Introduction:
The concepts of demand and supply
are useful for explaining what is happening in the market place. Every market
transaction involves an exchange and many exchanges are undertaken in a single
day. The circular flow of economic activity explains clearly that every day
there are a number of exchanges taking place among the four major sectors
mentioned earlier. A market is a place where we buy and sell goods and
services. A buyer demands goods and services from the market and the sellers
supply the goods in the market. In
economics, demand is “the quantity of goods and services that will be bought
for a given price over a period of time”.
For example if 10 Lakhs laptops are purchased in India during a year at
an average price of Rs.25000/- then we can say that the annual demand for
laptops is 10 Lakhs units at the rate of 25,000/-. This chapter describes demand and supply
which is the driving force behind a market economy. This is one of the most
important managerial factors because it assists the managers in predicting
changes in production and input prices. The manager can take better decisions
regarding the kind of product to be produced, the quantity, the cost of the
product and its selling price. Let us understand the concept of demand and its
importance in decision making.
Demand:
Demand means the ability and willingness to buy a specific quantity of a
commodity at the prevailing price in a given period of time. Therefore, demand
for a commodity implies the desire to acquire it, willingness and the ability
to pay for it.
Law of demand:
The quantity of a commodity demanded in a given time period increases as
its price falls, ceteris paribus. (I.e. other things remaining constant)
Demand schedule: a table showing the quantities of a good that
a consumer is willing and able to buy at the prevailing price in a given time
period. (Table – 1)
Demand Distinctions: Types Of Demand Demand may be defined
as the quantity of goods or services desired by an individual, backed by the
ability and willingness to pay.
Types Of Demand:
1.Direct and indirect demand: (or) Producers’ goods and
consumers’ goods: demand for goods that are directly used for consumption by
the ultimate consumer is known as direct demand (example: Demand for T shirts). On the other hand
demand for goods that are used by producers for producing goods and services.
(example: Demand for cotton by a textile mill)
2.Derived demand and autonomous demand: when a produce
derives its usage from the use of some primary product it is known as derived
demand. (example: demand for tyres derived from demand for car) Autonomous
demand is the demand for a product that can be independently used. (example: demand for a washing machine)
3.Durable and non
durable goods demand: durable goods are those that can be used more than once,
over a period of time (example: Microwave oven) Non durable goods can be used
only once (example: Band-aid)
4.Firm and industry
demand: firm demand is the demand for the product of a particular firm.
(example: Dove soap) The demand for the product of a particular industry is
industry demand (example: demand for steel in India )
5.Total market and
market segment demand: a particular segment of the markets demand is called as
segment demand (example: demand for 21 laptops by engineering students) the sum
total of the demand for laptops by various segments in India is the total
market demand. (example: demand for laptops in India)
6.Short run and long run demand: short run demand refers to
demand with its immediate reaction to price changes and income fluctuations.
Long run demand is that which will ultimately exist as a result of the changes
in pricing, promotion or product improvement after market adjustment with
sufficient time.
7.Joint demand and Composite demand: when two goods are
demanded in conjunction with one another at the same time to satisfy a single
want, it is called as joint or complementary demand. (example: demand for
petrol and two wheelers) A composite demand is one in which a good is wanted for several different uses.
( example: demand for iron rods for various purposes)
8.Price demand,
income demand and cross demand: demand
for commodities by the consumers at alternative prices are called as price
demand. Quantity demanded by the consumers at alternative levels of income is
income demand. Cross demand refers to the quantity demanded of commodity ‘X’ at
a price of a related commodity ‘Y’ which may be a substitute or complementary
to X.
Elasticity Of Demand
In economics, the term elasticity means a proportionate
(percentage) change in one variable relative to a proportionate (percentage)
change in another variable. The quantity demanded of a good is affected by
changes in the price of the good, changes in price of other goods, changes in
income and changes in other factors.
Elasticity is a measure of just how much of the quantity demanded will
be affected due to a change in price or income.
Elasticity of Demand is a
technical term used by economists to describe the degree of responsiveness of
the demand for a commodity due to a fall in its price. A fall in price leads to
an increase in quantity demanded and vice versa. 25 The elasticity of demand may be as
follows: Ֆ
·
Price Elasticity
·
Income
Elasticity and
·
Cross
Elasticity
Supply Analysis
Supply of a commodity refers to the various quantities of
the commodity which a seller is willing and able to sell at different prices in
a given market at a point of time, other things remaining the same. Supply is
what the seller is able and willing to offer for sale. The Quantity supplied is
the amount of a particular commodity that a firm is willing and able to offer
for sale at a particular price during a given time period.
Supply Schedule: is a table showing how much of a commodity,
firms can sell at different prices.
Law of Supply: is the relationship between price of
the commodity and quantity of that commodity supplied. i.e. an increase in
price will lead to an increase in quantity supplied and vice versa.
Supply Curve:
A graphical representation of how much of a commodity a firm sells at
different prices. The supply curve is upward sloping from left to right.
Therefore the price elasticity of supply will be positive. Graph - Supply curve.
Elasticity of Supply: Elasticity of supply of a
commodity is defined as the responsiveness of a quantity supplied to a unit
change in price of that commodity.
ΔQs / Qs
Es =
------------
ΔP / P
ΔQs = change in quantity supplied
Qs = quantity
supplied
ΔP = change in price
P = price Kinds Of Supply Elasticity
Price elasticity of supply: Price elasticity of
supply measures the responsiveness of changes in quantity supplied to a change
in price.
Perfectly
inelastic: If there is no response in supply to a change in
price. (Es = 0)
Inelastic supply: The proportionate change in
supply is less than the change in price (Es =0-1) Unitary elastic: The
percentage change in quantity supplied equals the change in price (Es=1) Elastic:
The change in quantity supplied is more than the change in price (Ex= 1- ∞)
Perfectly elastic:
Suppliers are willing to supply any amount at a given price (Es=∞) 44 The major
determinants of elasticity of supply are availability of substitutes in the
market and the time period, Shorter the period higher will be the elasticity.
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