1. Meaning of Demand
Demand refers to the quantity of a commodity that consumers are willing and able to buy at a given price during a specific period of time.
Components of Demand
- Desire for the commodity
- Willingness to pay
- Ability to pay
- Price of the commodity
- Time period
- Quantity of the commodity
Difference between Desire and Demand
| Basis |
Desire |
Demand |
| Meaning |
Wish to have a commodity |
Desire backed by willingness and ability to pay |
| Example |
Wanting a car |
Wanting and being able to buy a car |
2. Types of Demand
Direct Demand
- Price Demand – Demand affected by price
- Income Demand – Demand affected by income
- Cross Demand – Demand affected by the price of related goods
- Substitute goods (tea and coffee)
- Complementary goods (car and petrol)
Other Types
- Indirect (Derived) Demand – Demand for goods used to produce other goods (e.g., demand for labor, raw materials)
- Joint Demand – Two or more goods used together (e.g., bread and butter)
- Composite Demand – One good used for multiple purposes (e.g., milk for tea, sweets, etc.)
- Competitive Demand – Goods that can replace one another (tea vs. coffee)
3. Determinants of Demand
- Price of the commodity
- Income of the consumer
- Prices of related goods
- Substitute goods
- Complementary goods
- Taste and preference
- Advertisement
- Income distribution
- Size and composition of population
- Consumer's expectations
- Availability of credit
- Climate and weather
4. Law of Demand
Definition: Other things remaining the same, the quantity demanded of a commodity increases when its price falls and decreases when its price rises.
Assumptions
- Constant income, taste, habits, climate, and population
- No change in related goods' prices or expectations
Exceptions to the Law of Demand
- Future price expectations
- Giffen goods
- Prestigious goods
- Ignorance
- Change in fashion, habit, or preference
- Prosperity and depression
Causes of Downward Sloping Demand Curve
- Income effect
- Substitution effect
- Law of diminishing marginal utility
- New consumers entering market
- Different uses of the commodity
5. Demand Schedule and Demand Curve
- Demand Schedule: Table showing quantity demanded at different prices
- Demand Curve: Graph showing inverse relationship between price and quantity demanded
6. Demand Function and Equation
Dx = f(Px, Y, Pr, T, A, P, D, E, …)
Dx = a - bPx
Where:
- Dx: Demand for good X
- Px: Price of X
- Y: Income
- Pr: Price of related goods
- T: Taste and preference
- A: Advertisement
- E: Expectation
- a, b: Constants
7. Movement and Shift in Demand Curve
| Type |
Cause |
Effect |
| Movement (Price factor) |
Change in price |
- Extension in demand – due to fall in price
- Contraction in demand – due to rise in price
|
| Shift (Non-price factors) |
Other determinants |
- Rightward shift – increase in demand
- Leftward shift – decrease in demand
|
8. Meaning of Supply
Supply refers to the quantity of a commodity that producers are willing and able to offer for sale at a given price during a specific period of time.
9. Determinants of Supply
- Price of the commodity
- Price of other goods
- Price of factors of production
- Goal of the firm
- Technology improvement
- Government policy (tax, subsidy)
- Expected future price
- Number of firms
- Infrastructure development
- Natural factors
10. Law of Supply
Definition: Other things remaining constant, the quantity supplied of a good rises when its price rises and falls when its price falls.
Assumptions
- No change in input prices, technology, or number of producers
- Constant government policy and goals
Exceptions to Law of Supply
- Future price expectations
- Perishable goods
- Agricultural goods
- Auction sale
- Change in other factors
11. Supply Schedule and Supply Curve
- Supply Schedule: Table showing quantity supplied at different prices
- Supply Curve: Upward-sloping graph showing direct relationship between price and quantity supplied
12. Supply Function and Equation
Sx = f(Px, Po, Pf, T, G, …)
Sx = a + bPx
Where:
- Sx: Supply of good X
- Px: Price of X
- Po: Price of other goods/factors
- T: Technology
- G: Goals of producers
13. Movement and Shift in Supply Curve
| Type |
Cause |
Effect |
| Movement (Price factor) |
Change in price |
- Extension in supply – rise in price
- Contraction in supply – fall in price
|
| Shift (Non-price factors) |
Other determinants |
- Rightward shift – increase in supply
- Leftward shift – decrease in supply
|
14. Market Equilibrium
The point where demand and supply curves intersect — determining the equilibrium price and quantity.
- If demand > supply → shortage → price rises
- If supply > demand → surplus → price falls