UNIT – 2

DEMAND AND SUPPLY

LAW OF DEMAND AND SUPPLY –

TOPIC COVERED –

1. MEANING AND DEFINITION OF DEMAND

2. CAUSES OF THE DOWNWARD SLOPE OF THE DEMAND CURVE
3. DETERMINANTS OF DEMAND
4. ASSUMPTION OF LAW OF DEMAND
5. SHIFT AND MOVEMENT OF DEMAND CURVE
6. EXCEPTIONS OF LAW OF DEMAND
7. IMPORTANCE OF LAW OF DEMAND
8. LAW OF SUPPLY
9. ASSUMTION OF LAW OF SUPPLY
10. FACTOR AFFECTING LAW OF SUPPLY
11. SHIFT AND MOVEMENT OF SUPPLY CURVE
 1. MEANING AND DEFINITION OF LAW OF DEMAND
The law of demand states that when the price of a good or service falls, people buy more of it,
and when the price rises, people buy less—other things constant .
In simple words:
“Lower the price, higher the demand. Higher the price, lower the demand.”
This shows an inverse relationship between price and quantity demanded.

According to Prof. Samuelson:

“The law of demand states that people will buy more at lower prices and buy less at higher prices,
other things remaining the same”.

E. Miller writes:
“Other things remaining the same, the quantity demanded of a commodity will be smaller at
higher market prices and larger at lower market prices”.

Requisites:
1. Desire for specific commodity.
2. Sufficient resources to purchase the desired commodity.
3. Willingness to spend the resources.
4. Availability of the commodity at
(i) Certain price (ii) Certain place (iii) Certain time

Qdx = f (Px, M, Po, T,……….)

Here
Qdx = A quantity demanded of commodity x.
f = A function of independent variables contained within the parenthesis.
Px = Price of commodity x.
Po = Price of the other commodities.
T = Taste of the household.

2. CAUSES OF THE DOWNWARD SLOPE OF THE DEMAND CURVE

1. Law of Diminishing Marginal Utility -: As a consumer buys more units of a good,

the additional satisfaction (utility) from each additional unit decreases.

2. Substitution Effect -: When the price of a good falls, it becomes relatively cheaper than its
substitutes.

3. Income Effect -: When the price falls, the real income or purchasing power of the consumer
increases. This allows consumers to buy more of the good, so quantity demanded increases.

4. New Consumers (Market Entry Effect) -: At lower prices, some people who couldn’t
afford the good earlier can now enter the market. This increases total demand.
5. Multiple Uses of a Commodity-: Some goods have several uses (e.g., electricity, water,
milk) at lower prices, people may use it for additional or less essential purposes, increasing
demand.

3. DETERMINANTS OF DEMAND
1. The price of the good or service.
2. The income of buyers.
3. The prices of related goods or services—either complementary and purchased along with a
particular item, or substitutes and bought instead of a product.
4. The tastes or preferences of consumers will drive demand.
5. Consumer expectations. Most often, this refers to whether a consumer believes prices for
the product will rise or fall in the future.
6. For aggregate demand, the number of buyers in the market is the sixth determinant.

4. ASSUMPTION OF LAW OF DEMAND

According to Prof. Stigler and Boulding:
There are three main assumptions of the Law:
1. There should not be any change in the tastes of the consumers for goods (T).
2. The purchasing power of the typical consumer must remain constant (M).
3. The price of all other commodities should not vary (Po).

5. SHIFT AND MOVEMENT OF DEMAND CURVE -

BASIS MOVEMENT ALONG SHIFT ALONG CURVE

CURVE
Cause Price Factor Non-Price Factor ( Taste,
Preferences, Income, Price of
Related Goods, Population,
Future Price Expectation’s
etc.)
Type Extension/Contraction Increase/Decrease
Curve Position Same Curve Move to New Curve

6. EXCEPTIONS OF LAW OF DEMAND

1. Prestige goods: If the price of these goods rises, the demand for them may increase instead of
falling.
2. Price expectations: If people expect a further rise in the price of a particular commodity, they
may buy more of a rise in price. The violation of the law, in this case, is only temporary.

3. Ignorance of the consumer: If the consumer is ignorant about the rise in the price of goods,
he may buy more at a higher price.

4. Giffen Goods - Giffen Goods is a concept that was introduced by Sir Robert Giffen. These
goods are goods that are inferior in comparison to luxury goods. However, the unique
characteristic of Giffen goods is that as its price increases, the demand also increases.

5. Veblen Goods - According to Veblen, there are certain goods that become more valuable as
their price increases. As the price of these goods increases, their demand also increases because
these products then become a status symbol.

7. IMPORTANCE OF LAW OF DEMAND -:

1. Determination of price - The study of the law of demand is helpful for a trader to fix the price
of a commodity. He knows how much demand will fall by an increase in price to a particular level
and how much it will rise by a decrease in the price of the commodity.

2. Importance to Finance Minister

The study of this law is of great advantage to the finance minister. If by raising the tax the price
increases to such an extent that the demand is reduced considerably. And then it is of no use to
raise the tax because revenue will almost remain the same.

3. Importance to the Farmers

Good or bad crop affects the economic condition of the farmers. If a good crop fails to increase the
demand, the price of the crop will fall heavily. The farmer will have no advantage of the good crop
and vice-versa.

9. LAW OF SUPPLY
The law of supply is a basic principle in economics that asserts that, assuming all else being
constant, an increase in the price of goods will result in a corresponding direct increase in the
supply thereof. The law works similarly with a decrease in prices.
10. ASSUMTION OF LAW OF SUPPLY –
1. No Change in Technology - It is assumed that the level of technology used in production
remains constant. Any advancement in technology can lead to an increase in supply even without
a change in price.

2. No Change in Cost of Production - The prices of inputs like raw materials, wages, rent, etc.,
are assumed to be constant. If input costs change, the supply may change regardless of the
product's price.

3. No Change in the Prices of Related Goods - It is assumed that the prices of related goods
(substitute or complementary goods) remain constant. If the price of a substitute rises, producers
might shift to producing that good, affecting the supply of the original good.

4. No Change in Government Policies - Government policies such as taxation, subsidies, and

regulations are assumed to remain unchanged. A change in policy may either encourage or
discourage supply.

5. No Change in Natural Conditions - It is assumed that natural factors like weather, climate,
and natural calamities remain stable, especially in the case of agricultural goods. Bad weather can
reduce supply even if the price rises.

6. Time Period is Short - In the short run, supply can be adjusted easily with price changes. The
law is more applicable in the short run than the long run due to capacity limitations.

7. No Change in Number of Sellers - The number of sellers or firms in the market is assumed
to remain the same. An increase in sellers may increase total supply regardless of price changes.

11. FACTOR AFFECTING LAW OF SUPPLY –

1. Price of the Commodity - Generally, when the price of a good increases, the quantity
supplied increases, and vice versa. However, this is captured in the Law of Supply, assuming
other things remain constant.

2. Cost of Production - If the cost of raw materials, labour, rent, or capital increases, the
supply will decrease as profits reduce. Lower production costs lead to higher supply.

3. Technology - Improvement in technology increases efficiency and reduces cost, thus

increasing supply. Outdated technology can reduce supply.

4. Prices of Related Goods - If the price of a substitute product rises, producers may switch to
producing that product, reducing the supply of the original product.

5. Government Policies (Taxes and Subsidies) - Taxes increase production costs and
reduce supply. Subsidies lower production costs and increase supply.

6. Natural Conditions - Weather, climate, and natural disasters affect the supply, especially in
agriculture. Good weather increases supply; natural calamities reduce it.

7. Future Price Expectations - If producers expect prices to rise in the future, they
may withhold current supply. If they expect a fall, they may increase current supply.

8. Number of Sellers in the Market - More sellers mean more supply. Exit of firms from the
market reduces supply.
9. Availability of Inputs - Easy availability of factors like labour, capital, and raw materials
increases supply. Shortages reduce supply.
10. Transportation and Infrastructure - Good transportation systems help in faster and
cheaper supply. Poor infrastructure reduces market supply.

12. SHIFT AND MOVEMENT OF SUPPLY CURVE –

BASIS MOVEMENT ALONG SHIFT ALONG CURVE

CURVE
Cause Price Factor Other supply factor
(Technology, Cost of Inputs,
Taxes, Subsidy, No. of Seller,
Future expectation Etc. )
Type Expansion/Contraction Increase/Decrease
Curve Position Same Curve Move to New Curve
University of Lucknow’s Previous Year Questions on the above topics

a. What is law of demand write the meaning and assumptions?

b. Discuss Law of Demand . Why demand curve slopes downward to the right? (2023)
c. What is demand explain its various factors affecting law of demand how we can measure
elasticity of demand also explain application of demand in economics?
d. What do you mean by supply? What are the factors that influence it ? Discuss in detail increase
in supply and expansion of supply . (2021 )

Other Probable Questions for Exam ----

a. What is Law of Demand?
b. What is Exceptions of Law of Demand?
c. Give some Example where we can use law of demand?
d. Write the assumptions of law of supply?
e. Discuss in detail shift in demand curve and movement of demand curve?