Theory of Demand and Supply–:Hello, students today’s Topic we are talking about demand and supply. This theory shows how consumer preference determine consumer demand for commodities while business costs determine the supply of commodities. this artical very Important for your examnation.Thatswhy update24hour.com shraing Theory of Demand and Supply best for your Daily practice. altest give the some time to read this artical.
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Meaning of Demand
The concept ‘demand’ refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period of time.
In short ” By Demand,we mean the various quantities of a given commodity or service which consumer would buy in one market in a given period of time, at various prices , or at various incomes , or at various prices of related goods”.
WHAT DETERMINES DEMAND-
There are a number of factors which influence household demand for a commodity .
- Price of the commodity
- Price of related commodities
- Level of income of the household
- Tastes and preferences of consumers
- Other factors
Law Of Demand
It is an inverse relationship between price and quantity demanded. It means that we can say that the law of demand is based upon the price and quantity demanded.
PROF. ALFRED MARSHALL defined the law-
“The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers or in other words, the amount demanded increases with a fall in price and diminishes with a rise in price”.
Why does demand curve slope downwards?
Different economists have given different explanations for the operation of the law of demand . These are given below.
- Law of diminishing marginal utility– According to , Marshall people will buy more quantity at a lower price because they want to equalize the marginal utility of the commodity and its price. So a rational consumer will not pay more for lesser satisfaction . The diminishing marginal utility and equalizing it with the price is the cause for the downward sloping demand curve.
- Substitution effect- Hicks and Allen have explained the law in terms of substitution effect and income effect. When the price of a commodity falls, it becomes relatively cheaper than other commodities. It induces consumers to substitute the commodity whose price has fallen for other commodities which have now become relatively expensive.
- Income effect- When the price of the commodity falls, the consumer can buy the same quantity of the commodity with lesser money or he can buy more of the same commodity with the same amount of money . In other words, as a result of a fall in the price of the commodity , consumer’s real income or purchasing power increases. This increase in the real income induces him to buy more of that commodity. Thus , demand for that commodity increases. This is called income effect.
- Arrival of new consumers- When the price of a commodity falls , more consumers start buying it becomes some of those who could not afford to buy it previously may now afford to but it. This raises the consumers of a commodity at a lower price and hence the demand for the commodity in question.
Elasticity of demand –
Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends or we can say that it is the percentage change in quantity demanded divided by the percentage in one of the variables which demand depends.
Price elasticity of demand-
Price elasticity of demand expresses the response of quantity demanded of a good to a change in its price, given the consumer’s income, his tastes and prices of all other goods. In other words , it is measured as percentage change in quantity demanded divided by the percentage change in quantity demanded divided by the percentage change in price, other things remaining equal.
Price elasticity = % change in quantity demanded / % change in price.
Arc elasticity-
When the price change is somewhat larger or when price elasticity is to be found between two prices , the question arises which price and quantity should be taken as a base. This is because elasticity found by using original price and quantity figures as a base will be different from the one derived by using new price and quantity figures.
Ep = q1-q2/q1+q2*p1+p2/p1-p2
where p1 ,q1 are the original price and quantity and p2 ,q2 are the new ones.
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