Theory of Demand and supply

Theory of Demand and Supply

Demand meaning :

Demand means the various quantities of a given commodity or service which consumers would buy in one market during a given period of time, at various prices, or at various prices, or at various incomes, or at various prices of related goods.

Determinants of Demand :
a). Price of the commodity :

Others things being equal, the demand for a commodity is inversely related to its price, I.e. a rise in the price of a commodity brings about a fall in the quantity purchased and vice –versa.

b). Price of the related commodities :

         a).  Complementary goods : goods which are consumed together or simultaneously.

Ex :  tea and sugar, pen and ink.

Fall in price of one product the demand for the other rises

         b.Substitutes : goods which can be used in place of one another .

Ex : tea and coffee, ink pen and ball pen.

Fall in price of one product the demand for the other falls 

c). Income of the consumer :

Other things being equal, the demand for a commodity depends upon money income of the consumer. The purchasing powers of the consumer is determined by the level of his income. The larger the income the larger is the quantity demanded of a particular good.

d). Tastes and preferences of the consumers :

Goods which are modern or more in fashion command higher demand than goods which are of old design and out of fashion. It changes upon the tastes and preference of an individual consumer separately.

e). Other factors :

            a.Size of the population.

            b.The level of the national income and its distribution.

            c.Interest rates.

            d. Composition of population.

Demand function :

The demand function states the relationship between the demand for a product and its determinants .

                                Dx = f( Px, M, Py, Pc, T, A)

Where Dx is quantity demanded of product x

             Px is price of the commodity

             M is money income of the consumer

             Py is the price of the substitutes

             Pc is the price of the complementary goods

             T is the consumer tastes, and preferences

             A is advertisement expenditure

Law of Demand :

According to the law of demand, other things being equal, if the price of the commodity falls, the quantity demanded of it will rise and if the price of a commodity rises, its quantity demanded will decline.

Supply

Supply refers to the amount of a good or service that the producers are willing and able to offer to the market at various prices during a given period of time.

Determinants of supply :

          a). Price of the good.

          b). Prices of related goods.

          c). Prices of factors of production.

          d). State of technology.

          e). Government policy.

          f). Nature of competition and size of industry.

Law of supply :

The law of supply can be stated as: other things remaining constant, the quantity of a good produced and offered for sale will increase as the price of the good rises and decrease as the price falls.