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Demand & Supply: Meaning, Factors, Types, Law - Economics Study Notes

Last Updated on Apr 05, 2025
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Demand and supply is one of the most integral aspects of economics. Demand and supply is important not only for examination point of view but also for practical knowledge. In the following article, we will learn and understand the meaning, factors influencing, types, law, and examples of demand and supply in a market.

    •  
  • The law of demand and supply is a theory that establishes the relationship between the sellers and buyers of a particular commodity.
  • The theory defines the relationship between the price of the commodity and the willingness of the buyers to either buy or sell that commodity.
  • In normal conditions, as the price increases, sellers are willing to supply more and demand less. If the price falls, the sellers demand more and supply less.
  • The theory of demand and supply is based on the law of demand and the law of supply. The two laws come together to determine the actual market price and the volume of commodities in a market.

Let us learn more about demand and supply from the following sections in the article. Candidates planning to appear for the UPSC IAS and other competitive exams shall be able to learn and understand the topic better from the following Economics study notes.

Check out the Economics Syllabus for UPSC Prelims Exam here.

Demand & Supply – Introduction

The law of demand and supply is one of the most important as well as basic economic laws built on almost all economic principles. In the real market, people’s willingness to supply and demand a commodity determines the market equilibrium price, or the price where the quantity of the commodity that people are willing to supply equals the quantity that people demand.

However, various factors can influence both demand and supply, resulting in their increment or decrement in one way or the other.

A perfectly competitive market comprises buyers and sellers who are driven by their self-interested objectives.

  •  
  • Objective of the consumer is to maximize their respective preferences
  • Objective of the firms is to maximize their respective profits

Hence, both the consumers and firms objectives are compatible in the equilibrium.

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What is Demand?

Demand is when a customer desires for a particular commodity at the given price in which they are ready to buy in one market at different prices during a certain period of time. Hence, there can be two aspects of demand:

  1. Willingness to buy: Customer’s desire for the product
  2. Ability to pay: Customer’s purchasing power to pay the price for the desired commodity

The demand of the customers depends upon their needs and preferences. Hence, to create demand in the market, the following are essential:

  •  
  • Desire for the commodity
  • Means to purchase the commodity
  • Willingness to use those means for purchasing the commodity

Law of Demand

When there is a rise in the price of a commodity, the customer demands less quantity. Whereas, when the prices of the commodity fall, the demand for the commodity will rise.

In the above diagram, the vertical axis is the price of the commodity, and the horizontal axis is the quantity demanded for the commodity. The demand curve indicates the inverse relationship between the quantity and price of the commodity.

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Determinants of Demand

Following are the determinant factors of demand:

  •  
  • Price of the commodity: As there is an inverse relationship between price and demand of the commodity, whenever the price of the commodity increases, the quantity demanded decreases.
  • Price of the related commodities: These can be of two types-
    • Complementary commodities: Commodities that are consumed together, like, shoes and socks, smartphone and its cover, etc. Hence, a rise in the price of one commodity will lead to the demand of the other commodity to fall.
    • Competing commodities or alternatives: Commodities that are consumed to satisfy the same want are counted as alternatives for one another. For eg., soap and body wash, notepad and notebook, etc. When the price of the commodity rises, the demand for its alternatives or competitors increases.
    • Income of the consumers: The purchasing power of the consumer mainly depends on his income. Hence, higher the income of the consumer, greater will be the quantity demanded.
    • Consumers’ tastes and preferences: These change over time and it is noted that the trending items are mostly in demand as opposed to the obsolete ones.

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Types of Demand

In this section, let’s learn about the types of demand.

Types Meaning
Price Demand The number of goods and/ or services an individual is eager to buy at a given price.
Cross Demand The demand of a commodity is not subject to its own price, but the price of other similar products.
Income Demand The eagerness of a person to buy a definite quantity of a commodity at a given income level.
Joint Demand When two commodities are demanded because they work together to provide a benefit to the consumer.
Composite Demand When commodities have more than one use, an increase in the demand for one product leads to a fall in supply of the other.
Derived Demand The commodities demanded or needed for manufacturing commodities and which satisfy the consumer indirectly.

What is Supply?

Supply refers to the quantity of a commodity or service that is offered by the manufacturer at various prices to the customers during a given point of time. Hence, the determinants of supply are:

  1. Willingness: The quantity of the commodity that the producers are willing to sell at various prices
  2. Ability to supply: The quantity of the commodity available with the producers to sell at a point of time

The supply can be of any commodity that a particular firm has offered to sell in the market.

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Law of Supply

The law of supply implies that when there is an increase in the price of the commodity, the quantity of the commodity produced and available for sale also increases. On the other hand, when the price of the commodity drops, the supply also decreases. This occurs because of the fact that the higher the price, the higher will be the profit margin.

In the above graph, the vertical axis represents the price of the commodity, while the horizontal axis is the quantity supplied. The Supply curve implies a direct relationship between the quantity supplied and price of the commodity.

Demand Vs Supply

 

Following is a comparison chart showing the differences between demand and supply:

Demand Points of Differences Supply
It is the desire of a buyer and their ability to pay for a particular commodity at a certain price. Meaning It is the quantity of a commodity which is made available for the consumers by a firm at a certain price.
Downward-sloping Curve Upward-sloping
Inverse Relationship with Price Direct
Customer Implies to Firm
  • Taste & preferences
  • Number of buyers
  • Buyer expectations
  • Buyer Income
  • Price of related commodities
 Other determinants
  • Price of the resources
  • Number of firms producing the commodity
  • Technological advancements
  • Taxes, duties, subsidies

Equilibrium Point

The equilibrium point is a situation wherein the quantity demanded and the quantity supplied of a commodity intersect. This represents the equilibrium price. It is the point at which both the buyers and the sellers are satisfied. Equilibrium is also called the market-clearing price or market equilibrium.

Price  Quantity Demanded Quantity Supplied
10 10 50
8 20 40
6 30 30
4 40 20
2 50 10

Based on the above table, here’s a graph stating the demand and the supply for a commodity at various price ranges.

In the above graph, point E represents the intersection of both supply and demand, resulting in an equilibrium point.

When there is equilibrium, the quantity demanded and supplied helps the business to stabilize and survive in the market for a longer duration. When there is disequilibrium, its adverse effects are seen on the firm, markets, and other commodities as well as the economy.

You might also be interested in: Money & Types study notes!

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Demand & Supply FAQs

The law of supply implies that when there is an increase in the price of the commodity, the quantity of the commodity produced and available for sale also increases.

When there is a rise in the price of a commodity, the customer demands less quantity. Whereas, when the prices of the commodity fall, the demand for the commodity will rise.

Demand is when a customer desires for a particular commodity at the given price in which they are ready to buy in one market at different prices during a certain period of time.

Supply refers to the quantity of a commodity or service that is offered by the manufacturer at various prices to the customers during a given point of time.

The equilibrium point is a situation wherein the quantity demanded and the quantity supplied of a commodity intersect.
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