Bachelor Of Business

Administration
Jeenathul Rihana Haneefa Ibrahim
Bachelor of Business Administration (MGKVP)
Dip in Business Finance (University of Kelaniya)
Dip in Teaching Mathematics (Lyceum Academy)
Cert in Business Accounting (CIMA)
AAT Part Qualified

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
PART-03

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Why the demand curve slopes downward?
Generally, the demand curves slope downwards. It signifies that consumers
buy more at lower prices. We shall now try to understand why the
demand curve slopes downward?

Different explanations have been given different economists for the

operation of the law of demand. These are explained below:

Factors that cause a demand curve shifts are:

• Law of diminishing marginal utility

• Income effect
• Substitution effect
• Change in the number of consumers
• Multiple uses of a commodity

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Law of diminishing marginal utility
Consumers purchase commodities to derive utility out of them.
The law of diminishing marginal utility states that as consumption increases, the
utility that a consumer derives from the additional units (marginal utility) of a
commodity diminishes constantly.

Therefore, a consumer would purchase a larger amount of a commodity when it is

priced low as the marginal utility of the additional units decreases.

Income effect
A change in the demand arising due to change in the real income of a consumer
owing to change in the price of a commodity is called income effect.
A change in the price of a commodity affects the purchasing power of a consumer.

For example, if an individual buys two dozens of apples at 40 per kg, he/she spends
80. When the price of apples falls to 30 per kg, he/she spends 60 for purchasing
two kg of apples. This results in a saving of 20 for the individual, which implies that
the real income of the individual has increased by 20

The amount saved may be utilised by the individual in purchasing additional units of
apples. Thus, the demand for apples increased dueRihana
to a Haneefa
change Ibrahim
in real income.
Bachelor of Business Administration
Amazon College
 Substitution effect
The change in demand due to change in the relative price of a commodity is
called the substitution effect.

The relative price of a commodity refers to its price in relation to the prices of
other commodities.

Consumers always switch to lower-priced commodities that are substitutes of

higher-priced commodities in order to maintain their standard of living.
Therefore, the demand for relatively cheaper commodities increases.

For example, if the price of pizzas comes down, while the price of burgers
remains the same, pizzas will become relatively (burgers) cheaper. The demand
for pizzas will increase as compared to burgers.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Change in the number of consumers
When the price of a commodity decreases, the number of consumers of the
commodity increases. This leads to a rise in the demand for the commodity.

For example, when the price of apples is 120 per kg, only a few people
purchase it. However, when the price of apples falls down to 60 per kg, more
number of people can afford it.

Multiple uses of a commodity

There are certain commodities that can serve more than one purpose. For
example, milk, steel, oil, etc. However, some uses are more important over
others. When the price of such a commodity is high, it will be used to serve
important purposes. Thus, the demand will be low.

On the other hand, when the price of the commodity falls, it will be used for
less important purposes as well. Thus, the demand will increase.

For example, when the price of electricity is high, it is used only for lighting
purposes, whereas when the price of electricity goes down, it is also used for
cooking, heating, etc.
Rihana Haneefa Ibrahim
Bachelor of Business Administration
Amazon College
 Movement and Shift In Demand Curve
Movement along Demand Curve
Shift In Demand Curve

Movement along Demand Curve

Movement along Demand Curve is when the commodity experience change in
both the quantity demanded and price, causing the curve to move in a specific
direction.

Shift In Demand Curve

The shift in demand curve is when, the price of the commodity remains
constant, but there is a change in quantity demanded due to some other
factors, causing the curve to shift to a particular side.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Shift and Movement along Demand Curve
In economics, change in quantity demanded and change in demand are
two different concepts.

• Expansion and Contraction of Demand

• Increase and decrease in demand

Change in quantity demanded refers to change in the quantity purchased

due to rise or fall in product prices while other factors are constant.
It can be measured by the movement along the demand curve.
The terms, change in quantity demanded refers to expansion or contraction
of demand.
Change in demand refers to increase or decrease in demand for a product due to
various determinants of demand other than price (in this case, price is constant).

It is measured by shifts in the demand curve.

The terms, change in demand means to increase or decrease in demand.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Expansion and Contraction of Demand
The change in the quantity demanded of a product with change in its price, while
other factors are at constant, is called expansion or contraction of demand.

Expansion and contraction are represented by the movement along the same demand
curve. Let us discuss the expansion and contraction of demand as follows:

Expansion or Extension of Demand

It is an increase in the demand of a commodity due to decrease in its prices, while
other factors are constant.

For example, in Table, when the price of apple falls from 60 per dozen to 50 per
dozen, its quantity demanded rises from 6 dozens to 9 dozens by individual A.
Therefore, the demand for apple is expanded or extended.
Contraction of Demand
It is a decrease in the demand of a commodity due to increase in its price, while
other factors remain unchanged.

For example, when the price of apple rises from 60 per dozen to 80 per dozen, its
quantity demanded falls from 6 dozens to 2 dozens by individual A. Therefore, the
demand for apple is contracted.
Rihana Haneefa Ibrahim
Bachelor of Business Administration
Amazon College
Rihana Haneefa Ibrahim
Bachelor of Business Administration
Amazon College
Rihana Haneefa Ibrahim
Bachelor of Business Administration
Amazon College
In the demand curve, when the price of commodity X is OP1, quantity
demanded is OQ1. If the price of commodity X decreases to OP2, the
quantity demanded increases to OQ2.

• The movement of the demand curve from A1 to A2 in the downward

direction is called the extension of the demand curve.

• On the other hand, if the price of the commodity X rises from OP1 to OP3,
the quantity demanded of commodity X falls from OQ1 to OQ3. This
movement along the demand curve in the upward direction is called the
contraction of demand.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Increase and decrease in demand

Increase and decrease in demand takes place due to changes in other factors,
such as change in income, distribution of income, change in consumer‟s tastes
and preferences, change in the price of related goods. In this case, the price
factor remains unchanged.

Increase in demand
refers to the rise in demand for a product at a specific price,

Decrease in demand
is the fall in demand for a product at a given price.

When other factors change, the demand curve changes its position which is
referred to as a shift along the demand curve,

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Rihana Haneefa Ibrahim
Bachelor of Business Administration
Amazon College
Rihana Haneefa Ibrahim
Bachelor of Business Administration
Amazon College
 What is Supply?
Supply is an economic principle can be defined as the quantity of a product that a
seller is willing to offer in the market at a particular price within specific time.

The supply of a product is influenced by various determinants, such as price, cost of

production, government policies, and technology. It is governed by the law of supply,
which states a direct relationship between the supply and price of a product, while
other factors remaining the same.

A market is a place where buyers and sellers are engaged in exchanging

products at certain prices.

In a market, the two forces demand and supply play a major role in influencing
the decisions of consumers and producers.

The behaviour of buyers is understood with the help of the concept of demand. On
the other hand, the behaviour of sellers is analysed using the concept of supply.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Concept of Supply
What is Supply Concept? In economics, supply refers to the quantity of a
product available in the market for sale at a specified price and time.

In other words, supply can be defined as the willingness of a seller to sell

the specified quantity of a product within a particular price and time period.
Here, it should be noted that demand is the willingness of a buyer, while
supply is the willingness of a supplier.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Meaning of Supply
What is Supply Meaning? Supply has three important aspects, which are as
follows:
Supply is always referred in terms of price
The price at which quantities are supplied differs from one location to the other.
For example, fast moving consumer goods (FMCG) are usually supplied at
different prices in different prices.

Supply is referred in terms of time

This means that supply is the amount that suppliers are willing to offer during a
specific period of time (per day, per week, per month, bi-annually, etc.)

Supply considers the stock and market price of the product

Both stock and market price of a product affect its supply to a greater extent. If
the market price of a product is more than its cost price, the seller would
increase the supply of the product in the market. However, a decrease in the
market price as compared to the cost price would reduce the supply of product
in the market.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Supply Definition
What is Supply Definition? Economist has given different supply definition but
the essence is same.

Supply may be defined as a schedule which shows the various amounts of a

product which a particular seller is willing and able to produce and make
available for sale in the market at each specific price in a set of possible prices
during a given period.
McConnell

Supply refers to the quantity of a commodity offered for sale at a given price, in
a given market, at given time.
Anatol Murad

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Supply Example
What is Supply? Let us understand the concept of supply with an example.

For example, a seller offers a commodity at 100 per piece in the market. In this
case, only commodity and price are specified; thus, it cannot be considered as
supply.

However, there is another seller who offers the same commodity at 110 per piece in
the market for the next six months from now on. In this case, commodity, price, and
time are specified, thus it is supply.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Classification of supply
What is Supply Classification? Supply can be classified into two categories,
which are individual supply and market supply.

Individual supply is the quantity of goods a single producer is willing to

supply at a particular price and time in the market. In economics, a single
producer is known as a firm.

Market supply is the quantity of goods supplied by all firms in the

market during a specific time period and at a particular price. Market
supply is also known as industry supply as firms collectively constitute an
industry.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Determinants of Supply
Determinants of Supply are the factors that influence producer supply
cause the market supply curve to shift.

• Price of a product
• Cost of production
• Natural conditions
• Transportation conditions
• Taxation policies
• Production techniques
• Factor prices and their availability
• Price of related goods
• Industry structure

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Price of a product
The major determinants of the supply of a product is its price. An increase in
the price of a product increases its supply and vice versa while other factors
remain the same.

Producers increase the supply of the product at higher prices due to the
expectation of receiving increased profits. Thus, price and supply have a direct
relationship.

Cost of production
It is the cost incurred on the manufacturing of goods that are to be offered to
consumers. Cost of production and supply are inversely proportional to each other.

This implies that suppliers do not supply products in the market when the cost of
manufacturing is more than their market price. In this case, sellers would wait for a
rise in price in the future.
The cost of production increases due to several factors, such as loss of fertility of
land; high wage rates of labour; and increase in the prices of raw material,
transportation cost, and tax rate.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Natural conditions
The supply of certain products is directly influenced by climatic conditions. For
instance, the supply of agricultural products increases when the monsoon comes
well on time.

On the contrary, the supply of these products decreases at the time of drought.
Some of the crops are climate specific and their growth purely depends on climatic
conditions.

Production techniques
The supply of goods also depends on the type of techniques used for
production. Obsolete techniques result in low production, which further
decreases the supply of goods.
Over the years, there has been tremendous improvement in production
techniques, which has led to increase in the supply of goods.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Transportation conditions
Better transport facilities result in an increase in the supply of goods. Transport is
always a constraint to the supply of goods. This is because goods are not available
on time due to poor transport facilities.

Therefore, even if the price of a product increases, the supply would not increase.

Taxation policies
Government‟s tax policies also act as a regulating force in supply. If the rates of
taxes levied on goods are high, the supply will decrease. This is because high tax
rates increase overall productions costs, which will make it difficult for suppliers
to offer products in the market.

Similarly, reduction in taxes on goods will lead to an increase in their supply in the
market.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Factor prices and their availability
The production of goods is dependent on the factors of production, such as raw
material, machines and equipment, and labour.

An increase in the prices of the factors of production increases the cost of

production. This will make difficult for firms to supply large quantities in the
market.

Price of related goods

The prices of substitutes and complementary goods also influence the supply of a
product to a large extent.

For example, if the price of tea increases, farmers would tend to grow more tea
than coffee. This would decrease the supply of tea in the market.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Industry structure
The supply of goods is also dependent on the structure of the industry
in which a firm is operating. If there is monopoly in the industry, the
manufacturer may restrict the supply of his/her goods with an aim to
raise the prices of goods and increase profits.

On the other hand, in case of a perfectly competitive market structure,

there would be a large of number of sellers in the market.
Consequently, the supply of a product would increase.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 What is the Law of Supply?
The law of supply states that the relationship between price and supply of
a product.

According to the law of supply, the quantity supplied increases with a rise
in the price of a product and vice versa while other factors are constant.
The other factors may include customer preferences, size of the market,
size of population, etc.

Law of Supply Definition

The law of supply defined as: “Other things remaining unchanged, the supply of a
good produced and offered for sale will increase as the price of the good rises and
decrease as the price falls.”

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Assumptions of Law of Supply
Like the law of demand, the law of supply also follows the assumption of ceteris
paribus, which means that „other things remain unchanged or constant‟.

As mentioned earlier, the supply of a commodity is dependent on many factors

other than price, such as consumers‟ income and tastes, price of substitutes,
natural factors, etc.

All the factors other than the price are assumed to be constant. The law of
supply works on certain assumptions which are given as follows:

Assumptions of Law of Supply are:

• The income of buyers and sellers remains unchanged.

• The commodity is measurable and available in small units.
• The tastes and preferences of buyers remain unchanged.
• The cost of all factors of production does not change over a period of
time.
• The time period under consideration is short.
• The technology used remains constant.
• The producer is rational.
• Natural factors remain stable.
Rihana Haneefa Ibrahim
• Expectations of producers and the government policy
Bachelor do not
of Business change over
Administration
time. Amazon College
 Exceptions of Law of Supply
According to the law of supply, if the price of a product rises, the supply of the
product also rises and vice versa.

However, there are certain conditions where the law of supply is not applicable.
These conditions are known as exceptions to the law of supply. In such cases,
the supply of a product falls with the increase in the price of a product at a
particular point of time.

For example, there would be a decrease in the supply of labour in an

organization when the rate of wages is high.
The exception to the law of supply is represented on the regressive supply curve
or backward sloping curve. It is also known as an exceptional supply curve.

Exceptions of Law of Supply are:

Agricultural products
Goods for auction
Expectation of change in prices
Supply of labour
Rihana Haneefa Ibrahim
Bachelor of Business Administration
Amazon College
 Agricultural products
The law of exception is not applicable to agricultural products. The
production of these products is dependent on so many factors which are
uncontrollable, such as climate and availability of fertile land.

Thus, the production of agricultural products cannot be increased beyond a

limit. Therefore, even a rise in price cannot increase the supply of these
products beyond a limit.

Goods for auction

Auctions goods are offered for sale through bidding. Auction can take place
due to various reasons, for instance, a bank may auction the assets of a
customer in case of his failure in paying off the debts over a period of time.

Thus, supply of these goods cannot increase or decrease beyond a limit. In

case of these goods, a rise or fall in price does not impact the supply.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Expectation of change in prices
Law of supply is not applicable under the circumstances when there is an
expectation of change in the prices of a product in the near future.

For instance, if the price of wheat rises and is expected to increase further
in the next few months, sellers may not increase supply and store huge
quantities in the hope of achieving profits at the time of a price rise.

Supply of labour
The law of supply fails in the case of labour. After a certain point, the rise
in wages does not increase the supply of labour. At higher wages, labour
prefers to work for lesser hours. This happens due to change in
preference of labour for leisure hours.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
What is Supply Curve?
Supply Curve definition: In economics, supply curve is a graphical
representation of supply schedule is called supply curve.

In a graph, the price of a product is represented on Y-axis and quantity

supplied is represented on X-axis.

Types of Supply Curve

In, economics, Supply curve can be of two types, individual supply curve and
market supply curve. These two types of supply curves are explained as
follows:

Types of Supply Curve are:

• Individual supply curve
• Market Supply curve

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Individual supply curve
Individual supply curve: It is the graphical representation of individual
supply schedule.

The individual supply schedule of commodity A represented in Table when

plotted on a graph will provide the individual supply curve, which is shown
in Figure.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
The slope moving upwards to the right in individual supply curve shows the
direct relationship between supply and price, i.e. increase in supply along with
the rise in prices.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Market Supply curve
Market Supply curve: It is the graphical representation of market supply
schedule.

The market supply schedule of commodity A (supplied by Firm X and Firm Y)

represented in Table, when plotted on the graph will provide the market supply
curve, which is shown in Figure.

Example

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Rihana Haneefa Ibrahim
Bachelor of Business Administration
Amazon College
 Supply Curve Shifts
• Movement in Supply Curve
• Shift in Supply Curve

Movement in Supply Curve

Movement along Supply Curve is when the commodity experience change in
both the quantity supply and price, causing the curve to move in a specific
direction.

Shift in Supply Curve

The shift in supply curve is when, the price of the commodity remains constant,
but there is a change in quantity supply due to some other factors, causing the
curve to shift to a particular side.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Shifts and Movement along Supply Curve
In economics, like demand, change in quantity supplied and change in supply
are two different concepts.

• Expansion and Contraction of Supply

• Increase and Decrease In Supply

Change in quantity supplied occurs due to rise or fall in product prices while
other factors are constant.

It can be measured by the Movement along Supply Curve.

The term, Change in quantity supplied refers to expansion or contraction of
supply.
Change in supply refers to increase or decrease in the supply of a product due to
various determinants of supply other than price (in this case, price is constant).

It is measured by shifts in supply curve.

The terms, while a change in supply means an increase or decrease in supply.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Expansion and Contraction of Supply
Expansion or Extension of Supply
When there are large quantities of a good supplied at higher prices, it is known
as expansion or extension of supply.

Figure shows the movement of the supply curve:

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Contraction Of Supply
Contraction of supply occurs when smaller quantities of goods are supplied even at
reduced prices.

On the contrary, a fall in price from OP1 to OP3 results in a decrease in supply
from OQ1 to OQ2. This movement from A1 to A3 shown by the arrow
pointed downwards is known as the contraction of supply. Thus, the movement
from A1 to A3 is the representation of the expansion and contraction of the
quantity supplied.

In Figure, quantity supplied at price OP1 is OQ1. When the price rises to OP2,
the quantity supplied also increases to OQ2, which is shown by the upward
movement from A1 to A2 (it is pointed by the direction of the arrow between
A1 to A2). This upward movement is known as the expansion of supply.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Increase and Decrease In Supply

Increase In Supply
An increase in supply takes place when a supplier is willing to offer large
quantities of products in the market at the same price due to various reasons,
such as improvement in production techniques, fall in prices of factors of
production, and reduction in taxes.

Decrease In Supply
A decrease in supply occurs when a supplier is willing to offer small quantities
of products in the market at the same price due to increase in taxes, low
agricultural production, high costs of labour, unfavorable weather conditions, etc.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Supply curve shifts
A shift takes place in supply curve due to the increase or decrease in supply, which is
shown in Figure.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
In Figure, an increase in supply in indicated by the shift of the supply curve from
S1 to S2. Because of an increase in supply, there is a shift at the given price OP,
from A1 on supply curve S1 to A2 on supply curve S2. At this point, large
quantities (i.e. Q2 instead of Q1) are offered at the given price OP.

On the contrary, there is a shift in supply curve from S1 to S3 when there is a

decrease in supply. The amount supplied at OP is decreased from OQ1 to
OQ3 due to a shift from A1 on supply curve S1 to A3 on supply curve S3.

However, a decrease in supply also occurs when producers sell the same
quantity at a higher price (which is shown in Figure) as OQ1 is supplied at a
higher price OP2.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 What is Market Equilibrium?

Market Equilibrium is a situation where the price at which quantities demanded

and supplied are equal (Supply = Demand). When the market is in equilibrium,
there is no tendency for prices to change.

Market system is driven by two forces, which are demand and supply. This is
because these two forces play a crucial role in determining the price at which a
product is sold in the market. Price is determined by the interaction of demand
and supply in a market.

According to the economic theory, the price of a product in a market is

determined at a point where the forces of supply and demand meet. The point
where the forces of demand and supply meet is called equilibrium point.

Conceptually, equilibrium means state of rest. It is a stage where the

balance between two opposite functions, demand and supply, is achieved.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
Let us understand the concept of market equilibrium with the help of an example.
Table 1 shows the demand and supply of fans in Delhi at different price levels.

In Table 1, it can be observed that at the price of ₹700, the demand and supply of
fans is equal i.e. 70,000 fans. Therefore, market equilibrium exists at 70,000 where
demand and supply are the same. Figure 1 shows the market equilibrium of demand
and supply of fans mentioned in Table 1:

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
In Figure 1, E is the point where demand and supply both intersect. Thus,
market equilibrium exists at point E where demand and supply are equal.

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College
 Q & A?

Try to do your level best , do not compare yourself with another….

If you do so…… you are underestimating yourself”

Rihana Haneefa Ibrahim

Bachelor of Business Administration
Amazon College