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
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
• 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
