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The demand for any commodity is the desire for that commodity backed by ability to pay as well as
willingness to pay for it, and is always defined with reference to a particular time and price on which it
depends.
So, the demand for a good or service is defined to be the relationship that exists between the price of the
good and the quantity demanded in a given time period, ceteris paribus. One way of representing demand
is through a demand table/schedule such as the one appearing below:
Table 1(Demand Schedule)
Price
Quantity demanded
A demand schedule shows how an items quantity
(per unit)
(per week)
demanded would vary with its price, other things
2
100
being equal. In other words, a demand schedule is a
3
85
list of the quantities of a goods or service the
4
55
consumer(s) will buy at each of a series of prices.
5
35
The demand for the good is the entire relationship that is summarized by this table. This demand
relationship may also be represented by a demand curve when the numerical or tabular form is expressed
graphically (as illustrated below).
The data from demand schedule can be plotted on
Demand Curve
a graph and it contracts a demand curve.
In this case, Price (per unit) is shown on the
6
vertical (or 'Y') axis, and the quantity demanded
D
5
4
per unit of time is shown on the horizontal (or 'X')
3
axis.
2
D`
In the diagram, we can see this relationship. If the
1
price of a good is tk.5 per kilogram, consumers
0
will buy 35 kilogram of that per week. If the price
0
50
100
150
of that good falls to tk.4 per kilogram, 55
Quantity Demanded
kilograms of that will be bought per week.
Figure: 01
The demand function is algebraic expression of the relationship between price of a product and the
quantity demanded for, in relation to the specific period of time. The simplest form of the demand
function is as Qd = f(p) , here. Qd stands for quantity demanded and p stands for price.
This relationship, between price of a product and quantity demanded of the product under a certain
condition, can be expressed in numerical form as demand table/schedule, in graphical form as demand
curve or in algebraic form as demand function. These are the different expression of the same
relationship. The demand table, curve or function may either shows an individual demand or an market
demand.
There is no single concept of demand. Furthermore, the determinants of demand as well as their relative
importance vary with the category of good and level of aggregation. Thus, it is necessary to spell out
some important ways of categorizing demand. They are:
(a)
Demand for consumers goods and producers goods,
(b)
Demand for perishable and durable goods,
(c)
Derived and autonomous demands,
(d)
Firm and industry demands.
If price falls, a consumer can afford to buy more. He is able and willing to buy more because the
thing being cheaper, his real income increases. It is called income effect.
When the commodity become cheaper, it tends to be substituted wholly or partly for other
commodity. It is called substitution effect.
The income and substitution effect combine to increase the ability and willingness of the
consumers to buy more of the commodity whose price fallen.
A commodity tends to be put more uses and less urgent uses when it become cheaper. For
example if water is dear, we shall use it for drinking only; but when it becomes cheaper, we shall
use it for washing and other less urgent uses.
Price
The supply of a good is the relationship that is summarized by this table. This supply relationship may
also be represented by a supply curve when the numerical or tabular form is expressed graphically (as
illustrated below).
The data from supply schedule can be plotted on a
Supply Curve
graph and it contracts a supply curve.
In this case, Price (per unit) is shown on the
6
S
5
vertical (or 'Y') axis, and the quantity supplied per
4
unit of time is shown on the horizontal (or 'X') axis.
3
In the diagram, we can see this relationship. If the
2
S
price of a good is tk.3 per kilogram, supplier(s)
1
will sell 35 kilogram of that per week. If the price
0
0
20
40
60
80
100
of that good rise to tk.4 per kilogram, 60 kilograms
Quantity Supply
of that will be ready to sell per week.
Figure: 01
MARKET EQUILIBRIUM
By watching, individually, either demand curve or supply curve of a commodity we cannot say what
would be the price or rate of exchange of the commodity in the market. To find the price, we have to look
First, let's consider the effect of an increase in demand. As this diagram indicates, an increase in demand
results in an increase in the equilibrium levels of both price and quantity. An increase in income level,
increase in the price of the substitute product, favorable seasonal effect, change of consumes taste in
favour of the commodity, etc may cause such shift in demand and readjustment of the market
equilibrium.
If supply falls, equilibrium quantity will fall and equilibrium price will
rise by a leftward shift of supply curve (as illustrated in this diagram).
Such shift may be occurred by Increase in input price, natural
calamities, distortion of transportation and communication network,
and decline in production capacity due to war or political unrest,
exhaustation of natural resources, etc.
A price floor is a legally mandated minimum price. The purpose of a price floor is to keep the price of a
good above the market equilibrium price. Agricultural price
supports and minimum wage laws are example of price
ceilings. As the diagram below illustrates, an effective price
floor results in a surplus of a commodity since quantity
supplied exceeds quantity demanded when the price of a
good is kept above the equilibrium price.