CHAPTER 2: DEMAND, SUPPLY AND ELASTICITY (BASIC CONCEPTS)

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 price.

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.