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Theory of demand and supply and Market Efficiency, Lecture notes of Management Theory

MIT Art, Design and Technology UniversityManagement Theory

Theory of demand and supply and Market Efficiency

Typology: Lecture notes

2016/2017

Uploaded on 05/07/2022

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Unit:-2
Theory of demand and supply and Market Efficiency
•Demand function:- The functional relationship between quantity demanded
and its all the determinants is known as demand function. The change in
determinants of demand changes the amount of demand. The pricing and
non pricing determinants cause change in amount of demand. The price
factor creates movement along the demand curve where as non pricing
factors cause to shift in demand curve. A demand function of a commodity
can be expressed as- Qx= f(Px, Y, T, Py, E. Ad…….). The equation shows the
mathematical relationship between the quantity demanded of a commodity
and its various determinants. The single variable demand function is based
on the law of demand which show inverse relationship between price and
quantity demanded. It can be expressed as Qx=f(Px).
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Unit:-

Theory of demand and supply and Market Efficiency

  • (^) Demand function:- The functional relationship between quantity demanded and its all the determinants is known as demand function. The change in determinants of demand changes the amount of demand. The pricing and non pricing determinants cause change in amount of demand. The price factor creates movement along the demand curve where as non pricing factors cause to shift in demand curve. A demand function of a commodity can be expressed as- Qx= f(Px, Y, T, Py, E. Ad…….). The equation shows the mathematical relationship between the quantity demanded of a commodity and its various determinants. The single variable demand function is based on the law of demand which show inverse relationship between price and quantity demanded. It can be expressed as Qx=f(Px).
  • (^) Shift in demand curve: The change in quantity demanded due to non pricing factors (income, taste and preference, population etc.) is known as shift in demand curve. It makes the demand curve to change from its original position rightward or leftward remaining the price constant. Supply Function: The functional relationship between quantity supplied and its all the determinants is known as supply function. The change in determinants of supply changes the amount of supply. The pricing and non pricing determinants cause change in amount of supply. The price factor causes movement along the supply curve where as non price

ii. Non linear supply function: A supply function is said to be non linear when the slope of supply curve creates a real supply curve (curvilinear). Non linear supply function gives curvilinear supply curve in stead of a supply line. The slope supply curve changes all along the curve. It takes the form of a power function. Such as SX=APXb The upward sloping supply curve represents non linear supply function or non linear supply curve as shown in the figure. Movement along the supply curve: Movement along the supply curve is defined as the change in supply due to change in its price. Other things remaining the same when price of the product increases, the supply of the product also increases. Due

  • (^) Shift in supply curve:
  • (^) Due to change in non pricing determinant of supply, the amount of supply also changes. Due to which the supply curve changes its position. The change in the position of supply curve inward or outward is known as shift in supply curve. In the given figure OP is the original price where as OQ is the original quantity supplied and SS is the original supply curve. When amount of supply increases due to positive change in non pricing determinant of supply, the supply curve shifts right ward in the form of S 1 S 1 .On the other hand, when amount of supply reduces due to negative effect of non pricing determinants of supply, the supply curve shifts inward in the form of S 2 S 2. This change in the position of supply curve is known as shift in supply curve. E1 E E
  • (^) Cont… Market equilibrium can be explained with the help of following figure as well. In the given figure DD is a downward sloping demand curve where as SS is an upward sloping supply curve. They intersect each other at point E and establishes equilibrium. The equilibrium determines OP price and OQ quantity. When price rises to OP1, supply is excess over the demand and creates disequilibrium which causes the price to fall towards equilibrium. Similarly, when price falls to OP2, there is excess demand over supply. This causes the price to rise towards equilibrium. Finally equilibrium is attained at OP price where D=S is occurred.
  • (^) Types of demand function
  • (^) Linear demand function:- A demand function is said to be linear when the slope of the demand curve remains constant throughout it length. The linear demand function can be expressed as-Dx=a-bPx. If the value of a and b are known, total demand (Dx) for any given price can be obtained. In the given figure,