CHAPTER 2: DEMAND, SUPPLY AND ELASTICITY
2.1 Fundamental Concepts
Demand and supply are basic concepts in
economic analysis. This is because economics is fundamentally concerned
with ends and means. The quantities of various goods demanded
are expected to bring satisfaction of different wants or ends, the supply
of these goods is conditioned by the availability or scarcity of resources
which act as the means of production. Both the terms ‘demand’ and ‘supply’
have technical implications. By demand, we mean the quantity of any commodity
that ‘buyers are willing and have the ability to buy.’ Both
the conditions must be satisfied together before goods can be demanded.
One who smokes wishes to purchase cigarettes but he must have enough money
or resources to do so. Similarly, a quantity of a commodity is said to
be supplied only when a seller is willing to sell it at the market
The two concepts of demand and supply are, however, relative
in nature and conveniently interchangeable. For example, a person
may visit a distant wholesale market and purchase 50 small cans of beer
at a somewhat lower price than what he would have paid in the local market.
Therefore 50 cans of beer can be said to be his demand for the commodity.
On his way home he meets a friend B who requests for 10 cans of beer at
a particular price. If the bargain is acceptable, A will sell 10 cans
to B, which will consist of his (that is A’s) ‘supply’ and the remaining
40 cans will then be his demand. Later on if a close relative of A (say
C) requests him to part with 5 cans of beer on a ‘no profit no loss’ basis,
then that becomes a further part of his ‘supply’ and his demand is reduced
to 35 cans of beer. Similarly a shopkeeper who begins with 200 cans of
beer (which is his supply) may retain 10 cans for himself and for his
family members (this is known as self-consumption). In that case, his
supply is reduced to 190 cans and demand would be 10 cans.
Finally demand and supply are mutually opposing concepts,
in the sense that demand is an inverse (falling) function
of the price, while supply is a direct (rising) function
of the price. This is explained in the following sections.
1 Fundamental Concepts
2. 2 Demand Schedule, Function and Law
2. 3 Supply Schedule, Function and Law
2. 4 Elasticity of Demand and Supply
2. 5 The Concept of Equilibrium