Theory of Demand
De nition of Demand
Demand refers to the desire for goods backed by willingness and ability to pay at different
prices during a given period of time, other things remaining constant (ceteris paribus).
Demand is not just desire; it must be supported by purchasing power.
Example:
If a person wants a car but has no money, it is desire, not demand.
Law of Demand
The law of demand states that:
Other things remaining constant, when the price of a good increases, quantity demanded
decreases, and when the price decreases, quantity demanded increases.
Thus, price and quantity demanded have an inverse relationship.
Demand Curve
A demand curve is the graphical representation of the relationship between price and quantity
demanded.
Graph axes:
• X-axis → Quantity demanded
• Y-axis → Price
The demand curve slopes downward from left to right.
Demand Function
Determinants of
Demand
Demand is in uenced by several factors:
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1. Price of the good
2. Income of consumers
3. Taste and preferences
4. Price of related goods (substitutes and complements)
5. Consumer expectations
6. Number of buyers in the market
Change in Demand vs Change in Quantity
Demanded
Change in quantity demanded
• Caused by price change
• Movement along the same demand curve
Change in demand
• Caused by other factors
• Demand curve shifts left or right
Theory of Supply
De nition of Supply
Supply refers to the various quantities of a good that producers are willing and able to sell at
different prices during a given period of time, other things remaining constant (ceteris
paribus).
Law of Supply
The law of supply states that:
Other things remaining constant, when the price of a good increases, quantity supplied increases,
and when the price decreases, quantity supplied decreases.
Thus, price and supply have a positive relationship.
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Supply Curve
A supply curve is the graphical representation showing the relationship between price and
quantity supplied.
Graph axes:
• X-axis → Quantity supplied
• Y-axis → Price
The supply curve slopes upward from left to
right.
Determinants of
Supply
Supply is affected by:
1. Price of the product
2. Cost of inputs
3. Technology
4. Taxes and subsidies
5. Number of sellers
6. Price expectations
7. Weather conditions
Change in Supply vs Change in Quantity
Supplied
Change in quantity supplied
• Caused by price change
• Movement along supply curve
Change in supply
• Caused by other factors
• Supply curve shifts
Very Short Exam Summary
Theory of Demand explains the relationship between price and quantity demanded, which is
inverse according to the law of demand.
Theory of Supply explains the relationship between price and quantity supplied, which is
positive according to the law of supply.
If you want, I can also give you a 1-page ultra-short revision sheet of the entire chapter
(Demand + Supply + Elasticity + Equilibrium) that you can revise in 5 minutes before the
exam.
Q1. What is Elasticity of Demand?
Answer:
Elasticity of demand refers to the degree of responsiveness of quantity demanded of a good to
changes in its determinants such as price, income, or prices of related goods.
In simple words, it shows how much demand changes when price or other factors change.
Q2. Types of Elasticity of Demand
There are three main types:
1. Price Elasticity of Demand (PED)
2. Income Elasticity of Demand (YED)
3. Cross Elasticity of Demand (XED)
Determinants of Price Elasticity of Demand
1. Availability of Substitutes
Agar kisi product ke zyada substitutes available hain, to demand more elastic hoti hai.
Example:
Tea ↔ Coffee
Agar tea ka price badh gaya to log coffee buy kar sakte hain, isliye tea ki demand elastic hai.
👉 More substitutes → More elastic demand
2. Nature of Goods (Necessity vs Luxury)
Necessities
Demand inelastic hoti hai.
Example:
• Salt
• Rice
• Medicines
Price badhne par bhi log kharidenge.
Luxury Goods
Demand elastic hoti hai.
Example:
• Gold
• Expensive cars
• Designer clothes
👉 Necessity → Inelastic
👉 Luxury → Elastic
4. Time Period
Long run me demand more elastic hoti hai.
Short run me demand inelastic hoti hai.
Example:
Petrol
Short run: log immediately car use band nahi kar sakte.
Long run: log public transport ya EV choose kar sakte hain.
5. Number of Uses of a Good
Jis good ke multiple uses hote hain, uski demand elastic hoti hai.
Example:
Electricity
Uses:
• Lighting
• Cooking
• Heating
• Industrial use
Price change hone par consumption change hota hai.