Basics of Demand and Supply

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Demand:  Demand is the quantity of goods or services that consumers are willing and able to buy at a given price in a given period of time.
 
Difference Between Demand and Quantity Demanded
There is a difference between demand and quantity demanded i.e. demand refers to the whole demand schedule that consumer draws in mind showing different quantities of a commodity that a consumer intends to buy at different given prices, whereas quantity demanded refers to the particular quantity out of the demand schedule which was intended by consumer at a specific given price.
 
Types of Demand: Demand is of following types
Individual Demand is the demand of a single consumer.
Market Demand is the demand of all the consumers.
Demand Schedule is a table that shows different prices of a good in quantity of the same good demanded at different prices. Demand Schedule has two aspects: individual demand schedule and market demand schedule
Individual Demand Schedule is defined as a table that shows quantities of a commodity that an individual consumer is able and willing to buy at given prices of the same commodity.
 
Demand Function is the functional relationship between demand and determinate s of demand.
 
Individual Demand Function:
Dx = f(Px,Pr,T,Y,E)
Dx= Demand for good X

f = function of

Px = Price of own commodity: It is the most important determinant of demand for any good as price is inversely related to demand of the commodity. As the price rises, demand for the commodity decreases.

Pr= Price of related goods: Demand for a commodity of effected by price of related goods as well. Related goods are of two types
Substitute goods: These goods can be used in place of each other, e.g. tea & coffee. An increase in price of substitute gives rise to the demand for given commodity, e.g. rise in price of tea gives rise in demand of coffee.
Complementary goods: These goods are used together to fulfill the want, e.g. Car & Petrol. An increase in the price of complementary good leads to a decrease in demand for a given commodity, e.g. rise in price of car leads to decrease in demand for petrol.
 
T= Taste & Preference: Taste and preference directly effects demand for a commodity, it includes, fashion, climate etc.

Y= Income of the consumer: Generally income is directly related to the demand for a commodity. Demand rises with rise in income in case of normal goods.
 
E= Expected Price in Future: If the price of the commodity has a tendency to rise in future its demand in present will increase.
 
Market Demand Function:
Dx = f(Px,Pr,T,Y,E,N,Yd)
Dx= Demand for good X
f = function of
Px = Price of own commodity: It is the most important determinant of demand for any good as price is inversely related to demand of the commodity. As the price rises, demand for the commodity decreases.
 Pr= Price of related goods: Demand for a commodity of effected by price of related goods as well. Related goods are of two types
Substitute goods: These goods can be used in place of each other, e.g. tea & coffee. An increase in price of substitute gives rise to the demand for given commodity, e.g. rise in price of tea gives rise in demand of coffee.
Complementary goods: These goods are used together to fulfill the want, e.g. Car & Petrol. An increase in the price of complementary good leads to a decrease in demand for a given commodity, e.g. rise in price of car leads to decrease in demand for petrol.
 
T= Taste & Preference: Taste and preference directly effects demand for a commodity, it includes, fashion, climate etc.
 
Y= Income of the consumer: Generally income is directly related to the demand for a commodity. Demand rises with rise in income in case of normal goods.
 
E= Expected Price in Future: If the price of the commodity has a tendency to rise in future its demand in present will increase.
 
N= Population size: Market demand is determined with size of population. An increase in size of population rises the demand for a commodity and vice-versa.
 
Yd= Income distribution: If income in the country is equal then the market demand will be more and vice-versa.
Law of Demand
 
The law of demand states the inverse relationship between price and demand of a good. It states that as the price of a commodity increases its demand decreases, other factors remaining constant.
Assumptions of Law of Demand
           Price of the related goods remains constant.
           Technology of production remains constant.
           Taste and preference of a consumer remains constant.
           Income of a consumer remains constant.
           There is no expectation of price rise in near future.
 
 
 
 
Supply
Supply is defined as the quantity of a good or service that producers are willing and able to sell at a given price in a given time period. The word ‘supply’ has the following features:
1 The supply of a commodity is stated in quantitative terms as the desired quantities.
 2 The supply of a commodity is always with reference to the price at which the desired quantity is supplied.
 3 The supply is always measured as a flow or expressed with reference to a unit of time which may be a day, a week, a fortnight, a month, or a year or any other period of time.
 
Types of Supply: Supply can be classified as

Individual Supply: It refers to the supply of a single producer.
Market Supply: It refers to supply of the entire producers.
Supply Schedule:    It is table that shows different prices of a good in quantity of the same good supplied at each given price. It has two aspects: individual supply schedule and market supply schedule
Individual Supply Schedule:  It is defined as a table that shows quantities of a commodity that an individual
 
Supply Function: It is the functional relationship between supply and determinates of supply.
 
Sx = f(Px,Gp,Gf,Pi,T)
Sx= Supply for good X
f = function of
Px = Price of own commodity: It is the most important determinant of supply for any good as price is directly related to supply of the commodity. As the price rises, supply for the commodity rises and vice versa.
Gp = Government Policies: Supply of any commodity is affected by govt. policies. As the taxes increase the cost of production rises and profit of the producer decreases so he will reduce the supply and if the subsidies rises the profit of the producer will rise and he will tend to sell more at the given price.
Gf = Goal of the firm: Any firm has two goals, first is to sales maximization and second is profit maximization. If the firm works on profit maximization than it will sell more at higher price and earn super normal profits but if the goal of the firm is sales maximization than it will sell more at a lower rate.
Pi = Price of Inputs: If the price of inputs increase the cost of production will increase and the profit of the producer will fall so either he will increase the price of the commodity or he will decrease the supply of the commodity.
T = Technology: It also plays an imp. role in supply of the commodity. If the technology improves, the profit of the producer will rise and he will increase the supply of the commodity in the market.
 
Law of Supply
The law of demand states the direct relationship between price and supply of a good. It states that as the price of a commodity increases its supply increases, other factors remaining constant. In specific terms what we state in the law of supply is that the quantity of a commodity produced and offered for sale will .increase as the price of the commodity rises and decreases as the price falls other things remaining constant


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