THEORY OF DEMAND AND SUPPLY

DEMAND

    By demand we mean, then quantity of any commodity which a consumer wants to buy and has purchasing power.

Law of Demand

It is stated that "other things remaining same, the price of a commodity increases, demand of that commodity decreases, and when the price of a commodity decreases the demand of that commodity increases".

The functional relationship between quantity demanded and the price of the commodity is inverse and it can be expressed as:

        Q_d = f(P)

Where Q_d = quantity demanded

P = Price of the commodity

Assumption

1. There is no change in the taste, habits and preferences of the consumer.
   
2. The income of the consumer remains constant.
   
3. There is no change in the prices of the substitutes.
   
4. No change in the circumstances.
   

 

Explanation

The slope of the demand function is negative. With the increase of demand the demand curve will move to the right\up; with the decrease of demand it will move to the left\down. Price is independent and demand is dependent variable.

    The demand function is explained with the help of following example:

Price (P)	Quantity demanded (Qd)
0	10
1	8
2	6
3	4
4	2
5	0

 

By assuming different values of P, we can calculate the different values of Q_d.

 

As we assume different values of 'P' i.e. 0 to 5, then the calculated values of Q_d decrease from 10 to zero.

SUPPLY

    By demand we mean, then quantity of any commodity which a seller offers to purchase at a specific price and time.

Law of Supply

It is stated that "other things remaining same, when price of a commodity increases, supply also increases and when price of a commodity decreases, supply of that commodity also decrease".    

The functional relationship between supply and price of a commodity is direct and can be expressed as:

Q_s = f(P)

where Q_s = Supply of a commodity

P = Price of the commodity

Assumption

1. There is no change in the taste, habits and preferences of the consumer.
   
2. No change in Government taxation and other policies about business.
   
3. There is no change in the prices of the substitutes.
   
4. No change in the circumstances.
   

 

Explanation

The slope of the supply function is positive. With the increase in supply of a commodity the supply curve for that commodity will move to the right\up; with the decrease of supply it will move to the left\down.

    The supply function is explained with the help of following example:

 

Price (P)	Supply(Qs)
0	0
5	10
10	20
15	30
20	40
25	50

 

By assuming different values of P, we can calculate the different values of Q_s.

 

As we assume different values of 'P' i.e. 0 to 25, then the calculated values of Q_s also increase from zero to 50.