Demand & Supply

Learning Objective: Analyze demand and supply curves and predict market changes

During Dashain, the demand for goats skyrockets across Nepal. Prices surge from around Rs. 15,000 to Rs. 25,000 or more per goat. Meanwhile, during the off-season, goat prices drop back down. This real-life price fluctuation is a perfect example of demand and supply at work.

The Law of Demand

The Law of Demand states: When the price of a good increases, the quantity demanded decreases (and vice versa), assuming all other factors remain constant (ceteris paribus).

Why? When prices rise, consumers can afford less of the good, and they may switch to cheaper alternatives.

Example: When the price of Wai Wai noodles increases from Rs. 20 to Rs. 30, some consumers switch to cheaper brands or eat rice instead, reducing the quantity demanded.

Demand Curve

The demand curve slopes downward from left to right, showing the inverse relationship between price and quantity demanded.

The Law of Supply

The Law of Supply states: When the price of a good increases, the quantity supplied increases (and vice versa), ceteris paribus.

Why? Higher prices make production more profitable, encouraging producers to supply more.

Example: If the price of Nepali tea rises in international markets, more tea producers in Ilam and Jhapa are motivated to grow and supply tea.

Supply Curve

The supply curve slopes upward from left to right, showing the direct relationship between price and quantity supplied.

Shifts vs. Movements

Movement along the curve happens when the price of the good itself changes.

Shift of the curve happens when a non-price factor changes:

| Demand Shifts | Supply Shifts | |--------------|--------------| | Change in income | Change in production costs | | Change in tastes/preferences | New technology | | Price of related goods | Government subsidies or taxes | | Population changes | Natural disasters |

Example: If Nepal imposes a subsidy on fertilizers, the cost of producing rice falls, and the supply curve shifts to the right (more rice supplied at every price).

Elasticity Basics

Price Elasticity of Demand measures how sensitive quantity demanded is to a price change.

• Elastic demand: A small price change causes a large change in quantity (e.g., luxury goods, branded clothing)
• Inelastic demand: Price changes have little effect on quantity (e.g., rice, salt, petrol -- essentials in Nepal)

Formula: Price Elasticity = % Change in Quantity Demanded / % Change in Price

Key Term: Ceteris paribus is a Latin phrase meaning "all other things being equal." It is used in economics to isolate the effect of one variable.

Summary

• The Law of Demand shows an inverse relationship between price and quantity demanded.
• The Law of Supply shows a direct relationship between price and quantity supplied.
• A movement along the curve is caused by price changes; a shift is caused by non-price factors.
• Elasticity measures how responsive demand or supply is to price changes.