Demand and Supply

Introduction

The setup:

• Human wants are unlimited, but resources (land, labour,

capital, etc.) are limited
• This scarcity forces every economy to decide how to
allocate resources efficiently — this is the basic economic
problem
• The mechanism that does this allocation in a market
economy is price

How price does this job:

• Price of any good is determined by two forces: demand

(what buyers want and can pay for) and supply (what sellers
are willing to offer)
• Wherever demand and supply meet, a price gets fixed —
and that price signals producers what to make more of, and
consumers what they can afford
• This is why the chapter is building toward Demand and
Supply theory — it's the tool for understanding how scarce
resources get channelled efficiently.

The Market

A market is a place or system where buyers and sellers interact

to exchange goods and services. It can be physical, like a local
mandi, or non-physical, like an e-market. In a competitive
market, many buyers and sellers deal in identical goods, and no
single buyer or seller can influence the price. The price is
determined by the interaction of demand and supply.
Understanding Demand
The concept of desire is not associated with purchasing power or
the willingness to pay. But when we talk about demand, demand
is the desire to have a particular commodity backed by
purchasing power as well as the willingness to pay for the same.

Demand is the willingness of the buyer to buy a commodity at a

given price whereas quantity demanded is the actual quantity
which the consumer is willing to buy at the given price.
 Determinants of Demand
demand for a certain commodity is influenced by many factors like:

1. Price: - when the price of the commodity increases, the quantity demanded
decreases and vice versa. This is also known as the law of demand.

when we plot each of these price and quantity demanded, we get a

negatively sloped curve. This is also the demand curve of the good under
consideration and depicts how much quantity of the good the person will
demand at a given price.
2. Income: - if your pocket money increases from ₹100 to ₹200, your
purchasing power increases. As a result, you may demand more ice
cream, expensive ice cream, or other goods creating additional demand.
Thus, that mean the increase in income, the quantity demanded will
increase and with the decrease in income, the quantity demanded will
decrease.

• The increases in income, the demand curve shifts parallel to the right.
• Therefore, with the increase in income, the quantity demanded has increased.

3. Taste and Preference: - the demand for a commodity is increased or decreased due
to the change in taste and preference of an individual.
This change can be due to change in fashion, technological upgradation, change in
preference for goods due to age factors, change in season and so on.
Therefore, all these factors lead to a shift in the demand curve.
4. Price of Related Goods: - complementary goods and substitute goods.
Complementary goods are used together, such as cars and petrol; an increase in
demand for one increase demand for the other. Substitute goods can replace each
other, such as tea and coffee; if the price of one rise, demand for the other increases.

Individual and Market Demand Curve

Individual demand shows the quantity of a good demanded by one consumer at a

particular price. Market demand is the total quantity demanded by all consumers at
the same price. For example, if Raghu demands 3 kg and Ahmed demands 8 kg of
potatoes at ₹15 per kg, the market demand is 11 kg (3 + 8). Thus, the market demand
curve is obtained by adding the quantities demanded by all individuals at each
price.

The market demand curve is the horizontal summation of individual demand

curves, meaning we add the quantities demanded by all consumers at the same price.
For example, at ₹20, if the first individual demands 3 units and the second demands 1
unit, the market demand is 4 units (3 + 1).
Shift and Movement in Demand Curve

the shift of the demand curve and the movement along the demand curve -
are two different concepts: -

1. Movement along the Demand Curve A movement along the demand curve takes
place when there is a change in quantity demanded due to the change in price.

• Upward Movement: - An upward movement along the demand curve occurs

when the price of a commodity increases, causing the quantity demanded to
decrease. This is called contraction of demand. The demand curve itself does
not shift; there is only a movement upward along the same demand curve.

• A downward movement along the demand curve occurs when the price of a
commodity decreases, causing the quantity demanded to increase. This is
called expansion of demand. The demand curve does not shift; there is only a
downward movement along the same demand curve.
Shift in the Demand Curve
A shift in the demand curve occurs when the entire demand curve moves right or left
due to changes in non-price factors, such as income, tastes, or prices of related
goods.

• Rightward Shift: A rightward shift means an increase in demand. For example,

if family income increases, you may demand more ice cream even when its price
remains unchanged.

• Leftward shift: - A leftward shift in the demand curve occurs when demand
decreases due to a change in a non-price factor, such as weather or
preferences. For example, during cold weather, people may prefer less ice
cream, reducing its demand. The entire demand curve shifts to the left, which is
called a decrease in demand.
Supply

1. Meaning of Supply

• Supply: The quantity of a commodity that a producer/seller is willing to offer for

sale at various prices, during a given period of time.
• Quantity Supplied: The specific amount a producer will offer for sale at one
particular price.
• (Same kind of distinction as Demand vs Quantity Demanded)
2. Law of Supply

• Statement: Other things remaining constant (ceteris paribus), as the price of a

commodity increases, the quantity supplied also increases — and vice versa.
• Shows a direct / positive relationship between price and quantity supplied.
• Reason: At a higher price, the seller can cover the higher Marginal Cost (MC) of
producing extra units, so it becomes profitable to supply more.
• Note: Supply curve = MC curve (upward sloping).

Supply Schedule (example):

Price (₹) Quantity Supplied

10 100
15 150
20 200
25 250
 • Supply Curve: Positively sloped — moves upward from left to right (Price on Y-
axis, Quantity on X-axis).
3. Determinants of Supply

Factors that decide how much a seller supplies:

1. Price of the commodity — direct relation (Law of Supply). Causes movement

along the curve.
2. Cost of Production — inverse relation.
a. Input/production cost ↑ → profit ↓ → supply ↓ → leftward shift
b. e.g., wheat price ↑ → cost of making bread ↑ → bread supply curve shifts
left
3. Technological Upgradation — improves efficiency, more output in less time →
supply ↑ → rightward shift
4. Number of Sellers — more sellers enter the market → market supply ↑ →
rightward shift
a. e.g., smartphone market: far more producers today than a few years back
5. Other factors (from In-text Q10 — additional determinants worth noting):
a. Government policy — taxes discourage supply; subsidies encourage
supply
b. Future price expectations — if seller expects prices to rise later, may
hold back supply now
4. Individual Supply vs Market Supply

• Market Supply Curve = horizontal summation of all individual sellers' supply

curves at the same price.
• Example: At price $20 → Firm 1 supplies 3 units + Firm 2 supplies 4 units →
Market Supply = 7 units
5. Movement vs Shift in Supply Curve (often confused — important for exams)

A) Movement along the Supply Curve

• Caused only by a change in price — stays on the same curve.

• Upward movement → Price ↑ → Qty supplied ↑ → called Expansion of Supply
• Downward movement → Price ↓ → Qty supplied ↓ → called Contraction of
Supply

B) Shift in the Supply Curve

• Caused by a change in any factor other than price (cost of production,

technology, number of sellers, govt. policy, etc.)
• Rightward shift → entire curve moves right → Increase in Supply
 o e.g., milk price ↓ → cost of making cheese ↓ → more cheese supplied at
the same price
• Leftward shift → entire curve moves left → Decrease in Supply
o e.g., war stops coffee production in Country A → world coffee supply
shifts left

Quick Comparison Table:

Basis Movement Shift

Caused by Change in price Change in a non-price factor
What Entire curve moves to a new
Move along the same curve
happens position
Expansion (↑) / Contraction
Terms used Increase (right) / Decrease (left)
(↓)