Introductory Economics (Civil batch :…….

Chapter 2: Demand and Supply

1. Demand: Demand is the quantity of product that consumers are willing and able to buy at
various prices during a given period of time. A want will become a demand if it satisfies three
attributes:

i) Desire to buy,

ii) Willingness to buy and

iii) Ability to pay

For example, a want of a beggar for a car cannot be a demand for him because he cannot satisfy
the third attribute: ability to pay.

2. Demand Schedule and Demand Curve

A demand schedule is a table that shows the quantity demanded of a good or service at different
price levels. For example:

Table: Demand Schedule of pen

Price of Pen (Taka/Per unit) Quantity demanded of pen (per day/unit)

5 30
7 20
10 10

A graphical representation of demand schedule is the demand curve. An example is given below.

D
Y

10 Demand Curve
Price of Pen 7

5
D

O 10 10 10
X
Quantity of Pen

Figure: Demand curve

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3. Factors Affecting Demand

Demand for a commodity increases or decreases due to a number of factors. The various factors
affecting demand are discussed below:

i. Price of the Commodity: Generally, there exists an inverse relationship between price
and quantity demanded. It means, as price increases, quantity demanded falls.
ii. Price of Related Goods: Demand for the given commodity is also affected by change in
prices of the related goods. Related goods are of two types:
a) Substitute Goods: An increase in the price of substitute leads to an increase in the
demand for given commodity and vice-versa. For example, if price of a substitute good
(say, coffee) increases, then demand for given commodity (say, tea) will rise as tea will
become relatively cheaper in comparison to coffee. So, demand for a given commodity is
directly affected by change in price of substitute goods.
b) Complementary Goods: An increase in the price of complementary good leads to a
decrease in the demand for given commodity and vice-versa. For example, if price of a
complementary good (say, sugar) increases, then demand for given commodity (say, tea)
will fall as it will be relatively costlier to use both the goods together. So, demand for a
given commodity is inversely affected by change in price of complementary goods.

iii. Income of the Consumer: Demand for a commodity is also affected by income of the
consumer. In general sense. If the given commodity is a normal good, then an increase in
income leads to rise in its demand, while a decrease in income reduces the demand.
iv. Tastes and Preferences: Tastes and preferences of the consumer directly influence the
demand for a commodity. They include changes in fashion, customs, habits, etc. If a
commodity is in fashion or is preferred by the consumers, then demand for such a
commodity rises. On the other hand, demand for a commodity falls, if the consumers
have no taste for that commodity.
v. Population: A growth in population increases product purchases.
vi. Special influences: Special influences include availability of alternative forms of
transportation, safety of automobiles, expectation of future price increase etc.

4. Law of demand

Law of demand generally describes that holding other things constant, an increase in the price of
commodity leads to a fall in the quantity demanded of that commodity. In short it shows an
inverse relationship between price level and the quantity demanded by the consumer. This
concept is shown in the below figure.

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 Y

O
X

Above figure shows the law of demand. In the figure, DD is the demand curve. OX axis shows
the quantity of pen demanded and OY axis shows the price of pen. Clearly when the price of the
commodity increases from price P3 to P2, then its quantity demand comes down from Q3 to Q2
and then to Q3 and vice versa.

5. Why demand Curve slopes downward?

Causes of Downward Sloping of Demand Curve are discussed below.

i. Law of diminishing the marginal utility: The law of diminishing marginal utility states that with
each increasing quantity of the commodity, its marginal utility declines.
For example, when a person is very thirsty for water, the first glass of water that he drinks will
give him the most satisfaction. As he will consume more glasses, his level of satisfaction will
diminish.
Thus, when the quantity of goods is more, the marginal utility of the commodity is less. Thus, the
consumer is not willing to pay more prices for the commodity and its demand will decline. Also,
when the price of the commodity is low, its demand increases. Hence, the demand curve slopes
downwards from left to right.

ii. Substitution effect: Substitution effect occurs because a good becomes relatively more expensive
when its price rises. When the price of good A rises, I will generally substitute goods B, C, D, . . .
for it. For example, as the price of beef rises, I eat more chicken.

iii. Income effect: Income effect refers to the change in the real income or the purchasing power of
the consumers. When the price level falls the purchasing power of the consumer’s increases and
they buy more goods. Similarly, when the price level rises, the purchasing power of the consumer’s
decreases and they buy less quantity of goods.

6. Supply

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Supply can be defined as the total amount of a given product or service a supplier offers to consumers for a
specific price at a given period.

7. Law of Supply

Law of supply generally describes that holding other things constant, an increase in the price of
commodity leads to a rise in the quantity supplied of that commodity. In short it shows an
positive relationship between price level and the quantity supplied by the producer. This concept
is shown in the below figure.

Y S

P3

Price P2

P1

S
O
Q1 Q2 Q3 X

Quantity supplied

Figure: Law of supply

8. Equilibrium, Or Market-Clearing

Market equilibrium comes at the price at which quantity demanded equals quantity supplied. At that
equilibrium, there is no tendency for the price to rise or fall. The equilibrium price is also called the
market-clearing price.

Surplus: A surplus is a situation in which the quantity supplied exceeds the quantity demanded.

Shortage: A shortage is a situation in which the quantity demanded exceeds the quantity supplied.

The concept of market equilibrium is explained below with the help of figure.

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 Table 1: Demand and supply schedule

Price of good Quantity demanded Quantity supplied State of market

1 500 100 Surplus
2 400 200 Surplus
3 300 300 Equilibrium
4 200 400 Shortage
5 100 500 Shortage

The above table shows that the market is equilibrium at price 3 taka. Because at 3 taka price, the quantity
demanded and quantity supplied are equal. At any price below taka 3 , there is surplus and at any price
above 3 taka, there is shortage. Here, equilibrium price is 3 taka and equilibrium quantity is 300 units.
This is graphically shown below.

In the graph, OX axis shows quantity of goods demanded and supplied. OY axis shows price of the good.
SS is supply curve and DD is the demand curve. At point e , both demand and supply curve intersect each
other, so the condition of the market equilibrium is satisfied here. Therefore the market is equlibrium at
point e. Here the equilibrium price 3 taka and equilibruium quantity is 300 units. If the price raises to 4
taka, then ther will be surplus and it creates pressure on price to fall to the point e and the equlibrium
condition id retored again. Similarly, if the price falls to 2 taka, then there will be a shortage which also
creates pressure on price to fall to the point e. But at point e there is no tendancy to fall or rice in price.

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Reference Books

1. P. A Samuelson & W D Nordhaus: Economics 17th edition

2. N.G. Mankiw 3rd edition, Principles of Economics 2000
3. Pindyck, R. S., & Rubinfeld, D. L. (2014). Microeconomics. Pearson Education.

Assignment 1:

1. Why should students of Civil engineering read Economics?

2. Define national income. What is the most accepted approach of measuring national income in your sense?
And why you choose that?

Babor Ahmad
Lecture,
Department of Economics,
Dhaka International University (DIU), Bangladesh
MSS in Economics (HSTU), BSS (Hons) in Economics (HSTU)

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