Supply and Demand: Caiib Paper 1 (Module A), Unit 2

Supply and Demand: Caiib Paper 1 (Module A), Unit 2

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So, here we are providing “Unit 2: Supply and Demand” of “Module A: Economic Analysis” from “Paper 1: Advanced Bank Management (ABM)”.

The Article is Caiib Economic Analysis Unit 2:Supply and Demand

♦Demand

  • The amount of a commodity people buy depends on its price. The higher the price of an article, other things held constant; fewer the units consumers are willing to buy. This relationship between price and quantity bought is called the demand schedule, or the demand curve.
  • Theory of Supply and Demand shows how consumer preferences determine consumer demand for commodities, while business costs determine the supply of commodities.
Demand Schedule or the Demand Curve
  • A demand schedule is a table that shows the quantity demanded at different prices in the market. A demand curve shows the relationship between quantity demanded and price in a given market on a graph. The law of demand states that a higher price typically leads to a lower quantity demanded.
Law of Downward – sloping demand
  • When the Price of a commodity is raised (and other things being constant), buyers tend to buy less of the commodity. Similarly, when the price is lowered, other things being constant, quantity demanded increases.
Factors influences the Demand Curve
  • Average levels of income
  • The size of market/population
  • The prices and availability of related goods
  • Tastes or Preferences – Special Influences
There are two types of Demand Schedules:
  • Individual Demand Schedule
  • Market Demand Schedule
Individual Demand Schedule

It is a demanding schedule that depicts the demand of an individual customer for a commodity in relation to its price. Let us study it with the help of an example.

Price per unit of commodity X (Px) Quantity demanded of commodity X (Dx)
100 50
200 40
300 30
400 20
500 10

The above schedule depicts the individual demand schedule. We can see that when the price of the commodity is ₹100, its demand is 50 units. Similarly, when its price is ₹500, its demand decreases to 10 units.

Thus, we can conclude that as the price falls the demand increases and as the price raises the demand decreases. Hence, there exists an inverse relationship between the price and quantity demanded.

Individual Demand Curve
  • It is a graphical representation of the individual demand schedule. The X-axis represents the demand and Y-axis represents the price of a commodity.

  • The above demand curve shows the demand for Gasoline. When the price of gasoline is $3.5 per litre, its demand is 50 litres and when the price is $0.5 per litre, its demand is250 litres.
Market Demand Schedule
  • It is a summation of the individual demand schedules and depicts the demand of different customers for a commodity in relation to its price. Let us study it with the help of an example.
Price per unit of commodity X Quantity demanded by consumer A (QA) Quantity demanded by consumer B (QB) Market Demand              Q+ QB
100 50 70 120
200 40 60 100
300 30 50 80
400 20 40 60
500 10 30 40
  • The above schedule shows the market demand for commodity X. When the price of the commodity is ₹100, customer A demands 50 units while the customer B demands 70 units.
  • Thus, the market demand is 120 units. Similarly, when its price is ₹500, Customer A demands 20 units while customer B demands 30 units.
  • Thus, it’s market demand decreases to 40 units. Thus, we can conclude that whether it is the individual demand or the market demand, the law of demand governs both of them.
Market Demand Curve

It is a graphical representation of the market demand schedule. The X-axis represents the market demand in units and Y-axis represents the price of a commodity.

♦Supply

Supply
  • The supply schedule (or supply curve) for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell, other things being constant.
  • A firm sell 1000 units of a commodity at Rs 10 per unit. Its price elasticity of supply is 3. Number of units the firm will offer for sale if price falls to Rs 7.5 will be ……
  • Friends, please don’t get confused with Price Elasticity of Demand. In Price Elasticity of Demand, when the price is increased, the quantity demanded will be decreased. But in Price Elasticity of supply, when the price is increased, quantity supplied will be increased. Because, the supplier will supply more quantity of item when the price is increased.

Let us solve this one.

Price Elasticity of supply = percentage change in quantity supplied/percentage change in price

3   = ((1000-x)*100/1000)/((10-7.5)*100/10)
= ((1000-x)/10)/(2.5*10)
= ((1000-x)/10)/25
75  = (1000-x)/10
750  = 1000-x
x = 1000-750
= 250

Forces behind the supply Curve
  • Cost of Production
  • Prices of inputs and technological advances
  • Government Policy
  • Prices of related goods
  • Special Factors like weather influence on farming and agro-industry
Supply Schedule
  • It is a statement in the form of a table that shows the different quantities of a commodity that a firm or a producer offers for sale in the market at different prices.
  • It denotes the relationship between the supply and the price, while all non-price variables remain constant.
There are two types of Supply Schedules:
  • Individual Supply Schedule
  • Market Supply Schedule
Individual Supply Schedule
  • It is a supply schedule that depicts the supply by an individual firm or producer of a commodity in relation to its price. Let us understand it with the help of an example.
Price per unit of commodity X (Px) Quantity supplied of commodity X (Dx)
100 1000
200 2000
300 3000
400 4000
500 5000
  • The above schedule depicts the individual supply schedule. We can see that when the price of the commodity is ₹100, its supply is 1000 units. Similarly, when its price is ₹500, its supply increases to 5000 units.
  • Thus, we can conclude that as the price falls the supply decreases and as the price rises the supply also increases. Hence, there exists a direct relationship between the price and quantity supplied.
Individual Supply Curve
  • It is a graphical representation of the individual supply schedule. The X-axis represents the supply and Y-axis represents the price of a commodity. There exists a direct relationship between price and quantity supplied of a commodity.
Market Supply Schedule
  • It is a summation of the individual supply schedules and depicts the supply of different customers for a commodity in relation to its price. Let us understand it with the help of an example.
Price per unit of commodity X Quantity supplied by firm A (QA) Quantity supplied by firm B (QB) Market Supply            Q+ QB
100 1000 3000 4000
200 2000 4000 6000
300 3000 5000 8000
400 4000 6000 10000
500 5000 7000 12000

 

  • The above schedule shows the market supply of commodity X. When the price of the commodity is ₹100, firm A supplies 1000 units while the firm B supplies 3000 units.
  • Thus, the market supply is 4000 units. Similarly, when its price is ₹500, firm A supplies 5000 units while firm B supplies 7000 units. Thus, it’s market demand increases to 12000 units.
  • Thus, we can conclude that whether it is the individual supply or the market supply, the law of supply governs both of them.
Market Supply Curve
  • It is a graphical representation of the market supply schedule. The X-axis represents the market supply in units and Y-axis represents the price of a commodity.

♦Important Point

  • Supply increases (or Decreases) when the amount supplied increases (or Decreases) at each market price.
  •  Supply and demand interacts to produce equilibrium price and quantity or market equilibrium.
  • The Market Equilibrium comes at that price and quantity where the forces of supply and demand are in balance.
  •  At the Equilibrium price, the amount that buyers want to buy is just equal to the amount that sellers want to sell.
  • A Market equilibrium comes at the price at which quantity demanded equals quantity supplied.
  • The Equilibrium Price is also called as the Market Clearing Price.

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