Objectives:

To understand the basics of demand and supply

and their relevance in economic decision
making
To explain law of demand and exceptions to the
law
To analyze the different determinants of
demand and supply and their effects on
demand and supply curve

To develop an understanding of demand and

supply f function in determining market
equilibrium

Relevance and highlights

Indias population is 1378.22 million by 2030 and

growth of urban is expected to grow by 38% this

may raise the need for increase in demand of food
Indian carbon vision 2025 report estimates that
the demand for natural gas is expected to show a
sharp rise in future
A new restaurant opens up in town and gets great
reviews, that there are only 12 tables but
everyone wants to get reservation, what could be
the factors for gap?
Growth of IT/ITES sector is moving up
tremendously Is the need moving more up
indicating skill

Relevance and Highlights

Yes, the instances highlight the significance of

the two most important aspects of everyday

life that is demand and supply
Activities are driven by twin forces like
demand and supply
Needless to say if strong foundation of
understanding of business necessitates a
clear understanding of the concepts of
demand and supply

Relevance and highlights

Basic terms like wants, needs and desire

which hear close resemblance with demand

followed by dimension of demand and law of
demand
Focus of supply and finally would see how the
interaction between sellers and buyers of a
good or service at a mutually agreed up to
price

Market
Refers to the interaction between sellers

and buyers of a good or service at a

mutually agreed upon price
Demand is defined as that want need or
desire which is backed by willingness and
ability to buy a particular commodity in a
given period of time
Is the quantity of commodity which
consumer are willing to buy at a given price
for a partilcular unit of time

Demand /Types of
demand
Is effective desire, as it is backed by the
willingness to pay and the ability to pay the
price of the commodity Ex. purchase of
luxurious car
Types : on the basis of the nature of goods
demanded (consumer and capital goods) time
unit for which it is demanded (short run and
long run) relation between goods

Types of demand
Direct and derived demand :When a

commodity is demanded for its own sake by

the final consumer it is known as consumer
demand and the demand is derived demand
A good can be derived for various purpose
like consumption or for production of
another commodity
When a commodity demanded for the own
sake ie. by the final consumer it is known as
a consumer good

Types of demand
Al household items like TV, refrigerator,

furniture, computer and eatables , toiletries,

tonics and medicines are examples of
different kinds of consumer goods
Since these goods are demanded as they are
demand is direct demand. Direct demand is
also known as autonomous demand

Types of demand
Capital good is demanded for using it either

as a raw material or as an intermediary and its

demand is derived demand
On the other, when a commodity is demanded
for using it either as a raw material or as an
intermediary for value addition in any other
good or in the same good it is known as a
capital good and its demand is derived
demand

Types of demand
The reason is that these goods are not demanded for

their own sake, but to produce some other

commodities
For eg. If there is a demand for mobile phones with
radio, internet camera, the machinery required to
produce such phones will also be demanded
Here you can see mobile phone is an example of direct
demand while machinery is an eg of derived demand
Similarly demand for buildings increase demand for
construction materials like cement, concrete, bricks will
also increase thus demand for construction material is
derived by demand for new buildings

Types of demand
Recurring demand
Consumer goods have a recurring demand

ie., they are consumed on frequent intervals

like you eat food twice a day, take tea snacks,
3-4 times a day, read newspaper everyday,
have soft drinks as many times as you want,
fill petrol in your bike every week

Types of demand
Replacement demand : goods like TV, cars,

bikes, mobile phones ,watches furniture and

houses are all ex. of durable goods. They are
purchased to be used for a long period of time.
But they wear and tear over time due to use or
obsolescence of technology. Thus they need
replacement
At the same time all capital good like machinery
also need replacement. Thus the producer of
these goods have to make long term planning

Types of demand
Complementary and competing goods :

can you use a pen without ink Or a printer

without ink cartridge Or a computer without
software Or a car without petrol (diesel)
Goods which create joint demand are
complementary goods therefore demand for
one commodity is dependant upon demand
for the other one

Types of demand
If purchase of cars increase, demand for petrol

will also increase

If price of petrol goes up, demand for cars may
go down, or alternatively efficient vehicles may
increase
Goods which compete with each other to satisfy
any particular want are called substitutes
There are goods which compete with each other
because they are substitutes ex. if you are
thirsty, you may opt for water, coke, pepsi but
you will not drink all of them simultaneously
because they can independently satisfy your
want to quench thirst

Types of demand
When a consumer is indifferent between two
-

goods they are called as close substitutes

Coke and pepsi
wagonR and Santro
Petrol driven or diesel driven
Savings a/c with SBI or ICICI
Investing in government bonds or company
deposits

Types of demand
On the other hand there are products which

are not so good substitutes of each other for

ex. Car motorbikes, airways, roadways,
railways
Consumer goods and capital goods-marketing
usually define such goods as those which are
bought by the ultimate consumer for their
personal use or for the use of others in their
household

Types of demand
Capital goods which are not wanted for their

own sake but to use them as inputs in the

production of other goods/services
Ex car is a consumer good and steel is a
capital good
Demand for perishable good and durable
good. Consumer goods may be further
classified as durable good and non durable
good
Durable goods are those which last for a
relatively long time and consumed multiple
times As such demand for such goods are
postponed

Types of demand
Ex. For durable goods are cars, furniture,

mobile phones and TV. These goods are

required to be replaced after certain period of
time and hence present the case for
replacement demand
Non-durable goods are again of two types
perishable and non-perishable ex. fish,
cheese, milk .Most of these items get spoilt
within few hours without refrigeration

Types of demand
Non-perishable goods do not get spoiled as

quickly as perishable good ex. canned fruit

juice, bottled mineral water. Here most of
good items are best before date
Individual demand and Market demand
is demand for an individual consumer is
normally expressed as individual demand. A
seller is interested in total demand for cars
Demand by all consumers for its products
known as market demand

Determinants of Demand
Price of the product price has an negative

effect on demand
Income of the consumer- has a positive
relationship with demand. With increase in
consumers paying capacity.
Engel learned scholar observed that the
proportion of income spent on food decreases
He categorizes goods into normal and inferior
goods

Determinants of Demand
Normal goods has a positive relation between

demand and income

Inferior goods are commodities, the demand
for which falls as income rises. low quality
goods which people stop consuming with rise
income. Ex. lower class travel to higher class
travel

Determinants of Demand
Price of related goods bear two types of

relationship, they can be substitutes and

complementary
An increase in the price of a commodity
increases the demand for its substitutes and
reduces the demand for its complement
Substitutes are goods that satisfy a similar
need and can be used as replacement of each
other
Complements are demanded jointly

Determinants of Demand
Taste and preferences have such effect that

in spite of a fall in price, demand may not

increase if the good has gone out of fashion
and in in spite of increase in price, demand
may not decrease because of the product
being in fashion
Age, gender, education, profession, social
cultural norms, advertising play a role in
developing taste and preferences

Determinants of Demand
Advertising in modern age of cutthroat

competition among brands advertising

has gained a remarkable ground
Primary motive is to stimulate demand
for own brand
Instances have changed the life style of
people like Cadbury India has
revolutionized the market for its leading
product and life style has emerged as an
upcoming industry, bringing new change
in the dress sense

Is advertisement important factor

to influence demand?
Consumers expectation of future income and

price
Population
Growth of economy
Consumer credit

Demand function

Law of demand
Reasons behind law of demand
Price effect
Substitution effect
Income effect
Law of diminishing marginal utility
Demand schedule and demand curve
Shift in demand curve

Demand function
Exception to law of demand
Giffen good
Snob appeal
Demonstration effect
Future expectations of prices
Insignificant proportion of income spent
Goods with no substitutes

Supply
Refers to the quantities of a good or service

that the seller is willing and able to provide

at a given price at a given period of time
Determinants of supply
- price of the commodity
- Cost of production
- State of technology
- Number of firms
- Government policies

Supply function
Law of supply
Supply schedule and supply curve
Shift in supply curve
Market equilibrium
Excess supply
Excess demand
Price adjustment mechanism
Changes in market equilibrium