Dr. VANDANA BHAVSAR [Ph.D.

]
DEMAND & SUPPLY
ANALYSIS
DEMAND
Demand of a commodity indicates
that a consumer
Desire for a commodity
Capacity to pay for it
Willingness to pay for it
Availability of the commodity
at each possible price during a
given time period, other things
constant
TYPES OF DEMAND
Price demand D
x
= f (P
x
)
Income demand - D
x
= f (Y
x
)
Cross demand - D
x
= f (P
Y
)
Joint/complementary Demand - to take a snap we need
camera & film, to drive a car & petrol
Composite Demand Electricity used in agriculture,
railway, houses, factory
Direct & derived [joint] demand bread to eat, clothes
to wear direct demand, for house bricks, labour, cement, wood,
carpenter
Competitive Demand [substitutes]- tea & coffee

contd
Consumers goods & Producers goods demand
steel kitchen utensils Consumers goods, steel machines for
factory use producers goods
Perishable & Durable demand
Derived and Autonomous Demand cement not for
own sake but for construction of buildings, hardly any product
whose demand is independent sugar lesser dependent for drinks,
while automobile batteries fully tied with demand of vehicles.
Company & Industry Demand Demand for steel
produced by TISCO is company demand demand for steel produced
by all companies is industry demand
Demands by total Market & by Market Segments
different regions, etc
DETERMINANTS OF DEMAND
Price of own commodity
Price expectations
Price of related goods
Income of the consumer
Population
Taste & preference
Distribution of income
Innovations & inventions
Climate & weather
Trade activity
Savings & reduction in taxes
D
x
= f (P
x
, Y, P
Y
, T .. etc)

DEMAND SCHEDULE
INDIVIDUAL DEMAND
A list showing the quantity
of a good that a consumer
would choose to purchase
at different prices.


MARKET DEMAND
A list showing different
quantities of commodity
which all consumers will
buy at all possible prices

Price of X [Rs.] Quantity
demanded by
Mr. X
5 1
4 2
3 3
2 4
1 5
Price of
X [Rs.]

D. of
Mr. X
D. of
Mr. Y
Market
D.
5 1 2 1+2 = 3
4 2 3 2+3= 5
3 3 4 3+4= 7
2 4 5 4+5 = 8
1 5 6 5+6 = 9
Price of
Ice-Cream
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity of
Ice-Cream
3.00
12
1. A decrease
in price
...
2. ... increases quantity
of cones demanded.
The demand
curve at the right
shows each
price/quantity
combination listed
in the demand
schedule as a
point on the
demand curve.
DEMAND CURVE
LAW OF DEMAND
states that quantity demanded varies inversely with price,
other things constant/everything else remains the same.
contd....
The words, everything else remains the same
are important
In the real world many variables change
simultaneously
However, in order to understand the economy
we must first understand each variable
separately
Thus we assume that, everything else remains
the same, in order to understand how demand
reacts to price
The law of demand can be given in form of
formula as under
P = 1/Q
Movements Along The
Demand Curve
From a change in the price of the good

Quantity
Price
P
2
Q
2
Q
1
Q
3
P
1
P
3
Price increase moves
us leftward along
demand curve
Price increase moves
us rightward along
demand curve
Shifts in The Demand Curve
Shift of demand curve
a change in other things than price of the
good causes a shift in the demand curve itself,
for example, income

In Figure
Demand curve has shifted to the right of the
old curve as income has risen
A change in any variable that affects
demandexcept for the goods pricecauses
the demand curve to shift

contd
B C
Rs2.00
2
5
D
1
D
2
An increase in income
shifts the demand curve
from D
1
to D
2
.
Demand
Price
At each price, more milk is
demanded after the shift
in Qd v/s. in D
Quantity demanded means
It is a number represented by a single point on a
demand curve
When a change in the price of a good moves us
along a demand curve, it is a change in quantity
demand

The term demand means
The entire relationship between price and
quantity demandedand represented by the
entire demand curve
When something other than price changes,
causing the entire demand curve to shift, it is a
change in demand

SUPPLY
A firms quantity supplied of a good is the
specific amount its managers would choose to
sell over some time period, given
A particular price for the good
All other constraints on the firm

Market quantity supplied (or quantity supplied)
is the specific amount of a good that all sellers
in the market would choose to sell over some
time period, given
A particular price for the good
All other constraints on firms
Factors That Affect the
Supply Curve
Input prices
Price of Related Goods
Technology
Number of Firms
Expected Price
Changes in weather
Favorable weather
Unfavorable weather


The Supply Schedule
Supply schedule shows
quantities of a good or
service firms would
choose to produce and
sell at different prices,
with all other variables
held constant
F
G
2.00
S
40,000 60,000
Rs4.00
At Rs4.00 per bottle,
quantity supplied is
60,000 bottles (point
G).
When the price is
Rs2.00 per bottle,
40,000 bottles are
supplied (point F).
Number of Bottles
per Month
Price per
Bottle
Supply curvegraphical depiction of a supply schedule
Shows quantity of a good or service supplied at
various prices, with all other variables held constant
Supply Curve
The Law of Supply
states that when the price of a good rises and
everything else remains the same, the quantity of
the good supplied will rise

The words, everything else remains the same
are important
In the real world many variables change
simultaneously
However, in order to understand the economy we
must first understand each variable separately
We assume everything else remains the same in
order to understand how supply reacts to price
Shifts v/s. Movements Along
the Supply Curve
A change in the price of a good causes a
movement along the supply curve
A rise (fall) in price would cause a rightward
(leftward) movement along the supply curve

A drop in transportation costs will cause a shift
in the supply curve itself
Supply curve has shifted to the right of the old
curve as transportation costs have dropped
A change in any variable that affects supplyexcept
for the goods pricecauses the supply curve to
shift
A Shift of The Supply Curve
S
2
G
J
S
1
60,000
Rs4.00
80,000
A decrease in transportation
costs shifts the supply curve
for maple syrup from S
1
to
S
2
.
Number of Bottles
per Month
Price per
Bottle
At each price, more
bottles are supplied after
the shift
contd.
Quantity
Price
S
2
S
1
Entire supply curve shifts
rightward when:
price of input
price of alternate good
number of firms
expected price
technological advance
favorable weather
contd..
Quantity
Price
S
1
S
2
Entire supply curve shifts
rightward when:
price of input
price of alternate good
number of firms
expected price
unfavorable weather
Equilibrium: Supply &
Demand
When a market is in equilibrium
Both price of good and quantity bought and sold
have settled into a state of rest
The equilibrium price and equilibrium quantity
are values for price and quantity in the market
but, once achieved, will remain constant
Unless and until supply curve or demand curve
shifts

The equilibrium price and equilibrium quantity
can be found on the vertical and horizontal axes,
respectively
At point where supply and demand curves cross
Market Equilibrium
E
H
J
1.00
Rs3.00
D
S
50,000 75,000 25,000
Excess Demand
4. until price reaches its
equilibrium value of
Rs3.00
.
2. causes the price
to rise . . .
3. shrinking the
excess demand . .
.
1. At a price of Rs1.00 per
bottle an excess demand
of 50,000 bottles . . .
Number of Bottles
per Month
Price per
Bottle
contd
3. shrinking the
excess supply . . .
K
L
E
3.00
D
S
Rs5.00
50,000 35,000 65,000
Excess Supply at Rs5.00
2. causes the
price to drop,
4. until price reaches
its equilibrium value
of Rs3.00.
Number of Bottles
per Month
Price per
Bottle
1. At a price of Rs5.00
per bottle an excess
supply of 30,000
bottles . . .
contd.
1. An increase
in demand . .
.
E
F'
3.00
D
1
D
2
S
Rs4.00
50,000 60,000
3. to a new
equilibrium.
5. and equilibrium
quantity increases
too.
2. moves us
along the
supply curve .
. .
Number of Bottles of
Maple Syrup per Period
Price per
Bottle
4.
Equi
librium
price
increases
Using S&D: The Invasion of
Kuwait
Why did Iraqs invasion of Kuwait cause
the price of oil to rise?
Immediately after the invasion, United States
led a worldwide embargo on oil from both Iraq
and Kuwait
A significant decrease in the oil industrys
productive capacity caused a shift in the
supply curve to the left
Price of oil increased
The Market For Oil
P
2
D
E'
P
1
E
Q
2
Q
1
S
2
S
1
Barrels of Oil
Price per
Barrel of Oil
contd.
Why did the price of natural gas rise as
well?
Oil is a substitute for natural gas
Rise in the price of a substitute increases
demand for a good
Rise in price of oil caused demand curve for
natural gas to shift to the right
Thus, the price of natural gas rose
The Market For Natural Gas
Cubic Feet of
Natural Gas
Price per Cubic
Foot of Natural
Gas
P
4
P
3
F
Q
3
Q
4
S
D
2
F'
D
1
Changes in the Market for
Handheld PCs
1. An increase
in supply . . .
2. and a decrease
in demand . . .
5. and quantity
decreased as
well.
A
B
Rs400
D
2003
S
2002
S
2003
D
2002
Rs500
2.45 3.33
Millions of Handheld PCs
per Quarter
Price per
Handheld
PC
4. Price
decreased . . .
3. moved the market
to a new
equilibrium.
Consumer equilibrium



where
MU =marginal utility
P =price
a, b,..., z = various goods and services consumed
The term utility describes the pleasure, satisfaction or
benefit derived by a person from the consumption of goods
or services.
Marginal utility is the addition to total utility as a
consumer purchases each extra unit of a good or service.

Utility
z
z
b
b
a
a
P
MU
P
MU
P
MU
...
Marginal utility and water shortages
Consumer surplus
Consumer surplus is the excess of the price which
a person would be willing to pay rather than go
without the good, over that which he or she
actually does pay.