Demand Theory and Supply PDF

Demand Theory and Supply Unit 2  Contents of Unit 2 (8 crdts) Law of Demand- Movement along the demand curve- Shift in the Demand curve- Demand functions- firm - the market- Exceptions to law of demand- Demand forecasting – Purpose – Determinants of demand forecast...

Demand Theory and Supply Unit 2  Contents of Unit 2 (8 crdts) Law of Demand- Movement along the demand curve- Shift in the Demand curve- Demand functions- firm - the market- Exceptions to law of demand- Demand forecasting – Purpose – Determinants of demand forecast – A brief analysis of methods of demand forecasting The concept of elasticity of demand - Degrees of Elasticity of Demand—Price Elasticity of Demand, Income Elasticity of Demand –Cross- Price Elasticity of Demand _ Promotional Elasticity of Demand – Significance of the concept of elasticity of demand in business decision making- Importance of theory of demand in relation to Electronic commerce.  Meaning Demand: It refers to the quantity of the commodity consumers are willing to buy at a particular time and ready to pay for it. Demand curve: other things remaining same, demand curve is relationship between price and quantity of a particular good that the consumers are willing to buy. Willingness to purchase or buy Need/ Want Purchasing power (Capacity or ability to pay) Movement along the demand curve- due to change in prices Shift in the demand curve - due to change in non- price factors Demand curve Determinants of demand It depends on 6 variables: 1. Price of the good 2. Income of the consumer: Normal goods and inferior goods 3. Price of related good/services: substitute goods and complement goods 4. The expected price of the good in future periods 5. Taste of the consumers 6. No. of buyers Movement along the demand curve Shift in the demand curve  Law of demand It describes the relationship between the quantity demanded and the price of a product. It states that the demand for a product decreases with increase in its price and vice versa, while other factors are at constant. Therefore, there is an inverse relationship between the price and quantity demanded of a product. Demand is a dependent variable and price is an independent variable  Demand is a function of price and can be expressed as follows: D = f(P) Where D= Demand P= Price f = Functional Relationship Qdx = a – bPx A is a constant intercept Term B is the coefficient slope of the demand curve P is the price of the commodity. Qdx = 12 – 2Px  Market Demand Function If there are more customers QA = (70 - 2P) QB = (200 – 4P) Qc = (20 – 0.5P) Qd = (70 – 2p) +(200 – 4P) + ( 20 – 0.5P) What is the market Demand?  Demand Schedule Demand schedule refers to a tabular representation of the relationship between price and quantity demanded. It demonstrates the quantity of a product demanded by an individual or a group of individuals at specified price and time. There are 2 types of demand schedules: Individual demand Market demand schedule Individual demand schedule It refers to a tabular representation of quantity of products demanded by an individual at different prices and time.  Market demand schedule It shows a tabular representation of quantity demanded in aggregate by individuals at different prices and time. It demonstrates the demand of a product in the market at different prices. Market demand schedule also demonstrates an inverse relation between the quantity demanded and price of a product. Market demand schedule Why do demand curves slope downwards? Demand curve slopes downwards due to- The law of diminishing marginal utility (Real) Income effect Substitution effect Different uses of the same commodity New Buyers  Exceptions to Law of Demand Goods having Prestige Value: Veblen Effect Giffen’s Paradox.  Types of Demand Price Demand (Price and Quantity Demand Relations) Income Demand (Income and Quantity Demand Relations) Cross Demand (Quantity demanded X good with the prices of other related goods y) (Substitutes +, Complementary -)  Supply What is Supply? The amount of a product that firms are willing and able to sell at a particular price is called supply. Law of Supply: law of supply states that other things remaining the same, the quantity of any commodity that firms will produce and offer for sale rises with the rise in price and falls with the fall in price. That is Higher the price higher is the supply and Lower the price lower is the supply. QS = f (Px, Prices of Raw Materials, Technology) cet.par QS = f(Px)  Law of Supply The law of supply states that,other things remaining constant more of a commodity is supplied at a higher price and less of it is supplied at a lower price. The supply function can be expressed as: Sx = f (Px) 20  Shifts in supply and changes in supply The difference between supply and quantity supplied In economic terminology, supply is not the same as quantity supplied. When we refer to supply, it means the relationship between a range of prices and the quantities supplied at those prices—a relationship that can be illustrated with a supply curve or a supply schedule. When we refer to quantity supplied, it means only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve, and quantity supplied refers to a specific point on the curve. 21 22 23  Equilibrium Eq means different forces operating on a market are in Balance. A situation in which the quantity demanded is equals the quantity supplied at the prevailing market price.  Shifts in Demand & Supply Shifts in Demand Shifts in Supply Shifts in Both Demand & Supply