Price.
• Draw the curve

Change in Supply
• An increase in supply means that the whole supply curve shifts to the right side.
• An decrease in supply means that the whole supply curve shifts to the left side
• Change in supply takes place due to the change in other factors except price.
Price of goods which can be produce same inputs, input prices, tax, weather
condition etc.
• Draw the curve
Market Supply
Market supply for a commodity is the sum of all individual supplies for a the
commodity at a given price, per unit of time.
Market supply curve is horizontal summation of individual supply curves at
different prices.
Price (Rs.) Suppliers Market Supply
A B C D A+B+C+D

10 3 2 0 6 11
20 6 4 2 8 20
30 9 6 4 10 29
40 12 8 6 12 38
50 15 10 8 14 47
60 18 12 10 16 56
70 21 14 12 18 65
Determination of Market Price
• Market price of a commodity is determined jointly by the interaction
between demand and supply.
• See the combination of demand and supply schedules below.
Px Qd Qs
0 10 2 Excess Demand
1 8 4
2 6 6 Equilibrium
3 4 8
4 2 10 Excess supply
5 0 12

• Draw the curves

Excess Demand and Excess Supply
Excess Demand: The amount by which the Qd exceeds the Qs is called
as the excess demand.
• Draw the curve

Excess Supply: The amount by which the Qs exceeds the Qd is called as

the excess supply.
• Draw the curve
Change in Equilibrium Price
Equilibrium price and quantity change due to the change in supply and
demand.
1. A rise in Demand
• Arise in demand or a rightward shift of the demand curve causes an
increase in the equilibrium price and quantity.
• Draw the curve
2. A rise in Supply
• Arise in supply or a rightward shift of the supply curve causes an
decrease in the equilibrium price and quantity.
• Draw the curve
Elasticity of Demand
Elasticity of Demand

Demand for a commodity is determined by a change in its price, prices of related goods,
income and other factors.

The ways in which Qd response to the change of each factors are measured by the use of the
concept of elasticity.

The concept of elasticity implies that,

 ‘’A measure for the response of Qd to the changes in factors that determine the demand.’’
The elasticity of demand refers to the degree to which demand responds to a change in an
economic factor.
There are three types of elasticity of demand.
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
 Price Elasticity of Demand
The measure of the responsiveness of the Qd of a commodity to the
changes in its own price is known as price elasticity of demand.
‘’Percentage change in the quantity demanded relative to percentage
change in price.’’
It measures how the Qd responds to a price change.
This relationship can be presented as;

% change in Qd Q P
• Ed = P Q
% change in the Price
 Five types of elasticity
Five types of elasticity can be identified based on the value of elasticity.

1. Perfect inelastic (zero 1. There is no change in Qd when price changes

elasticity) Ed
2. % change in Qd is less than the % change in
2. Inelastic (greater than zero) price

3. Unity elasticity 3. % change in Qd is equal to the % change in

price
4. Elastic (Greater than one)
4. % change in Qd is higher than the % change in
5. Perfect elastic (infinitely price
elastic) 5. No change in price cause an infinite
response of the Qd
 Income Elasticity
Income elasticity of demand: It measures how Qd responds to the
change of income.
% change in Qd Q Y
• Ed = ------------------------- -----X-----
% change in Income Y Q

Main two variety of commodity can be identified under the Co-efficient

of income elasticity.
1. Normal Good (+)
2. Inferior Good (-)
Luxurious good
Essential good
Cross elasticity of demand
It measures how Qd responds to the change of the price of its close
substitute good and complementary goods.

% change in Qd of X good
• Ed = -------------------------------------------------------
% change in Price of Substitute/Complementary Good

Under the co-efficient of cross elasticity of demand, two major goods can
be found.
1. Substitute good (+)
2. Complementary good (-)
Determinants of Elasticity of Demand
Availability of substitute: If a commodity has a close substitute then
its demand will be elastic.

Nature of Commodity: If a commodity is a necessity (drugs/foods)

then its demand will be inelastic.

Whether the product is habit, the commodity is inelastic.

Cigarette.

Time taken to produce: Time taken to produce a commodity is short,

commodity is elastic.