Demand and Supply

Two forces determine the market price

demand

Demand is the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same.

law of demand

other things remaining the same,quantity demanded is inversely related with the price


The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services that we observe in everyday transactions. The law of demand states that quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility. That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, and use each additional unit of the good to serve successively lower valued ends.

individual demand and market demand

changes in demand
the curve just move horizontal

reasons for shift in demand curve

  1. Change in prices of related goods
  2. Change in expected future prices
  3. Change in income
  4. Change in expected future income and credit
  5. Change in preferences
  6. Change in number of buyers
    the number of buyers can be seen as Size and Composition of the Population
    For example, as the population grows, the demand for food increases as well, simply because there are more mouths to feed.
  • price of related goods
    substitute in consumption
    complement in consumption
    • If price of substitute increases
      demand for good Increase
    • If price of complement increases
      demand for good Decrease
  • Expected future prices
  • income
kind of goodEffect of increase in income
Normal goodDemand for the good increases
Inferior goodDemand for the good decreases
  • Expected future income
    • Demand will increase when income is expected to increase in the future.
    • Changes in expected future income has the greatest effect on the demand for big ticket items such as houses and cars.
  • Preferences
    • Preferences may change when people become better informed or new goods become available.
  • Number of buyers
    • The greater the number of buyers in a market, the larger is the demand for any good.

supply

  • Supply is the relationship between the quantity supplied of a good and the price of the good when all other influences on selling plans remain the same.
  • Quantity supplied is the amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price.
  • Law of supply
    • Other things remaining the same, quantity supplied is positively related with the price.

Reasons for Shift in Supply Curve

  1. Change in prices of related goods
  2. Change in prices of resources and other inputs
  3. Change in expected future prices
  4. Change in productivity
  5. Change in number of sellers
  • Price of related goods
    • A substitute in production is a good that can be produced in place of another good. For example, luxury cars and ordinary cars are substitutes in production in an automobile factory.
    • A complement in production is a good that is produced along with another good. For example, cream is a complement in production of skim milk in a dairy.
goodsupply of good
Supply of the good If price of substitute increasesDecrease
If price of complement increasesIncrease
  • Input prices
    • Input prices influence the cost of production.
  • Expected future prices
    • A rise in the expected future price of a good decreases the current supply for the good.
  • Productivity
    • An increase in productivity lowers cost of production and shifts supply curve to the right.
  • Number of sellers
    • The greater the number of sellers in a market, the larger is the supply.
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