DEMAND

SUPPLY

The Price System

- By Ravinder Varma

Input Markets and Output Markets

Output, or product, markets are the markets in which goods and services are exchanged. Input markets are the markets in which resourceslabor, capital, Payments flow in the opposite direction as the physical flow of and landused to produce resources, goods, and services products, are exchanged.
(counterclockwise).

Meaning of Demand
Demand means effective desire Effective demand = desire + willingness to buy +ability to pay Without willingness and ability to pay desire cant be effective demand. Demand is a relative concept . Demand is relative to time and price.

Example :
A ) The demand for rice is 100 kgs. B ) The demand for rice at price Rs 5/- per kg is 100 Kgs per day .

Characteristics of Demand

1. 2. 3.

Effective Demand : Desire + Ability to pay + Willingness to buy Demand is a relative concept . Demand can be Direct or Derived .

4.
5. 6.

Demand can be expressed in tabular representation of the price and quantity demand, this is known as demand schedule.
The demand schedule which is then plotted on a graph, we get demand curve. Demand is a dependent variable.

Law of Demand

Other factors remaining constant there is an inverse relationship between the price of a good and demand.

Understanding Demand

At a Higher price,

At a Lower price,

Less is demanded

More is demanded

Two reasons why more is demanded as price falls

The Income Effect Earlier 1kg chicken=Rs100. I used to eat once in a week Now chicken became cheaper. 1kg=Rs50. So, with same earlier budget of Rs100 I am able to eat twice a week

Two reasons why more is demanded as price falls

The Substitution Effect: Earlier I used to eat more mutton as mutton was cheaper than chicken. But, now chicken has become cheaper than mutton. So, I prefer to eat more chicken than mutton Demand for chicken is rising

Factors Determining Demand

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

PRICE OF A COMMODITY PRICE OF OTHER COMMODITY CUSTOMS , TASTES , HABITS, FASHIONS AND PREFERENCES INCOME QUANTITY OF MONEY IN CIRCULATION UTILITY OF THE COMMODITY QUALITY CLIMATIC CONDITIONS EXPECTATIONS REGARDING FURTURE PRICE SIZE OF THE POPULATION CHANGE IN WEALTH DISTRIBUTION ADVERTISING , SALESMANSHIP AND PUBLICITY TECHNOLOGY PSYCHOLOGY OF CONSUMERS

Demand Function

D = f (Pn, PnPn-1, Y, T, P, E) Where: Pn = Price of the good itself PnPn-1 = Prices of other goods e.g. prices of Substitutes and Complements Y = Consumer incomes including both the level and distribution of income T = Tastes and preferences of consumers P = The level and age-structure of the population E = Price expectations of consumers for future time periods

Demand Schedule

Its a tabular representation of the price and the quantity demanded. It tells us the relation between the price of the product and the quantity demanded

At a higher price Rs 50 /- the quantity demanded is 10 units and at a lower price Rs 5 /- the quantity is 60 units. Thus the demand schedule shows an inverse relationship between price and quantity demand

Demand Curve

When the demand schedule is plotted on a graph we get Demand Curve . The demand curve is almost always represented as downwards-sloping from left to right indicating an inverse or negative relationship between price and quantity demand, meaning that as price decreases, consumers will buy more of the good.

Price is measured on the Y axis And quantity demand on the X axis. DD is the demand curve, which slopes downwards from left to right indicating an inverse or negative relationship between price and quantity demanded .

Individual Demand Curve

The individual demand curve shows the relationship between the price of a good and the quantity that a single consumer is willing to buy, or quantity demanded.
The law of demand states that the higher the price, the smaller the quantity demanded, ceteris paribus (Other thing remain constant).

Market Demand Curve ( Aggregation of Individual Demands )

Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

From Household Demand to Market Demand

Assuming there are only two households in the market, market demand is derived as follows:

Market Demand Curve ( Aggregation of Individual Demands )

How to calculate market demand?

Price
Rs 2.00 Rs 3.00 Rs 4.00 Rs 5.00

Ind.1 Ind. 2 600 400 200 100 300 200 100 50

Market Demand (600 + 300) = 900 600 300 150

Inter related demand

1.Joint Demand A demand for a particular good is likely to increase the demand for another good. Complementary goods Pen and ink, toothbrush and toothpaste 2.Competitive Demand An increase in the demand for one good will reduce the demand for another good. Substitutes goods Pepsi cola and coca cola, KFC and McDonalds, PROTON and HONDA 3.Derived Demand The demand for a good increases, demand for the factor of production to produce goods will also increase. House: bricks, cement, tiles etc 4.Composite Demand Refer to multi purpose products Rubber can be used to produce tires and shoes.

The Impact of a Change in the Price of Related Goods

Demand for complement good (ketchup) shifts left

Demand for substitute good (chicken) shifts right

Price of hamburger rises Quantity of hamburger demanded falls

The Impact of a Change in Income

Higher income decreases the demand for an inferior good

Higher income increases the demand for a normal good

When price changes, what happens?

The curve does not shift. There is a change in the quantity demanded

P
$20 $15

A change in price causes a change in the quantity demanded

A B

$10 $5
10 20

D
Q 40 50

30

When something changes other than price, what happens?

The whole curve shifts, there is a change in demand

P
$20 $15

When the ceteris paribus assumption is relaxed, the whole curve can shift

$10 $5
10 20 30

40 50

D2 D1 Q

VARIATION IN DEMAND
The change in demand exclusively due to a change in price is called extension or contraction of demand. When price is the only factor influencing the demand for a commodity, other factors remaining constant, we have an extension or contraction of demand. Change in price of a good or service leads to Change in quantity demanded (Movement along the curve).

CHANGE IN DEMAND
The change in demand due to a change in factors other than price is known as Increase or Decrease in demand. When other factors than price influence the demand for a commodity , price remaining same , we have an increase or decrease in demand which is shown by complete shifts in the demand curve. Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).

Factors which bring changes in Demand (other than price)

1. Change in fashion (less demand even though price is less) 2. Change in weather ( a fall in price of woolen clothes does not increase their demand in summer) 3. Changes in quantity of money in circulation. (if money circulation increases, purchasing power increases)

4. Changes in population (if birth rate increases, more toys will be sold. More old age population means more demand for walking stick, falls teeth and medicine) 5. Habits/Taste and Customs (if people develop taste for tea in place of lassie, the demand for Tea will be more ) 6. Technical progress ( due to this, old things are not wanted. Gramophone was replaced by Radio, Radio sets replaced by TV sets

7. Advertisement (an advertisement may create a new type of Demand- medicine, toilet, accessories etc)

Artificial Demand
It has controversial applications in microeconomics (pump and dump strategy) and advertising. Synonyms for "artificial demand" include "fake demand" and "false need". Vehicles of creating artificial demand can include mass media advertising, which can create demand for goods, services, political policies or platforms, and other entities.

Example: Big Bazzar : To sell all their products to extent , they have created artifical demand for their goods by the means of advertising.
Advertising Strategy : The discounts , the schemes to create more hype in market . Marketing Strategy : Taking consideration the time factor . 2 Din Bachat ke Is se saasta kidar nahi So artificial demand is created .

Exceptions of Law of Demand

1. CONSPICIOUS CONSUMPTION Where a consumer regards the consumption of a commodity as a mark of distinction, he will go in for higher price commodity. Eg-Diamonds. Such consumers measure utility of a commodity entirely by its price. Hence more will be purchased when its price goes up where according to the law od demand, less is purchased at a higher price than at a lower price.

2. GIFFIN PARADOX
Sir Robert Giffin observed in mid 19th century that when the price of bread increased, the low paid workers in Britain spent more on itsince it was their main food and they cut on meat. This means that demand of bread increased when its price went up, which is an exception to the law of demand

3. Changes in expectation

When prices are expected to continue rising, buy more even though prices has risen

4. Trade cycle.
In times of general economic prosperity, people buy more, even when prices have gone up.

5.

Brands v/s Status

Some persons conscious of their higher status buy more of the higher priced brands as status symbol.

6. Other Misc situation

When commodity goes out of fashion, its demand may fall despite its falling price

Some Questions

Some Questions

Some Questions

Next Lecture Price Elasticity

. To be continued