Lecture 04-A

Lecture: 04

CONCEPT OF DEMAND & SUPPLY

 

Definition of Demand:

                        It is the quantity of the good purchased at a given price in a given time.

Explanation:

                        The word ‘demand’ is a desire of a buyer to buy. It is a relationship showing various amounts of a commodity that a buyer would be willing and able to purchase at alternative prices during a given time period, all other things remains the same. Thus the definition of demand includes three components;

(a) Price of the commodity

(b) Quantity of the commodity

(c) Time

Note: that time period may vary. This can be week, month, year etc.

For example: Muhammad Ali purchased 1 kg of rice at Rs.25 per kg last week.

This is the demand for rice by Muhammad Ali.

Law of Demand:

            The law of demand is given as, “If price of a commodity falls, its quantity demanded increases and if price of the commodity rises, its quantity demanded falls, other things remaining constant.” OR Demand is inversely proportional to Price and Quantity.

Demand Curve:

                        A Demand Curve is a graphical representation of the relationship between price and quantity demanded. It is a line or curve, in which point P is Price and Qd is quantity demanded. That point shows the amount of the good buyers would choose to buy at that price.

Rise and Fall of Demand (or Shift in Demand Curve)

            When demand for a commodity goes up or down, not due to price but due to other factors, the change is called rise (or increase) in demand and fall (or decrease) in demand.

Example:

            In Summer, the original demand (sale) of apples remains at 40 kilos per day with the price of Rs.48 per kilo which increases in Winter i.e. people buy 100 kilos per day which far ahead of 40 kilos per day but price remains same. This is called increase in demand as depicted in table above.

Fall in Demand:

When the demand of commodity decreases not due to price but due to other factors the change is called fall in demand.

1.      Change in Income.

2.      Change in Population.

3.      Change in Consumer Preferences (Tastes or Liking and Disliking).

4.      Prices and availability of related goods (substitutes and complements).

5.      Advertisements and Publicity.

6.      Change in income distribution.

7.      Expectations of future prices can affect current purchases.

8.      Change in quantity of money.

9.      Expenditure.