Demand Curve, it's Movement and Shift

 

Demand Curve

The graphical representation of the relationship between the demand of the commodity and price of the commodity, at any given time, is known as the demand curve.

A demand curve can also be defined as the graphical representation of a demand schedule. A demand schedule is a tabular statement which represents the various quantity of the commodity that the consumers are ready to buy at every different price, at any given time.

In a graph, the price of the commodity is represented in the vertical axis (Y-axis) and the quantity demanded is represented on the horizontal axis (X-axis). A commodity’s price and its demand share inverse relationship. This means, higher the price of the commodity, lesser will be its demand and lower the price, higher will be the demand. Therefore, in a graph, demand curve makes a downward slope.

In the following figures, fig. I is an example of demand schedule and fig. II is its graphical illustration (demand curve).

Fig. I: Demand schedule
Price of soda per bottle (in Rs.)	Quantity (bottles) demanded per day (*1000)
10	40
20	30
30	20
40	10

Fig. II: Demand curve

 

Movement along a demand curve

It is caused by the change in price of the commodity, whilst other things remaining same.

The amount of quantity demanded by the consumer changes with the rise and fall in the price of the commodity if other determinants of demand remain constant. This alternation in demand, when shown in the graph, is known as movement along a demand curve.

Movement along a demand curve can also be understood as the variation in quantity demanded of the commodity with the change in its price, ceteris paribus.

There is no new demand curve is drawn.

There can be two types of movement in a demand curve – extension and contraction.

Extension in a demand curve is caused when the demand for a commodity rises due to fall in price. And, contraction in demand curve is caused when the demand for a commodity falls due to rise in price.

In the above fig. II, let us suppose Rs. 30 is the original price of the soda per bottle and 20,000 units are the original quantity of demand. When the price falls from Rs. 30 to Rs. 20, the amount of quantity demanded rises from 20,000 units to 30,000 units. With this change in demand, there is a movement in the demand curve from point B to point C which is known as an extension of the demand curve.

Similarly, when the price of the soda increases from Rs. 30 to Rs. 40, the demand for the soda falls from 20,000 units to 10,000 units. This time, there is a movement in the demand curve from point B to point A, and this movement is known as a contraction in the demand curve.

Shift in demand curve

The amount of commodity demanded by the consumers may change due to the effect of non-price factors as well. Non-price factors which influence demand for the commodity may be consumers’ income, the price of related goods, advertisement, climate and weather, the expectation of rise or fall in price in future, etc.

When the amount of commodity demanded changed due to non-price factors, there is no extension or contraction in the curve but the formation of the entirely new demand curve. As a result, demand curve shifts from its original position.

For an example, the demand for cold drinks in the market may increase substantially even at same price due to hot weather.

Fig. III: Shift in demand curve

The shift in demand curve is also of two types – rightward shift and leftward shift.

When the demand for a commodity increases at the same price due to favorable changes in non-price factors, the initial demand curve shifts towards the right, and there is a rightward shift in the demand curve. Similarly, when the demand for a commodity fails at same price due to unfavorable changes in non-price factors, the initial demand curve shifts towards left, and there is a leftward shift in the demand curve.

In the given fig. III, let us suppose, DD is the initial demand curve where P is the original price and Q is the original quantity of demand of a commodity. Due to favorable changes in non-price factors, the demand for the commodity in the market has increased from Q to Q₂ amount at the same price. Thus, the demand curve has shifted rightwards and new demand curve D₂D₂ has formed.

Similarly, due to unfavorable changes in non-price factors, the demand for the commodity has fallen from Q to Q₁ amount. Thus, a new demand curve D₁D₁ has formed at the left side of the initial curve.

Reasons for rightward shift of curve

§  Increase in consumers’ income

§  Increase in price of its substitute goods

§  Decrease in price of its complementary goods

§  Favorable change in taste and preference

§  Expectation of rise in price of the commodity in future

§  Increase in population

Reasons for leftward shift of curve

§  Decrease in consumers’ income

§  Decrease in price of its substitute goods

§  Increase in price of its complementary goods

§  Unfavorable changes in taste and preference

§  Expectation of fall in price of the commodity in future

Adopted from: https://www.businesstopia.net/economics/micro/demand-curve-movement-shift

Supply Function and Supply Equation

 

Supply Function

The functional relationship between the quantity of commodities supplied and various determinants are known as supply function. It is the mathematical expression of the relationship between supply and factors that affect the ability and willingness of the producer to offer the product. The relationship may exist between two or more number of variables.

Mathematically, a supply function can be expressed as

Q_s = f(P; P_rg) where,

Q_s = Quantity of commodity supplied

P = Price of the good

P_rg = Price of related good

 

Individual Supply Function

The algebraic expression of an individual supply schedule is called individual supply function. An individual supply schedule is a tabular statement representing the various amounts of a commodity that a single producer is willing to sell at a different price, during a given period of time.

Individual supply schedule
Price of milk per liter (in Rs.)	Quantity supplied per day in liters (*1000)
10	10
12	13
14	20
16	25

Mathematically, a supply function can be represented as

S_x = f(P_x, Po, P_f, S_t, T, G) where,

S_x = Supply of the commodity x

P_x = Price of the commodity x

P_rg = Price of related goods

P_f = Price of factors of production

S_t = State of technology

T = Taxation policy

G = Goals of the firm

 

Market Supply Function

Market supply function is the algebraic expression of the market supply schedule. Market supply schedule can be defined as the tabular statement which represents various amounts of a commodity that the entire producers in the whole economy are willing to supply at the optimal price, at any given time.

Market supply schedule
Price of the product X per unit (in Rs.)	Individual supply per day			Market supply per day
	A	B	C
100	750	500	450	1700
200	800	650	500	1950
300	900	750	650	2300
400	1000	900	700	2600

Market supply function can also be defined as the summation of individual supply functions within a specific market.

Mathematically, a market supply function can be represented as

S_x = f(P_x, Po, P_f, S_t, T, G, N, F, M) where,

S_x = Market supply of the commodity x

P_x = Price of the commodity x

P_rg = Price of related goods

P_f = Price of factors of production

S_t = State of technology

T = Taxation policy

G = Goals of the market

N = Number of firms

F = Future expectation regarding price of the commodity x

M = Means of transportation and communication

Adopted from: https://www.businesstopia.net/economics/micro/supply-function

Supply and it's Determinants

 

Supply

It means the quantities of a commodity that it’s producer or seller has willingness and ability to offer for sale at a given price and period of time.

Determinants of Supply

a.      Price of the Commodity

The price of the commodity is the most important determinant of supply. There is direct relationship between price of the commodity and its quantity supplied, other thing remaining same. It means that the higher price, producers or sellers offer more quantity or commodity for sale and at lower price, producers or sellers offer less quantity of the commodity for sale.

b.     The price of the Other Goods

The supply of a commodity is inversely related with price of other commodities. For eg: A rise in the price of rice will fall the supply of wheat. This is due to the fact that rise in the price of rice will encourage producers to produce more rice.

c.      Price of the factors of Production

Supply of commodity is also affected by the price of the factors of production. With this rise in the price of the factors of production, the cost of production also rises, which results decrease supply and vice-versa.

d.     State of Technology

Technological innovations and inventions tend to make it possible to produce better quality and/or quantity of goods using the same resources. Therefore, the state of technology can increase or decrease the supply of certain goods.

e.      Government Policy

Commodity taxes like excise duty, import duties, GST, etc. have a huge impact on the cost of production. These taxes can raise overall costs. Hence, the supply of goods that are impacted by these taxes increases only when the price increases. On the other hand, subsidies reduce the cost of production and usually lead to an increase in supply.

f.Other Factors

There are many other factors affecting the supply of goods or services like the government’s industrial and foreign policies, the goals of the firm, infrastructural facilities, market structure, natural factors etc.

Law of Supply

 

Introduction:

The law of supply states that, other things remaining the same, the quantity supplied of a commodity is directly or positively related to its price. In other words, when there is a rise in the price of a commodity the quantity supplied of it in the market increases and when there is a fall in the price of a commodity, its quantity supplied decreases, other things remaining the same. Thus, the supply curve of a commodity slopes upward from left to right.

Law of Supply Assumptions

The term “other things remaining the same” refers to the following assumptions in the law of supply:

1.     No change in the state of technology.

2.     No change in the price of factors of production.

3.     No change in the number of firms in the market.

4.     No change in the goals of the firm.

5.     No change in the seller’s expectations regarding future prices.

6.     No change in the tax and subsidy policy of the products.

7.     No change in the price of other goods.

The law of supply can be explained with the help of supply schedule and supply curve as explained below.

Supply Schedule

Supply Schedule is a tabular presentation of various combinations of price and quantity supplied by the seller or producer during a period of time. We can show the supply schedule through the following imaginary table.

The given schedule shows positive relationship between price and quantity supplied of a commodity. In the beginning, when the price is Rs.10 per kg, quantity supplied by the seller is 1kg. As the price increases from Rs.10 per kg to Rs.20 per kg and then to Rs.30 per kg, the quantity supplied by the seller also increases from 1 kg to 2 kg and then to 3 kg respectively.

Further rise in price to Rs.40 and then to Rs.50 per kg results in increase in quantity supplied by the seller to 4kg and then to 5kg. Thus, the above schedule shows that there is positive relationship in between price and quantity supplied of a commodity.

Supply curve

The supply curve is a graphical representation of a supply schedule. By plotting various combinations of price and quantity supplied of the table, we can derive an upward sloping demand curve as shown in the figure below:

In the given figure, price and quantity supplied are measured along the Y-axis and the X-axis respectively. By plotting various combinations of price and quantity supplied we derived points A, B, C, D, E curve and joining these points we find an upward sloping i.e. SS₁. The positive slope of the supply curve SS₁ establishes the law of supply and shows the positive relationship in between price and quantity supplied.

Exceptions and Limitations of the Law of Supply

a.      Auction Sale

The law of supply states that quantity supplied increases with increase in price and vice-versa. But this law doesn’t hold true in case of auction sale. An auction sale takes place at that time when the seller is in financial crisis and needs money at any cost.

b.     Price expectation of seller

If the seller expects that the price of commodity is going to fall in near future, he will try to sell more even if the price level is very low. On the other hand, if the seller expects further rise in price of the commodity he will not sell more even if the price level is high. It is against the law of supply.

c.      Stock clearance sale

When a seller wants to clear its old stock in order to store new goods, he may sell large quantity of goods at heavily discounted price. It is also against the law of supply.

d.     Fear of being out of fashion

As we know that quantity supplied of a commodity is affected by fashion, taste and preferences of the consumer, technology and time. If the seller thinks that the goods are going to be outdated in the near future, he sells more at a lower price which is also against the law of supply.

e.      Perishable goods

Those goods which have very short life-time and they become useless after that are all perishable goods. Those goods must be made available in the market at its right time whatever be its price. So the seller becomes ready to sell his goods at any offered price. It is also against the law of supply.

Adopted from: https://www.businesstopia.net/economics/micro/law-supply

Law of Demand

 

Law of Demand

It states that other things remaining the same, the amount demanded increases with a fall in price and decreases with a rise in price. It means there is an inverse relationship between demand and price.

Assumptions under which law of demand is valid

This law will be applicable only if the below mentioned points are fulfilled.

1.     No change in price of related commodities.

2.     No change in income of the consumer.

3.     No change in taste and preferences, customs, habit and fashion of the consumer.

4.     No change in size of population

5.     No expectation regarding future change in price.

Understanding law of demand using demand schedule

This law can be explained with the help of demand schedule and demand curve as presented below:

Demand Schedule is a tabular representation of various combinations of price and quantity demanded by a consumer during a particular period of time. An imaginary demand schedule is given below:

The above demand schedule shows negative relationship between price and quantity demanded for a commodity.

Initially, when a price of a good is Rs.10 per kg, quantity demanded by the consumer is 10 kg.

As the price decrease from Rs.10 per kg to Rs.8 per kg and then to Rs.6 per kg, quantity demanded by the consumer increases from 10 kg to 20 kg and then to 30 kg respectively.

Further, fall in price from Rs.6 per kg to Rs.4 per kg and then to Rs.2 per kg, results in increase in quantity demanded by the consumer from 30 kg to 40 kg and then to 50 kg, respectively.

Thus, from the above schedule we can conclude that there is opposite inverse relationship in between price and quantity demanded for a commodity.

Understanding law of demand using demand curve

It is the graphical representation of demand schedule. In other words, it is a graphical representation of the quantities of a commodity which will be demanded by the consumer at various particular prices in a particular period of time, other things remaining the same.

We can show, the above demand schedule through the following demand curve:

In the figure above, price and quantity demanded are measured along the y-axis and x-axis respectively. By plotting various combinations of price and quantity demanded, we get a demand curve DD1 derived from points A, B, C, D and E.

This is a downward sloping demand curve showing inverse relationship between price and quantity demanded.

Limitations/Exceptions of law of demand

a.      Inferior goods/ Giffen goods

Some special varieties of inferior goods are termed as giffen goods. Cheaper varieties of goods like low priced rice, low priced bread, etc. are some examples of Giffen goods.

This exception was pointed out by Robert Giffen who observed that when the price of bread increased, the low paid British workers purchased lesser quantity of bread, which is against the law of demand. Thus, in case of Giffen goods, there is indirect relationship between price and quantity demanded.

b.     Goods having prestige value

Few goods like diamond can be purchased only by rich people. The prices of these goods are so high that they are beyond the capacity of common people. The higher the price of the diamond the higher the prestige value of it.

In this case, a consumer will buy less of the diamonds at a low price because with the fall in price, its prestige value goes down. On the other hand, when price of diamonds increase, the prestige value goes up and therefore, the quantity demanded of it will increase.

c.      Price expectation

When the consumer expects that the price of the commodity is going to fall in the near future, they do not buy more even if the price is lower.

On the other hand, when they expect further rise in price of the commodity, they will buy more even if the price is higher. Both of these conditions are against the law of demand.

d.     Fear of shortage

When people feel that a commodity is going to be scarce in the near future, they buy more of it even if there is a current rise in price.

For example: If the people feel that there will be shortage of L.P.G. gas in the near future, they will buy more of it, even if the price is high.

e.      Change in income

The demand for goods and services is also affected by change in income of the consumers.

If the consumers’ income increases, they will demand more goods or services even at a higher price. On the other hand, they will demand less quantity of goods or services even at lower price if there is decrease in their income. It is against the law of demand.

f.       Change in fashion

The law of demand is not applicable when the goods are considered to be out of fashion.

If the commodity goes out of fashion, people do not buy more even if the price falls. For example: People do not purchase old fashioned shirts and pants nowadays even though they’ve become cheap. Similarly, people buy fashionable goods in spite of price rise.

g.     Basic necessities of life

In case of basic necessities of life such as salt, rice, medicine, etc. the law of demand is not applicable as the demand for such necessary goods does not change with the rise or fall in price.

h.     Ignorance

If the consumer is not aware of the competitive price of the commodity, he purchases more of the commodity even at higher price. It is because high price commodity are generally considered as superior in quality. Such attitude and ignorance of the consumer makes the law of demand ineffective.

Adopted from: https://www.businesstopia.net/economics/micro/law-demand