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The demand for any commodity is the desire for that commodity backed by ability to pay as
well as willingness to pay for it, and is always defined with reference to a particular time
and price on which it depends.
So, the demand for a good or service is defined to be the relationship that exists between
the price of the good and the quantity demanded in a given time period, ceteris paribus.
One way of representing demand is through a demand table/schedule such as the one
appearing below:
Table 1(Demand Schedule)
Price
Quantity demanded
(per unit)
2
3
4
5
(per week)
100
85
55
35
The demand for the good is the entire relationship that is summarized by this table. This
demand relationship may also be represented by a demand curve when the numerical or
tabular form is expressed graphically (as illustrated below).
The data from demand schedule can be plotted
Demand Curve
'X') axis.
D`
0
0
50
100
150
Quantity Demanded
per week.
Figure: 01
The demand function is algebraic expression of the relationship between price of a
product and the quantity demanded for, in relation to the specific period of time. The
simplest form of the demand function is as Qd = f(p) , here. Qd
(b)
(c)
(d)
LAW OF DEMAND
From the above discussion it is clear that an inverse relationship exists between the price
and the quantity demanded when other factors are held constant. This inverse relationship
between price and quantity demanded is so common that economists have called it the law
of demand, the law of demand states the inverse relationship between price and quantity
demanded. The law says Other things remaining the same, as the price of a commodity
falls, demanded quantity rises and as the price rises, demanded quantity falls.
EXCEPTIONS TO THE LAW OF DEMAND:
1. When a serious shortage is feared, people get panicky and by more even though the
price is rising.
2. When the good in question is a luxury item. In case the use of a commodity confers
distinction, the wealthy people will buy more when the price rises, to be included among
the few distinguished personages. Conversely, people tend to cut their purchases, if they
believe such commodity tend to be inferior or similar but more expansive/prestigious
product /brand is up coming in the market.
3. Sometimes people buy more at a higher price in sheer ignorance.
4. If the price of necessity of life goes up, the consumer has to readjust his whole
expenditure. He may cut down his expenses on other food articles and in order to make up,
more may have to be spent on this particular good. Thus, more of this commodity will be
purchased in spite of its high price.
5. When the good whose demand is being studied goes out of fashion. With the popularity
of VCD player in Bangladesh, the demand for VCR may very well fall even if VCR has
become cheaper. Similarly, during off-seasons, goods are sold at reduced prices and yet
demand is low.
DETERMINANTS OF DEMAND
A Consumers demand for a commodity or service depends on several factors, the most
important of which are the following:
1. Price of the commodity or service,
2. Consumers income,
3. Prices of related goods or services,
4. Consumer tastes and preferences,
In addition to these factors, the total demand for a commodity or service also depends
upon:
5. Population and its distribution.
6. Consumers expectations (in case of durable goods).
7. Weather
If price falls, a consumer can afford to buy more. He is able and willing to buy more
because the thing being cheaper, his real income increases. It is called income
effect.
When the commodity become cheaper, it tends to be substituted wholly or partly for
other commodity. It is called substitution effect.
The income and substitution effect combine to increase the ability and willingness of
the consumers to buy more of the commodity whose price fallen.
A commodity tends to be put more uses and less urgent uses when it become
cheaper. For example if water is dear, we shall use it for drinking only; but when it
becomes cheaper, we shall use it for washing and other less urgent uses.
Quantity supplied
(per unit)
2
3
4
5
(per week)
15
35
60
90
The supply of a good is the relationship that is summarized by this table. This supply
relationship may also be represented by a supply curve when the numerical or tabular form
is expressed graphically (as illustrated below).
Supply Curve
Price
'X') axis.
3
2
0
0
20
40
60
80
100
Quantity Supply
week.
Figure: 01
The Supply function is algebraic expression of the relationship between price of a product
and the supplied quantity, in relation to the specific period of time. The simplest form of the
supply function is as QS = f(p) , here. QS stands for supplied quantity and p stands for
price.
Alike demand, this relationship, between price of a product and supplied quantity of the
product under a certain condition, can be expressed as supply table/schedule in numerical
form, as supply curve in graphical form or as supply function in algebraic form. These are
the different expression of the same relationship.
DETERMINANTS OF SUPPLY
The supply of a commodity or service depends on several factors, the most important of
which are the following:
MARKET EQUILIBRIUM
By watching, individually, either demand curve or supply curve of a commodity we cannot
say what would be the price or rate of exchange of the commodity in the market. To find
the price, we have to look though the interaction of demand and supply curves and find out
the market equilibrium point, where supply meets demand.
Let's combine the market demand and supply curves on one diagram:
It can be seen that the market demand
and supply curves intersect at a price of
tk.3 and a quantity of 60 units. This
combination of price and quantity
represents an equilibrium since the
quantity demanded equals the quantity
supplied. At this price, each buyer is able
to buy all that he or she desires and each
firm is able to sell all that it desires to sell.
Once this price is achieved, there is no
reason for the price to either rise or fall
(as long as neither the demand nor the
supply curve shifts).
A price floor is a legally mandated minimum price. The purpose of a price floor is to keep
the price of a good above the market equilibrium
price. Agricultural price supports and minimum wage
laws are example of price ceilings. As the diagram
below illustrates, an effective price floor results in a
surplus of a commodity since quantity supplied
exceeds quantity demanded when the price of a
good is kept above the equilibrium price.