Market forces of Demand and Supply: UPSC/ RAS/ HCS/ UPPSC
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Market forces of Demand and Supply: UPSC/ RAS/ HCS/ UPPSC

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Economics

Market forces of Demand and Supply: UPSC/ RAS/ HCS/ UPPSC

The study of market forces of demand and supply is one of the most concepts of economics. Its proper analysis is very crucial to understand its concept. Let's begin with it.

Demand

The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.

Law of Demand:

Other things equal (ceteris paribus), when the price of good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises.

Demand curve:

The downward-sloping line relating the price and quantity demanded is called the demand curve.

Market forces of Demand and Supply, UPSC, RAS, HCS, UPPSC

Market demand vs individual demand

  • Market Demand is the sum of all the individual demands for a particular good or service.
  • To find the quantity demanded at any price, we add the individual quantities found on the horizontal axis of the individual demand curves.
  • The market demand curve shows how the quantity demanded of a good varies as the price of the good varies, while all other factors are held constant.

Market forces of Demand and Supply, UPSC, RAS, HCS, UPPSC

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Shifts in the demand curve

  • Any change that increases the quantity demanded at every price shifts the demand curve to the right and is called an increase in demand.
  • Any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand.

Market forces of Demand and Supply, UPSC, RAS, HCS, UPPSC

Variables affecting a shift in demand

Income:

Normal goods:

  • A good for which, other things equal, an increase in income leads to an increase in demand.
  • For eg., if the income of an individual increase, then his demand for ice cream will increase

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Inferior goods:

  • A good for which, other things equal, an increase in income leads to a decrease in demand. For eg., if income falls we will not try to buy a car and more likely to ride in a bus.
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Price of related goods:

Substitute goods:

  • Two goods for which an increase in the price of one will lead to an increase in the demand for another. For eg., if the price of frozen yogurt rises, then people will demand less yogurt, and the demand for its nearest substitute i.e. ice cream will increase.

Complementary goods:

  • Two goods for which an increase in the price of one leads to a decrease in the demand for the other. For eg., if the price of petrol increases, the demand for cars will decrease.

Tastes and Preferences:

If an individual likes ice cream, then he will buy more of it.

Expectations:

If one expects to earn a higher income next month, then he may save less and spend more of his current income on buying any good he likes.

A number of buyers:

If there are more buyers, then the demand for goodwill increases and the demand curve would shift to the right.

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Exceptions to law of demand

Giffen goods:

  • It is a good for which demand increases as the price increases and falls when the price decreases.
  • It has an upward-sloping demand curve.
  • It is typically a Giffen product that does not have easily available substitutes.
  • Ex. The Irish potato famine in the 19th century. During the famine, as the price of potatoes rose, impoverished consumers had little money left for more nutritious but expensive food items like meat (the income effect). So even though they would have preferred to buy more meat and fewer potatoes (the substitution effect), the lack of money led them to buy more potatoes and less meat. In this case, the income effect dominated the substitution effect, which is a characteristic of Giffen's good.

Natural calamities:

In situations like floods and famine, people usually stock up the goods to avoid any shortages even though there may be a price increase.

Latest fashion trends:

Latest products are bought by people even if they witness a price increase.

Anticipation of prices:

If consumers are expecting the prices to rise further then they will buy more at the present to avoid buying at higher prices in the near future.

Supply

  • The quantity supplied of any good or service is the amount that sellers are willing and able to sell.

Law of Supply:

  • Other things equal, when the price of good rises, the quantity supplied of the good also rises, and when the price falls, the quantity falls as well.

Supply curve:

  • The curve relating to price and quantity supplied is called the supply curve.

Market forces of Demand and Supply, UPSC, RAS, HCS, UPPSC

Market supply vs individual supply

  • The market supply is the sum of the supplies of all sellers.
  • To find the total quantity supplied at any price, we add the individual quantities found on the horizontal axis of the individual supply curves.
  • The market supply curve shows how the quantity supplied of a good varies as the price of the good varies while all other factors are held constant.

Market forces of Demand and Supply, UPSC, RAS, HCS, UPPSC

Shifts in Supply curve

  • Any change that raises the quantity supplied at every price, shifts the supply curve to the right and is called an increase in supply.
  • Any change that reduces the quantity supplied at every price shifts the supply curve to the left and is called a decrease in supply.

Market forces of Demand and Supply, UPSC, RAS, HCS, UPPSC

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