The Law of Demand, Demand Schedule, and Demand Curve

Meaning and Definition of the Law of Demand

The law of demand states the relationship between the price of a commodity and the quantity demanded of it. 

It studies and explains the spending and purchasing habits of consumers at any time.

Whereas suppliers of goods and services tend to increase the supply of their products to the market (as a result of the increase in prices), consumers tend to react inversely. 

Consumers shrink their demand for goods and services whose prices have begun to increase.

This decrease in demand happens because consumers have to make purchases within their own financial limits. Naturally, they tend to curtail their purchases of costly items and shift their attention towards lower-cost commodities.

The law of demand is based on this trend of decreasing demand for goods and services whose prices are spiralling upwards.

So, the law of demand and the law of supply are inversely related to each other.

Definition of The Law of Demand

The law of demand states that, other factors remaining constant, as the price of a good or service increases, consumer demand for it will decrease. 

So, according to this law of demand, the price of a commodity and the demanded quantity are inversely related to each other. 

If the price rises, demand for the quantity will decrease, and if the price falls, the demanded quantity will increase.

• The demand for any commodity is expressed as @ the rate of its price and at a particular point in time or during a given period of time.
• Or, in other words, the demand for any quantity is to be mentioned in terms of its price at a particular point in time or during a given period of time.

Example:

The demanded quantity of sugar was 100 kg @ 30/per kg as at 9 AM. At 12 Noon, the demand was 80 kg @ 35/per kg.

Demand for sugar during the period 10 AM to 12 Noon was 200 kg @ 30/per kg.

Demand Schedule

A demand schedule is a chart showing various prices of a commodity and the quantities demanded at each price range.

Let me give an example here.

Suppose a consumer goes to purchase Sugar. He buys 5 kg of sugar when the price is Rs.30 per kg. Suppose the price increases to Rs. 40. 

Then he will buy only 4 kg, and if the price increases to Rs. 50, he will buy only 3 kg. 

As the price goes on increasing, he goes on decreasing his consumption. 

Or, conversely, when the prices fall, he will increase the quantity of purchases. 

The same thing can be represented in the demand schedule as below.

Demand Schedule for Sugar                                                      

Price of sugar	Qty. demanded
30	5 kg
40	4 kg
50	3 kg

The above example is for a particular person's individual demand. So, if we consider the demand of other people also for the commodity of Sugar, then it will be deemed as the total market demand for sugar. Suppose there are 10 people and each one demands various quantities at each price level. Then, you will have to add all the quantities demanded by all people for each price level to know the total demand at each price level. This is known as market demand for sugar. 

Demand Curve

A demand curve is a graph representing the relationship between the price of a commodity and the quantity demanded by consumers at each price level of that commodity. It is a graphical representation of the demand schedule.

So, from the above figures of demand for sugar at different prices, we can prepare the demand curve as shown in the figure below.

Demand Curve for Sugar

In the figure above (drawn by me by hand), the demand curve is the slant line at the top-right corner of the image. It slopes downward because, with every increase in price, demand decreases.

Regarding factors affecting supply and demand, you may view for details at this link.

The Law of Supply: Supply Schedule and Supply Curve

As we have seen earlier, a supplier always tries to sell more and more commodities when prices are high, and, conversely, restricts his supplies when prices start falling. This is the underlying law of supply.

The law of supply employs this basic reality in its definition. It assumes that, while other factors determining supply remain constant, price changes will result in changes in the quantity supplied.

The Law of Supply Definition

The law of supply states that "all other factors remaining constant, an increase in the price will result in an increase in quantity supplied and vice versa". 

In other words, the law of supply states that there is a direct relationship between price and quantity.

Businessmen, whether producers, sellers, or service providers, tend to release more of their products into the market when prices rise, in order to pocket more profits.

Conversely, when prices fall, they tend to withdraw or restrict stocks to stabilise the prices of their goods.

These variations in the supply chain are studied and controlled by preparing presentations through charts and graphs. They are known as "Supply Schedules" and "Supply Curves" in economics. 

Supply Schedule

A supply schedule is a table or chart showing the changes in quantities supplied at varying ranges of the price of a commodity.

Suppose a supplier deals in rice.

 

At a price of, say, Rs. 50 per kg, the supplier will put into the market all of his stock, say 10,000 kg of rice. 

If the price comes down to Rs. 45 per kg, he may sell only, say, 8,000 kg. 

If the price further goes down to Rs. 40, he will restrain more and will supply only 5,000 kg. 

On the other hand, suppose the price increases from Rs. 50 to Rs. 60 per kg, he will try to procure more stocks from other sources and increase his supplies to 15,000 kg. 

The same can be presented through a chart as shown below:

Supply Schedule chart

Price of Rice (Rs. Per kg)	Quantity of rice supplied (in Kg)
60	15,000
50	10,000
45	8,000
40	5,000

So, it is clear from the above supply schedule that the supplier decreases his supply quantity when prices fall. 

If you view the same chart from bottom to top, you will realise that the supplier has increased his supply whenever the price increased from the previous price. 

The same thing can be illustrated through a supply curve also.

Supply Curve

A supply curve is the line or graph connecting all the points representing supply levels at various commodity prices.

So, a Supply Curve can be defined as the graphic representation of the relationship between the price of a commodity and the quantities supplied by the supplier.

The quantities supplied are measured on the horizontal axis and the prices on the vertical axis in the graph below.

Example of Supply Curve:

From the above supply schedule of rice, we can draw the supply curve. 

Let us start with the price as 'zero' and quantity supplied also as zero. And then, denote the points from the Supply Schedule.

So, the supply curve will be like this, as represented below:

The supply curve will rise as prices increase, because the supplier will continue to increase the quantity supplied with every price increase, unless he is unable to do so because of other factors affecting supply. In such cases, when he is unable to maintain his supply, the supply curve may begin to fall.

There can be many factors that affect supply. To know the factors affecting supply, you may view the information at this link.

Revenue Definition, and Different Types of Revenue in Economics

Definition of Revenue:

According to the International Financial Reporting Standards (IFRS), Revenue is the inflow of economic benefits arising during the ordinary course of an entity's economic activities.

The inflows should directly come from its product-selling activities or services rendered. They should not include other income.

According to the above definition, Revenue = Gross Receipts from sales or services. Other receipts like interest, royalties, and rents (which are not part of their core business) are treated as Misc. Income/Receipts.

Revenue is also referred to as Gross Income or Gross Receipts.

Generally, revenue is measured as receipts accrued from sales or services performed during a specific period of time - say, a particular week, a particular month, or a year. It is irrespective of whether payment is received during that same period or not.

IFRS Definition vs Accounting Concept of Revenue:

But, for accounting purposes, while preparing the Profit and Loss/ Balance Sheets, or Revenue Budgets, all types of income are considered as revenue. So, an accountant takes receipts from the sale of assets, interest received from banks, and rent receipts, etc., as Revenue in his books.

Revenue is the income earned by a business enterprise, organisations, or governments. Revenue may be either in the form of sales proceeds from goods and services sold, or in the shape of receipts from other activities and sources of any enterprise or government. So, for business organisations, revenue includes sales income and/or fees received for services rendered.

In the case of Governments, revenue includes receipts from the collection of taxes, duties, and Bonds and Debentures, if any, invested by them. It can include even donations received from others, funds received from other social activities, etc. All these receipts are collectively known as revenue.

Financial Statements prepared by companies for arriving at Net Profit/Loss consider income received from other sources also as their receipts in order to tally them against their total expenditure.    

Different Types of Revenue in Economics

There are different concepts of revenue according to the nature of organisations.

Sometimes, revenue can be referred to as business revenue, government revenue or association revenue based on the nature of organisation or enterprise.

Business Revenue

Business revenue refers to income or receipts from normal business activities of any organisation. Businesses that indulge in the manufacturing and/or selling of products, or in providing services to their clients, receive income either in the form of sales or as fees for services. This income is known as 'business revenue'.

 

The main point is that the income should be from their primary business activity. 

If one is engaged in a rental business, then his business income is the rent received. 

If it is a financial institution, then its income will be from interest and other charges received from lending loans.

This business revenue can be classified into two parts: sales income and other income.

1) Sales Revenue or Sales Income;
Sales revenue denotes the income received by way of sales of goods or services. 

For a manufacturer, it is income from the sale of produced goods. 

For a grocery store or merchant, it is income from the sale of provisions or merchandise. 

For a banker, it can be the sale of loans. 

For a service provider, such as a consultant, barber, or cobbler, it is the service charges received. 

So, sales revenue is their business income.

2) Other Revenue or Other Income:
While performing a business, you may receive some income that is not directly related to your primary business activity. 

For example, you are running a manufacturing business. You sell your produce and receive the revenue. Now, you may not be spending all that income for your business. 

You may deposit some money in fixed deposits or invest in other investments. So, you will be receiving interest from these investments. It is not your sales income. It is to be termed as 'other income'.

Similarly, you may sell some old machinery or assets and buy new ones. This sale of old assets is not your primary sale. It is your 'other income'.

If you can rent a part of your building or any machinery to others for a short period, the rent received is also treated as 'other income'.

Government Revenue

Government revenue is entirely different from business revenue. Government revenue is the money received from various taxes and duties imposed by the government to meet its expenditure in the running of the government and funding various development programs of the country.

The receipts include collections from Income Tax, Goods and Services Tax, Sales Tax, etc., and duties such as Customs Duty, Excise Duty, Export/Import Duty, etc. 

Government revenue may also include income generated through financial and banking operations and through the railways and tourism departments. All these are part of government revenue intended for spending it back on public works and other welfare activities for the country.

Association Revenue (Social & Non-Profit Organisations)

Association revenue is that type of revenue generated by non-profit organisations and public associations like cooperatives and NGOs. It is a fund created through non-business-oriented activities for a common cause of the members of the organisation or for public welfare. The revenue generated includes membership fees of members, donations or charity funds received from outsiders, and any financial help received from governments, etc. They may also generate revenue through sponsorship of cultural or other programmes.

For information regarding the Concepts of Total Revenue, Average Revenue, and Marginal Revenue,

please go to this link: Concepts of Revenue and Calculation formulae

Definition of Cost: Different Types and Elements of Cost in Economics Explained

What is Cost

In Economics, Cost is the value of inputs employed to produce an output. It is the aggregate of various cost elements.

It includes the cost of materials, labour charges, rent or depreciation of tools incurred in producing the output, interest paid or foregone by employing the capital, and the value of efforts and sacrifices made by the producer in producing the output.

Cost can be defined as the monetary value of all materials, resources, and efforts involved in producing an output, along with the value of time, the opportunity foregone, and the risks involved in producing the output.

For example, to understand the elements of cost, look at the example of a housewife preparing food.

• The housewife purchases provisions and vegetables, etc. 
• She invests money in utensils, a gas stove, and gas. 
• She labours in the kitchen for hours cutting vegetables, cooking the ingredients, and doing other related tasks. 
• She employs a maid to wash dishes and pays her periodically. 
• She sweats in the kitchen instead of resting in the hall or her bedroom, watching TV or reading books. 
• Further, she risks getting cut or burning her fingers while cooking. 
• So each one of these factors, when taken in their monetary value, constitutes the cost factor of the food she prepared.

This is how the cost of any product is assessed. 

All elements taken together constitute the total cost of the product.

Types and Elements of Cost in Economics

The following are the different types of costs in economics that refer to different aspects of the cost.

• Total cost
• Fixed cost
• Variable cost
• Average cost
• Marginal cost
• Explicit cost
• Implicit cost

Now, let us have a look at the features of each and every aspect of these costs.

Total Cost

Total cost refers to the total amount of expenses incurred in producing the output, which includes the monetary value of each and every aspect mentioned in the above example of a housewife preparing food. It is the cost as a whole of the product. So, total cost constitutes all the expenses incurred in achieving the output.

Fixed Cost

Fixed cost is a more or less lump-sum cost that must be incurred irrespective of the quantity or quality of the product produced. It has no relation to the volume of output. 

For example, in the above illustration of a housewife preparing food, you can see that the stove is needed irrespective of the quantity of food to be cooked. Again, you need the utensils also for cooking. So, these are fixed expenses that are needed as a base for cooking the food. 

The risk factor and the labor are also there, which constitute fixed costs for most part of it. 

In general, fixed costs include all salaries and administrative expenses, including the value of depreciation of assets during that period. 

These are compulsory expenses incurred irrespective of production.

Here, you should note one point. The fixed cost for smaller quantities of production may be high, whereas if the production quantity increases, the fixed cost per unit decreases. 

With the same fixed expenses, you can produce more quantities up to some limits.

Variable Cost

Variable costs are variable in nature. They depend on the quantity and quality of the produce. If food is to be cooked for more people, the expenses increase, and for fewer people, they decrease. If you have to produce high-quality food, you need high-quality ingredients, which are more expensive. So, the cost depends on these factors.

In the above example of a housewife cooking food, the cost of provisions, vegetables, and gas consumption can vary depending on the quantity of food to be prepared. 

If you are cooking for four people, it will be less. But if you cook for 10 people, the total expenses will be much more. This is one variable cost example.

But, on the whole, you should note that the variable cost per unit of food may remain the same. Because the same quantity of provisions and vegetables is required per head.

Average Cost

Average cost refers to the cost per unit of production. It is derived by dividing the total cost by the number of units produced. 

Suppose in the above example of cooking food, if total expenses incurred are Rs.1,000 and the food is served to 10 people, the average cost per meal is 1000 / 10 = Rs.100 per meal. 

Or, if the total monthly expense for cooking comes to Rs.6,000, then the average cost per day is Rs.200 (6,000 / 30 days = 200). 

And if 4 people eat per day, then the average cost per head is 200 / 4 = 50.

Marginal Cost

Marginal cost is the extra amount of expenditure incurred for the addition of one unit of extra product.

Say, for example, a guest visited your home, and you cooked one more plate of meals for him. 

You had to spend on some extra rice, dal, and vegetables for him. Now, the value of these extra items is the additional expenditure incurred in cooking an extra meal. All other expenses remained the same. 

But you had to put in some more effort while cutting extra vegetables, etc. 

So, in this case, the marginal cost incurred is the value of that extra rice, pulses, vegetables, and any other extra ingredients used by you. 

This is the notion or concept of marginal cost.

Explicit Cost

Explicit means clearly and physically visible. You are seeing those expenses clearly without any doubt or misunderstanding. You will be paying the amount, can get bills for them, and enter the amounts in your records as proof of payment. 

In the above example, the cost of provisions, vegetables, utensils, and payment to your maid are all explicit costs.

Implicit Cost

Implicit means implied or understood. They can not be directly experienced. You are not making direct payments to outsiders to prove those expenses. But, you can evaluate such expenses with the aid of the prevailing market value of such expenses.

In the above-cited example of food preparation by the housewife, you can see that the gas stove and utensils are used for cooking. So, it is an element of cost. If you hire the same things from the market to cook food, you might have to pay some rent. So, that much of the rent is an implicit cost of the food. Or, you may calculate the depreciation (if the stove or utensils are too costly) and include that amount as an implicit cost, in place of rent.

So, whatever items get used in production that are not directly and completely identifiable with production, calculate the value of those items through other means of calculation. All such costs are known as implicit costs.

Production Process: Classification of Production Processes

We have learnt that Production is one of the major economic activities that employs land, labour, capital, and entrepreneurship as its factors of production.

Now, what is the production process? Let us understand how production takes place and what processes are involved in production activity.

Production Process Definition and Meaning

The production process can be defined as any activity involved in transforming inputs into outputs. It is the act of manufacturing or producing outputs of economic value to meet the demands and needs of customers and consumers, employing the various processes or techniques available. It involves employing two types of resources.

• The first type involves the employment of tools known as transforming resources. Land, building, labour or manpower, machinery, and managerial skills- all these are examples of transforming resources. They transform the inputs into end products.
• Similarly, production involves employing another kind of resource known as ingredients or inputs in achieving the desired level and quality of production. These ingredients are known as transformed resources. For example, in a cement production process, the ingredients used are limestone, gypsum, and ash, which get transformed into cement.

Classification of Production Processes

Now, coming to different types or classifications of production processes, each process can be identified and classified based on many different sets of features.

I am providing two major types of classification in this article. One classification is based on the volume and the type of market. The other classification is based on the nature of activities involved.

Classification Based on Volume of Production | Type of Market

This classification identifies the following types of production processes to target specific customers and volumes.

1) Mass Production Process/Flow Production Process:

 
In this process, production is carried out on a large scale, employing extensive machinery and automated processes.

Production quantities are not limited to any particular demands or orders but are decided by management through estimates. 

You are able to produce a wide range of output varieties and qualities on a large scale, as most of the work is automated and there is a continuous supply of inputs to achieve the output.

There will be different sections or departments of production staff overseeing and streamlining the activities from one stage of production to another, until the output is complete in all respects and put into the market for sale.

2) Job Production Process: 

Job production involves taking orders from customers and producing the goods according to those orders. 

It may include taking orders from different customers for different items or only for a specific item of production. 

But the quantity produced is equal to the orders placed by the buyer or customer. 

Examples: Hundred Cupcakes for a wedding ceremony; or four kinds of Sweet Dishes, 50 pieces each, for a birthday party.

3) Batch Production Process: 

In this process, goods are produced in batches in sequence according to your own set goals. 

If your target is to produce 4 types of items, each numbering 100 units, then you will produce them one by one. First, you will produce 100 units of item no. 1, then 100 units of item no. 2, and so on. 

Your attention will be concentrated on each item till it is produced completely. So, your machines and workforce are fully employed on each item of good till it is completed.

4) Just-in-Time Production Process: 

Just-in-time process involves producing goods or services as and when they are actually required. It may be similar to the job production process. But not exactly the same. 

Job production is directly linked with your customers, whereas just-in-time is related to demands or orders placed by your agents and retailers.

Production Processes Based on Nature of Functions

Production processes can be classified according to the nature of function or activity involved in the process. So this classification identifies the production process either as a manufacturing process, an administrative process, a selling and distribution process, or a marketing process.

This classification is useful for Cost Accountants. It helps in bifurcating the cost of production stage-wise.

Let us look at these processes:

1) Manufacturing Process

All activities directly related to the production of output are identified as the manufacturing process.

For example, if you are producing bread, the cost of the flour and the activities of making sponge with wheat flour, then fermenting it and mixing the flour to make dough, and baking the bread in an oven to make the final product- all these functions are known as the manufacturing process of the bread. It determines the basic cost of bread.

2) Administrative process

The administrative process involves the administrative expenses involved in the procurement of raw materials and tools for preparing the bread, the planning of resources including finances for running the business and management functions, etc.

3) Selling and Distribution Process

The actual selling functions, including storage in godowns or selling outlets, including the distribution of finished products to selling points and other related selling activities, are all to be cited as features of the selling process.

4) Marketing Process

The marketing process involves locating the market for goods by identifying more profitable markets through surveys and analysis reports; promoting sales through advertising and publicity; promoting the brand image of the product and the company; and promoting the company's shares, etc.