Ca foundation

E CONOMICS
REVISION

By:- CA. Arpit

Rajawat
Chapter 2.

Theory of
Demand and
Supply
 DEMAND
It refers to the quantity of a good or
DEFINITION service that consumers are willing &
able to purchase at various prices
during a given period of time.

WILLING AT A
DEMAN
TO PAY GIVEN
D FOR IT TIME

DESIRE OF ABILITY AT THE

A
COMMODI TO PAY GIVEN
TY FOR IT PRICE
DETERMINES DEMAND
Price of
commodi
ty

price of
Other Related
factors commoditi
es

DETERMINANTS
OF DEMAND

Consumer Income
's of the
Expectati consume
on rs

Tastes and
preference
s of
consumers
 There is an inverse relation between price
Price of and demand for a good i. e., when price of a
commodity good is high , demand for it win be low and
vice - versa .

Related goods can be divided into two

categories :
- Complementary goods ⇒ Goods which are
price of Consumed
Related together on simultaneously
commodities - Competing or substitute goods ⇒ Good which
can
be consumed with equal ease & satisfaction in
place of other good
A change in income of consumer leads to a
change in quantity demanded of good but
demand for all commodities is not affected in
same manner . For this purpose , we can
Income of divide into categories :-
the - Normal goods ⇒ There is a direct or positive
consumers relation between income and demand for a
normal good.
- Inferior goods ⇒ These are the goods for
which
demands falls WHEN income rises .
 Demand for a commodity depends upon
consumer 's tastes & preferences i.e.
occupation, age, family, composition etc.
Any change in the taste of the consumer
shall have a direct effect on the demand for
Tastes and a good.
preferences  Demonstration effect ‘or’ Bandwagon
of effect’ - These are the effects that are
consumers caused by observation of the actions of
others and their consequences .
 when a product becomes common among
all, some people decrease or altogether stop
its consumption . This is called snob effect.
 Highly priced goods are consumed by
status seeking rich people to satisfy their
need for conspicuous consumption . This is
called Veblan effect .

Consumers expectations regarding future

Consumer's prices ,
Expectation Income , supply conditions etc. Influence
current demand.
 OTHER
FACTOR

Consumer
The level of
Composition credit
Size of the National
of facility &
population income & its
population interest
distribution
rates

Larger the Higher the

size of Old people how rate of
national interest
population, walking
income ↳ Demand
greater is sticks
Higher the More
the demand demand
for Youth New
commoditie mobile
s. phones
 DEMAND
FUNCTION
A function is a symbolic of a relationship
between the dependent and independent
variables .
It States the relationship between the demand of a
product ( the dependent variable ) and its
determinants
( the independent or explanatory variables ) .

Demand
(
function
=x) D = F ( Px , M , P y , P c , T , A
Quantity Price of Consumer
demand the tastes
Price of
ed of commodi and
its
product ty preferenc
Money substitute
× es Advertiseme
income of s Price of its
the complement nt
consumer ary goods expenditure
 LAW OF DEMAND
there is an inverse relationship between price
and quantity demanded, ceteris paribus

The greater the amount to be Sold,

the smaller must be the price at
DEFINITION which it is offered in order that it
may find purchasers we in other
words the amount demanded
increases with a fall in price and
diminishes with a rise in price.
-Alfred Marshall
 DEMAND SCHEDULE
A demand schedule is a tabular statement
showing various quantities of good demanded at
various prices during a given time period

Individu Market
al Demand
Demand Schedul
Schedul It shows various e
It is an
e quantities aggregate
demanded of a
good at different
of
prices by a single individual
individual / demand
family / schedules
household during in a
a given time market
period.
Demand schedule of an individual
consumer
Price Quantity
(in Rupees) demanded
( units )
A 5 10
B 4 15
C 3 20
D 2 35
E 1 60
Market
Price Demand
Quantity Total Market
Demanded By DEMAND
P Q R

5 10 8 12 30
4 15 12 18 45
3 20 17 23 60
2 35 25 40 100
1 60 35 45 140
 DEMAND CURVE
A demand curve is a diagrammatic
representation of a demand schedule.
It is obtained by plotting a demand schedule.

This downward
sloping curve
describes the
inverse price -
demand
relationship
The market demand curve, like the individual demand
curve, slopes downwards to the right because it is
nothing but the lateral summation of individual
demand curves
 RATIONALE OF THE LAW OF DEMAND
This law States that as a consumer
goes on consuming more & more
units of a particular good , the utility
derived from the consumption of
each additional unit goes on
Law of declining. A consumer is in
diminishi equilibrium ( i.e. maximizes his
ng satisfaction) when the marginal
utility of the commodity and its price
marginal equalize . The operation of
utility diminishing marginal utility and the
act of the consumer to equalize the
utility of the commodity with Its
price result in a downward sloping
demand curve
 The total fall in quantity demanded
due to an increase in price Is termed
Price as Price effect . The law of demand
effect can be dubbed as “Negative Price
Effect " with some exceptions
 Price
Effect

Incom
Substitutio
n effect e
effect

It refers to the
It refers to effect on the
substituting one
change in quantity
commodity in place
of the other when it demanded when
becomes relatively the real income of
cheaper as compared the consumer
to its substitute . As changes due to
a result, the demand change in the price
of the given of the given
commodity rises. commodity .
 Pric
Substituti Income e
on effect effect
effe
ct
when the price of a commodity falls, More
Annual of consumers . start buying it because some of
those who could not afford to buy it earlier
new may now be able to buy It . ts raises The no .
consumer of consumers of a commodity at a lower price
and hence the demand . for the commodity in
s Certain commodities have multiple uses . If
question .
their
prices fall , they will be used for varied
purposes
and therefore their demand for such
Differen commodities
t uses will increase . when the price of such
commodities
are high ( on rises ) they will be put to
limited
uses only .
Eg s - olive oil
 EXCEPTIONS TO THE LAW OF DEMAND

There are certain cases where law of demand is

not applicable . Instead of being an inverse
relation between price and demand of a good
some consumers measure utility of a
there is a direct relation between the two
commodity by
its price i. e. if the commodity is expensive
they
think it has got more utility and vice versa.
conspicu Therefore, they buy less at lower price and
ous more of It at higher price. Higher prices are
indicators of higher utilities. A higher prices
goods means higher prestige value and higher
appeal and vice versa . Thus, a fall in their
price would lead to fall in their
quantities demanded . This is against the
law of demand.
In some cases, demand for a commodity falls
when its price falls and vice versa. Giffen
goods - Goods which are inferior, with no
Giffen close substitutes easily available and which
goods occupy a substantial place in consumer 's
budget. In case of inferior goods like bajra ,
cheap bread etc . also called “ Giffen goods”.
 Conspicuous
necessities

The demand for some goods is guided by the

demonstration effect of the consumption
pattern of a social group to which The person
belongs Egt Tv , refrigerators etc.
These goods due to their constant usage,
become necessities of life .

Future
expectations
about prices

When the prices are rising, households Tend

to purchase larger quantities of The
commodity, out of fear that prices may go up
further and vice versa .
 Irrational
behavior of
The
consumers

At times consumers make impulsive purchases

without any calculation about price &
usefulness of the product . In such cases the
law of demand fails .

speculative
goods

In the speculative market , particularly in the

market for Stocks and shares, more will be
demanded when the prices are rising and less
will be demanded when prices decline .
 INCREASE AND SHIFT IN
DEMAND
DECREASE IN CURVE
DEMAND
 when there is change in demand due to
change in factors other than price of the
commodity, It is called increase or decrease
in demand.

 Price remaining the same when demand

rises due to change in factors other than
price, it is called increase in demand .

 Price remaining the same when demand

falls due to change in factors other than
price. it is called decrease in demand
In the figure
• original demand curve is
DD . At OP price OQ
quantity is being
demanded .
• As the demand
changes , the demand
curve shifts either to the
night ( D , D , ) on to the
left LDZDD .
• At D. Di, 0 Qi quantity is
being demanded at the
price OP . This shows the
increase in demand
( rightward shifts in
demand curve ) due to
factor
other than price .
• At Du Dre, 002 quantity
is being demanded at the
price OP . This shows
decrease in demand
( leftward shift in demand
# When demand of a commodity INCREASES due to
factors
other than price , firms can sell a larger quantity at
a
prevailing price and earn higher revenue

# The aim of a advertisement and sales promotion

activities
is to shift the demand curve to the right and To
MOVEMENTS
reduce ALONG THE DEMAND CURVE
the elasticity of demand .
Vs SHIFT OF DEMAND CURVE
A movement along
the demand curve A shift of The demand
curve indicates that
indicates
there is a change in
changes in the
demand at each possible
quantity demanded price because one or
because of more other factors, Such
price changes , other as incomes , tastes or
factors remaining the price of some other
constant . goods , have changed .
ELASTICITY OF
DEMAND
It is defined as the responsiveness of
the quantity demanded of a good to
changes in one of the variables on
which demand depends . It is basically
a percentage change in quantity
demanded divided by the percentage
change in one of the variables on
which demand
depends .

It is the price elasticity of demand

which is usually referred to as
elasticity of demand
1. PRICE ELASTICITY
Price elasticity of demand expresses the response
of quantity demanded of a good to a change in its
price, given the consumer 's income, his tastes
and prices of all other goods.
In other words, It is measured as the % change in
quantity demanded divided by % change in price,
other things remaining equal .
IN SYMBOLIC TERMS

Ep = Price elasticity
q = Quantity
p = Price
∆ = change

The value of price elasticity varies

from minus infinity to approach
zero from the negative sign .
2. POINT ELASTICITY
In point elasticity, we measure
elasticity at a given point on a
demand curve.
The concept of point elasticity is
used for measuring price elasticity
where the change in price Is
infinitesimal.
Point elasticity makes use of
derivative rather than finite
changes in price and quantity