Transcript Demand, Supply and Price Analysis

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Meanings and Definition of Demand:
The word 'demand' is so common and
familiar with every one of us that it seems
superfluous to define it.
The need for precise definition arises simply
because it is sometimes confused with other
words such as desire, wish, want, etc.
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Demand in economics means a desire to
possess a good supported by willingness and
ability to pay for it.
If you have a desire to buy a certain
commodity, say a car, but you do not have
the adequate means to pay for it, it will
simply be a wish, a desire or a want and not
demand.
Demand is an effective desire, i.e., a desire
which is backed by willingness and ability to
pay for a commodity in order to obtain it.
In the words of Prof. Hibdon:
 "Demand
means the various
quantities of goods that would be
purchased per time period at
different prices in a given
market".
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(i) Willingness and ability to pay. Demand is
the amount of a commodity for which a
consumer has the willingness and also the
ability to buy.
(ii) Demand is always at a price. If we talk of
demand without reference to price, it will be
meaningless. The consumer must know both
the price and the commodity. He will then be
able to tell the quantity demanded by him.
(iii) Demand is always per unit of time. The
time may be a day, a week, a month, or a
year.
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Example:
For instance, when the milk is selling at the
rate of Tk 60 per liter, the demand of a buyer
for milk is 1 liter a day.
If we do not mention the period
nobody can guess as to how much
consume? It is just possible we
consuming ten liters of milk a week,
or a year.
of time,
milk we
may be
a month
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While explaining the law of demand, we have
stated that, other things remaining the same
(cetris paribus), the demand for a commodity
inversely with price per unit of time.
The other things have an important bearing
on the demand for a commodity.
They bring about changes in demand
independently of changes in price. These non-
price
factors
shift
factors
or
determinants which influence demand are as
follow:
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(i) Changes in population:
If the population of a country increase account of
immigration or through high birth rate or on account
of these factors,
The demand for various kinds of goods will increase
even the prices remains the same. The demand curve
will shift upward to the right.
The nature of the commodities demanded will
depend up to taste of the consumers. If due to high
net production rate, the percentages of children to
the total population increases in a country, there will
greater demand for toys, children food, etc.
Similarly, if the percent aged people to the total
population increases, the demand for walking sticks,
artificial teeth, invalid chairs, etc. will increase.
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(ii) Changes in tastes:
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Demand for a commodity may change due to
changes in tastes and fashions.
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For example, people develop a taste for
coffee. There is then a decrease in the
demand for tea. The demand curve for tea
shifts to the left of the original demand curve.
Similarly women's fashions are usually ever
changing. Sometime they keep hair long and
sometime short. So, whenever there is a
change in their hair style, the demand for
hairpins, hair nets, etc. is greatly affected.
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(iii) Changes in income:
When the income of consumers increases
generally leads to an increase in the demand for
some commodities and a decrease in the demand
for other commodities.
For example, when income of people increases,
they begin to spend money on those which were
previously regarded by them as luxuries, or
semi-luxuries and reduce the expenditure on
inferior goods.
Take the case of a man whose income has
increased from Tk 10,000 to Tk 20,000 per
month. His consumption of wheat will go down
because he now spends more money on the
superior food such as cake, fish, daily products,
fruits, etc.
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(iv) Changes in the distributions of wealth:
If an equal distribution of wealth is brought
about in a country, then there will be less
demand for expensive luxuries goods. There will
be more demand for necessaries and comfort
items.
(v) Changes in the price of substitutes:
if the price of a particular commodity rises,
people may stop further purchase of that
commodity and spend money on its substitute
which is available at a lower price. Thus we find,
a change in demand can also be brought about
by a change in the price of the substitute.
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(vi) Changes in the state of trade:
The total quantity of goods demanded is also
affected by the cyclical fluctuations in economic
activities. If the trade is prosperous, the demand
for raw material, machinery, etc., increases. If on
the other hand, the trade period is dull, the
demand for, producer's goods will fail sharply as
compared to the demand for consumer goods.
(vii) Climate and weather conditions:
The climate and weather conditions have an
important bearing on the demand of a
commodity. For instance, the consumer's
demand for woolen clothes increases in winter
and decreases in summer.
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Supply is of the scarce goods. It is the
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In the words of Meyer:
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amount of a commodity that sellers are able
and willing to offer for sale at different price
per unit of time.
“Supply is a schedule of the amount of a good
that would be offered for sale at all possible
price at any period of time; e.g., a day, a
week, and so on”.
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There is direct relationship between the price
of a commodity and its quantity offered for
sale over a specified period of time.
When the price of a goods rises, other things
remaining the same, its quantity which is
offered for sale increases as and price falls,
the amount available for sale decreases. This
relationship between price and the quantities
which suppliers are prepared to offer for sale
is called the law of supply
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When the supply of the commodity rises or
falls
due
to
non-price
determinants,
the supply is said to have increased
supply or decreased supply.
The increases or decrease or the rise or fall
in supply may take place on account of
various factors.
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The rise of fall in supply may take place due to
changes in the cost of production of a
commodity.
If the prices of various factor of production used
in the production of a particular commodity
increase of it total cost of production.
There will be reduction in the supply of that
commodity at each price because the amount
demanded decreases with a rise in price.
Conversely, if the prices of the various factors of
production fall down, it will result in lowering the
cost of production and so an increase in the
supply on varying prices.
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(ii) Changes in Technique.
The supply of a commodity may also be
affected by progress in technique.
If an improvement in technique takes place
in a particular industry, it will help in
reducing its cost of production. This will
result in greater production and so an
increase in the supply of the commodity. The
supply curve will shifts to the right of the
original supply curve.
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(iii) Improvement in the Means of
Transport.
The supply of the commodity may also
increase due to improvement in the
means
of
communication
and
transport.
If the means of transport are cheap
and fast, then supply of the
commodity can be increased at a short
notice at lower price.
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(iv) Climatic Changes in case of Agricultural
Products.
The supply of agricultural products is directly
affected by the weather conditions and the use
of the better methods of production.
If rain is timely plentiful well-distributed; and
improve methods of cultivation are employed
then other things remaining the same, there
will be bumper crops. It would then be possible
to increase the supply of the agriculture
products
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(v) Political Changes.
The increase or decrease in supply may also
place due to political disturbances in a
country.
If country wages wars against another
country or some kind of political disturbances
take place just as we had at the time of
partition, then the channels of production are
disorganized.
It results in the decrease of certain goods the
supply curve shifts to the left of originals
curve.
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(vi) Taxation Policy.
If a government levies heavy taxes on the
import of particular commodities, then the
supply of these commodities is reduced at
each price.
The supply curve shifts to the left, conversely
if the taxes on output in the country are low
and government encourages the import of
foreign commodities, then the supply can be
increased easily.
The supply curve shifts to the right of
originals supply curve.
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Goals of firms.
If the firms expect higher profits in
the future, they will take the risk and
produce goods on large scale
resulting in larger supply of the
commodities. The supply curve shifts
to the right.
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Seasonal price variation
As with all agricultural markets, livestock markets are
susceptible to seasonal variation. Fresh milk prices
fluctuate in the same way as food crop prices moving inversely with supply on the market as supply
diminishes in the dry season.
Meat prices move in a slightly different manner with
natural shocks. While food prices are likely to rise
during bad years when crop production falls, meat
prices will fall during the same years as producers
attempt to sell livestock they can no longer maintain
for lack of feed or water.
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The bad year price rise in food causes supply
to fall and sellers to hoard supplies,
contributing to reduced consumption.
This lengthens the period during which food
supplies will last. The consequences of a bad
year on the livestock market, however, are
the opposite.
The perishability of livestock during such a
year causes supplies to be consumed more
quickly than normal. The effects may be felt
for years as producers attempt to rebuild
their herds.
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It is not due to natural shocks, but is based
on the reactions of supply to changing
market conditions.
Because sustained increases in livestock
production, in response to some increase in
demand, may take some years to bring about,
during the lag prices may be sustained at a
high level, and fall later.
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The cobweb model or cobweb theory is an
economic model that explains why prices might
be subject to periodic fluctuations in certain
types of markets.
It describes cyclical supply and demand in a
market where the amount produced must be
chosen before prices are observed. Producers'
expectations about prices are assumed to be
based on observations of previous prices.
Nicholas Kaldor analyzed the model in 1934,
coining the term ‘cobweb theorem’.
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The cobweb model is based on a time lag
between supply and demand decisions.
Agricultural markets are a context where the
cobweb model might apply, since there is a lag
between planting and harvesting.
Suppose for example that as a result of
unexpectedly bad weather, farmers go to market
with an unusually small crop of strawberries.
This shortage, equivalent to a leftward shift in
the market's supply curve, results in high prices.
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If farmers expect these high price conditions
to continue, then in the following year, they
will raise their production of strawberries
relative to other crops.
Therefore when they go to market the supply
will be high, resulting in low prices.
If they then expect low prices to continue,
they will decrease their production of
strawberries for the next year, resulting in
high prices again.
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This process is illustrated by the diagrams.
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The equilibrium price is at the intersection of the supply
and demand curves.
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A poor harvest in period 1 means supply falls to Q1, so
that prices rise to P1.
If producers plan their period 2 production under the
expectation that this high price will continue, then the
period 2 supply will be higher, at Q2.
Prices therefore fall to P2 when they try to sell all their
output. As this process repeats itself, oscillating between
periods of low supply with high prices and then high
supply with low prices, the price and quantity trace out a
spiral.
In either of the first two scenarios, the combination of
the spiral and the supply and demand curves often looks
like a cobweb, hence the name of the theory