Summary Short Notes _ Theory of Demand and Supply (Unit 01)

Chapter - 2
Thoery of Demand and Supply
Unit -1 Law of Demand and Elasticity of Demand
 Definition of Demand :
 Quantity of a good or service that buyers are willing and able to purchase at various prices during a
given period.
 More than just desire; it involves the ability to pay and the willingness to use that means for a purchase.
 Elements of Effective Demand :
 Desire, means to purchase, and willingness to use those means.
 Desire alone isn't enough; it must be backed by purchasing power.
 Quantity Demanded :
 Always expressed at a given price.
 Represents a continuous flow of purchases over a period of time.
 Short Definition:
"Demand is the various quantities of a commodity or service consumers would buy in one market during a
given period, at various prices or incomes."
 Factors Determining Demand :
1. Price of the Commodity:
 Inverse relationship between price and demand.
 Higher price reduces quantity demanded; lower price increases it.
 Example: If the price of smartphones increases, people might buy fewer of them.
2. Price of Related Commodities:
 Complementary goods (e.g., tea and sugar) and substitutes (e.g., tea and coffee) impact demand.
 Complementary goods' prices affect each other inversely; substitutes' prices have a direct relation.
 Example: A decrease in car prices can increase the demand for petrol.
3. Disposable Income:
 Increase in disposable income generally increases demand for goods.
 Normal goods' demand rises with income; inferior goods' demand falls.
 Example: As income rises, demand for luxury goods like high-end electronics increases.
4. Tastes and Preferences:
 Modern or fashionable goods have higher demand.
 External effects like demonstration, bandwagon, and snob effects influence demand.
 Example: People buying the latest gadgets due to a demonstration effect.


1 Theory of Demand and Supply

, 5. Consumers' Expectations:
 Expectations about future prices, income, and supply influence current demand.
 Positive expectations lead to higher demand; negative expectations reduce it.
 Example: Expecting a sale in the future may decrease current demand.
 Other Factors :
 Population size, age distribution, national income, consumer-credit facilities, government policies,
and various external factors play roles in influencing demand.
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 Demand Function:
1. It refers to the functional relationship between the demand for a product (the dependent variable) its
determinants (the independent variables) is called demand function
Dx = f (Px, Y, Py, T, etc.)
Where –
Dx = quantity demanded of product X
Px = the price of the product X
Y = disposable income of the consumer
Py = the price of its related goods
Pc = the price of its complementary goods
T = consumer’s tastes and preferences
2.
3. Law of Demand:
 Definition: States an inverse relationship between the price of a good and the quantity demanded,
assuming other factors remain constant (ceteris paribus).
 Alfred Marshall's Definition: "The greater the amount to be sold, the smaller must be the price."
 Illustration: When the price increases, quantity demanded falls; when the price decreases,
quantity demanded rises.
 Factors Held Constant: Prices of related goods, consumer income, tastes, and preferences etc.
4. Demand Schedule:
 Definition: A table showing quantities of a good at different prices, assuming other factors are constant.
5. Demand Curve:
 Definition: A graphical representation of the demand schedule.
 Slope: Negative slope (downward) indicating the inverse relationship.
6. Market Demand Schedule and Curve:
 Definition: Market demand shows the total quantity demanded by all buyers at different prices.
 Summation: Adding individual quantities demanded at each price to obtain market demand.
 Market Demand Curve: Horizontal summation of individual demand curves.


2 Theory of Demand and Supply