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Demand and Supply analysis 2.

2
The demand for any commodity is the desire for that commodity backed by ability to pay as
well as willingness to pay for it, and is always defined with reference to a particular time
and price on which it depends.
So, the demand for a good or service is defined to be the relationship that exists between
the price of the good and the quantity demanded in a given time period, ceteris paribus.
One way of representing demand is through a demand table/schedule such as the one
appearing below:
Table 1(Demand Schedule)
Price

Quantity demanded

(per unit)
2
3
4
5

(per week)
100
85
55
35

A demand schedule shows how an items


quantity demanded would vary with its price,
other things being equal. In other words, a
demand schedule is a list of the quantities of a
goods or service the consumer(s) will buy at
each of a series of prices.

The demand for the good is the entire relationship that is summarized by this table. This
demand relationship may also be represented by a demand curve when the numerical or
tabular form is expressed graphically (as illustrated below).
The data from demand schedule can be plotted

Demand Curve

on a graph and it contracts a demand curve.

Price of the Goods

In this case, Price (per unit) is shown on the


6

vertical (or 'Y') axis, and the quantity demanded

per unit of time is shown on the horizontal (or

'X') axis.

In the diagram, we can see this relationship. If

D`

the price of a good is tk.5 per kilogram,


consumers will buy 35 kilogram of that per

0
0

50

100

week. If the price of that good falls to tk.4 per

150

kilogram, 55 kilograms of that will be bought

Quantity Demanded

per week.

Figure: 01
The demand function is algebraic expression of the relationship between price of a
product and the quantity demanded for, in relation to the specific period of time. The
simplest form of the demand function is as Qd = f(p) , here. Qd

stands for quantity

demanded and p stands for price.


This relationship, between price of a product and quantity demanded of the product under a
certain condition, can be expressed in numerical form as demand table/schedule, in
graphical form as demand curve or in algebraic form as demand function. These are the
different expression of the same relationship. The demand table, curve or function may
either shows an individual demand or an market demand.
There is no single concept of demand. Furthermore, the determinants of demand as well as
their relative importance vary with the category of good and level of aggregation. Thus, it is
necessary to spell out some important ways of categorizing demand. They are:

Demand and Supply analysis 2.2


(a)

Demand for consumers goods and producers goods,

(b)

Demand for perishable and durable goods,

(c)

Derived and autonomous demands,

(d)

Firm and industry demands.

LAW OF DEMAND
From the above discussion it is clear that an inverse relationship exists between the price
and the quantity demanded when other factors are held constant. This inverse relationship
between price and quantity demanded is so common that economists have called it the law
of demand, the law of demand states the inverse relationship between price and quantity
demanded. The law says Other things remaining the same, as the price of a commodity
falls, demanded quantity rises and as the price rises, demanded quantity falls.
EXCEPTIONS TO THE LAW OF DEMAND:
1. When a serious shortage is feared, people get panicky and by more even though the
price is rising.
2. When the good in question is a luxury item. In case the use of a commodity confers
distinction, the wealthy people will buy more when the price rises, to be included among
the few distinguished personages. Conversely, people tend to cut their purchases, if they
believe such commodity tend to be inferior or similar but more expansive/prestigious
product /brand is up coming in the market.
3. Sometimes people buy more at a higher price in sheer ignorance.
4. If the price of necessity of life goes up, the consumer has to readjust his whole
expenditure. He may cut down his expenses on other food articles and in order to make up,
more may have to be spent on this particular good. Thus, more of this commodity will be
purchased in spite of its high price.
5. When the good whose demand is being studied goes out of fashion. With the popularity
of VCD player in Bangladesh, the demand for VCR may very well fall even if VCR has
become cheaper. Similarly, during off-seasons, goods are sold at reduced prices and yet
demand is low.
DETERMINANTS OF DEMAND
A Consumers demand for a commodity or service depends on several factors, the most
important of which are the following:
1. Price of the commodity or service,
2. Consumers income,
3. Prices of related goods or services,
4. Consumer tastes and preferences,
In addition to these factors, the total demand for a commodity or service also depends
upon:
5. Population and its distribution.
6. Consumers expectations (in case of durable goods).
7. Weather

Demand and Supply analysis 2.2


SLOPE OF A DEMAND CURVE:
The Demand curve usually slopes downwards; this is in accordance with the law of
diminishing marginal utility. When the price a commodity falls, people ability and
willingness to buy that commodity increases and new buyers enter the market and the old
buyers will probably buy more, even some people in preference to other commodity may
buy the commodity. So based on the law of diminishing marginal utility the demand curve
must slopes downwards, for only then the phenomenon of increasing demand with falling
price can be represented by the curve.
More precisely, we can consider the following reasons to explain the downward slope of the
demand curve:

If price falls, a consumer can afford to buy more. He is able and willing to buy more
because the thing being cheaper, his real income increases. It is called income
effect.

When the commodity become cheaper, it tends to be substituted wholly or partly for
other commodity. It is called substitution effect.
The income and substitution effect combine to increase the ability and willingness of
the consumers to buy more of the commodity whose price fallen.

A commodity tends to be put more uses and less urgent uses when it become
cheaper. For example if water is dear, we shall use it for drinking only; but when it
becomes cheaper, we shall use it for washing and other less urgent uses.

SUPPLY AND EQUILIBRIUM ANALYSIS


Supply can be meant as the amount offered for sale at a given price. We can also define
Supply as a schedule of amount of goods that would be offered for sale at all possible price
at any one instant of time (or, during any period of time), in which other conditions remain
the same.
Supply is the relationship that exists between the price of a good and the quantity supplied
in a given time period, ceteris paribus. The supply relationship may be represented by a
supply schedule or supply curve or supply function:
(Supply Schedule)
Price

Quantity supplied

(per unit)
2
3
4
5

(per week)
15
35
60
90

A supply schedule shows how an items


quantity supplied would vary with its price,
other things being equal. In other words, a
supply schedule is a list of the quantities of a
goods or service the supplier(s) will sell at each
of a series of prices.

The supply of a good is the relationship that is summarized by this table. This supply
relationship may also be represented by a supply curve when the numerical or tabular form
is expressed graphically (as illustrated below).

Demand and Supply analysis 2.2


The data from supply schedule can be plotted on

Supply Curve

a graph and it contracts a supply curve.


In this case, Price (per unit) is shown on the

Price

vertical (or 'Y') axis, and the quantity supplied


per unit of time is shown on the horizontal (or

'X') axis.

3
2

In the diagram, we can see this relationship. If

the price of a good is tk.3 per kilogram,

supplier(s) will sell 35 kilogram of that per week.

0
0

20

40

60

80

If the price of that good rise to tk.4 per kilogram,

100

60 kilograms of that will be ready to sell per

Quantity Supply

week.

Figure: 01
The Supply function is algebraic expression of the relationship between price of a product
and the supplied quantity, in relation to the specific period of time. The simplest form of the
supply function is as QS = f(p) , here. QS stands for supplied quantity and p stands for
price.
Alike demand, this relationship, between price of a product and supplied quantity of the
product under a certain condition, can be expressed as supply table/schedule in numerical
form, as supply curve in graphical form or as supply function in algebraic form. These are
the different expression of the same relationship.

And there are two types of supply

schedule: Individuals Supply Schedules and Supply schedule of the market.


LAW OF SUPPLY
A positive relationship exists between the price and the supplied quantity when other
factors are held constant. This positive relationship between price and supplied quantity is
so generally called the law of supply. The law says Other things remaining the same, as
the price of a commodity rises its supply is extended. The quantity offered for sale varies
directly with price, i.e. the higher the price the larger is the supply, and vise versa.
EXCEPTIONS TO THE LAW OF SUPPLY:
1. In cases of rare contribution or unique items like antiques, paintings, historical jewelry,
etc. the quantity of supply remain fixed even if the price climbs high to higher.
2. The supply of labour follows the law of supply up to a certain level, but after that level,
the supply decreases as the wage (price of labour) increases. It is mainly because of
prevalence of stronger substitution effect that offsets income effect at a certain wage rate.
3. The price of agricultural products does not always follow the law of supply for various
reasons like effect of seasonality, longer production period, type of soil and so on.
4. An exception to the law of supply also can be leaded by sellers expectation for more
price hike with in a short period of time.

DETERMINANTS OF SUPPLY
The supply of a commodity or service depends on several factors, the most important of
which are the following:

Demand and Supply analysis 2.2


1. Price of the commodity or service,
2. Costs of the various factors of production,
3. Improved techniques of production,
4. Improvement in the means of transport and communication,
5. Number of Sellers,
6. Goals set by the producing firms,
7. Weather.

MARKET EQUILIBRIUM
By watching, individually, either demand curve or supply curve of a commodity we cannot
say what would be the price or rate of exchange of the commodity in the market. To find
the price, we have to look though the interaction of demand and supply curves and find out
the market equilibrium point, where supply meets demand.
Let's combine the market demand and supply curves on one diagram:
It can be seen that the market demand
and supply curves intersect at a price of
tk.3 and a quantity of 60 units. This
combination of price and quantity
represents an equilibrium since the
quantity demanded equals the quantity
supplied. At this price, each buyer is able
to buy all that he or she desires and each
firm is able to sell all that it desires to sell.
Once this price is achieved, there is no
reason for the price to either rise or fall
(as long as neither the demand nor the
supply curve shifts).

If the price is above the equilibrium, a


surplus occurs (since quantity supplied
exceeds quantity demanded). This
situation is illustrated in this diagram. The
presence of a surplus would be expected
to cause firms to lower prices until the
surplus disappears (this occurs at the
equilibrium price of tk.3).

Demand and Supply analysis 2.2


If the price is below the equilibrium, a shortage occurs (since quantity demanded exceeds
quantity supplied). This possibility is illustrated in this diagram. When a shortage occurs,
producers will be expected to increase the price. The price will continue to rise until the
shortage is eliminated when the price reaches the equilibrium price of tk. 3.

CHANGE IN EQUILIBRIUM: SHIFTS IN DEMAND AND SUPPLY


Let's examine what happens if demand or supply changes.

First, let's consider the effect of an increase in demand. As


this diagram indicates, an increase in demand results in an
increase in the equilibrium levels of both price and quantity. An
increase in income level, increase in the price of the substitute
product, favorable seasonal effect, change of consumes taste
in favour of the commodity, etc may cause such shift in
demand and readjustment of the market equilibrium.

A decrease in demand results in a decrease in the equilibrium


levels of price and quantity (as illustrated in this diagram). A
decrease in income level, price reduction of the substitute
product, unfavorable seasonal effect, change of consumes taste
against of the commodity, etc may cause such shift in demand
and readjustment the market equilibrium.

An increase in supply may be propelled by technological


advancement, reduction in cost of factor of production, decrease
of fuel price, improvement of transportation and communication
facilities, etc. which may make such rightward shift of supply
curve that is realized by a higher equilibrium quantity and a
lower equilibrium price. (Illustrated in this diagram.)

If supply falls, equilibrium quantity will fall and equilibrium


price will rise by a leftward shift of supply curve (as illustrated
in this diagram). Such shift may be occurred by Increase in
input price, natural calamities, distortion of transportation and
communication network, and decline in production capacity
due to war or political unrest, exhaustation of natural
resources, etc.

Demand and Supply analysis 2.2

PRICE CEILINGS AND PRICE FLOORS


A price ceiling is a legally mandated maximum price. The purpose of a price ceiling is to
keep the price of a good below the market equilibrium
price. Rent controls and regulated gasoline prices are
examples of price ceilings. As the diagram below
illustrates, an effective price ceiling results in a
shortage of a commodity since quantity demanded
exceeds quantity supplied when the price of a good is
kept below the equilibrium price. This explains why rent
controls and regulated gasoline prices have resulted in
shortages.

A price floor is a legally mandated minimum price. The purpose of a price floor is to keep
the price of a good above the market equilibrium
price. Agricultural price supports and minimum wage
laws are example of price ceilings. As the diagram
below illustrates, an effective price floor results in a
surplus of a commodity since quantity supplied
exceeds quantity demanded when the price of a
good is kept above the equilibrium price.