Fundamentals of Economics: Demand, Supply, and Market Equilibrium

This document provides a detailed explanation of the economic concepts of demand and supply. It begins by defining demand, its characteristics, and the factors influencing it, including willingness and ability to pay, price, and time. The document differentiates between individual and market demand, and outlines various types of demand such as price, income, and cross demand. It presents demand schedules and curves, illustrating the relationship between price and quantity demanded, and explains the law of demand. The document also covers the concept of supply, defining it as the quantity of a commodity sellers are willing to offer at different prices. It differentiates between supply and stock, and explains the law of supply. The document further explains supply functions and curves, and discusses price determination using tabular and graphical approaches, demonstrating market equilibrium. Finally, the document explains the market model and price determination, including short-run, intermediate-run, and long-run scenarios.

Demand and Supply

Demand
Demand normally means the desire or
willingness for a good.
Apart from the desire or willingness, consumer
should be able to buy the good. Demand is
therefore an effective desire.

There are thus three main characteristics of
demand in economics
1. Willingness and ability to pay.
2. Demand is always at a price.
3. Demand is always per unit of time.

• Individual’s Demand for a commodity:
The individual’s demand for a commodity is the
amount of a commodity which the consumer is
willing to purchase at any given price over a
specified period of time, certeris paribus.
• The market Demand for a Commodity:
The market demand for a commodity is obtained
by adding up the total quantity demanded at
various prices by all the individuals over a
specified period of time in the market.
certeris paribus (Latin phrase) means all other things being unchanged or constant

Kinds of Demand:
There are three types of demand:
• Price Demand
• Income Demand
• Cross Demand

Price Demand
• It refers to various quantities of a good or
service that a consumer would be willing to
purchase at all possible prices in a given
market at a given point of time, ceteris
paribus.

Income Demand
• It refers to various quantities of a good or
services that a consumer would be willing to
purchase at different levels of income, ceteris
paribus.

Cross Demand
• It refers to various quantities of a good or
service that a consumer would be willing to
purchase not due to changes in the price of the
commodity under consideration, but due to
changes in the price of related commodities.

Demand Schedule
• A demand schedule may be defined as a list showing the
relationship between different qualities of a commodity and
their respective demand prices at a particular place and time.
Table No. 1: The following is a hypothetical demand schedule of Milk in ‘A’ Market-
Price of milk
(Rs. per litre)
Quantity Demanded
(thousand litres)
4 10
6 9
8 8
10 7
12 6
14 5
16 4
18 3
20 2

Demand Curve:
• The graphical representation of a demand
schedule is called demand curve. The units of
commodity are measured along X-axis while
price of commodity along Y-axis.

Law of Demand
• “A rise in the price of a commodity or service is
followed by a reduction in demand and a fall in
price is followed by an increase in demand, if
conditions of demand remain constant”. In other
words, “demand varies inversely with price.”
• Thus, demand is a function of price, i.e. it Varies
with price and mathematically, expressed as-
Q= f (Pq)
Where, Q = Quantity demanded.
Pq = Price per unit of Q

Effective Demand, Derived demand
and Reservation demand and price
• Effective Demand: Effective demand is the
desire of the consumer for the commodity
backed up by his purchasing power.
• Derived demand: Derived demand refers
to demand for goods which are needed for
further production. It is the demand for
producer’s goods like industrial raw
material, machine tools and equipments.