NEED

WANT

DEMAND
Demand
Demand for a commodity refers to the quantity of
the commodity which an individual household is
willing to purchase per unit of time at a particular
price.
Demand for a commodity implies:
(a) Desire to acquire it,
(b) Willingness to pay for it, and
(c) Ability to pay for it.
Law of Demand
Marshall law states that, all other factors
being equal, as the price of a good or
service increases, consumer demand for
the good or service will decrease and vice
versa.
 Exceptions to law of demand
1. Giffen goods: Inferior goods on which the consumer spends a large
part of his income and the demand for which falls with a fall in their
price.. a rise in their price drains their resources and the poor have to
shift their consumption from the more expensive goods to the giffen
goods,

2. Articles of snob appeal: Goods which serve ' status symbol ' do not
follow the law of demand. these are goods of ' conspicuous
consumption

3. Expectations regarding future prices: If the price of a commodity

is rising and is expected to rise in future the demand for the
commodity will increase.

4. Emergency: At times of war, famine etc. consumers have an

abnormal behaviour..

5. Quality-price relationship: people assume that expensive goods are

of a higher quality then the low priced goods.
Demand Schedule
Demand Curve
 Market Demand
 Market demand refers to the sum of
all individual demands for a
particular good or service.

 Graphically, individual demand

curves are summed horizontally to
obtain the market demand curve.
Demand functions

simple demand functions

Qd = a – bP

more complex demand functions

Qd = a – bP + cY + dPs – ePc
 Demand curve for equation: Qd = 10 000 – 200P
50

40

30

20
P
10

0
0 2 4 6 8 10

Q (000s)
 Demand
50
curve for equation: Qd = 10 000 – 200P

40 P Qd (000s)
5 9
30

20
P
10

0
0 2 4 6 8 10

Q (000s)
 Demand
50
curve for equation: Qd = 10 000 – 200P

40 P Qd (000s)
5 9
30 10 8

20
P
10

0
0 2 4 6 8 10

Q (000s)
 Demand curve for equation: Qd = 10 000 – 200P
50

40 P Qd (000s)
5 9
30 10 8
15 7
20
P
10

0
0 2 4 6 8 10

Q (000s)
 Demand
50
curve for equation: Qd = 10 000 – 200P

40 P Qd (000s)
5 9
30 10 8
15 7
20 20 6
P
10

0
0 2 4 6 8 10

Q (000s)
 Prices of Related Goods
Substitutes & Complements
 When a fall in the price of one good
reduces the demand for another good,
the two goods are called substitutes.
(Tea & Coffee)
 When a fall in the price of one good
increases the demand for another
good, the two goods are called
complements.(Car & petrol)
Determinants of demand
Tastes & Preferences
number and price of substitute goods
number and price of complementary goods
Income (Taxes & Subsidies)
Advertisings
Expectations
Seasonal Variations
Population
Determinants of demand
Change in Quantity Demanded
versus Change in Demand

Change in Quantity Demanded

 Movement along the demand curve.
 Caused by a change in the price of
the product.
 Changes in Quantity
Price of
Cigarettes
Demanded
per Pack
A tax that raises the
price of cigarettes
C results in a
$4.0
movement along the
0
demand curve.

2.00 A

D1
0 12 20 Number of
Cigarettes Smoked
Change in Quantity Demanded
versus Change in Demand

Change in Demand
 A shift in the demand curve, either to
the left or right.
 Caused by a change in a
determinant other than the price.
 Consumer Income
Price of
Normal Good
Ice-Cream
Cone
$3.0 An
0
2.5 increase
0 Increase in
2.0 in demand income...
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 of Ice-
Cream
 Consumer Income
Price of
Inferior Good
Ice-Cream
Cone
$3.0
0
2.5 An
0
2.0
increase
0 Decrease
in
1.5 in demand income...
0
1.0
0
0.5
0
D2 D1 Quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 of Ice-
Cream
Change in Quantity Demanded
versus Change in Demand
Variables that A Change in
Affect Quantity
Demanded This Variable . . .
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
buyers
Components of Demand:
The Substitution Effect
 Assuming that real income is constant:
If the relative price of a good rises, then
consumers will try to substitute away from
the good. Less will be purchased.
If the relative price of a good falls, then
consumers will try to substitute away from
other goods. More will be purchased.
 The substitution effect is consistent with
the law of demand.
© Oxford University
Press, 2016. All rights
reserved.
Components of Demand:
The Income Effect
 The real value of income is inversely
related to the prices of goods.
 A change in the real value of income:
will have a direct effect on quantity
demanded if a good is normal.
will have an inverse effect on quantity
demanded if a good is inferior.
 The income effect is consistent with the
law of demand only if a good is normal.
© Oxford University
Press, 2016. All rights
reserved.
What is Supply?
 . Supply indicates how much a good
producers are willing and able to offer
for sale per period at each possible price,
other things constant
 Law of Supply
 As a good’s price increases (decreases), the quantity
suppliers are willing and able to supply increases
(decreases)
 The quantity supplied is usually directly related to its
price
 P QS
Supply Schedule
 A Supply Schedule displays the quantity of a product
supplied at each price
Price Per Bottles Bottles
Bottle Supplied Supplied
Firm A Firm B
.74 200 100
.50 130 70
.36 75 50
.28 50 25
 © Oxford University
Press, 2016. All rights
reserved.
Market Supply
 Market Supply Schedule: a table showing
the quantity supplied of a commodity at
each price for a given period of time.
 Market Supply Curve: A positively-sloped
curve showing the various price-quantity
combinations given by the market supply
schedule.

© Oxford University
Press, 2016. All rights
reserved.
Changes in Supply
Examples of things that could shift the
supply curve:
1) An improvement in technology,
2) A reduction in the price of resources used
in the production of the commodity,
3) For agricultural commodities, more
favorable weather conditions.

© Oxford University
Press, 2016. All rights
reserved.
 © Oxford University
Press, 2016. All rights
reserved.
Market Equilibrium
Market Equilibrium
 Equilibrium Price of a Commodity: the
price at which the quantity demanded of
the commodity equals the quantity
supplied and the market clears.
 Surplus: occurs when the quantity
supplied exceeds the quantity demanded.
 Shortage: occurs when the quantity
demanded exceeds the quantity supplied.
© Oxford University
Press, 2016. All rights
reserved.
 The Market Mechanism
 Market Mechanism Summary
1) Supply and demand interact to
determine the equilibrium price.
2) When not in equilibrium, the market will adjust
to a shortage or surplus and return to the
equilibrium.
3) Markets must be competitive for the
mechanism to be efficient.

34
MARKET DEMAND & SUPPLY

Price Price
MARKET MARKET
PQD 200 DEMAND P QS 200 SUPPLY

Rs.510 B 2,000
Rs.560 S12,000

420
335 x
U
Y
E
4,000
7,000
450
335 x
E
10,000
L
L
7,000
255 R
11,000 220 E
4,000
180 S16,000 1 5 R 1,000
S

EQUILIBRIUM 35
 MARKET DEMAND &
SUPPLYPrice
Price Rs.5
Demand S Price Supply

P QD P Q
4
Rs.52,000 Market
Rs.512,000
S
Equilibrium
Rs.44,000
Rs3
Rs.410,000
Rs.37,000 7,000
11,0002
Rs.2 Rs.3 4,000
16,000
Rs.1 Rs.2 1,000
1
D Rs.1
o 2 4 6 78 10 12 14 16 Q
36
Quantity
 The Market Mechanism
Y
S
Price
(Rs. per unit)

P E

Quantity
O Q X 37
The Market Mechanism
Price
S
(Rs. per unit)
Surplus
P1
If price is above equilibrium
Point-Supply exceeds
Demand.
P

Q Quantity
38
 The Market Mechanism
Price
S
(Rs per unit)

Surplus
P1
Assume the price is P1 , then:
1) Quantity Supplied is >
Quantity Demanded
P2 2) Producers lower price.
3) Quantity supplied decreases
4) Equilibrium is restored

Q1 Q3 Q2 Quantity
39
 The Market Mechanism
Price
(Rs. per unit) S

E Assume the price is P2, then:

1) Quantity Demanded is greater
than quantity Supplied
P3 2) Producers raise price.
3) Quantity supplied increases
4) Equilibrium is restored

P2
Shortage
D

Q1 Q3 Q2 Quantity
40
 Change in Supply

P D1 S1
S2

Price P2

P1

o Q2 Q1 Q
Quantity
 Change in Demand

D2 S1
P D1

Price P2

P1

o Q1 Q2 Q
 D P Q D P Q
D1 A D1
D1 S B S
P2
P1
D2
P1
P2

“Increase in Demand” Q1 Q2 Q2 Q1 “Decrease in Demand”

Four Possibilities
S P Q S P Q
D D D S2
C S1
S1 P2
P2 S1 P1
P1

“Increase in Supply” Q1 Q2 Q2 Q 1 43
“Decrease in Suply”
Change in Supply = Change in Demand

D2 S3
D1
S1
D3 S2

Q
44
 Price Ceilings
and Price Floors
 Price Ceiling
is a legally established maximum price which a seller can
charge or a buyer must pay.

 Price Floor
is a legally established minimum price which a seller can
charge or a buyer must pay.

45
 Price Ceilings
 When the Government imposes a price ceiling (i.e., a
legal maximum price at which a good can be sold) two
outcomes are possible:
The price ceiling is not binding.
The price ceiling is a binding constraint on the market,
creating shortages.

46
A Binding Price Ceiling
Price
S

Price
PE Ceiling

PC
Shortag
e D

Q QE Q Quantity/time
S D 47
 Market Impacts
of a Price Ceiling
 A Binding Price Ceiling creates. . .
Shortages (QD > QS)
Shortages create :
• Queuing
• Discrimination criteria set by sellers
• Bundled pricing with other goods
• Bribery/corruption

48
 Price Floors

 When the Government imposes a price floor

(i.e., a legal minimum price at which a good
can be sold) two outcomes are possible:
The price floor is not binding.
The price floor is a binding constraint on the
market, creating surpluses.

49
 A Binding Price Floor
Price
Surplus S
PF

Price Floor
PE

D
Q QE Q Quantity/time
D S
50
 Market Impacts
of a Price Floor

 A Binding Price Floor creates. . .

Surpluses (QS > QD)
Surpluses create :
• Discrimination criteria set by buyers
Examples:
• Minimum wages act

51
Tutorial
Q1. The demand equation for a popular brand of fruit
drink is given by the equation
Qx = 10 – 5Px + 0.001I + 10Py
where Qx = monthly consumption per family in gallons
Px = price per gallon of the fruit drink = $2.00
I = median annual family income = $20,000
Py = price per gallon of a competing brand = $2.50
 Interpret the parameter estimates.
 At the stated values of explanatory variables,
compute the monthly consumption (in gallons) of
fruit drink.
 Suppose median annual family income increased to
$30,000. What will be answer to part (ii) now?
 Q2. Demand function for a variety of Bakeman
biscuits is:
Q = 2.02P + 0.03A - 0.04Ac + 0.06Pc + 0.001I
where Q and P are quantity and price of the Bakeman
biscuits respectively; A and Ac are company’s own and
competitor’s advertisement expenditures, Pc is price of
competitor’s and I is the average personal disposable
income. Given A = 50, Ac = 100, Pc = 5 and I = 20,000

 Write down the demand & inverse demand equation.

 Draw the demand curve and find Q for P = 10.
12. Briefly list and elaborate on the factors that will be
affecting the demand for the following products in the
next several years. Do you think these factors will cause
the demand to increase or decrease?
a. Convenience foods (sold in food shops and supermarkets)
b. Products purchased on the Internet
c. Fax machines
d. Digital cameras
e. DVDs rented from retail outlets
f. Pay-per-view television programing
g. Airline travel within the United States; airline travel within
Europe
h. Gasoline
a. Busier life styles, two-income families, single-parent households
will continue to cause demand for convenience foods to increase.
b. Demand is already increasing drastically for goods purchased
on the Internet and is posed to explode in the next five years.
c. Will decline as usage of internal fax modems and e-mail
attachments continue to rise.
d. May decrease as digital cameras become less expensive and in
greater demand.
e. Pay-per-view and satellite TV programs will continue to erode
video rental demand.
f. Pay-per-view should increase as broader band connections to
the home make this form of entertainment cheaper and easier to use.

 g. Longer term trends point in an upward direction.

h. It is difficult to tell, but if demand for SUV’s and trucks

continues to rise, there will also be a steady increase in demand
(particularly in the U.S. and Western Europe). Also, if emerging
markets continue to grow (particularly in countries such as China
and Brazil), there will be more automobiles and hence an
increase in world demand for gasoline.
13. Briefly list and elaborate on the factors that will be
affecting the supply of the following products in the next
several years. Do you think these factors will cause the
supply to increase or decrease?
a. Crude oil
b. Beef
c. Computer memory chips
d. Hotel rooms
e. Fast food outlets in emerging markets
f. Credit cards issued by financial institutions
g. Laptop computers
h. PC servers