unit-2-new.pptx

8/9/2019 unit-2-new.pptx

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DETERMINANTS OF DEMAND

1. Price of that commodity(Higher the pricelower is the Demand)

2.

Income of the consumer ( Directly related)

3.

Price of related goods

1. Substitutes

2. Complements

4.

Taste and preferences

5.

Future expectations

1. Related to future income

2. Related to future price of the goods and its

related goods


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DEMAND ANALYSIS

Law of Demand:

Law of demand expresses the relationship betweenthe Quantity demanded and the Price of thecommodity.

The law of demands states that,

if other things remaining constant the lower the

price of a commodity the larger the quantitydemanded of it and vice versa.

In simple terms other things remain constant, ifthe price of the commodity increases, the demandwill decrease and if the price of the commoditydecreases, the demand will increase.

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DEMAND ANALYSIS

Assumptions:

No change in taste and preference.

Income of the consumer is constant.

No change in customs, habit, quality of

goods.

No change in substitute products, related

products and the price of the product.

No complementary goods.

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EXPLANATION OF THE LAW:

1.

Demand Schedule

2.

Demand Curve


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Demand Schedule:

A demand schedule is a numerical tabulation that shows thequantity of demeaned commodity at different prices.

The demand schedule may be of 2 types :

1.

Individual demand Schedule

2.

Market demand Schedule.

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Table Showing the IDS & MDS:

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DEMAND ANALYSIS

Graphical Representation of IDC & MDC

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Price/

Quantity

Product Total/

Market

A B

10 30 40 70

20 15 20 35


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DEMAND ANALYSIS

Demand Distinctions:

1. Individual andmarket demand

2. Producers Good and Consumers Good.

3. Derived Demand and Autonomous Demand.

4. Industry Demand and Firm (Company) Demand.

5. Short Run Demand andLong Run Demand.

6. Joint demandandrival demand

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DEMAND ANALYSIS

Demand Function:

A Mathematical relationship between quantity demanded

of the commodity and its determinants is known as

Demand Function.

When this relationship relates to the demand by an

individual consumer it is known as Individual demand

function and while it relates to the market its known as

market demand function.

Individual Demand Function :

Qdx = f (Px, Y, P1. Pn-1, T, A, Ey. Ep, U)

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WHERE

Qdx = Quantity demanded for product X.

Px = Price of product XY = Level of Income

P1..Pn-1 = Prices of all other products

T = Taste of the consumer

A = Advertisement

Ey = Expected future incomeEp = Expected future price

U = Other determinants not covered inthe list of determinants.

Market Demand Function:

Qdx = f (Px, Y, P1. Pn-1, T, A, Ey, Ep, U, D, P) P = Population

D = Distribution of consumers.

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Exceptions of Law of Demand:

In certain cases the slope of Demand Curve is

upward i.e. positively sloped, it is known as the

exceptions of Law of Demand.

These exceptions are as follows:

1. Giffen Goods (Giffen Paradox)

2. Emergency (War etc)

3. (Car, Fancy Cloths etc) and (Fancy Diamonds,

High price shoes, etc)

4. Depression ( Price and quantity demand is low)

5. Ignorance Effect (High priced commodity is better

in quality)

6. Speculation (Future change in price)

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Shift of a demand curve:

1. The shift of a demand curve takes place when

there is a change in any non-price determinant of

demand, resulting in a new demand curve. Non-price

determinants of demand are those things that will

cause demand to change even if prices remain the

same.

2. Some of the more important factors are the prices of

related goods (both substitutesandcomplements),

income, population, and expectations.

3. Upward and downward demand curve
http://en.wikipedia.org/wiki/Substitute_goodhttp://en.wikipedia.org/wiki/Complementary_goodhttp://en.wikipedia.org/wiki/Complementary_goodhttp://en.wikipedia.org/wiki/Substitute_good


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SHIFT IN DEMAND CURVE:THE SHIFT FROM D1 TO D2 MEANS AN INCREASE IN

DEMAND WITH CONSEQUENCES FOR THE OTHER

VARIABLES


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ELASTICITY OF DEMAND

Elasticity of demand is defined as the percentage change in

quantity demanded caused one percent change in each

of the determinants under consideration while the other

determinants are held constant.

Ed = change in quantity demanded / change in the

determinant.

There are mainly five types of Elasticity of Demand :

Price Elasticity of demand

Income Elasticity of demand

Cross Elasticity of demand

Promotional Elasticity of demand

Expectation Elasticity of demand

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Price Elasticity of Demand :

Price Elasticity of Demand measures the degree of

responsiveness of the quantity demanded of a commodity due

to a change in its own price.

Ep = - ( change in quantity demanded) /

( change in the Price).

Here we ignore the ve sign as the relation between price and

the quantity demanded is opposite.

Price Elasticity of Demand are of 5 types :

1. Perfectly elastic demand

2. Perfectly / Absolutely inelastic demand

3. Relatively Elastic demand

4. Relatively inelastic demand

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1) Elastic:

The change in quantity > change in price.

From the diagram below we see a small change in price

brings about a large change in the quantity demanded.

This happens when there are many substitutes in the

marketplace.

Ex: Luxuries goods


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2) Inelastic:

It is the reverse of elastic.

The change in quantity < change in price.

Examples of this are necessities like food and fuel

Consumers will not reduce their food purchases if

food prices rise, although there may be shifts in the

types of food they purchase.


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3) Unit elasticity:

The change in quantity = change in price.

From the diagram below we see a change in price

brings about an exact change in the quantity

demanded.

A 2 change in price brings about a 2 change in

quantity demanded


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4) Perfectly elastic:

The change in price is zero.

At the market going price P*, the quantity demanded

is infinite.

So by the formula of elasticity:

E

d

(perfectly elastic) = ( change in Q

d

) (

change in price)

=0

=

Imaginary Situation


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5) Perfectly inelastic: The change in quantity is zero.

At any price, the quantity demanded is the same.

The consumption of this commodity is fixed, and not

dependent on price.

E

d

(perfectly inelastic) = ( change in Q

d

) ( change in

price)

=0

=0

Ex: Life saving Drug


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Income Elasticity of Demand:

Income Elasticity of Demand measures the degree of

responsiveness of the quantity demanded of a commodity due

to a change in money income of the consumer.

Ey= (

change in quantity demanded) /

( change in the Money Income).

Cross Elasticity of Demand:

Cross Elasticity of Demand measures the degree of

responsiveness of the quantity demanded of one commodity

due to a change in price of some related goods.

Exy= (

change in quantity demand of goods Y) /

( change in the price of goods X).

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INCOME ELASTICITY OF DEMAND

Income elasticity of demand can be used

as an indicator of industry health, future

consumption patterns and as a guide to

firms investment decisions.

income elasticity of demand measures the responsiveness
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income elasticity of demand measures the responsivenessof the demand for a good to a change in the income of thepeople demanding the good .

For example, if, in response to a 10% increase in income, thedemand for a good increased by 20%, the income elasticityof demand would be 20%/10% = 2.

A negative income elasticity of demand is associated withinferior goods; an increase in income will lead to a fall inthe demand and may lead to changes to more luxurioussubstitutes.

A positive income elasticity of demand is associated withnormal goods; an increase in income will lead to a rise indemand.

If income elasticity of demand of a commodity is less than 1,it is a necessity good.

If the elasticity of demand is greater than 1, it is a luxury goodor a superior good.

A zero income elasticity (or inelastic) demand occurs whenan increase in income is not associated with a change in

the demand of a good. These would be sticky goods.

1 High income elasticity of demand:
http://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Elasticity_(economics)http://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Inferior_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Inferior_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Inferior_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Normal_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Normal_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Necessity_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Luxury_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Luxury_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Superior_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Sticky_(economics)http://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Sticky_(economics)http://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Superior_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Luxury_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Luxury_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Luxury_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Necessity_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Normal_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Normal_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Inferior_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Inferior_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Inferior_goodhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Supply_and_demandhttp://localhost/var/www/apps/conversion/tmp/scratch_3/wiki/Elasticity_(economics)


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1. Highincome elasticity of demand:

In this case increase in income is accompanied by relatively larger

increase in quantity demanded. Here the value of coefficient

Ey is greater than unity (Ey>1). E.g.: 20% increase in quantity

demanded due to 10% increase in income.

2. Unitaryincome elasticity of demand:

3. Lowincome elasticity of demand:

4. Zero income elasticity of demand:(Ey=0). E.g.: No change in quantity demanded even 10% increase in

income.

5. Negativeincome elasticity of demand:

In this case increase in income is accompanied by decrease inquantity demanded. Here the value of coefficient Ey is less than

zero/negative (Ey


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TYPES OF CROSS ELASTICITY OF

DEMAND

1.

Zero cross elasticity of demand (when

Goods are not related to each other)

2.

Negative cross elasticity of demand (In

Complementary goods)

3. Positive cross elasticity of demand(Substitute)

4.

Infinite cross elasticity of demand

(Imaginary situation)


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Advertising or Promotional Elasticity of Demand:

Advertising or Promotional Elasticity of Demand

measures the degree of responsiveness of the

quantity demanded of a commodity due to a change

in expenditure on advertising and other sales

promotion activities.

Ea = ( change in quantity demanded) /

( change in the Expenditure on

Advertisement).

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Factors affecting the Elasticity of Demand :


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Factors affecting the Elasticity of Demand :

1.

Nature of the product

2.

Availability of the substitute product

3.

Uses of the commodity

4.

Income Levels

5.

Proportion of Income spent

6.

Postpone consumption

7.

Price levels

8.

Time period

9.

Durability

10.

Taste & Preference

11.

Demonstration Effect

12.

Advertisement

13.

Special Demand (Medicine)

14.

Complementary Goods

15.

Expectation of the future price etc 30


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Importance or Significance of Elasticity of Demand:

Practical Importance:

1. Production Planning

2. Theory of Pricing

3. Theory of distribution

4. Theory of Foreign exchange

5. Theory of International Trade

6. Theory of Public Finance

7. Theory of Forecasting of Demand

8. Monopoly Market and limits of monopoly power

9.Determinants of the status of the commodity,

complementary or substitute.

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IMPORTANCE OR SIGNIFICANCE OF


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IMPORTANCE OR SIGNIFICANCE OF

ELASTICITY OF DEMAND:

1. Useful in price determination

2. Fixation of rewards for factors of production

3. Helpful in taxation policy

4. Use in international trade

5. Demand forecasting

6. Decision about advertising and promotional

activities

7. Decision about investment


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RELATION BETWEEN TR,MR,AR AND

PRICE ELASTICITY OF DEMAND

Revenue is the income generated from the output produced by

firms and then sold in goods markets.

It is also known as sales turnover.

TOTAL REVENUE = Price per unit x Quantity sold ( TR = p x

q)

AVERAGE REVENUE = PRICE = Total revenue divided by

output - the average revenue curve for a business is the

same as their demand curve.

MARGINAL REVENUE = the change in total revenue as a

result of selling one extra unit of output.

TOTAL REVENUE is maximised when marginal revenue =

RELATION BETWEEN TR MR AR AND


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RELATION BETWEEN TR,MR,AR AND

PRICE ELASTICITY OF DEMAND

(EXAMPLE)

Price Quan. TR MR AR

10 1 10 - 10

9 2 18 8 9

8 3 24 6 8

7 4 28 4 7

6 5 30 2 6

5 6 30 0 5

4 7 28 -2 4

3 8 24 -4 3

2 9 18 -6 2


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