Demand

 Desires
 Needs
 Goods & Services (Product/Commodity)
 Particular Price
 Particular Quantity
 Market Place
 Time Period
 Willingness to Pay
 Capacity to Pay
 Effective Desires
Supply
The amount of goods and services that a firm /producer/seller wants to sell in a
particular market place particular price is known as Supply.
Determinants of supply
•Price of the Commodity
•Price of Related Goods
•Technology
•Future Expectations
•Price of Factors of Production
•Goal of the Firms
•Government Policy
•Numbers of Firms
•Development of Infrastructure
•Natural Factors
•International Causes
Question:
What is the difference between supply and stock?
Consider:
If a beggar, greedy merchant and a teacher want to buy a smart
mobile phone.
 Beggar has strong willing power but unable to afford it.
 Greedy merchant has strong financial capacity but weak
willing power.
 Teacher possess two qualities i.e., capacity to pay and
willingness to pay.
Conclusions:
Beggars and greedy merchant’s buying a mobile set is just a
desires or need whereas teacher’s need is demand because it is
backed by willingness to pay and capacity to pay.
Meaning / Definition of demand
In common sense,, demand refers to needs or desires. In
economics, the amount of goods and services that a
consumer wants to buy in particular market place,
particular price & particular time period is called demand.
Needs or desires that are backed or supported by
willingness to pay and capacity to pay is known as
demand.
Example-I
Mira demanded R.s one thousand to her mother for
buying a T-shirt.
Example-II
The demand for apple in ABC Fruits House is 200 kg. per
week at the rate 350 per kg.
Assignment:
Make at least two examples of market demand.
Determinants/Factors
Influencing/Factors Affecting of Demand
 Price of the Product
 Income of the Consumer
 Price of Related Goods
 Advertisement Expenditure
 Size, Growth & composition of Population
 Habits, Taste, Preferences and Fashion of the
Consumer
 Government Tax Policy
 Wealth & Income Distribution
 Future Expectations of the Consumers
 The Availability of Credit Facility
 Weather
 Customs Traditions
Demand Function
The functional relationship between quantity demanded for a
commodity and determinants of demand is called demand function
where quantity demand is a dependent variable and quantity demand
is an independent variable.
Mathematically,
Qd = f (P, Y, Pr, A, Pn, Z, W, B………….)
Where;
Qd = Quantity Demanded for a commodity
F = Relations
Y = Income
Pr = Price of Related Goods
A = Advertisement Expenditure
Pn,= Population
Z = Teste Preference etc.
W = Weather
B = Banking Facilities
Example-I
Score Function
S = f (H, C, P, G, B……………)
Example-II
Paddy Production Function
P = (W, S, L, I, P…….)
Example-III
Corona Spreading Function
C= (L, I, S, M, F, T, P………)
Assignment
Make two examples of market demand functions.
 Linear Demand Function
A demand function is said to be linear when the slope of the demand curve remains constant
throughout its length. In other words, if both independent variable and dependent variable change at
a constant rate, demand function will be linear. Mathematically it can be expressed as,
QX = a - bPX
Where;
QX = Quantity Demand for X.
PX = Price of X.
a = Intercept
b = Slope Demand Curve.
 Non- Linear Demand Function
A demand function is said to be non-linear when the slope of a demand curve changes all along the
demand curve. In other words, the changes in price and quantity are unequal along a non-liner demand
curve. Mathematically it can be expressed as,
QX = a.PX-b
QX = Quantity Demand for X.
PX = Price of X.
a = Intercept
b = Slope Demand Curve.

Price per Call No. of Telephone Calls Per Month

1.50 3

5.0 4

12.0 16

17.0 34

24.0 44
 Movement Along a Demand Curve
Movement along a demand curve is defined as the change in demand for a commodity due
to change in its price, other things remaining the same. Other things remaining the same,
when the quantity demanded for the commodity increases due to fall in price, it is called
extension in demand. Other things remaining the same, when the quantity demanded for
the commodity decreases due to rise in price, it is called contraction in demand.
 Shift in Demand Curve
Shift in demand curve is defined as the change in demand for commodity due to change
in determinants of demand other than price of the commodity. If the original demand
curve is shifted to the right then it is known as rightward shift in demand curve or
increase in demand. On the other hand, if the original demand curve is shifted to the
left then it is known as leftward shift in demand curve or decrease in demand.
Factors Causing the Shift in Demand Curve
 Income of the Consumer
 Price of Related Goods
 Advertisement Expenditure
 Size & Growth of Population
 Habits, Taste, Preferences and Fashion of the Consumer
 Government Tax Policy
 Wealth & Income Distribution
 Future Expectations of the Consumers
 The Availability of Credit Facility
 Weather
 Customs Traditions
 Money Supply
Difference between movement along the
demand curve and shift in demand curve
Case Study
TWO WAYS TO REDUCE THE QUANTITY OF SMOKING DEMANDED
Because smoking can lead to various illnesses, public policymakers often want to reduce the amount that people
smoke. There are two ways that they can attempt to achieve this goal. One way to reduce smoking is to shift the
demand curve for cigarettes and other tobacco products. Public service announcements, mandatory health
warnings on cigarette packages, and the prohibition of cigarette advertising on television are all policies aimed at
reducing the quantity of cigarettes demanded at any given price. If successful, these policies shift the demand
curve for cigarettes to the left. Alternatively, policymakers can try to raise the price of cigarettes. If the
government taxes the manufacture of cigarettes, for example, cigarette companies pass much of this tax on to
consumers in the form of higher prices. A higher price encourages smokers to reduce the numbers of cigarettes
they smoke. In this case, the reduced amount of smoking does not represent a shift in the demand curve.
Instead, it represents a movement along the same demand curve to a point with a higher price and lower
quantity. How much does the amount of smoking respond to changes in the price of cigarettes? Economists have
attempted to answer this question by studying what happens when the tax on cigarettes changes. They have
found that a 10 percent increase in the price causes a 4 percent reduction in the quantity demanded. Teenagers
are especially sensitive to the price of cigarettes: A 10 percent increase in the price causes a 12 percent drop in
teenage smoking. A related question is how the price of cigarettes affects the demand for illicit drugs, such as
marijuana. Opponents of cigarette taxes often argue that tobacco and marijuana are substitutes so that high
cigarette prices encourage marijuana use. By contrast, many experts on substance abuse view tobacco as a
“gateway drug” leading young people to experiment with other harmful substances. Most studies of the data are
consistent with this latter view: They find that lower cigarette prices are associated with greater use of
marijuana. In other words, tobacco and marijuana appear to be complements rather than substitutes.
 Questions For Discussion
1 .What are the causing factor of leftward shift in demand curve for
cigarettes and other tobacco products?
2. How does the increase in government taxes to the cigarette
manufacturing company affect the point along the demand curve?
3. Sketch the suitable diagram for representing the given case.
4. Why the teenagers are more sensitive towards the change in price of
cigarette?
5. Why does the price of cigarette affect the demand for marijuana?
Macroeconomic Issue
Nepal is one of the developing countries in the world. It is famous in the world due to its
diversity in climate, culture, history, religions & resource endowment. We are rich in
water resources. Nepal possesses about 2.7% water resources of the world. Eight more
then 8000 mt mountains including Mount Everest we have. Tourism industry is also
assuming most of the potential industry of Nepal. Development of industrial and
agricultural sector can create more and more employment opportunities as well as we
can also generate sufficient level of national output. Potentially we are rich in various
factors but country’s economic situation is worsening year by year. Most of the
macroeconomic indicators are falling situation. Increasing trade deficit, increase in
public debt, increase in regular expenditure in budget and decline in remittance clearly
shows the fall in economic condition of Nepal. Covid-19 also cause for worsening
macroeconomic indicators. Political, Social, religious and other factors are also assuming
hindrances for economic development of developing country like Nepal. From the above
summarized economic picture of Nepal’s how can we summarized its shortcomings and
suggest to the concern policy maker?
 Supply Function
The functional relationship between quantity supply of a commodity and
determinants of supply is called supply function where quantity supply is a
dependent variable and determinants of supply are independent variable.
Mathematically,
QS= f (P, Pr,O, N, T, G, F, PF…………… )
Where;
QS= Quantity supply of a commodity
F= Relations
P = Price of commodity
Pr, =Price of related goods
O = Objective of the firms
N = No. of firms
T = Technology
G = Government tax policy
PF = Price of factors of production
In short,
Qs= f(P)
 Linear supply Function
A supply function is said to be linear when the slope of the supply curve
remains constant throughout its length. In other words, if both independent
variable and dependent variable change at a constant rate, supply function will
be linear. Mathematically it can be expressed as,
QX = a + bPX
Where;
QX = Quantity Supply of X.
PX = Price of X.
a = Intercept
b = Slope Supply Curve.
 Non- Linear Supply Function
A supply function is said to be non-linear when the slope of a supply curve changes all
along the supply curve. In other words, the changes in price and quantity are unequal
along a non-liner supply curve. Mathematically it can be expressed as,
QX = a.PXb
QX = Quantity supply of X.
PX = Price of X.
a = Intercept
b = Slope Supply Curve.
 Movement along a Supply Curve
Movement along a supply curve is defined as the change in supply of a
commodity due to change in its price, other things remaining the same.
Other things remaining the same, when the quantity supply of the
commodity increases due to increase in price, it is called extension in
demand. Other things remaining the same, when the quantity supply of
the commodity decreases due to decrease in price, it is called contraction
in supply.
 Shift in Supply Curve
Shift in supply curve is defined as the change in supply
of a commodity due to change in determinants of
supply other than price of the commodity. If the
original supply curve is shifted to the right, then it is
known as rightward shift in suppy curve or increase in
supply. On the other hand, if the original supply curve is
shifted to the left, then it is known as leftward shift in
supply curve or decrease in supply.
 Elasticity of Demand
The elasticity of demand is a measure of degree of
responsiveness of a demand for commodity to the change
in its determinants. In other words, elasticity of demand is
the ratio between percentage or proportionate change in
quantity demand and percentage or proportionate change
in any determinants of demand. Mathematically,
Ed = Percentage change in Quantity Demanded/Percentage
Change in Determinants demand
 Price Elasticity of Demand
Price elasticity of demand is defined as the responsiveness of change in
quantity demanded of a commodity to the change in price. In other
words, the price elasticity of demand can be defined as the ratio of
percentage change in quantity demanded to the percentage change in
price. Mathematically,
EP = Percentage Change in Quantity Demanded/Percentage Change in
Price
EP= Q2- Q1/P2-P1 ×P/Q
Example-I: If 10 percentage rises in price of apple brings 20 percentage
decrease in demand for apple then calculate elasticity of demand.
Example-II: IF the price of apple is R.s 300 then its demand is 200 kg
per day. If the price of apple increases R.s 300 to R.s 400 then its
demand decreases 150 kg per day. Calculate the price elasticity of
demand.
 Perfectly Elastic Demand (EP=∞)
If a small or negligible change in price of a
commodity leads to remarkable change in quantity
demanded for a commodity then the demand is
said to be perfectly elastic. In this case demand
curve is perpendicular to quantity or X-axis.
 Perfectly Inelastic Demand(EP=0)
If a remarkable change in price of a commodity does
not bring any change in quantity demanded for a
commodity, then the demand is said to be perfectly
inelastic. In this case the demand curve is parallel to
the quantity or X-axis.
 Relatively Elastic Demand (EP>1)
If a percentage change in price is less than percentage change
in quantity demanded for a commodity then demand is said to
be relatively elastic. For example, if 10% increase in price leads
to 15% decrease in quantity demanded for a commodity then
the value of EP becomes greater than 1or elasticity of demand
becomes relatively elastic. in this case demand curve is flatter
one.
 Relatively Inelastic Demand (EP<1)
If a percentage change in price is greater than percentage
change in quantity demanded for a commodity then
demand is said to be relatively inelastic. For example, if
10% increase in price leads to 5% decrease in quantity
demanded for a commodity then the value of EP becomes
less than one or elasticity of demand becomes relatively
inelastic. In this case demand curve is steeper one.
 Unitary Elastic Demand (EP=1)
If a percentage change in price of the commodity is equals to the
percentage change in quantity demanded for a commodity, then
demand is said to be unitary elastic. For example, if 10% increase in
price of a commodity leads to 10% decrease in quantity demanded for
a commodity then the value of EP becomes unity.
Graphical Representation
Measurement of Price Elasticity of Demand
•Percentage Method
•Total Outlay Method
•Point Method
•Arc Method
 Percentage Method
Percentage method is the simplest method for calculating price
elasticity of demand. Under this method, price elasticity of demand is
calculated by the ratio of percentage change in quantity demanded to
percentage change in price. According to this method, price elasticity
of demand is calculated by using following formula:

EP>1, demand is elastic. If EP<1, demand is inelastic. If EP=1,

demand is unitary elastic.
Example: I
If 20% decrease in price of mango leads to 40% increase in
quantity demanded then calculate price elasticity of demand by
percentage method.
 Total Outlay Method (Expenditure Method)
Total outlay method is simplest method for calculating price elasticity of demand. This method was
developed by Alfred Marshall. This Method is also known as expenditure method. Under this
method, the price elasticity of demand is calculated by comparing the expenditure made by the
consumer before or after the change in price. Total outlay is calculated by the product of price and
quantity purchased. Total outlay method is only able to classify weather the price elasticity of
demand is unitary, elastic and inelastic.
Elasticity Greater Than Unity (EP> 1)
It is also called elastic demand. When total expenditure increases with fall in price and decreases
with the rise in price, the demand is said to be elastic demand. P ↑⇒QD↓⇒T.E↓⇒ EP> 1.
Elasticity Less Than One (EP< 1)
It is also called inelastic demand. When total expenditure increases with increase in price and
decreases with the decrease in price, the demand is said to be inelastic demand.
P↑⇒QD↓⇒T.E↑⇒EP< 1
Elasticity Equal to Unity (EP = 1)
It is also called unitary elastic demand. When the total expenditure remains unchanged with a fall
or rise in price, then price elasticity of demand is said to be equal to unity .P
↑⇒QD↓⇒T.E(Unchanged)&P↑⇒QD↓⇒T.E(Unchanged)⇒EP = 1
Total Outlay Method Tabular Representation
Total Outlay Method Graphical Representation
 Total Outlay Method

EP = 1 E P> 1 E P< 1
P=120 P=100 P=120 P=100 P=120 P=100
Q=5 Q=6 Q=5 Q=7 Q=5 Q=5.5
T.E=600 T.E= 600 T.E=600 T.E=700 T.E=600 T.E=550
 Point Method
Point method is also an important method for calculating price elasticity of demand. This method was
developed by Neo-classical economist Alfred Marshall. This method is also known as geometric or
graphical method. Point method is the measure of the proportionate change in quantity demanded in
response to a very small proportionate change in price. The concept of point method is suitable when
change in price and the consequent change in quantity demanded are very small. Therefore, this method is
the measure of price elasticity of demand at a particular point of demand curve.
 Point Elasticity on a Linear Demand Curve
Linear demand curve implies same slope throughout demand curve. In this,
method we take a straight-line demand curve and measure the price
elasticity of demand. It is calculated by using following formula.
 Point Elasticity on a Non- Linear Demand Curve
Non linear demand curve implies different slopes at a different point
throughout the demand curve. Point elasticity on a non-linear demand curve
is measured by drawing a tangent to the demand curve at the chosen point
and measuring the elasticity of the tangent.
 Arc Method
The concept of arc elasticity was developed by Dalton. It was further developed by A.P
Learner. The arc method is used when there is great change in price and quantity
demanded. Arc signifying a part of demand curve between any two points. The
distance between two points is called arc.
Use or Importance of Price Elasticity of Demand
•Product Pricing
•Factor Pricing
•Price Discrimination
•Joint Product Pricing
•Price Determination of Public Utilities
•International Trade
•Taxation
 Income Elasticity of Demand
Income elasticity of demand is defined as the degree of responsiveness of demand
for a commodity to the change in the income of the consumer. In other words,
income elasticity of demand is the ratio of the percentage change in demand for a
commodity to the percentage change in income.

Numerical Example: I
If income of a particular household is R.S 50,000 per month then demand for meat is 7 kg
per month. If the income of household increase R.S 50,000 to 70,000 then the demand for
meat increases 7 kg to 10 kg then calculate income elasticity of demand.
Numerical Example: II
If the income of the consumer is R.S 30,000 per month then the demand for cycle in a
particular market is 100 cycle per month. If the income of the consumer increases R.S
30000 to R.S 50000 then the demand for cycle decreases to 100 cycles per month to 60
cycles per month then calculates income elasticity of demand.
 Positive Income Elasticity of Demand (EY>0)
If the demand for a commodity varies positively with income, income elasticity
will be positive. In other words, if increase in income leads to increase in demand
for a commodity and decrease in income leads to decrease in demand for a
commodity. It is called positive income elasticity of demand.
 Income Elasticity Greater Than Unity (EY>1)
If percentage change in quantity demanded is higher than percentage change in
income of the consumer then the income elasticity of demand is greater than
one. For example, if 5% increase in income leads to 10% increase in demand for
commodity than the income elasticity of demand becomes greater than one.
 Income Elasticity of Demand Less Than Unity (EY<1)
If percentage change in quantity demanded is less than percentage change
in income of the consumer then the income elasticity of demand is less than
one. For example, if 10% increase in income leads to 5% increase in demand
for commodity than the income elasticity of demand becomes less than
one.
 Income Elasticity of Demand Less Than Unity (EY<1)
If percentage change in quantity demanded is less than percentage change in
income of the consumer then the income elasticity of demand is less than
one. For example, if 10% increase in income leads to 5% increase in income of
the consumer than the income elasticity of demand becomes less than one.
Income Elasticity of Demand Equal to Unity (EY=1)
If percentage change in quantity demanded is equals to percentage
change in income of the consumer, then the income elasticity of demand
is unitary. For example, if 5% increase in income leads to 5% increase in
quantity demanded than the income elasticity of demand becomes
unity.
 Negative Income Elasticity of Demand (EY<0)
If there exists inverse relationship between income of the consumer and
demand for goods and services then the income elasticity of demand is
said to be negative income elasticity of demand. An increase in income
leads to decline in quantity demanded and vice-versa. Negative
elasticity exhibits in case of inferior goods .
 Zero Income Elasticity of Demand (EY= 0)
If the quantity demand for commodity remains the same
whatever the income of the consumer then income elasticity of
demand becomes zero. In case of essential and basic goods like
salt medicine the income elasticity of demand becomes zero.
 Cross Elasticity of Demand (Exy)
The cross elasticity of demand is defined as the percentage
change in the quantity demanded of good X resulting from
a percentage change in the price of Y. In other word, the
ratio of percentage change in the quantity demanded of
good X to a given percentage change in the price of Y
commodity.
 Positive Cross Elasticity of Demand (Exy> 0)
When the quantity demanded of a commodity and price of related
commodity change into same direction, the cross elasticity of demand
is positive. In the case of substitute goods, the cross elasticity of
demand is positive. For example, if the price of tea rises, it will lead
to increase in the demand for coffee. Similarly, a fall in the price of
tea will cause a decrease in the demand for coffee. Hence, tea and
coffee are substitute goods.
 Negative Cross Elasticity of Demand (Exy< 0)
When demand for a commodity and price of related commodity change into
opposite direction, the cross elasticity of demand is negative. In the case of
complementary goods, cross elasticity of demand is negative. For example, if
the price of car falls, assuming the price of petrol remains constant, the
demand for car and petrol both increase because both are jointly used. In
means that car and petrol are complementary goods.
Numerical Example-I
 Elasticity of Supply
The elasticity of supply is a measure of degree of responsiveness of a supply for commodity
to the change in its determinants. In other words, elasticity of supply is the ratio between
percentage or proportionate change in quantity supply and percentage or proportionate
change in any determinants of supply.
Price Elasticity of Supply
Price elasticity of supply is defined as the responsiveness of change in quantity supplied of a
commodity to the change in price. In other words, the price elasticity of supply can be
defined as the ratio of percentage change in quantity supplied to the percentage change in
price. Mathematically,

Example-I:
If 10 percentage rises in price of apple brings 20 percentage increase in supply for apple then calculate price
elasticity of supply.
Example-I:
IF the price of apple is R.s 300 then its supply is 200 kg per day. If the price of apple increases R.s 300 to R.s
400 then its supply increases 250 kg per day. Calculate the price elasticity of supply.
 Perfectly Elastic Supply (EP=∞)
If a small or negligible change in price of a commodity leads to
remarkable change in quantity supply of a commodity then the
supply is said to be perfectly elastic. In this case supply curve is
perpendicular to quantity or X-axis.
 Perfectly Inelastic Supply (EP=0)
If a remarkable change in price of a commodity does not bring
any change in quantity supply of a commodity, then the supply is
said to be perfectly inelastic. In this case the supply curve is
parallel to the quantity or X-axis.
 Relatively Elastic Supply (EP>1)
If a percentage change in price is less than percentage change in quantity
supply of a commodity then supply is said to be relatively elastic. For
example, if 10% increase in price leads to 15% increase in quantity supply
of a commodity then the value of EP becomes greater than 1or elasticity of
supply becomes relatively elastic. in this case supply curve is flatter one.
 Relatively Inelastic Supply (EP<1)
If a percentage change in price is greater than percentage change in quantity supply
of a commodity then supply is said to be relatively inelastic. For example, if 10%
increase in price leads to 5% increase in quantity supply of a commodity then the
value of EP becomes less than one or elasticity of supply becomes relatively inelastic.
In this case supply curve is steeper one.
 Unitary Elastic Supply (EP =1)
If a percentage change in price of the commodity is equals to the
percentage change in quantity supply for a commodity, then supply is said
to be unitary elastic. For example, if 10% increase in price of a commodity
leads to 10% increase in quantity supply of a commodity then the value of
EP becomes unity.
Types of Price Elasticity of Supply