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DEMAND AND

SUPPLY
3
CHAPTE
R
Meaning of Demand
• Ordinarily, the term want, desire and demand are used
interchangeably.
• These terms have different meanings.
 Suppose you desired to have a color TV, but you don’t
have enough money, then this will just be a wishful
thinking but not a demand.
 You have money but you don’t want to spend it on color
TV, this is just a want not a demand.
Demand

• Demand is a particular amount of a commodity that


buyers are willing to buy and able to pay at a given
price during a given time.
 For example, at a price of Rs. 1 per icecream, the
consumer buys 5 icecreams.
 Here the demand at Rs. 1 per ice-cream is 5 ice
creams.
Determinants of demand cont.

1. Price of a commodity (higher the price


lower the demand and vice versa):
2. Price of other goods
I. Substitute goods: some goods can be
substituted like tea for coffee, bal pen for
ink pen etc. The change of price of one good
lead the change in demand of other good.
Determinants of demand cont.

II. Complementary goods: Complementary goods are


those goods which complete the demand for each
other, and are , therefore, demanded together. A
fall in the price of one causes increase in the
demand of the other and vice versa.
Complementary goods are car and petrol/ diesel,
torch and battery etc.
Demand function or determinants of demand
cont.
3. Income of the consumer:
Change in income tend to increase in demand of
normal goods but decrease in inferior goods.
4. Taste and preferences:
Culture, belief, fashion etc. play the role for taste
and preferences.
5. Expectations:
If the consumer expects that the price of a
commodity will increase in the future will buy more
quantity in present and vice versa.
Law of demand
• The law of demand states that other things
remaining the same, quantity demanded of a
commodity increases with fall in the price and
decreases with rise in price.
• Assumption of the law of demand:
The law of demand functions properly when
“other things remain the same (cetirus paribus)”.
The main assumptions of the law are as follows:
Law of demand
The main assumption of the law of demand
are as follows:
i. Tastes and preferences of the consumer
remain constant.
ii. There is no change in the income of the
consumer.
iii. Price of the related goods do not change.
iv. The consumer do not expect any change in
the price of the commodity in the near
future.
DEMAND IN HEALTH CARE
 People desire to remain healthy has led to
continuous growth in the demand of health care.
However there are also a number of specific reason
why the demand of health care has expanded so
dramatically in developed countries over the rescent
year

1. Change in the Age structure


Changes in the age structure of the population have
increased the demand of health care. Elderly people
requires more health care than other age groups
2. Increasing Real Incomes
Increasing real incomes have lead to increase in the
people expectation of health care. Many of us are
now not prepared to put up with the pain and
discomfort.
3. Improvement In Medical Technology
Improvement in medical technology have
continuously increased the range of treatment
possible. A good example of this is the way in which
the development of kidney dialysis machine has
largely prevented kidney failure from killing people.
Supply
Meaning of supply:

• Supply refers to the quantity of commodity


offered for sale considering different possible
prices at a point of time.
• “The supply of goods is the quantity offered for
sale in a given market at a given time at various
prices”
Thomas
Distinction between stock and supply:

• In ordinary language the words stock and supply are


used interchangeably.
• These terms have different meanings in economics.
• Stock of a commodity refers to the total quantity of that
commodity which at any given time is available in the
market with the seller.
• Supply refers to that part of the stock that the seller is
prepared to sell at a given price and at a given time.
Factors affecting supply of commodity
a. Price of the given Commodity:
The most important factor determining the supply of a commodity is
its price. As a general rule, price of a commodity and its supply are
directly related. It means, as price increases, the quantity supplied of
the given commodity also rises and vice-versa. It happens because at
higher prices, there are greater chances of making profit. It induces
the firm to offer more for sale in the market.

b. Prices of Other Goods:


• As resources have alternative uses, the quantity supplied of a
commodity depends not only on its price, but also on the prices of
other commodities. Increase in the prices of other goods makes
them more profitable in comparison to the given commodity.
Factors affecting supply of commodity cont.
C. Prices of Factors of Production (inputs):
• When the amount payable to factors of production and cost of inputs
increases, the cost of production also increases. This decreases the
profitability. As a result, seller reduces the supply of the commodity.
On the other hand, decrease in prices of factors of production or
inputs, increases the supply due to fall in cost of production and
subsequent rise in profit margin.

d. State of Technology:
Technological changes influence the supply of a commodity. Advanced
and improved technology reduces the cost of production, which raises
the profit margin. It induces the seller to increase the supply.
However, technological degradation or complex and out-dated
technology will increase the cost of production and it will lead to
decrease in supply
e. Government Policy (Taxation Policy):
• Increase in taxes raises the cost of production and, thus,
reduces the supply, due to lower profit margin. On the other
hand, tax concessions and subsidies increase the supply as they
make it more profitable for the firms to supply goods.

F. Goals / Objectives of the firm:


• Generally, supply of a commodity increases only at higher prices
as it fulfills the objective of profit maximization. However, with
change in trend, some firms are willing to supply more even at
those prices, which do not maximise their profits. The objective
of such firms is to capture extensive markets and to enhance
their status and prestige.
G. Expected future price
Law of supply
• The law of supply states that other things remaining constant,
quantity supplied of a commodity increases with increase in the
price and decrease with a fall in its price.
As the price of good increases suppliers will attempt to maximize
profits by increasing the quantity of the product sold
 Assumptions of the law:
 No change in price of the factors of production
 No change in technology
 No change in the price of related goods
 No expectation of change in the price in the future
Shortages and Surpluses
• A shortage occurs when quantity demanded
exceeds quantity supplied.

• A surplus occurs when quantity supplied


exceeds quantity demanded.
Types of Demand

Demand can be classified into three major types:

1. Price Demand

2. Income Demand

3. Cross Demand
1. Price Demand

Price demand shows the relationship between


price of the goods and quantity demanded. If
the price of goods is higher consumers will
purchase less quantity of goods and if the price
is lower, consumers will purchase more
quantity of goods. It means there is inverse
relationship between price and quantity
demanded.
2. Income Demand
Other thing remaining the same, income demand
indicates the relationship between income of
the consumer and quantity of demanded
commodity. In others words, it relates to the
various quantities of a commodity that will be
bought by the consumer at various levels of
income.
 Here, demand of goods depends upon the
income of consumer. Generally, if income
of consumer increase the demand of goods also
increases and vice-versa.
3. Cross Demand

It is a situation; where change in the price of


one-commodity results in the change of the
demand of other commodity. In this way, cross
demand indicates how the demand for a
commodities affected by changes in the price of
related goods.
Demand Curve

The demand curve…


 † Graphically shows how much of a good
consumers are willing to buy (holding their
incomes, preferences, and other things
constant) at different prices.

 … The demand curve shows the relationship


between price and quantity demanded,
holding other things constant.
– Price on the vertical axis
– Quantity demanded on the horizontal axis
Demand Curve

The slope of demand curve (downward from left to right indicates that a greater quantity
SUPPLY AND DEMAND 24
will be demanded when the price is lower. Copyright © 2004 South-Western
Shift in the Demand Curve

• A change in any variable other than price that


influences quantity demanded produces a shift
in the demand curve or a change in demand.
• Factors that shift the demand curve include:
– Change in consumer incomes
– Population change
– Consumer preferences
– Prices of related goods:
• Substitutes: goods consumed in place of one another
• Complements: goods consumed jointly
© OnlineTexts.com p. 25
Shift in the Demand Curve

This demand curve has shifted to the right. Quantity


demanded is now higher at any given price.
© OnlineTexts.com p. 26
Supply Curve
• A graphical representation of the relation
between the supply price and quantity
supplied, holding all  supply determinants
constant.
 The Supply curve shows the relationship
between price and quantity demanded,
holding other things constant.
– Price on the vertical axis
– Quantity Supplied on the horizontal axis
Supply curve

Supply curves are drawn as 'upward sloping' due to the positive relationship between price
and quantity supplied. The Slope of supply curve (upward from left to right) tell us that as the
price goes up, producer are willing to produce more goods.
28
Shift in the Supply Curve
• A change in any variable other than price that
influences quantity supplied produces a shift
in the supply curve or a change in supply.
• Factors that shift the supply curve include:
– Change in input costs
– Increase in technology
– Change in size of the industry

© OnlineTexts.com p. 29
Shift in the Supply Curve

For an given rental price, quantity supplied is now lower


than before.
© OnlineTexts.com p. 30
Market Equilibrium
The interaction between demand and supply determines price in
the market. The point where the demand and supply curve meets
each other that is the exact price of the product fixed by the
market. When the quantity of a product demanded equals the
quantity supplied at the prevailing market price, this is called a
market equilibrium. When a market reaches an equilibrium, there
is no pressure to change the price.
 If the price is below the equilibrium price, there will be excess
demand . Excess demand (sometimes called a shortage) occurs
when, at the prevailing market price, the quantity demanded
exceeds the quantity supplied, meaning that consumers are
willing to buy more than producers are willing to sell.
 If the price is below the equilibrium Excess supply (sometimes
called a surplus) occurs when the quantity supplied exceeds
the quantity demanded, meaning that producers are willing to
sell more than consumers are willing to buy.
meaning that producers are willing to sell more than consumers are willing to
buy
Equilibrium

Equilibrium occurs at a price of $3 and a quantity of 30


units.
© OnlineTexts.com p. 33
The graphical interaction of supply and
demand
Shortages and Surpluses
• Sometimes the market is not in equilibrium-that is
quantity supplied doesn't equal quantity demanded.  When this
occurs there is either excess supply or excess demand.

• A Market Shortage occurs when there is excess demand- that is


quantity demanded is greater than quantity supplied.  In this
situation, consumers won't be able to buy as much of a good as they
would like. 

• In response to the demand of the consumers, producers will raise


both the price of their product and the quantity they are willing to
supply.  The increase in price will be too much for some consumers
and they will no longer demand the product.  Meanwhile the
increased quantity of available product will satisfy other consumers. 
Eventually equilibrium will ©be reached.
OnlineTexts.com p. 35
• A Market Surplus occurs when there is excess supply- that is
quantity supplied is greater than quantity demanded.  In this
situation, some producers won't be able to sell all their
goods. 

• This will induce them to lower their price to make their


product more appealing.  In order to stay competitive many
firms will lower their prices thus lowering the market price for
the product. 
• In response to the lower price, consumers will increase their
quantity demanded, moving the market toward an
equilibrium price and quantity.  In this situation, excess supply
has exerted downward pressure on the price of the product.
Exercise
What are demand and supply? Identify the
health demand and assess the supply situation
of health services in Nepal