Demand:-Demand for a commodity is the amount of it that a consumer will purchase or will be ready to take off from the

market at a various given price in a period of time. Example:- If a poor man wishes to have a car, his wish or desire for a car will not constitute the demand for a car because he cannot offered to pay for it that is, he has no purchasing power to make his wish or desire effective. Demand in economics implies both desire to purchase and the ability to pay for a good. Factors of Demand:1.Taste & desire of the consumer 2. Income of Consumer 3. Price of related goods Substitute goods Complementary goods 4. Changes in the numbers of buyers. 5.Consumer Exceptations Law of Demand The law of demand expresses the relationship between price & quantity demanded . According to the Law , other things being equal, if price of commodity falls the quantity demanded of the commodity will rise, and if price of commodity increase the quantity demanded will decline. Thus according to the law of demand there is inverse relationship between price & quantity when other things remaining the same. Demand Schedule & Demand curve Prices(Rs) 5 (P1) 4 ( P2) 3 (P3) 2 ( P4) 1 (P5) Quantity Demanded(Units) 2 (Q1) 3 (Q2) 4(Q3) 6 (Q4) 10 (Q5)

Assumption of Law of Demand 1. 2. 3. 4. 5. People income remains unchanged. People tastes remain unchanged. Price of the other related goods remain the same. No substitute for the commodity in question are available. no further changes in the price of the commodity.

Exception of Law of Demand 1 2 3 4 Status Symbol. Speculation Highly priced. Giffen Paradox

Why does the demand curve slope down wards? We have explained that when price falls the quantity demanded of a commodity rises and vice versa, other things remaining the same. It is due to this law of demand that demand curve slopes downwards to the right, now the important question is why the demand curve slopes down wards or in other words, why the law of demand describing inverse price demand relationship is valid There are two reason behind this:Income Effect:- When price of the commodity falls, the consumer can buy more quantity of the commodity with his given income. Or if he chooses to buy the sme amount of the commodity as before , some money will be left with him because he has to spend less on the commodity due to its lower price. In other words, as a result of fall in the price of the commodity, consumer real income or purchasing power increases. This increase in real income induces the consumer to buy more of that commodity. This is called income effect of the change in the price of the commodity. Substitution effect:- when the price of the commodity falls , it becomes relatively cheaper than other commodities. This induces the consumer to substitute the commodity whose price has fallen for other commodities which have now become relatively dearer.

Individual Demand and Market Demand Individual Demand:- The individual demand is demand of the individual for a commodity at a various prices. Demand Schedule of an individual consumer Prices(Rs) 5 (P1) 4 ( P2) 3 (P3) 2 ( P4) 1 (P5) Quantity Demanded(Units) 2 (Q1) 3 (Q2) 4(Q3) 6 (Q4) 10 (Q5)

Market Demand:- Market demand is the sum total of demands of all the consumers in the market for a commodity at various prices. Price(Rs) 1 2 3 4 5 6 Quantity demanded by A 16 11 7 4 2 1 Quantity demanded by B 11 7 5 4 3 2 Quantity demanded by C 15 12 10 7 5 2 Market Demand 16+11+15=42 11+7+12=30 7+5+10+22 4+4+7=15 2+3+5=10 1+2+2=5

Change in Quantity Demanded versus change in Demand Change in demand :- represents shifting of demand curve due to change in factors other than price of the goods. Change in demand (which is represented by a shift in the demand curve) here the demand curve is shifted because of determinates of demand change.

Change in Quantity demanded:- is movement along demand curve when price changes. Demand changes when the price of good changes , if the price of the good increase, quantity demand decrease. This is illustrated as a demand movement along the demand curve ( The demand curve is not Shiffting)

Supply:- Supply refers to the schedule of the quantities of a good that the firm are able & willing to offer for sale at various prices. Thus the term supply refers to the entire relationship between the price of a commodity and the quantity supplied at various possible prices. Determinates or Factors of Supply:1 Price of inputs. 2. Price of related goods. 3. Number of Producers. 4. Future price Expectation. 5. Production Technology. 6.Taxes & Subsidies

Law of Supply:- Supply of a commodity is functionally related to its price. The law of supply relates to this functional relationship between price of the commodity and its quantity supplied. In contrast to the inverse relationship between the quantity demanded and the changes in the price, the quantity supplied of the commodity generally various directly with price. That is the higher the price the larger is the quantity supplied of a commodity. Supply Schedule & Supply Curve Prices(Rs) 500 510 520 530 540 550 Curve Thus according to law of supply the, the quantity supplied of the commodity is directly or posilively related to price, it is due to this positive relationship between price of a commodity and its quantity supplied , that the supply curve of a commodity slopes upwords to right as seen supply curve. Market Equilibrium:- The market Demand curve:- demand curve of the commodity normally slopes downwards. In other with the fall in price, quantity demanded rises and vice versa. Supply curve:- supply curve of the commodity slopes upwards. In other words, the firm will offer to sell more quantity of good at a higher price than at a lower one. The level of price at which demand and supply curve intersect each other will finally come to say in the market. In other ward the price at which quantity demanded equals quantity supplied is called equilibrium price, for at this price the two forces of demand and supply exactly balance each other. The quantity of the good which is purchased and sold at this equilibrium price is called equilibrium amount. Thus , the intersection of demand and supply curves determine price quantity equilibrium. Quantity Supplied(Units) 100 150 200 225 250 275

Market Equilibrium

Elasticity of demand & Supply:Elasticity of Demand:- The concept of demand elasticity of demand therefore refers
to the degree of responsiveness of the quantity demanded of a good to a change in its price, consumers income& prices of related goods.

Concept of Elasticity of Demand

Price Elasticity. Income Elasticity. Cross Elasticity.

Price Elasticity of Demand:- Price elasticity of demand indicates the degree of

responsiveness of quantity demanded of goods to change in its price. Price elasticity of demand is defined as the ration of the percentage change in quantity demanded of a commodity to a change in price. Formula:Percentage change in quantity demanded Price Elasticity of demand = Percentage change in price Example:- Suppose 5% change rise in the price of eggs causes its quantity demanded falls by 10% Price elasticity of demand = 10 =2 5

Classification of elasticity of demand

1.Perfectly Elastic demand: It refers to that situation where the slightly rise in price causes the quantity demanded of the commodity fall to zero, and slightly fall in price causes an infinite increase in quantity demand of the commodity The demand in such a case is hyper sensitive and the elasticity of demand is infinite. It should however remembered that cases of perfectly elastic demand are very rare in actual life and as such only of theoretical interest. 2. Perfectly inelastic demand:- it refers that situation where even substantial changes in price leave the demand unaffected. In other words, price may change considerable, but the quantity demanded of the commodity remain unchanged . The demand in such case is insensitive or non responsive and the elasticity of demand is zero. like perfectly elastic demand cases of perfectly inelastic demand are also rare in real life and such are of any practical interest . 3 Elastic Demand:- When the percentage change in quantity demanded of a commodity is greater then the percentage in price. Elasticity of demand will be greater than one and in this case demand is said to be elastic.

4. Inelastic Demand:- when the percentage change in quantity demanded a commodity is lesser than the percentage change in price. Elasticity of demand will be less than one in this case demand is said inelastic demand. 5.Unitary elastic Demand:- when the percentage change in quantity demanded is equal to the percentage change in price. Elasticity of demand will be equal to one and in this case of demand is called unitary elastic demand

Cross Elasticity:- Cross elasticity basically define the relationship of two

commodities in the same ways. The relationship of two commodities x & y can be either substitutive or complementary or even naturally. In other words, the two goods can be either substitutes of each other or complementary to each other or completely independent to each other. 1. Substitutive:- In this context the cross elasticity of demand may be defined as the ratio of proportionate change in the quantity demanded of commodity x to a given proportionate change in the price of commodity y. Formula:- Percentage change in the quantity demanded of x Percentage change in the quantity demanded of y Let us assume that the two commodities x & y are substitute of each other. In this case if price of x rises, assuming that price of y remain constant, the quantity demanded of y increase, because consumer have substitute of x. If x and y are the perfect substitutes for each other the cross elasticity of demand will be positive Example: Tea & coffee. 2

Complementary :- The cross elasticity in complementary goods will be

negative. A rise in the price of y will mean not only a decrease in quantity demanded of y but also decrease in quantity demanded of x because both are demanded together. It is a case of joint demand. The cross elasticity in the case of jointly demanded commodities is Negative Example:-Pen & Refile 2. Completely independent to each other:- A change in the price of the commodity will not affect the quantity demanded of th other. In this case both the commodity totally independent to each other, A rise or fall in the price of y does not affect the quantity demanded of x Example:- Cloth & Cold drink.

Income elasticity of demand:- Income elasticity of demand for commodity shows

the extent to which a consumer demand for that commodity changes as a result of a change in his income. It shows the responsiveness of a consumers purchase of that commodity to a change in his income. It may be defined as the ratio of proportionate change in the quantity demanded of the commodity to a given proportionate change in income of consumer. Income elasticity:Proportionate change in the quantity demanded of the income Proportionate change in the income of the consumer

Classification of income elasticity 1. Zero income elasticity of demand:- This refers to the situation where a given increase in consumers money income does not result in any increase in quantity demanded of the commodity Ei =0 2. Negative income elasticity of demand:- Where a given increase in the consumers money income is followed by an actual fall in the quantity demanded of the commodity. This happens in the case of economically inferior goods. Ei<0 3. Unitary income elasticity of demand:- Where the proportion of the consumers income spent on the commodity in question is exactly the same both before & after in the increase in income Ei =1

Elasticity of Supply:- It may be defined as the responsiveness of the sellers to

change in the price of the commodity The supply of the commodity may increase or decrease consequent upon the change in its price . The extent to which the supply of the commodity increases or decreases as a result of the change in price is referred to as elasticity of supply Elasticity of supply= Percentage change in quantity supplied Percentage change in price

Factors influencing elasticity of supply:1 Time:- The element of time exercises an important influence on
2 3 elasticity of supply. The longer the period of time , the more elastic is the supply likely to be. Nature of industry:- Heavy or light. The nature of industry whether heavy or light also exerts its influence on elasticity of supply. Limited supply of specific inputs:- It is quite possible that a special input required by an industry may be found in a limited quantity and increased supply of it may be available only at steeply higher prices. As a result the supply curve of such an industry will be relatively inelastic because additional output of that industry will be available only a higher prices.

Cost of production:- Elasticity of supply affects the cost of production of a commodity. If the production of a commodity. If the production of the commodity is taking place under the law of diminishing production then the supply of such a commodity will be inelastic because it is difficult to increase production even on increasing price as cost of production increases along with increase in supply. On the contrary , if the production is taking place under cost reducing law then the supply of such a commodity will be elastic. Nature of Product:- If the commodity is quickly perishable , the supply of the commodity would be inelastic because its supply cannot be increased even on the rise of its price such as vegetable, fruits, milk etc. on the contrary , if the commodity is durable, the supply of this commodity would be elastic because its supply can be increased on the rise of its price. Higher/ Lower taxation:- Higher /Lower taxation also affected the elasticity of supply higher taxation imposed on the output of a commodity or on the factors required for its production may decrease the supply, such as scooters, cars etc. on the contrary imposition of lower taxation on the output of a commodity or on the factors required for its production may increase the supply, such as, electrical goods, domestic goods etc. Price level:- Elasticity of supply is also influenced by the price level. Higher the price level greater is the supply that will come forth. On the contrary, lower the price level lesser is the supply that will come forth because the producers will reduce the production on account of loss or no profit. Number of sellers:- Elasticity of supply is also influenced by the number of sellers in a particular commodity. Entry of more sellers in a particular commodity. Entry of more sellers will increase the supply and the exist will decrease the supply.

Indifference Curve
In microeconomics, an indifference curve is a graph showing combinations of two goods to which an economic agent ( such as a consumer or firm) is indifferent, that is, it has no preference for one combination over the other. They are used to analyze the choice of economic agents. Indifference curve indicate the various combination of two goods which yield equal satisfaction of the consumer. It is also known as ISO- Utility Curve & equal utility curve An indifference curve shows all the various combination of two goods that give an equal amount of satisfaction to a consumer. Example:- If a consumer was equally satisfied with 1 apple and 4 bananas, 2 Apples and 2 bananas or 5 Apple and 1 Bananas, these combination would all lie on the same indifference curve.

Assumption of indifference Curve:-

i) Rational behavior of the consumer: It is assumed that individuals are rational in making decisions from their expenditures on consumer goods. (ii) Utility is ordinal: Utility cannot be measured cardinally. It can be, however, expressed ordinally. In other words, the consumer can rank the basket of goods according to the satisfaction or utility of each basket. (iii) Diminishing marginal rate of substitution: In the indifference curve analysis, the principle of diminishing marginal rate of substitution is assumed. (iv) Consistency in choice: The consumer, it is assumed, is consistent in his behavior during a period of time. For insistence, if the consumer prefers combinations of A of good to the combinations B of goods, he then remains consistent in his choice. His preference, during another period of time does not change. Symbolically, it can be expressed as: If A > B, then B > A (iv) Consumers preference not self contradictory: The consumers preferences are not self contradictory. It means that if combinations A is preferred over combination B is preferred over C, then combination A is preferred over combination A is preferred over C. Symbolically it can be expressed: If A > B and B > C, then A > C (v) Goods consumed are substitutable: The goods consumed by the consumer are substitutable. The utility can be maintained at the same level by consuming more of some goods and less of the other. There are many combinations of the two commodities which are equally preferred by a consumer and he is indifferent as to which of the two he receives.

Example:
For example, a person has a limited amount of income which he wishes to spend on two commodities, rice and wheat. Let us suppose that the following commodities are equally valued by him: Various Combinations: a) b) c) d) e) 16 Kilograms of Rice 12 Kilograms of Rice 11 Kilograms of Rice 10 Kilograms of Rice 9 Kilograms of Rice Plus Plus Plus Plus Plus 2 Kilograms of Wheat 5 Kilograms of Wheat 7 Kilograms of Wheat 10 Kilograms of Wheat 15 Kilograms of Wheat

It is matter of indifference for the consumer as to which combination he buys. He may buy 16 kilograms of rice and 2 kilograms of wheat or 9 kilograms of rice and 15 kilograms of wheat. All these combinations are equally preferred by him. An indifference curve thus is composed of a set of consumption alternatives each of which yields the same total amount of satisfaction. These combinations can also be shown by an indifference curve.

Figure/Diagram of Indifference Curve:

The consumers preferences can be shown in a diagram with an indifference curve. The indifference showing nothing about the absolute amounts of satisfaction obtained. It merely indicates a set of consumption bundles that the consumer views as being equally satisfactory.

In fig. 3.1 we measure the quantity of wheat along X-axis (in kilograms) and along Y-axis, the quantity of rice (in kilograms). IC is an indifference curve. It is shown in the diagram that a consumer may buy 12 kilograms of rice and 5 kilograms of wheat or 9 kilograms of rice and 15 kilogram of wheat. Both these combinations are equally preferred by him and he is indifferent to these two combinations. When the scale of preference of the consumer is graphed, by joining the points a, b, c, d, e, we obtain an Indifference Curve IC. Every point on indifference curve represents a different combination of the two goods and the consumer is indifferent between any two points on the indifference curve. All the combinations are equally desirable to the consumer. The consumer is indifferent as to which combination he receives. The Indifference Curve IC thus is a locus of different combinations of two goods which yield the same level of satisfaction.

Indifference Curve Properties 9 An indifference curve slopes downwards from left to right (negative slope). The negative slope is a consequence of the fact that the demand for one commodity (x) increases while the demand for another commodity (y) decreases ( because of diminishing marginal utility of Y). Which is necessary to maintain the total satisfaction .

10 Indifference curve do not intersect. This is a consequences of the assumption that consumer will always prefer to have more of either good than to have less. 11 The curve are convex which is a consequence of the assumption that as consumer have less and less of one good , they require more of the other good to compensate( corresponding to the law of diminishing marginal utility) 12 The indifference curves are ubiquitous through out an indifference map. In other words, there exists an indifference curve through any given point on an indifference map. Indifference curve application to tax choice The indifference curve technique can also be used to analyze some taxation problem. The indifference curve can be employed to prove that income tax as a tax is better than an equivalent sales tax or an excise tax from the point of view of the tax payer. Let us suppose that the government wants to raise an additional revenue, of say 50/-crores, through taxation. The government can raise this revenue from the public either through the imposition of an income tax or through levying an excise tax on a commodity. So far as the government is concerned, it may be immaterial for it whether it raises this amount through income tax or through an excise tax so long as it bring 50/- crores. But it is very much material for the tax payer whether the required revenue is raised through an income or an excise tax.

Consumer Surplus
Concept of consumers surplus was introduced by Alfred Marshall. According to him: "A consumer is generally willing to pay more for a given quantity of good than what he actually pays at the price prevailing in the market". For example, you go to the market for the purchase of a pen. You are mentally prepared to pay $25 for the pen which the seller has shown to you. He offers the pen for $10 only. You immediately purchase the pen and say thank you. You were willing to pay $25 for the pen but you are delighted to get it for $10 only. Consumers surplus is the difference between the maximum amount a consumer is willing to pay for the good and the price he actually pays for the good. In our example given above, the consumers surplus is $15 ($25 $10).

Definition:- Marshall Excess of the price which a consumer would be willing to pay rather than go without a thing over that which he actually does pay is the economic measure of this surplus satisfaction it may be called consumer surplus.
Consumer Surplus = what a consumer is willing to pay what he actually pay The concept of consumers surplus is the result of two important phenomena: (i) Characteristic of consumers behavior.

(ii) Characteristic of market. The characteristic of consumers behavior is that as he buys more and more of a particular commodity, the marginal utility of the successive units begins to decrease. A rational buyer continuous purchasing the commodity up to the unit which equates his marginal utility of the good to the price he pays for it. The second phenomenon is that there is perfect competition among sellers and a single price prevails in the market for a particular commodity at a particular time. The buyer is able to get the first unit of the commodity at the same price as the second or pay any other unit thereafter

Schedule:
The concept of consumers surplus is now explained with the help of a schedule and a demand curve. Quantity 1 2 3 4 Total Willing to Pay ($) 25 20 15 10 75 Price ($) 10 10 10 10 Consumers Surplus ($) 15 = (25 10) 10 = (20 10) 5 = (15 10) 0 30

10 x 4 = 40

Diagram/Figure:

In this figure 3.20, the individual demand curve DD/ shows the maximum amount a consumer is willing to pay for each unit of the good. An individual is not willing to purchase any pen at a price of $30 per month. He will, however, is willing to purchase one pen at a price of $20 per pen, he is willing to purchase 2 pens. The surplus diminishes with the decline in the marginal utility of pens. In case the price comes down to $15 per pen, the consumer purchases 3 pens. By using this demand curve, we measure the surplus which a consumer gets from the purchase of pens. The current market price of a pen $10, which we have assumed the purchaser cannot change. The

consumer was willing to pay $25 per pen but he actually pay $10 only, the consumers surplus for the first pen is $15 = (25 10). For the second pen, it is $10 = (20 10) and for the third consumers surplus is $5 = (15 10). There is no surplus on the fourth unit as the market price for the pen is the same what he would have paid for the pen. The total consumers surplus from the purchase of four pens is $15 + $10 + $5 = $30. It is the sum of surpluses received from each pen. The shaded area in the graph shows the total consumers surplus.

Assumption of consumer Surplus concept 1 Utility & satisfaction have a relationship:- Marshall assume that utility &
satisfaction have a definite relationship with each other. Utility implies expected satisfaction whereas satisfaction means actual realized satisfaction. The commodity may appear to have a high degree of utility when it is bought by the individual consumer but on actual consumption it may yield satisfaction much less than what was expected.

2. Consumer surplus derived from the demand curve:- It is based on demand curve
assumption the main assumption that underlies the demand curve is that determinants of demand, other than price do not change while measuring consumer surplus of various quantities of a commodity . Marshall does take into account the price change but excluding other determinates of demand. 3. Utility of commodity depend upon the quantity:- Concept of consumers surplus is that utility of commodity depend upon the quantity of the commodity alone. In other word each commodity is to be treated as an independent commodity. The utility of tea for example is assumed to be determined by the quantity of tea alone, not by quantity of the related goods. 4. No Substitutes:- Commodity under consideration had no substitutes of any kind, or a commodity in question was absolutely independent of related commodities. This assumption appeared to him to be indispensable for the construction of demand curve. 5. No change in taste , fashions:- Marshall assumed that difference of income , taste , fashion etc did not exist among the purchaser. This assumption was essential for Marshall because without it he could not have measured the volume of consumers surplus in the entire market. 6 Marginal utility of particular commodity should be remain constant:- This is an important assumption of entire analysis of value. Without this assumption he could not have compared the utility obtained from the commodity with the disutility incurred or the price paid for it.

Criticism of consumers surplus 1. Critics point out in 1st assumption namely that utility & satisfaction bear a definite relationship:- Satisfaction may not always be proportional to
utility or there may not always be definite relationship between the two.

Example:- A person who buys a papaya for 80/- he imagine that its utility will
be worth say 90/-. So there will occure to him a consumer surplus worth 10/- now suppose that an actually eating it, he finds that it isnt as good as he had imagined & that its satisfaction is worth say 70/- his expected consumer surplus of 10/- is now converted into a consumer loss of 10/Marshall assumption that satisfaction is directly proportionate to utility is not valid in actual practice. 2. Critics of 2nd assumption that measuring consumers surplus, all determinants of demand except the price remain unchanged. This assumption considered to be a unrealistic assumption because in actual life the various determinants of demand do not remain unchanged. Consumer surplus from a commodity is determine not only by its price but also by the availability or non availability of related products.

3. Critics of 3rd assumption that constancy of marginal utility of money.

This assumption is not accepted because actually when a consumer spend money on a particular commodity, his stock of money is correspondingly reduced with the result that the marginal utility from money rise up. According to the law of diminishing marginal utility, the greater the stock the smaller is the utility Marshalls assumption of constancy of marginal utility of money appears to be untenable in actual practice. 4. Critics of the 4th assumption that the utility of a commodity depend upon the quantity of that commodity. Example:- the utility of tea depends not only on the quantity of tea, but also on supply of related good like coffee. In other words no commodity can be considered as absolutely independent. 5. Critics of the 5th assumption that a commodity has no substitutes or other related goods. Critics point out that there is hardly any commodity in real life which has no substitutes or related goods. It is neither possible nor feasible to treat the various substitutes of a commodity under the group.

6. Critics of 6th assumption that no difference between the income, taste, fashion
etc:This assumption is considered as a unrealistic, arbitrary& improper There are large number of purchaser in the market with different income, price & taste etc. They are bound to react differently to a economic situation.