Demand

2nd presentation

Why the slope of the Demand curve is negative

• As we have discussed above, that when the price decrease quantity demanded increase, and when price increase quantity demanded decrease. Now we discuss that why the demand curve has downward slope,

• The first reason or the factor behind the downward slope of the demand curve is income effect. Suppose the price of the commodity decreases, now consumer have some money left in his or her pocket or he can purchase more with the same amount. Now it is clear that because of decrease in price the real income or the purchasing power of the consumer will increase, and this increase in real income induces the consumer to purchase more. This effect is known as income effect.

• The second reason or the factor behind the downward slope of demand curve is substitution effect. Because of the decrease in price, consumers shift their consumption from other commodities to this commodity. This decrease in price induces the customers to substitute the commodities with the cheaper one. According to Prof, Marshall Substitution effect is more important than income effect in determining the downward slope of demand curve.

• The third factor or the reason behind the downward slope of demand curve is new consumers. With a lower price now some new consumers can also afford that particular commodity that they cannot purchase at previous price. That’s why the slope of demand curve is downward.

• The fourth reason behind the downward slope of demand curve is the alternative uses of a commodity. When the price of the commodity decreases consumers can use that commodity for different uses, it is also a reason behind the downward slope of demand curve.

• There are many factors which can change the demand of a commodity. Some of the main factors are given below,

• 1. Change in the real income;• As we know that the meaning of real income is

purchasing power. If the price of a commodity decreases a consumer can purchase more units of that particular commodity with the same money income. In other words when price decreases real income increases, and when real income or purchasing power increases demand will also increases.

Causes of change in Demand;

• 2. Distribution of the income;• It should be noted that the Marginal Propensity

to Consume (MPC), of the poor people are high in comparison with rich person. It means that the share of the increased income spent on consumption is more in case of poor people in comparison with rich people. If there is an equal distribution of national income than the demand will increase.

• 3. Change in weather;

• Change in weather also affects the demand of some particular commodities like, in summer the demand for soft drink and ice cream increases significantly. On the other hand in the season of winter the demand of woolen cloths and hot drinks increases.

• 4. Size of Population;

• Size of the population also affects the demand of the commodity. If the population is large than the demand will also large, on the other hand if the population is less than the demand of a particular commodity will also less.

• 5. Increase in Money supply;

• Money supply also affects the demand of a commodity. If the money supply increases, people have more money in their pockets to spend. Increase in money supply will increase the purchasing power of the consumers; hence the demand will also increase.

• 6. Change in the price;

• As we know that according to the law of demand, there is a negative relationship between price and the quantity demanded (other factors are constant). It means, lower the price, the greater is the demand, and vice-versa.

• 7. Price of the related goods;

• Related goods can be further divided into two parts,

• (a) Substitute goods, and

• (b) Complimentary goods

• Substitute Goods;

• As we know that the increase in the consumption of one commodity will lead to a decrease in the demand for the other substitute commodity. When a decline in the price of one good results in a decline in the demand for other goods, those goods are considered as substitute goods.

• Complimentary goods;

• If the price of one commodity and the demand for other commodity are inversely related, these goods can be considered as complimentary goods.

Supply

• The Qs is the amount of a good that is offered in a market for sale in a given period of time is known as quantity supplied. There are several factors which can influence the quantity supplied; the main factors are as follows;

• 1. The price of the particular commodity

• 2. The price of the inputs

• 3. The prices of related goods

• 4. Future price of the product

• 5. Number of the firms in production process.

• Supply depends upon several factors, in a functional form;

• Qs = f(P, Py, Pf, T, Pe, F)

•

• Quantity supplied is a function of price, price of the inputs, future price, level of technology and the number of firms.

Supply schedulePrice Quantity Supplied

60 700

55 650

50 600

45 550

40 500

35 450

30 400

• Table shows that at the price of 60 Rs, the quantity supplied was 700, and when the price decreases from 60 to 25, the quantity supplied also decreased to 350 units from 600 units. We can show it graphically;

Y

XO

Quantity Supplied

Pri

ce

30

35

40

45

50

55

60

400 450 500 550 600 650 700

s

s

• When all the factors are constant except the price of the commodity, there is a positive relationship between price and the quantity supplied. When the price was Rs, 30 the quantity supplied was only 400, as the price increases from 30 to 60 Rs, the quantity supplied also increase from 400 units to 700 units. This concept is known as increase in demand.

Equilibrium with the help of demand and supply

• Where, the demand curve and supply curve intersect each other that point is known as equilibrium point. In other words equilibrium is a situation of market in which a consumer can buy all of a good they wish and producers can sell all of the goods they wish. At the equilibrium price is known as equilibrium price and the quantity is known as equilibrium quantity.

Y

XO

Quantity Supplied

Pri

ce

30

35

40

45

50

55

60

400 450 500 550 600 650 700

s

s

D

D

E

• In the above figure we have assumed quantity supplied on X axis and Price of the commodity on Y axis. The demand and the supply curves have been shown as DD and SS, respectively. It is clear from the figure that point E is equilibrium point, at which demand curve and supply curve intersect each other. And Rs, 45 is the equilibrium price and 550 units are equilibrium quantity.