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Sample Essay on Supply and Demand

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❶They show the sum total of various quantities demanded by all the individuals at various prices.

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Demand can be described as the relationship between the price and quantity demanded for a particular good or service in specific circumstance. For each price provided, the demand relationship will tell the quantity that the customers are willing to purchase at a corresponding price. The quantity the customers are willing to purchase at a particular price is called the Quantity Demanded.

An important thing to do is distinguish between demand and the quantity demanded. To explain the concept, the buyers are the people who want or need the product or service. The demand relationship expresses the willingness and ability for the whole assortment of prices.

To claim that a customer has a demand for a particular item is to declare that the customer has money with which to buy the item and is willing to exchange the money for the item. Customers do not demand what they do not truly want or need; therefore, a want or a need that lacks purchasing power is not a demand.

With that in mind, it is not enough that the suppliers possess the good or the ability to perform a service. Economists usually treat supply symmetrically as demand. This means that they treat supply as a correlation between price and the quantity supplied. Supply also means willingness to sell, and the supplier must be willing to sell the item or service at a price that the customers will demand it.

Demand is not a particular quantity since the quantity that people are willing and able to purchase will change in response to the price changes.

There is a methodical relationship between the price in the marketplace and the quantity that customers are willing and able to purchase. In economics the relations of supply and demand is understood as the equilibrium.

Think of demand as a force which tends to increase the price of a good or service. Then think of supply as a force which tends to reduce the price. When the two forces are balanced, the price will neither increase or decrease they will be stable.

This analogy allows us to think of the stable or natural price in a particular market as the equilibrium price. This type of equilibrium exists when the price is high enough that the quantity supplied equals the quantity demanded.

On a diagram the equilibrium is the price at which the two curves intersect. The subsequent quantity is the amount that will be traded in a market equilibrium. The Law of Demand states that the demand curve is downward sloping. There are two types of change in demand. The first is movement along the demand curve, and the second is a shift among the demand curve. A movement along the curve is usually caused by a change in the price of the good or service.

For example, a decline in the price of the good results in an increase of demand. The starting point of the theory is the demand function which is a multivariate relation We derive the downward sloping demand curve for a normal good of individual consumer by making the ceteris paribus assumption, i.

If there is a change in the price of the commodity under consideration there is movement along the same demand curve.

The law of demand states that the consumer responds to lower prices by buying more. There are various exceptions to the law of demand. The best known exception is the Giffen good—a consumer buys more, not less, of a commodity at higher prices Another is the Veblen effect-some commodities are wanted solely for their higher prices. The higher these prices are, the more the use of such commodities fulfills the requirements of conspicuous consumption, and thus the stronger the demand for them.

However, if there is a change in any other variable except the price of the commodity the whole demand curve shifts to a new position implying change in demand, i. However, for analytical purposes, what is relevant is market demand and not individual demand. The reason is that the price of a commodity is determined not by individual demand but by market demand.

The market demand for a commodity is derived by adding up the demand curves of individual consumers. However, three aggregation problems arise while arriving at the market demand curve by horizontally adding up individual demand curves, viz.

The demand function of an individual consumer has two properties. First, the demand function is single-valued, i. This property follows from the fact that the consumer does not suffer from money illusion, i. These properties of the demand function were first brought into focus by P.

Samuelson under the heading: The law of demand indicates the direction of change in quantity demanded of a commodity to a change in its own price, ceteris paribus. Elasticity of demand is a measure of market sensitivity of demand.

It measures the degree of responsiveness of consumers to a change in price of a commodity, the income of buyers or change in the price of any other commodity which may be a substitute or a complement.

Sometimes we refer to another concept of elasticity, viz. It may apparently seem that the slope of the demand curve is the same as its elasticity. But this is a false belief. The coefficient of price elasticity of demand e p is written as. If the demand curve is horizontal, its slope is zero but elasticity is infinite. But if the demand curve is vertical its slope is infinite but its elasticity is zero. Price elasticity of demand falls along a straight line demand curve, even if its slope remains the same at all points.

By contrast, if the demand curve is a rectangular hyperbola its slope changes from point to point but its elasticity is the same at all points. There are various determinants of price elasticity of demand. This, in its turn, depends on the definition of the commodity. On the basis of the value of the coefficient of income elasticity of demand we can classify goods into two main categories—normal having positive income elasticity of demand , and inferior having negative income elasticity of demand.

It may be noted that inferiority has nothing to do with the physical property of a commodity. Inferiority is related to the income position of the buyer. In case of a superior luxury good the coefficient of income elasticity is greater than one, in case of a normal good it is less than one, and it is negative in case of an inferior good. The sum of the expenditure share weighted income elasticities of demand is equal to 1.

This means that if one good is a luxury the other must be an inferior one. However, if the consumer spends all his income on two goods both cannot be inferior luxury at the same time, but both can be normal. If income elasticity of demand of all the goods is equal, then also the sum of the income elasticities will be equal to 1. Cross elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a certain percentage change in the price of another commodity.

On the basis of the value of the coefficient of cross elasticity of demand we can classify commodities into three categories, viz. The sum of the partial price, cross and income elasticities of demand is zero. The market demand curve for a commodity is more elastic than that of an individual consumer. The reason is that when price of a commodity falls, three effects are generated simultaneously.

First, existing consumers buy more of the commodity. Second, price fall brings new consumers into the market since potential buyers become actual buyers. This is known as the market size effect. Third, when the price of a commodity falls, people develop. Economists have found it more interesting to study individual demand than market demand. In this context they have built the theoretical foundations of demand. We study theory of consumer demand with a twofold objective.

Our first objective is to find out the equilibrium condition of a rational consumer whose objective is utility welfare maximisation subject to the budget income constraint. Our second objective is to derive the demand curve of the consumer and account for its negative downward slope. Two main approaches to the theory of consumer demand are the cardinal utility approach and the ordinal indifference curve or preference approach.

The second variant of the ordinal approach is known as the revealed preference approach. These approaches may now be reviewed. Marshall develops the cardinal approach by bringing into focus the distinction between marginal utility and total utility. So a paradox was encountered, known as the paradox of value or the water-diamond paradox.

The paradox was resolved by Marshall by using the concept of marginal utility. According to Marshall, the price of a commodity is determined from the demand side, not by total utility, but by marginal utility. Since marginal utility of diamond is higher than that of water, the price of diamond is higher than the price of water. Marshall developed the cardinal utility approach by assuming that utility can be measured or quantified. So his approach is based on the concept of measurable utility.

He assumes that the utility of commodity can be measured in cardinal numbers, called utils. He also assumes that the marginal utility of money remains constant at all levels of income. On the basis of this assumption Marshall developed the equilibrium condition of the consumer in terms of a famous law, known as the law of equimarginal utility which is expressed as.

If this assumption i. The law simply states that the ratio of marginal utility to price has to be same for all goods and all such ratios must be equal to the constant marginal utility of money. According to Marshall the demand curve for a normal good is downward sloping due to the operation of a fundamental psychological law, viz.

The marginal utility of a commodity indicates the maximum amount the consumer is willing to pay to buy one extra unit of a commodity. As marginal utility falls, the consumer is ready to pay less and less price to acquire every extra unit of it.

This means that price change and quantity change of a commodity are in the opposite direction. And the demand curve of a normal good slopes downward from left to right. The Marshallian demand curve is called ordinary demand curve. The reason will be explained later in this essay in the context of the ordinal approach to the theory of demand. In spite of this, the concept has a number of practical uses. For example, the concept is used to show the net welfare loss from an indirect tax called deadweight loss.

Similarly, there is welfare loss in monopoly because a monopolist takes away the entire consumer surplus and converts this into his own profit. If the utility of each good is independent of the quantity of other goods, then all goods must have positive income elasticities. Thus, the Marshallian approach rules out the existence of inferior goods. So the law of diminishing marginal utility does not hold. In order to remove these two defects of the cardinal approach, initially Pareto and Edge worth and, subsequently, J.

Allen, developed the ordinal or indifference curve approach to the theory of consumer demand. Since this approach is based on the taste and preference of the buyer, it is also called the preference approach.

In order to develop a meaningful theory of consumer demand we need three pieces of information, viz: Information about ii and iii is given by the budget line. The budget line is so important for the consumer because in his search for maximum utility, the consumer is faced with a budget or an income constraint. And a rational consumer is supposed to maximise utility welfare , subject to the budget constraint.

And the consumer reaches equilibrium when his desire to buy coincides with his capacity, i. The indifference curve approach is based on a number of axioms such as the consistency, rationality, non-satiety and dominance. An indifference curve is a locus of points showing alternative combinations of any two goods which yield the same level of satisfaction to the consumer, as shown in Fig.

An indifference curve is a boundary line separating the superior points points above an IQ from the inferior points points below IC.

An indifference curve may also be called an iso-utility curve.


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Essay # 1. Meaning of Demand: The demand for a commodity is its quantity which consumers are able and willing to buy at various prices during a given period of time. So, for a commodity to have demand the consumer must possess willingness to buy it, the ability or means to buy it, and it must be.

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