Supply and Demand

Theory of Supply and Demand shows how consumer preferences determine consumer demand for commodities, while business costs determine the supply of commodities.

THE DEMAND SCHEDULE

Relationship that exists between price and quantity bought is called the Demand Schedule or the Demand Curve

e.g – The higher the price of an article, other thing remain constant, the less units consumers are willing to buy and vice versa.

THE DEMAND CURVE

Ø  The graphical representation of the demand schedule is the demand curve.

Ø  Quantity and price are inversely related.

Ø  Law of downward-sloping demand.

Quantity demanded tends to fall as prices rises for two reasons –

 1. Substitution effect (substitute other similar goods)

2. Income effect (curb consumption)

FORCE BEHIND THE DEMAND CURVE

·         Average income

·         Size of market

·         Price and availability of related goods

·         Taste and preferences

·         Special influences e.g Umbrella in rainy and air condition in hot weather

THE SUPPLY SCHEDULE

The supply schedule (or supply curve) for a commodity shows the relationship between its markets prices and the amount of that commodity that producers are willing to produce and sell, other things being constant.

THE SUPPLY CURVE

Ø  Show Upward slop

Ø  The law of diminishing returns

FORCE BEHIND THE SUPPLY CURVE

·         Cost of production

·         Prices of input and technological advances

·         Technological advances

·         Prices of related goods

·         Government policy

·         Special factors

IMPORTANT POINT

Ø  When changes in factors other than a good’s own price affect the quantity supplied, we call these changes as shifts in supply .

Ø  Supply and demand interacts to produce an equilibrium price and quantity or market equilibrium.

Ø  When the forces of supply and demand are in balance, there is no reason for price to rise or fall, as long as other things remain unchanged.

Ø  A market equilibrium comes at the price at which quantity demanded equals quantity supplied.

Ø  The equilibrium price is also called the market-clearing price.

EFFECT OF A SHIFT IN SUPPLY OR DEMAND

Ø  In case of Supply, there might have been a change in technology or input price.

Ø  In demand shift, one of the influences affecting consumer demand – incomes, population, and the prices of related goods or taste