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Agricultural Science

Laws of demand and supply

What is ‘Demand?’

Demand is an economic principle that describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease demand, and vice versa.

Law of Demand

The law of demand states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises.

Demand Schedule

Demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price. A market demand schedule for a product indicates that there is an inverse relationship between price and quantity demanded.

Price (N)Quantity Demand (kg)
10010
8020
6030
4040
2050

Demand curve

This is a graph showing how the demand for a commodity or service varies with changes in its price.

Factors Affecting Demand

Even though the focus in economics is on the relationship between the price of a product and how much consumers are willing and able to buy, it is important to examine all of the factors that affect the demand for a good or service.

These factors include:

Price of the Product

There is an inverse (negative) relationship between the price of a product and the amount of that product consumers are willing and able to buy. Consumers want to buy more of a product at a low price and less of a product at a high price. This inverse relationship between price and the amount consumers are willing and able to buy is often referred to as The Law of Demand.

The Consumer’s Income

The effect that income has on the amount of a product that consumers are willing and able to buy depends on the type of good we’re talking about. For most goods, there is a positive (direct) relationship between a consumer’s income and the amount of the good that one is willing and able to buy. In other words, for these goods when income rises the demand for the product will increase; when income falls, the demand for the product will decrease. We call these types of goods normal goods.

However, for some goods the effect of a change in income is the reverse. For example, think about a low-quality (high fat-content) ground beef. You might buy this while you are a student, because it is inexpensive relative to other types of meat. But if your income increases enough, you might decide to stop buying this type of meat and instead buy leaner cuts of ground beef, or even give up ground beef entirely in favor of beef tenderloin. If this were the case (that as your income went up, you were willing to buy less high-fat ground beef), there would be an inverse relationship between your income and your demand for this type of meat. We call this type of good an inferior good. There are two important things to keep in mind about inferior goods. They are not necessarily low-quality goods. The term inferior (as we use it in economics) just means that there is an inverse relationship between one’s income and the demand for that good. Also, whether a good is normal or inferior may be different from person to person. A product may be a normal good for you, but an inferior good for another person.

The Price of Related Goods

As with income, the effect that this has on the amount that one is willing and able to buy depends on the type of good we’re talking about. Think about two goods that are typically consumed together. For example, bagels and cream cheese. We call these types of goods compliments. If the price of a bagel goes up, the Law of Demand tells us that we will be willing/able to buy fewer bagels. But if we want fewer bagels, we will also want to use less cream cheese (since we typically use them together). Therefore, an increase in the price of bagels means we want to purchase less cream cheese. We can summarize this by saying that when two goods are complements, there is an inverse relationship between the price of one good and the demand for the other good.

On the other hand, some goods are considered to be substitutes for one another: you don’t consume both of them together, but instead choose to consume one or the other. For example, for some people Coke and Pepsi are substitutes (as with inferior goods, what is a substitute good for one person may not be a substitute for another person). If the price of Coke increases, this may make Pepsi relatively more attractive. The Law of Demand tells us that fewer people will buy Coke; some of these people may decide to switch to Pepsi instead, therefore increasing the amount of Pepsi that people are willing and able to buy. We summarize this by saying that when two goods are substitutes, there is a positive relationship between the price of one good and the demand for the other good.

The Tastes and Preferences of Consumers

This is a less tangible item that still can have a big impact on demand. There are all kinds of things that can change one’s tastes or preferences that cause people to want to buy more or less of a product. For example, if a celebrity endorses a new product, this may increase the demand for a product. On the other hand, if a new health study comes out saying something is bad for your health, this may decrease the demand for the product. Another example is that a person may have a higher demand for an umbrella on a rainy day than on a sunny day.

The Consumer’s Expectations

It doesn’t just matter what is currently going on – one’s expectations for the future can also affect how much of a product one is willing and able to buy. For example, if you hear that Apple will soon introduce a new iPod that has more memory and longer battery life, you (and other consumers) may decide to wait to buy an iPod until the new product comes out. When people decide to wait, they are decreasing the current demand for iPods because of what they expect to happen in the future. Similarly, if you expect the price of gasoline to go up tomorrow, you may fill up your car with gas now. So your demand for gas today increased because of what you expect to happen tomorrow

The Number of Consumers in the Market

As more or fewer consumers enter the market this has a direct effect on the amount of a product that consumers (in general) are willing and able to buy. For example, a pizza shop located near a University will have more demand and thus higher sales during the fall and spring semesters. In the summers, when less students are taking classes, the demand for their product will decrease because the number of consumers in the area has significantly decreased.

What is ‘Demand Elasticity?’

Demand elasticity, in economics, refers to how sensitive the demand for a good is to changes in other economic variables. Demand elasticity is important because it helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors. A firm grasp of demand elasticity helps to guide firms toward more optimal competitive behavior. Elasticity greater than one are called “elastic,” elasticities less than one are “inelastic,” and elasticity equal to one are “unit elastic.”

What is ‘Price Elasticity Of Demand’

Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.

  1. Perfectly Elastic Demand:

When a small change in price of a product causes a major change in its demand, it is said to be perfectly elastic demand. In perfectly elastic demand, a small rise in price results in fall in demand to zero, while a small fall in price causes increase in demand to infinity. In such a case, the demand is perfectly elastic or ep = 00.

The degree of elasticity of demand helps in defining the shape and slope of a demand curve. Thuuerefore, the elasticity of demand can be determined by the slope of the demand curve. Flatter the slope of the demand curve, higher the elasticity of demand.

Though, perfectly elastic demand is a theoretical concept and cannot be applied in the real situation. However, it can be applied in cases, such as perfectly competitive market and homogeneity products. In such cases, the demand for a product of an organization is assumed to be perfectly elastic.

From an organization’s point of view, in a perfectly elastic demand situation, the organization can sell as much as much as it wants as consumers are ready to purchase a large quantity of product. However, a slight increase in price would stop the demand.

  1. Perfectly Inelastic Demand:

A perfectly inelastic demand is one when there is no change produced in the demand of a product with change in its price. The numerical value for perfectly inelastic demand is zero (ep=0).

Demand remains constant for any value of price. Perfectly inelastic demand is a theoretical concept and cannot be applied in a practical situation. However, in case of essential goods, such as salt, the demand does not change with change in price. Therefore, the demand for essential goods is perfectly inelastic.

  1. Relatively Elastic Demand:

Relatively elastic demand refers to the demand when the proportionate change produced in demand is greater than the proportionate change in price of a product. The numerical value of relatively elastic demand ranges between one to infinity.

Mathematically, relatively elastic demand is known as more than unit elastic demand (ep>1). For example, if the price of a product increases by 20% and the demand of the product decreases by 25%, then the demand would be relatively elastic.

  1. Relatively Inelastic Demand:

Relatively inelastic demand is one when the percentage change produced in demand is less than the percentage change in the price of a product. For example, if the price of a product increases by 30% and the demand for the product decreases only by 10%, then the demand would be called relatively inelastic. The numerical value of relatively elastic demand ranges between zero to one (ep<1). Marshall has termed relatively inelastic demand as elasticity being less than unity.

  1. Unitary Elastic Demand:

When the proportionate change in demand produces the same change in the price of the product, the demand is referred as unitary elastic demand. The numerical value for unitary elastic demand is equal to one (ep=1).

Supply

Supply may be defined as the quantity of commodity which a producer is willing and able to offer for sale at a given price over a particular period of time.

The quantity of commodity offered for sale in the market is known as Effective supply.

Law of Supply

The law of supply states that the higher the price , the higher the quantity of produce that will be supplied or the lower the price the lower the quantity of produce that will be offered for sale.

Supply schedule

Supply scheduled is a table which shows the relationship between price and quantity of commodity supplied. It shows the quantity of goods that can be supplied as the price of goods change.

Supply Curve

Supply curve, in economics, graphic representation of the relationship between product price and quantity of product that a seller is willing and able to supply. Product price is measured on the vertical axis of the graph and quantity of product supplied on the horizontal axis.

  1. Change in the cost of production
  2. An increase in the number of producers will cause an increase in supply
  1. Expansion in capacity of existing firms, e.g. building a new factory
  1. An increase in supply of a related good e.g. beef and leather
  1. Climatic conditions are very important for agricultural products
  1. Improvements in technology, e.g. computers, reducing firms costs
  1. Lower taxes reduce the cost of goods
  1. Increase in government subsidies will also reduce cost of goods

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price. It is necessary for a firm to know how quickly, and effectively, it can respond to changing market conditions, especially to price changes. The following equation can be used to calculate PES.

The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good, with all other factors remaining the same.

Implications of demand and supply on agricultural production

  1. When demand is lower than supply , the price of the produce will fall and farmers will be discouraged from further production
  2. When demand exceed supply ,price would tend to rise and farmers would be stimulate to produce more
  3. Higher supply of agricultural products may lead to reduction in price and demand
  4. high cost of a product may lead to low demand and high demand for its substitute
  5. High taste of agricultural products by consumers will lead to high demand for such products
  6. Increase in the income of consumers may lead to increase in the demand agricultural products and vice versa
  7. high cost of production may lead to low supply and high prices of products and vice versa
  8. High cost and lack of farm input may lead to low supply and high cost of farm products and vice versa
  9. Favourable weather and climate for production will lead to high supply of farm products and vice versa
  10. increase in the numbers of farmers will lead to higher supply and reduction in the price of food,and vice versa

Law Of Diminishing Returns

A concept in economics that if one factor of production (number of workers, for example) is increased while other factors (machines and workspace, for example) are held constant, the output per unit of the variable factor will eventually diminish.

Although the marginal productivity of the workforce decreases as output increases, diminishing returns do not mean negative returns until (in this example) the number of workers exceeds the available machines or workspace. In everyday experience, this law is expressed as “the gain is not worth the pain.

Importance Of Law Of Diminishing Returns In Agriculture

  1. It helps the entrepreneurs to determine the best proportion to combine the various factors of production
  2. It also enables him to know when to stop adding more input of the variable factors to a fixed factors
  3. It also enables him to determine the wages he will pay to his workers
  4. It enables him to minimize cost and avoid wastage of resources in order to make more profits.

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