UNIT -II A: DEMAND & SUPPLY

• Concept of demand, Demand Function, Determinants of demand, Law of

Demand its exceptions, Movement along & shifting of demand, Concept of
supply, Market equilibrium and determination of price.

➢ Demand: The term ‘demand’ refers to the quantity of a good or service that buyers are
willing and able to purchase at various prices during a given period of time.
It is to be noted that demand, in Economics, is something more than the desire to
purchase, unless desire is backed by purchasing power or ability to pay and willingness
to pay, it does not constitute demand.
➢ Determinants of demand:
The important factors that determine demand are given below.
1. Price of Commodity: Other things being constant, with a rise in price of commodity,
its demand contracts (reduces) and with a fall in price, its demand extends i.e. rises.
2. Price of Related Goods: Demand for a commodity is influenced by change in price
of related goods. They are of two types :
(i) Substitute Goods – The goods which can be used in place of each other or which can
be substituted for each other. Example- Tea and Coffee, increase in price of Tea,
decreases the demand for tea and eventually increase the demand for coffee as due to
increase in price of tea, the consumers will shift to consumption of coffee.
(ii) Complementary Goods – The goods which complete the demand for each other and
therefore are demanded together, Example – Pen and Ink, Car and Petrol. In case of
complementary goods a fall in price of one, causes increase in demand of the other and
a rise in price of one causes decrease in demand for another.
3. Income of the Consumer – The demand for a commodity may increase/decrease
with a rise in income depending on nature of commodity .For this, the goods are divided
into –
(i) Normal Goods: The goods whose demand increases with rise in income and
decreases with fall in income are termed as normal income. They have positive effect
related to income.
Eg. Rice, Wheat etc.
(ii) Inferior Goods: The goods whose demand decreases with rise in consumer’s income

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 and increases with the fall in income is termed as inferior goods. There is an inverse
relation between income of consumer and demand for goods. The income effect is
negative. Example: Jowar, Bajra, etc.
4. Tastes and preferences of buyers: The demand for a commodity also depends upon
the tastes and preferences of buyers. Goods which are modern or more in fashion have
higher demand than goods which are of old design or are out of fashion.
5. Consumers’ Expectations: Consumers’ expectations regarding future prices,
income, supply conditions etc. influence current demand. If the consumers expect
increase in future prices, increase in income and shortages in supply, more quantities
will be demanded. If they expect a fall in price or fall in income they will postpone their
purchases of nonessential commodities and therefore, the current demand for them will
fall.
➢ Demand Function: Demand function shows the relationship between demand for a
commodity and its various determinants (factors affecting demand).
Dx = f (P,Pr,Y,T,E)
Here, Dx = Quantity demanded of commodity X.
Px = Price of Commodity X.
Pr = Price of Related Commodity.
Y = Consumer’s Income.
T = Taste and Preference.
E = Consumer’s Future Expectation.
➢ Law of demand: The law of demand states that other things being equal, when the
price of a good rises the quantity demanded of the good will fall. Thus, there is an
inverse relationship between price and quantity demanded. The ‘other things’ which are
assumed to be equal or constant are the prices of related commodities, income of
consumers, tastes and preferences of consumers, and all factors other than price which
influence demand.
➢ Demand Schedule: A demand schedule is a table showing the quantities of a good that
buyers would choose to purchase at different prices, per unit of time, with all other
variables held constant.
➢ Types of Demand Schedule
➢ (a) Individual Demand Schedule: It refers to demand schedule of an individual buyer
of a commodity in the market. It shows quantity of a commodity which an individual
buyer buys at different possible prices of that commodity at a point of time.
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 Table 1A: Individual Demand Schedule
Price per unit of Apple (Rs.) Quantity of Apple
Demanded (Units)
A 1 4
B 2 3
C 3 2
D 4 1
➢ (b) Market Demand Schedule: It is a table showing different quantity of a commodity
that all the buyers in the market are ready to buy at different possible prices of the
commodity at a point of time.
Table 1B: Market Demand Schedule
Price per unit of A’s Demand B’s Market
Apple (Rs.) (Units) Demand Demand
(Units) (A+B)
A 1 4 5 9
B 2 3 4 7
C 3 2 3 5
D 4 1 2 3

➢ Demand Curve: Graphical representation of demand schedule is known as demand

curve .It basically is a curve that shows how quantity demanded of a commodity is
related to its price.
➢ Types of demand curve:
(a) Individual Demand Curve
(b) Market Demand Curve

(a) Individual Demand Curve: It is a curve showing different quantity of a commodity

that one particular buyer is ready to buy at different prices of the commodity at a point
of time.
• The Demand Curve slopes downward from left to right indicating inverse relationship
between price of commodity and its quantity demanded.

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 Figure 1: Individual Demand Curve

(b)Market Demand Curve: It shows various quantities of various commodities that

all the buyers in the market are ready to buy at different possible prices of the
commodity.
• It is horizontal summation of the Individual Demand Curves.

Figure 2 Derivation of Market Demand Curve

➢ Reasons for operation of law of demand (why does the demand curve slope
downwards from left to right):
• Law of Diminishing Marginal Utility: Law of diminishing marginal utility states that
as we consume more and more units of a commodity, the utility derived from each
successive unit goes on decreasing. The consumer will be ready to pay more for those
units which provide him more utility and less for those which provide him less utility.
It implies that he will purchase more only when the price of the commodity falls.
• Income Effect: When price of a commodity falls, purchasing power or real income of
the consumer increases which enables him to purchase more quantity of the commodity

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 with the same money income. Let us take an example. Suppose you buy 4 ice creams
when price of each ice cream is ` 25. If price of ice creams falls to ` 20, then with same
money income you can buy 5 ice creams now.
• Substitution Effect: When price of a commodity falls, it becomes comparatively
cheaper as compared to its substitutes (although price of substitutes has not been
changed). This will lead to rise in demand for the given commodity. For example, if
coke and Pepsi both are sold at ` 10 each and price of coke falls. Now coke has become
relatively cheaper and will be substituted for Pepsi. It will lead to rise in demand for
coke.
➢ Exceptions of law of demand: Normally, a buyer is willing to buy more quantity of a
commodity at a lower price and less of it at a higher price. But in certain circumstances,
a rise in price may lead to rise in demand. These circumstances are called Exceptions
to the Law of Demand. Some important exceptions are:
• Giffen Goods: Giffen goods are special type of inferior goods in which negative income
effect is stronger than negative substitution effect. Giffen goods do not follow law of
demand as their demand rises when their price rises. Examples of Giffen goods are
jowar and bajra etc.
• Veblen goods: As per Veblen, there are some products that become more significant and
valuable as their price or cost increases. Also, this happens generally with luxury
products and precious metals and stones. For example, some goods are used by rich
people as status symbols, e.g. diamonds, gold jewellary etc. The higher the price, the
higher will be the demand for these goods. When price of such goods falls, these goods
are no longer looked at as status symbol goods and, therefore, their demand falls.
• Necessities: Commodities such as medicines, salt, wheat etc. do not follow law of
demand because we have to purchase them in minimum required quantity, whatever
their price may be.
• Goods Expected to be Scarce: When the buyers expect a scarcity of a particular good
in near future, they start buying more and more of that good even if their prices are
rising. For example, war, famines etc. people tend to buy more of some goods even at
higher prices due to fear of their scarcity in near future.
• When the law of demand is violated, the demand curve will be upward
sloping. An upward sloping demand curve occurs when an increase in
prices of commodities leads to an increase in quantity demanded. In other

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 words, an upward sloping demand curve shows that there is a direct
relationship between prices and quantity demanded.
• Example: Demand curve for Giffen goods are upward slopping.

➢ MOVEMENT ALONG THE DEMAND CURVE (CHANGE IN QUANTITY

DEMANDED): When demand of a commodity changes due to change in its price,
keeping other factors constant, it is called change in quantity demanded. It is graphically
expressed as a movement along the same demand curve. There can be either a
downward movement or an upward movement along the same demand curve.
Upward movement along the same demand curve is called contraction of demand or
decrease in quantity demanded and downward movement along the same demand
curve is known as expansion of demand or increase in quantity demanded. These can
better be explained with the help of Fig. 3.

Figure 3 Movement Along the Demand Curve

A fall in price from OP to OP1 leads to increase in quantity demanded from OQ to OQ 1

(expansion of demand) resulting in a downward movement from point A to point B along the
same demand curve DD.

On the other hand, when Price rises from OP to OP2, quantity demanded falls from OQ to OQ 2
(contraction of demand) leading to an upward movement from point A to point C along the
same demand curve DD.

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➢ SHIFT IN DEMAND CURVE (CHANGE IN DEMAND): In law of demand all
factors other than price of the commodity are assumed to be constant. But what happens
when other factors determining demand change but price remains constant? When the
demand for a commodity changes due to change in any factor other than the price of
the commodity, it is known as change in demand. It is graphically expressed as shift in
demand curve.
Demand curve of a commodity may shift due to change in price of substitute good,
change in price of complementary goods, change in income of the buyer, change in
tastes and preferences, change in population, change in distribution of income etc. The
shift in demand curve can be explained with the help of Fig. 4.

Figure 4: Shift in Demand

In the above figure it is seen that, quantity demanded decreases from OQ to OQ1 at the
same price OP. This decrease is due to unfavourable change in factors other than price
of the commodity. This is called decrease in demand. When there is decrease in
demand, the demand curve shifts towards left.
When quantity demanded increases from OQ to OQ2 at same price OP, this is called
increase in demand. Increase in demand is due to favourable change in factors other
than price of the commodity. In case of increase in demand, the demand curve shifts
towards right.