Transcript DEMAND ANALYSIS Samir K Mahajan, M.Sc, Ph.D.,UGC-NET Assistant Professor (Economics) MEANING OF DEMAND Demand is effective desire which can be fulfilled.

DEMAND ANALYSIS
Samir K Mahajan, M.Sc, Ph.D.,UGC-NET
Assistant Professor (Economics)
MEANING OF DEMAND
Demand is effective desire which can be fulfilled. Demand
must satisfy the following pre-requisites:
•
Desire for a specific commodity
• Ability to pay or sufficient resources to purchase the desired
commodity
• Willingness to spend on the commodity
•
Availability of the commodity at particular price, time and place.
All these mentioned requisites must be satisfied simultaneously to
satisfy the meaning of demand.
DEMAND DETERMINANTS
Demand determinants refer to the factors that affect demand for
commodity (a consumer good), such as:
Price of the Commodity
Income of the Consumer
Price of related goods
 Taste and preference of consumer
Growth of population
Government policy
Climatic conditions
 Income distribution
Expected change in price
Future expectation about income etc.
DEMAND DETERMINANTS
Some important determinants of demand are discussed as follows:
Price of the Commodity
Normally, quantity demanded of a commodity varies inversely with its price, ceteris
paribus ( i.e. other things remaining the same). As price of a commodity rises,
quantity demanded of it falls and as price of the commodity falls, quantity demanded
of it rises .
Income of the Consumer
Change in income of the consumer also brings about changes in demand for a
commodity.
Demand for a normal good varies directly with income of the consumer, other things
remaining the same. Normal goods are those goods whose demand increases with
increase in income of the consumer and vice versa. Demand for inferior goods
decreases with increases in income of the consumer .
DETERMINANTS OF DEMAND(contd)
Price of Related Goods
Goods are said to be related when they are either substitute goods or complementary
goods. Substitute goods are those goods which compete with each other to satisfy a
particular want. E.g. railways and airways, branded mobiles and Chinese mobile. etc .
Complementary goods are those goods which are jointly demanded to satisfy a
particle want. Examples of complementary goods are car and petrol, etc.
In case of substitute goods: Quantity demanded of a commodity varies directly with
the price of its substitute. In case of complementary goods: Quantity demanded of a
commodity varies inversely with the price of its complementary goods.
Taste And Preferences
Demand for goods is affected by taste and preferences of the consumer which are
subjective in nature, and are shaped by individual like and dislikes, faith and belief,
fashions, habits, trends etc.
DEMAND FUNCTION
Demand functions expresses the functional relationship between demand for a commodity
(i.e. a consumer good) and its determinants. It can be written as :
Dx= f (Px , Y, PR ,T, Pe , G, …………..)
Where,
Dx symbolizes demand for commodity X
Px symbolizes price of commodity X
Y symbolizes income of the consumer
PR symbolizes price of related good R
T symbolizes taste and presences
Pe symbolizes expected change in price of commodity X
G symbolizes growth of population
KINDS OF DEMAND
There are three kinds of demand relations which are usually studied under demand
analysis such as: Price Demand, Income Demand and Cross Demand.
Price Demand: Price demand studies how demand for a commodity ( Dx) changes with
respect to change in price(Px) , ceteris paribus (other things remaining the same).
Dx= f (Px)
Income Demand: Income Demand examines how demand for commodity ( Dx) changes as a
result of change in income of the consumer(Y) , other things remaining the same.
Dx= f (Y)
Cross Demand: Cross demand studies how quantity demand of a commodity ( Dx) changes
as a result of change in price of its related goods ( PR ), ceteris paribus . Cross demand
function can be denoted as follows:
D x= f ( P R )
LAW OF DEMAND
The law of demand states that normally quantity demanded
of a commodity varies inversely with price, ceteris paribus.
In other words, the law of demand states that other things
reaming the same, lesser quantity of a commodity will be
demanded at higher prices, and more quantity of it will be
demanded at lower prices.
Demand curve
Demand curve is the graphical representation of the relationship between demand for a
commodity (Dx) and its price (Px) .
Normally, a demand curve slopes downward
from left to right indicating the operation of the
law of demand.
Price
D
Demand Curve
D
0
Quantity demand
Exceptional Demand Curves/
Exception to Demand curve or Law of Demand
In some rare situations, the law of
demand does not hold good.
In such situations, the demand
curve slopes upward instead of
sloping downward suggesting a
rise in demand with rising price.
Cases in which this tendency is
observed are referred to as
exceptions to the general law of
demand.
Here demand curve DD curve is known as an exceptional demand curve.
Exceptional Demand Curves contd.
Exceptions to law of demand are





Giffen goods,
conspicuous consumption
conspicuous necessities,
expected changes in price,
extraordinary situations like natural disasters, famine, riots etc
Exception to Demand curve contd.
Giffen goods:
In case of certain inferior goods called Giffen goods, when the price falls, quite
often less quantity will be purchased than before because of the negative
income effect and people’s increasing preference for a superior commodity
with the rise in their real income. Few examples of giffen goods are cheap
potatoes, coarse cloth, coarse grain, etc.
Conspicuous consumption:
Some expensive commodities like diamonds, expensive cars, exorbitantly
high priced mobile phones etc., are used as status symbols to display one’s
wealth or , to distinguish oneself from average people. The more expensive
these commodities become, the higher their value as a status symbol and
hence, the greater the demand for them. Law of demand does not apply here.
Conspicuous necessities:
certain things become necessities of modern life. These are purchased even if
their prices rise. E.g. TV, refrigerators, mobile phones, automobiles.
Exception to Demand curve contd.
Expected Changes in Price:
Expected or anticipated changes in price of a commodity in future also can affect quantity
demanded of it at present. If it is expected that the price of a commodity will rise in
future, the demand for it rise and vice versa.
Extraordinary situations:
War, famines, riots, natural calamities are extra ordinary situations when
people’s behavior becomes abnormal. Law demand does not apply in
abnormal situations.
CHANGES IN QUANTITY DEMANDED/
MOVEMENT ALONG DEMAND CURVE
There are two concepts related to changes in quantity demand such as:
 Extension of Demand
 Contraction of Demand
Changes in Quantity Demanded contd.
EXTENSION OF DEMAND
Extension of Demand :
Other things remaining the same,
when more quantity of a
commodity is demanded due to
fall in its price, it is called
extension of demand. There is a
downward movement along the
demand curve in case of extension
of demand.
Price
D
P2
A
Extension
of demand
B
P1
D
O
Q1
Q2
Quantity Demanded
Changes in Quantity Demanded contd.
CONTRACTION OF DEMAND
Contraction of Demand :
Price
Other things remaining the same,
when less quantity of a
commodity is demanded due to
rise in its price, it is called
contraction of demand . There is a
upward movement along the
demand curve in case of
contraction of demand.
D
P2
A
Contraction
of demand
P1
B
D
O
Q1
Q2
Quantity Demanded
Changes in Demand/
Shift in Demand Curve/
There are two concepts related to changes in quantity demand such as:
 Increase in Demand
 Decrease in Demand
Changes in Demand /Shift in demands are caused by




Changes in income
Changes in price of substitutes
Changes towards the taste and preferences of the commodity
Changes in climate etc.
Changes in Demand contd.
Increase in Demand
When , due to factors other than price, more quantity of a commodity is demanded at
same price or same quantity is demanded at higher price, it is called increase in
demand. There is a upward /rightward shift in demand.
Price
more demand at
same price
Same demand at
higher price
D/
P2
D
P1
D/
D
O
Q1
Q2
Demand
O
Q1
Changes in Demand contd.
Decrease in Demand
When , due to factors other than price, less quantity of a commodity is demanded at
same price or same quantity is demanded at lower price, it is called decrease in
demand. There is a downward /leftward shift in demand
Price
Less demand at
same price
Same demand at
lower price
D/
P2
D
P1
D/
D
O
Q1
Q2 Demand
O
Q1
ELASTICITY OF DEMAND
Elasticity of demand is the measure of the responsiveness of quantity
demanded of a commodity in response to change in a particular demand
determinant (say price) while keeping other determinants constant( such as:,
income, or price of related good , advertisement, growth of population and so
on). Algebraically, it is defined as
Where eD is elastic of demand
Q is quantity demanded ()
Z is any demand determinant (initial)
dQ is change in quantity demanded
dZ is change in demand determinant
CONCEPTS OF ELASTICITY OF DEMAND
There may be as many as concepts of elasticity of demand as the
number of demand determinants. Most important concepts of
elasticity of demand are:
Price elasticity of demand (here the demand determinant is
price of the commodity)
Income elasticity of demand (here the demand determinant is
income of consumer)
Cross elasticity of demand (here the demand determinant is
price of related goods)
PRICE ELASTICITY OF DEMAND
Price Elasticity of demand is the measure of the responsiveness of quantity
demanded of a commodity in response to change in price , ceteris paribus.
𝐞𝐏 =
𝐞𝐏
𝒑𝒆𝒓𝒄𝒅𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
𝒅𝑸
𝑸
=
𝒅𝑷
𝑷
𝐞𝐏 =
𝒅𝑸
𝑝
𝑥( )
𝒅𝑷
𝑄
Where eP is elastic of demand
Q is quantity demanded (initial)
P is price of the commodity (initial)
dQ is change in quantity demanded
dP change in price
***Price elasticity usually carries a negative sign because of inverse relationship between
price and demand. However, it is absolute value of price elasticity of demand that
determines the different degrees/kinds of price elasticity of demand.
PRICE ELASTICITY OF DEMAND (cntd.)
KINDS OF PRICE ELASTICITY OF DEMAND
Perfectly elastic demand :
Elastic Demand /Relatively Elastic Demand:
𝑒𝑃 > 1
Unit Elastic Demand:
Inelastic Demand / Relatively Inelastic Demand :
Perfectly inelastic Demand:
𝑒𝑃 < 1
PRICE ELASTICITY OF DEMAND (cntd.)
PERFECTLY ELASTIC DEMAND
Price
Perfectly elastic
demand curve
When quantity demanded of
the commodity changes
though there is no change in
price, it is known as perfect
elastic demand.
Incase of Perfectly elastic
demand,
P
D
0
Q1
Q2
Quantity Demand
PRICE ELASTICITY OF DEMAND (cntd.)
ELASTIC DEMAND
When the proportionate
change in demand is more
than
the
proportionate
changes in price, it is known
as relatively elastic demand.
E.g. luxury goods
Price
D
Incase of elastic demand,
Elastic demand curve
𝑒𝑃 > 1
P2
P1
D
0
Q1
Q2
Quantity demanded
PRICE ELASTICITY OF DEMAND (cntd.)
UNIT ELASTIC DEMAND
When the proportionate
change in demand is equal to
proportionate changes in
price, it is known as unitary
elastic demand.
Price
D
Unit elastic demand equal
P2
P1
Incase of unit elastic demand,
D
0
Q1
Q2
Quantity Demand
PRICE ELASTICITY OF DEMAND (cntd.)
INELASTIC DEMAND
Price
D
Inelastic demand curve
P2
P1
When
the
proportionate change
in demand is less than
the
proportionate
changes in price, it is
known as relatively
inelastic demand. e.g.
necessities, electricity
etc.
Incase of inelastic demand,
𝑒𝑃 < 1
D
O
Q1
Q2
Quantity Demanded
PRICE ELASTICITY OF DEMAND (cntd.)
PERFECTLY INELASTIC DEMAND
Price
D
Perfectly inelastic
demand curve
P2
P1
When a change in price,
howsoever large, change
no changes in quality
demand, it is known as
perfectly inelastic demand.
E.g. salts
Incase of perfectly inelastic
demand,
0
Q
Quantity Demanded
PRICE ELASTICITY OF DEMAND (cntd.)
ALL KINDS OF (Price)DEMAND CUVES BE SHOWN IN ONE DIAGRAM AS FOLLOWs
Price
𝑒𝑃 > 1
𝑒𝑃 < 1
0
Quantity Demanded
,
Income Elasticity Of Demand
Income Elasticity of demand is the measure of the responsiveness of quantity
demanded of a commodity in response to change in income of the consumer, ceteris
paribus.
𝐞𝒀 =
𝒑𝒆𝒓𝒄𝒅𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒊𝒏𝒄𝒐𝒎𝒆 𝒐𝒇 𝒄𝒐𝒎𝒖𝒔𝒎𝒆𝒓
or,
or,
Where
is income elasticity of demand
Q is the quantity demanded (initial)
Y is the income of the consumer (initial)
dQ is the change in quantity demanded
dY is the change in income
INCOME ELASTICITY OF DEMAND (cntd.)
KINDS OF INCOME ELASTICITY OF DEMAND
 Positive Income elasticity of demand which includes
o Unitary Income Elasticity ( ey=1 ) indicates that a proportionate (percentage or relative
)change in quantity demanded is equal to proportionate change in money income.
o High Income Elasticity (ey > 1 ) indicates that a proportionate change in quantity
demanded is more than proportionate change in money income. E.g. luxuries
o Income elasticity less than unity / Low Income Elasticity (eY < 1 ) indicates that
a proportionate change in quantity demanded is less than proportionate
relative change in money income. e.g. necessities
 Zero Income elasticity /Perfectly Inelastic Income demand (ey = 0 ) indicates a
change in income will have no effect on the quantity demanded e.g. salts
 Negative income elasticity (eY < 0 ) [in case of inferior goods] indicates that less
is bought at higher incomes and more is bought at lower incomes.
,
Cross Elasticity Of Demand
Cross Elasticity of demand is the measure of the responsiveness of quantity
demanded of a commodity in response to change in price of its related goods, ceteris
paribus. It can be written as:
𝐞𝑨𝑩 =
𝒑𝒆𝒓𝒄𝒅𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅 𝒐𝒇 𝒈𝒐𝒐𝒅 𝑨
𝒑𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒓𝒆𝒍𝒂𝒕𝒆𝒅 𝒈𝒐𝒐𝒅 𝑩
or,
or,
Where
eAB is cross elasticity of demand
QA is the quantity demanded of commodity A (initial)
PB is the Price of the commodity B(initial)
d QA is the change in quantity demanded of commodity A
d PB is the change in price
INCOME ELASTICITY OF DEMAND (cntd.)
KINDS OF CROSS ELASTICITY OF DEMAND
Positive Cross elasticity of demand (eAB > 0 ) when the goods A and B are
substitutes] e.g. Coca cola and Pepsi, Chinese mobile phones and smart phones.
 Negative Cross elasticity of demand (eAB
complementary] e.g. vehicle and petrol
< 0
) [when the goods A and B are
 Zero Cross elasticity of (eAB = 0 ) [when the goods A and B are
independent/unrelated] e.g. gold and rice.
GEOMETRIC METHOD /POINT METHOD OF MEASURING ELASTICITY OF DEMAND
Geometric method attempts to measure numerical elasticity of demand at a
particular point on the demand curve. The is method is applied when changes in
price and the resultant change in quantity demanded are infinitely small. As per
point method,
Thus,
𝒑𝒓𝒐𝒑𝒓𝒊𝒐𝒏𝒂𝒕𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝒑𝒓𝒐𝒑𝒊𝒐𝒏𝒂𝒕𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
𝒅𝑸
𝑸
𝐞𝐏 =
𝒅𝑷
𝑷
𝒅𝑸
𝑝
𝐞𝐏 =
𝑥( )
𝒅𝑷
𝑄
𝐞𝐏 =
Where,
eP is price elasticity of demand
Q is quantity demanded (initial)
P is price of the commodity (initial)
dQ is change in quantity demanded
dP change in price
GEOMETRIC OR POINT METHOD contd.
Price elasticity of demand at point D at demand curve AB can be written as
𝐞𝐏 𝒂𝒕 𝒑𝒐𝒊𝒏𝒕 𝑫 𝒐𝒏 𝒅𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆 𝑨𝑩 =
𝑩𝑫
𝑨𝑫
Price
A
𝒆𝑷
C
P2
P1
𝒂𝒕 𝒂𝒏𝒚 𝒑𝒐𝒊𝒏𝒕 𝒐𝒏 𝒕𝒉𝒆 𝒅𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆 =
dP
D
E
dQ
O
Q1
B
Q2
Demand
𝑳𝒐𝒘𝒆𝒓 𝒔𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝑫𝒆𝒎𝒂𝒏𝒅 𝑪𝒖𝒓𝒗𝒆
𝑼𝒑𝒑𝒆𝒓 𝑺𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝑫𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆
GEOMETRIC METHOD contd.
Different kinds of price edacity of demand is shown in the following through
geometric method.
A e=
8
P
r
i
c
e
d
e>1
c
e=1
e<1
d
e=0
0
B
Demand
ARC METHOD OF MEASURING ELASTICITY OF DEMAND
Arc method is applied when changes in price and the resultant change in quantity
demanded are somewhat large or we have to measure elasticity over an arch of
demand curve. The formula for arc elasticity is as follows:
P
r
i
c
e
𝒅𝑸
𝒅𝑷
𝒆𝑷 = (
)÷(
)
𝑷𝟏 + 𝑷𝟐
𝑸𝟏 + 𝑸𝟐
𝟐
𝟐
𝒅𝑸
𝑷 +𝑷
)𝑿( 𝟏 𝟐 )
𝒅𝑷
𝑸𝟏 +𝑸𝟐
𝒆𝑷 = (
D
P2
Where
A
Q1 is original quantity demanded
Q2 is new quantity demanded
P1 is original price
B
P1
0
P2 is final price
D
Q1
Q2
Demand
UTILITY
Utility is defined as the power of commodity to satisfy a human want.
 People know utility of goods by means of introspection and therefore is
subjective.
 Being subjective, it varies from persons to persons. That is, different persons
may derive different amount of utility/satisfaction from the same good.
 The desire for a commodity by a person depends upon the utility he expects
to obtain from it.
CARDINAL AND ORDINAL UTILITY
UTILITY contd.
There are two basic approaches to the notion of utility such as:
 cardinal approach
 ordinal approach
According to the cardinal school of thought, utility can be measured in terms of
numerical value 0, 1, 2, 3, 4 etc. Some economists view that utility can be measured in
terms of subjective units called ‘utils’ (i.e. 0, 1, 2, 3, 4 …) while others view that utility
can be measured in terms of price or monetary units the consumer is willing to pay for
the additional unit of the commodity. The concept of cardinal utility has been
popularized by economists like Marshall, Jevons, Walrass, etc.
According to the ordinal school of thought, utility is not measurable rather it is an
ordinal magnitude which can be ranked and compared as 1st, 2nd, 3rd etc. They view that
the consumer does not know in specific units the utility of various commodity in order
to make his choice. Rather she/he can rank her/his preferences of for various
combinations of two commodities according to the satisfaction derived from each
combination of the commodities. The concept of cardinal utility has been popularized
by economists like Edgewotrh, Hicks, Allen etc.
TOTAL UTILITY AND MARGINAL UTILITY
Total Utility
Total psychological satisfaction obtained by a consumer from consuming a given amount
of a particular commodity is called total utility.
Marginal Utility
Marginal Utility is the extra utility derived by a consumer from the consumption of an
additional unit of a particular commodity.
RELATIONSHIP BETWEEN TU AND MU
The Law of Diminishing Marginal Utility
35
Quantity
(Q)
TU
(utils)
MU=dU/dQ
(utils)
1
2
3
4
5
6
7
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
Total/Marginal Utilities
30
TU
25
20
15
10
5
0
1
-5
2
3
4
5
6
7
MU
Quantity of Commodity
RELATIONSHIP BETWEEN TU AND MU.
 Total utility (TU) is the sum total of marginal utilities .
TU=∑MU
 Marginal utility (MU) is the rate of change in total utility with respect to a unit
change in quantity of the commodity consumed.
MU=dU/dQ
dU symbolizes change in total utility
dQ symbolizes change in quantity of commodity consumed
 When the MU decreases, TU increases at decreasing rate.
 When MU becomes zero, TU is maximum. It is a saturation point.
 When MU becomes negative, TU declines
LAWS OF CARDINAL UTILITY ANALYSIS
 Laws of Diminishing Marginal Utility
 Law of Equi-Marginal Utility
LAW OF DIMINISHING MARGINAL UTILITY
It is a psychological fact that when a person consumes more and more units of a
commodity during a particular time, the extra utility he derives from the successive
units of the commodity will diminish.
The Law of Diminishing Marginal Utility states that the additional satisfaction derived
from the additional unit of a commodity goes on diminishing.
The law highlights that while total wants of a man is unlimited, each single want is
satiable. As a consumer more and more units of a commodity, intensity for the
commodity goes on falling , and a point is reached where he does not want more of it.
He is completely satisfied with the commodity which is reflected by zero marginal
utility.
The law of diminishing marginal utility also serve the basis for law of law of demand
or downward sloping demand curve.
CONSUMER’S EQUILIBRIUM
A consumer is in equilibrium when he maximises his utility or satisfaction by
spending his given money income on different goods.
Consumer’s Equilibrium in Case of Single Good
Let us take a simple model of single commodity X.
The consumer either spends his money income on the good or retains his money income.
 In such situation, the consumer will be in equilibrium when MUX = PX
Where, MUX is marginal utility of commodity X
PX is price of the commodity X.
 If MUX > PX , the consumer can increase his well-being by purchasing more units of the
commodity X.
 If MUX < PX , the consumer can increase his total cost satisfaction by cutting down the
quantity of commodity X and keeping more of his income unspent.
 Thus, he maximises his satisfaction when MUX = PX
CONSUMER’S EQUILIBRIUM contd.
Consumer’s Equilibrium In case of More Than One Good
and
Law of Equi-Marginal Utility
The law of equi-marginal utility states that a consumer distributes his limited
income among various commodities in such a way that marginal utility of money
expenditure on each good is equal. This is the condition of consumer’s equilibrium in
case of more than one commodity.
Marginal utility of money expenditure on a good is the ratio of marginal utility
of the commodity to price of it.
CONSUMER’S EQUILIBRIUM contd.
Consumer’s Equilibrium In case of More Than One Good
and
Law of Equi-Marginal Utility
Thus if there are more than one commodity, the condition for equilibrium is the
equality of the ratios of marginal utilities’ of the individual commodities to the
respective prices.
𝑴𝑼𝟏 𝑴𝑼𝟐 𝑴𝑼𝟑
=
=
= ⋯ … … … … . . = 𝑴𝑼𝑴
𝑷𝟏
𝑷𝟐
𝑷𝟑
Subject to constraint imposed by money income (Y)
Y =P1Q1 + P2Q2 + P3Q3 +…….
Where,
MU1 , MU2 , MU3 …….. are marginal utilities of commodity 1, 2, 3,…….
P1 , P2 , P3, ……. are prices of commodity 1, 2, 3,……………….
Q1 , Q2 , Q3 are quantities of commodity 1, 2, 3, ……………….
𝑴𝑼𝑴 is marginal utility of money expenditure
SUPPLY
Supply indicates quantities of a commodity of a offered for sale at each possible
price at a given time period, other things constant
Determinants of Supply
Price of the product
State of technology
Prices of relevant resources
Prices of alternative goods
Producer expectations
Number of producers/sellers in the market
LAW OF SUPPLY
Law of supply states that normally, the quantity supplied varies directly with its
price, other things constant.
In other words , law of supply states that lower the price, the smaller the
quantity supplied and higher the price, the greater the quantity supplied.
Supply Curve
Supply curve is the graphical representation of the relationship between supply of a
commodity (Dx) and its price (Px) .
Normally, a supply curve slopes upward from left
to right indicating the operation of the law of
supply.
Price
S
Supply Curve
S
0
Supply
Equilibrium price
a
EQUILIBRIUM PRICE
commodity is determined
at point(E) where market
demand is equal to
market supply.
Price
At price P2 , supply is
more demand and thus
there is surplus in the
market. Price will fall
causing supply to fall and
demand to rise. Price
will continue to fall until
it reaches equilibrium
price
Pe at which
Demand=Supply
(
Equilibrium point E).
S(P)
Surplus
P2
E
Pe
P1
Shortage
D(P)
0
Q1
Qe
Demand
=
Supply
Q2
Demand/Supply
At P1, demand is more than supply and as such there is shortage in the market. Price
will raise causing demand to fall and supply to rise. Price will continue to rise until it
reaches equilibrium price at which Demand=Supply ( Equilibrium point E).
Alfred Marshall (1842 – 1924)
One of the most influential economists of his time. Introduced the ideas of supply and
demand, marginal utility, and costs of production into a coherent whole. Made
extensive use of graphs and diagram in economics.
Nationality:
British (English)
School:
Neo-Classical
Influences
Léon Walras, Vilfredo Pareto, Jules Dupuit,
Stanley Jevons, Sidgwick
Influenced
Neoclassical economists, John Maynard
Keynes, Arthur Cecil Pigou
Contributions
Principles of Economics (1890)
Thank You