2. In This Lecture…..
• Concepts of Demand and
Supply: Individual and Market
Demand and Supply
• Demand and Supply Curves,
Schedules and Factors Affecting
Demand and Supply
Movements along
Demand/Supply Curves and
their Shifts
3. In This Lecture…..
• Concepts, Types and Measurements of
and Factors affecting Elasticity of Demand
and Supply
• Producer’s Surplus
• Consumer’s Surplus
• Effects of Government Intervention,
Effects of Price Ceiling and Price Floor
and Dead Weight Loss
• Concepts of Externalities
4. Demand
A Definition
Demand refers to the quantity
of the commodity which the
consumer is willing to buy at
a particular price during a
particular time period.
5. Want, Desire, Demand
• Desire to have a RR, but do not have
enough money – wishful thinking
• In spite of having the money you do not
want to spend on RR – want
• Your desire to have a RR with the ability
and willingness to pay for it combined
together will be - demand
6. Factors determining Demand & Demand Function
• Dx = f (Px, PR,Y, T, E)
Dx = Demand for commodity X
Px = Price of commodity X
PR= Price of related goods
(Substitute and Complementary)
Y = Income of the consumers
T = Taste and preference
E = Expectations of the buyers
7. Demand and Prices of Other Goods
• Substitute Goods : These are
those goods which are an
alternative to one another in
consumption eg. Tea or coffee,
Pepsi or Coca cola
• A fall in the price of substitute
good say Y, leads to a fall in the
quantity demanded of good X and
vice versa
8. • Complementary Goods : They are
those goods which are jointly used or
consumed together to satisfy a want
eg. Tea and sugar, bread and butter.
• A fall in the price of complementary
good say Y, leads to a rise in the
quantity demanded of good X and
vice versa
9. Demand and Income of the consumer
• If X is a Normal Good, then with the
increase n the income, consumer
buys more of the good. It has positive
income effect.
• If X is an Inferior Good, then with the
increase n the income, consumer
buys less of the good. Eg. Coarse
Grains. It has negative income effect.
10. Factors determining Market Demand & Demand
Function
• Dx = f (Px, PR,Y, T, E, N, Yd, A)
Dx = Demand for commodity X
Px = Price of commodity X
PR= Price of related goods
Y = Income of the consumers
T = Taste and preference
E = Expectations of the buyers
N = Population
Yd= Income distribution
11. Law of Demand
There is an inverse relationship between the price of a
commodity and the quantity demanded of that
commodity.
Dx = f (Px), ceteris peribus
where, Dx = quantity demanded of good X
Px = price of the good X
As the price of a good rises, the quantity demanded of
the good falls, and as the price of a good falls, the
quantity demanded of the good rises, ceteris paribus.
Price
Quantity
13. Assumptions of the Law of Demand
* Price of related goods is constant
* The income of the consumers remain
unchanged.
* Consumers tastes and preferences
remains
same.
* Expectations of the customers is constant
* Number of population remains same.
* All the units of the goods are homogenous.
* Commodity should be normal good.
14. Demand Schedule
Demand Schedule : It’s a tabular
representation showing the different
quantities of a good that the consumers
are willing to pay at different levels of
prices during a given period of time.
A demand schedule is the numerical
representation of the law of demand.
15. Demand Curve
Demand Curve : It’s a graphical
representation of the demand
schedule showing the different
quantities of a good that the
consumers are willing to pay at
different levels of prices during a given
period of time.
19. Why Demand Curve always Slopes
Downwards?
* Law of Diminishing Marginal Utility
As a consumer consumes more and
more of a same commodity at a point of
time, the utility derived from each
additional unit consumed goes on
declining / the consumer is willing to pay
less for more units of a good. This shows
inverse relationship between price and
quantity demanded.
20. Why Demand Curve always Slopes
Downwards?
* Substitution Effect
When the price of a good falls,
consumer buys less of the substitute
goods and more of the good whose price
has fallen. This shows inverse relationship
between price and quantity demanded.
21. Why Demand Curve always Slopes
Downwards?
* Income Effect
With the fall in the price of a good, the
real income or the purchasing power of
the consumer rises and he demands more
of the good. This shows inverse
relationship between price and quantity
demanded.
22. Why Demand Curve always Slopes
Downwards?
* New Consumers Creating Demand
As price of a commodity falls, a new
consumer class appears who can now
afford the good. Thus, the demand
increases.
23. Why Demand Curve always Slopes
Downwards?
* Different Uses
With the fall in the price of a good, it is
put to various uses and demand for that
commodity increases and vice versa. Eg.
Milk can be used for making butter,
cheese, curd and drinking purposes etc.
24. Exceptions to the Law of Demand
* Giffen Goods
It is an inferior good like jowar, bajra
that is consumed by low-paid wage
earners who spend a large proportion of
their income to buy it.
In this case, as the price of giffen good
decreases, the low-paid wage earners
shift to better quality good as their real
purchasing power has increased thereby
deceasing the demand for the giffen good.
It is named after Sir Robert Giffen
(1837-1910)
25. Exceptions to the Law of Demand
* Goods of Status
Precious goods like diamonds, gold,
silver – higher the price higher will be its
demand.
It is also known as Veblen goods /
prestigious goods.
It is named after Thorstein Veblen
(1857-1929)
26. Exceptions to the Law of Demand
* Expectation of price rise in future
If the price of a commodity rises and
the consumer expects further rise in price,
it leads to an increase in the demand for
that commodity and vice versa. Eg.
Shares.
27. Exceptions to the Law of Demand
* Demonstration Effect / Keeping up with
Jones
If people are buying the goods by
imitating the consumption pattern of the
higher income group – the demand will be
higher even at higher price.
28. Exceptions to the Law of Demand
* Emergency
In case of emergency like war, curfew,
drought or famine, the law of demand
does not hold.
29. RECAP
Factors determining Demand & Demand
Function
• Dx = f (Px, PR,Y, T, E)
Dx = Demand for commodity X
Px = Price of commodity X
PR= Price of related goods
Y = Income of the consumers
T = Taste and preference
E = Expectations of the buyers
30. Demand and Prices of Other Goods
• Substitute Goods : These are
those goods which are an
alternative to one another in
consumption eg. Tea or coffee,
Pepsi or Coca cola
• A fall in the price of substitute
good say Y, leads to a fall in the
quantity demanded of good X and
vice versa
32. • Complementary Goods : They are
those goods which are jointly used or
consumed together to satisfy a want
eg. Tea and sugar, bread and butter.
• A fall in the price of complementary
good say Y, leads to a rise in the
quantity demanded of good X and
vice versa
34. Demand and Income of the consumer
• If X is a Normal Good, then with the
increase n the income, consumer
buys more of the good. It has positive
income effect.
• If X is an Inferior Good, then with the
increase n the income, consumer
buys less of the good. Eg. Coarse
Grains. It has negative income effect.
36. Demand and Consumer’s Taste
Price
price
D
D’
D’
O
D
O
Quantity demanded
with an unfavourable
change in consumer’s
taste
Quantity demanded
with a favourable
change in consumer’s
taste
37. Demand and Expectations of Buyers
Price
price
D
D’
D’
O
D
O
Quantity demanded
when consumers
expect the price
to fall in near future
Quantity demanded
when consumers
expect the price
to rise in near future
38. Factors determining Market Demand & Demand
Function
• Dx = f (Px, PR,Y, T, E, N, Yd, A)
Dx = Demand for commodity X
Px = Price of commodity X
PR= Price of related goods
Y = Income of the consumers
T = Taste and preference
E = Expectations of the buyers
N = Population
Yd= Income distribution
A = Age and Sex composition of Population
39. Individual Demand and Market Demand
• Individual Demand :It means quantity demanded of a good by
an individual consumer at various prices
per time period.
• Market Demand :It is the aggregate of the quantities
demanded by all consumers in the market
at different prices per time period.
40. Market Demand Schedule
Market Demand Schedule : It’s a
tabular representation showing the
different quantities of a good that the
consumers in the market are willing to
pay at different levels of prices during
a given period of time.
41. Market Demand Curve
Market Demand Curve : It’s a
graphical representation of the market
demand schedule showing the
different quantities of a good that the
consumers in the market are willing to
pay at different levels of prices during
a given period of time.
45. Change in Quantity Demanded (movement) vs.
Change in Demand (shift) of Demand Curve
• Change in Quantity Demanded / Movement
along the demand curve
It is caused by the change in the price of
good other things remaining constant.
* Expansion of Demand : It refers to rise in
demand due to the fall in price of the good.
* Contraction of Demand : It refers to fall in
demand due to the rise in price of the good.
47. • Shift / Increase or Decrease in Demand
It is caused by changes in factors other
than price of the good like
consumer’s income
price of related goods
consumer’s taste and preferences
consumer’s expectations etc.
48. Contd.
* Increase in Demand : It refers to more
demand at a given price or same demand at
higher price. It is indicated by the rightward shift
in the demand curve. It is due to
- increase in the income of the consumers
- increase in the price of substitute goods
- decrease in the price of complementary
goods
- favorable change in customer’s taste
- consumer’s expectation of rise in price of
the good in near future
49. Contd.
* Decrease in Demand : It refers to less demand
at a given price or same demand at lesser price. It
is indicated by the leftward shift in the demand
curve. It is due to
- decrease in the income of the consumers
- decrease in the price of substitute goods
- increase in the price of complementary
goods
- unfavorable change in customer’s taste
- consumer’s expectation of fall in price of the
good in near future
52. Difference in the Causes of Shift in the Demand
Curve
Increase in Demand (Upward or
Rightward shift in Demand)
Decrease in Demand
(Downward or Leftward shift in
Demand)
1. Increase in the income of the
consumers.
1. Decrease in the income of the
consumers.
2. Increase in the price of
substitute goods.
2. Decrease in the price of
substitute goods.
3. Fall in the price of
complementary goods.
3. Rise in the price of
complementary goods.
4. Favorable change in the taste
and preferences of the customers
4. Unfavorable change in the taste
and preferences of the customers
5. Consumer’s expectation of rise
in the price of goods in near future
5. Consumer’s expectation of fall
in the price of goods in near future
53. Difference between Increase in Demand
and Expansion of Demand
Increase in Demand
•It refers to shift in demand curve.
•There is a rightward shift in the demand
curve.
•It is due to:- increase in consumer’s income
- increase in the price of substitute goods
- fall in the price of complementary goods
- favorable change in consumer’s
taste
- consumer’s expectation of rise in the
price in near future
Expansion of
Demand
•It refers to movement
along a demand curve.
•The consumers move to
the right on the same
demand curve.
•It is due to the fall in the
price of the commodity.
54. Contd.
Increase in Demand
Expansion of Demand
•It is defined as a rise in demand
at the same price of a commodity
or same demand at higher price.
•Graphical presentation:-
•It is defined as rise in demand
due to fall in price of the
commodity.
• Graphical Presentation :-
Price
Price
P
D
D1
P
P1
O
Q
Q1
D
O
Q
Quantity
•Numerical example:Px
Qx
3
3
90
80
Q1
Quantity
•Numerical Example :Px
Qx
3
4
90
80
55. Difference between Decrease in Demand
and Contraction of Demand
Increase in Demand
•It refers to shift in demand curve.
•There is a leftward shift in the demand
curve.
•It is due to:- decrease in consumer’s income
- decrease in the price of substitute goods
- rise in the price of complementary goods
- unfavorable change in consumer’s
taste
- consumer’s expectation of fall in the
price in near future
Expansion of
Demand
•It refers to movement
along a demand curve.
•The consumers move to
the left on the same
demand curve.
•It is due to the rise in the
price of the commodity.
56. Contd.
Increase in Demand
Expansion of Demand
•It is defined as a fall in demand at
the same price of a commodity or
same demand at lower price.
•Graphical presentation:-
•It is defined as fall in demand due
to rise in price of the commodity.
• Graphical Presentation :-
Price
D1
D
P
Price
P1
P
O
Q1
Q
D
O
Q1
Quantity
•Numerical example:Px
Qx
3
3
90
100
Q
Quantity
•Numerical Example :Px
Qx
3
2
90
100
