ca foundation economics chapter 2 theory of demand and supply

                                 Chapter2  theory of demand and supply 

Effective demand 

desire + means to purchase (ability) + willingness to use

demand means the various quantity os a given commodity or services which consumers would buy in one market during a given period of time, at various price or various price of related goods.

Determination of demand (what determines demand)

1(1)  Price of commodity = first we have considered to the ‘’ceteris paribus’’ means that other things are constant. when the price of the commodity will increase then demand will also fall and in case of the price of commodity decrease then, in this case, the demand is increasing. Relationship between price and quantity is ‘’inverse relation’’ overall price of the commodity and quantity demanded of the commodity is negative relation.

2.    Types of related goods = there are two types of related goods that are (a) substitute goods   (b) complementary goods,

(2) Substitute goods  = we can consume in place of one another easily and satisfy the want. Let us take an example x and y are two substitute goods in case of x’s price raise then goods of y’s quantity also increase, there is a positive relationship between price and quantity.

Complementary goods  = complementary goods are those goods which consume together. Example car and patrol, printer and ink. Relationship between complementary goods = there is a negative relation.

(3) the income of the consumer

Types of goods (a) capital goods – goods use to help further production.

(b) consumer goods – any goods are used by the consumer and there is no further production.

(c) durable goods – which goods are don’t wear are quickly and last over a long period of time. Example land, car, tv.

(d) nondurable goods – which goods used at once, it has a short life cycle. Example food items, fuel, paper.

(4) Tastes and preferences of the consumer

There are three effects (a) demonstration effect/bandwagon effect (b) snob effect (to ignore) (c) Veblen effect/prestige goods effect.

(5) consumer expectations

(a)             Future prices (b) increase in income (c) shortage in supply

(6) other factors

(a)             Population size (b) population composition  (c) level of national income and its distribution (d) consumer credit facility and interest rates.

Expansion and contraction of the demand curve

Expansion and the contraction in demand/change in quantity demanded/movement along the same demand curve.

Expansion

1.    When the quantity demanded increase due to decrease in price, it is called an expansion of demand.

2.     Reason = decrease in price.

3.    It is also known as a downward movement on the same demand curve.

Contraction

1.    When quantity demanded decrease due to increase in price it is called a contraction in demand.

2.    Reason = increase in price

3.    It is also known as an upward movement on the same demand curve.

Change in demand /shift in demand curve/increase and decrease in demand

Increase in demand

1.(a)    When more is demanded at the same price due to change in factor, it is called an increase in demand.

2.(b)    Reason = favourable changes.

3(c   It cause rightward shift in demand curve.

Decrease in demand

1(a) When less is demanded at the same price due to a change in factor it is called a decrease in demand.

2(b)  Reason = unfavourable change.

3(c) It causes a leftward shift in the demand curve.

Difference between the shift in the demand curve and movement in the demand curve

Movement along demand curve	Shift in demand curve
(1)   It shows a change in quantity demanded.	It shows a change in demand.
(2)  It occurs due to a change in price.	It occurs due to change in other factors like change in income, change in the price of related goods, change in taste and preferences.
(3)   Movement is there on the same demand curve.	It shifts the demand curve either left or in right.