demand& the elasticity and degrees of .PPT

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1. THEORY OF DEMAND

2. Meaning of Demand
According to Bobber, “By demand we mean the various quantities of a given
commodity or service which consumers would buy in one market in a given
period of time at various prices.”
Requisites:
a.Desire for specific commodity.
b.Sufficient resources to purchase the desired commodity.
c.Willingness to spend the resources.
d.Availability of the commodity at
(i) Certain price (ii) Certain place (iii) Certain time.

3. Kinds of Demand
1.Individual demand
2.Market demand
3.Income demand
4. Cross demand
-Demand for substitutes or competitive goods (eg.,tea & coffee, bread and
rice)
-Demand for complementary goods (eg., pen & ink)
5. Joint demand (same as complementary, eg., pen & ink)
6. Composite demand (eg., coal & electricity)
7. Direct demand (eg., ice-creams)

4. FACTORS AFFECTING DEMAND
1. Prices of Goods
2.Income of Consumer
3.Prices of Related Goods
4.Population
5.Tastes,Habit
6.Expectation about future prices
7.Climatic Factors
8.Demonstration Effect
9.Distribution of national income

5. Demand Schedule
Demand Schedule:a tabular presentation showing different quantities of a commodity that would
be demanded at different prices.

Types of Demand Schedules
Individual Demand schedule Market Demand Schedule
PriceA
1 50
2 40
3 30
4 20
PriceA B C M.S
1 50 45 40 135
2 40 30 38 108
3 35 20 30 85
4 20 15 25 60

6. Demand Curve
The Graphical Representation of Demand Schedule is called a
Demand Curve. It is of two types:
Types of Demand Curve
Y Y
Price Less Flatter Price More Flatter
O Demand X O Demand X
Individual DC Market DC

7. Figure 2.1 Market demand for tomatoes
Demand, the assumed inverse relationship between price and quantity purchased, can be
represented by a curve that slopes down toward the right. Here, as the price falls from $11
to zero, the number of bushels of tomatoes purchased per week rises from zero to 110,000.

8. Figure 7.2 Market demand curve
The market demand curve for Coke, D
A+B, is obtained by summing the quantities that
individuals A and B are willing to buy at each and every price (shown by the individual
demand curves D
Aand D
B).

9. The Law of Demand
Prof. Samuelson:“Law of demand states that people will buy more at lower price and
buy less at higher prices, others thing remaining the same.”
Ferguson: “According to the law of demand, the quantity demanded varies inversely
with price”.
Chief Characteristics:
1.Inverse relationship.
2.Price independent and demand dependent variable.
3.Income effect & substitution effect.
Assumptions:
No change in tastes and preference of the consumers.
Consumer’s income must remain the same.
The price of the related commodities should not change.
The commodity should be a normal commodity

10. The Law of Demand
EXPLAINERS:
Why demand curve slopes downwards?
1. Income effect
2. Substitution effect
3. Diminishing Marginal Utility
4. No. of uses of a commodity

11. Law of Demand
Exceptions:
•Inferior goods
•Articles of snob appeal. (exception: Veblen goods, eg., diamonds)
•Expectation regarding future prices (shares, industrial materials)
•Emergencies
•Quality-price relationship
•Conspicuous necessities.
•Ignorance
•Change in fashion, habits, attitudes, etc..
Importance:
•Price determination.
•To Finance Minister
•To farmers
•In the field of Planning.

12. Market Research and Law of Demand
1.The more confidence a person has in price information as a predictor of quality,
the more likely he’ll be to choose a high-priced, rather than a low-priced item.
2.A person who perceived himself as experienced in purchasing a product will
generally choose a low-priced item, but an inexperienced person will select a
high-priced one.
3.A person who selects a high-priced item will (i) believe it’s more difficult to judge
product quality, and (ii) feel he has less ability to make accurate quality judgments
than one who chooses a low-priced item.
4.A person who purchases a high-priced product would perceive large quality
differentials. He would also feel that it is risky and uncertain to go in for a low-
priced product.
5.Business executives also disbelieve that the consumer is rational. (Eg., Yale –the
under priced lock)
6.Purchasing behavior of the consumer is mostly repetitive.

13. CHANGES IN Demand Curve
Movement along demand curve Vs. Shift in demand curve:
When quantity demanded changes ( rise or fall ) as a result of change in
price alone, other factors remaining the same it is known as movement.It
is of 2 kinds:
1.Contraction/fall in quantity demanded
2. Extension/Rise in quantity demanded
When quantity demanded changes ( rise or fall ) as a result of change in
other factors alone, other than price it is known as shift.It is of 2 kinds:
1.Decrease/fall in quantity demanded
2. Increase/Rise in quantity demanded

14. CHANGES IN DEMAND
P
Q
A
B
P
Q
D
1
D
2
CHANGE IN PRICE=
change in quantity
demanded
CHANGE IN OTHER=
change in demand
P
1
P
2
Q
1 Q
2

15. DEMAND FUNCTION
It explains the relationship between demand and its various factors.
Qualitative relation : Dx = f ( Px)
Quantitative relation: Dx = a –bPx where a and b are constants
A demand function is said to be linear when the slope of the demand
curve remains constant throughout .The alphabet a denotes total
demand at zero price and alphabet b denotes slope of the demnad
curve.
Let us assume a=100 and b=5. Now find out the demand function ,
schedule and curve.

16. What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(a) people change their preference from
hamburgers to hot dogs?

17. What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(b) U.S. negotiates a deal w/ China to trade
hot dogs for egg rolls?

18. What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(c) the price of ground beef plummets?

19. What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(d) the minimum wage rises?

20. What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(e) the MWU threatens a strike if owners
fail to meet their demands?

21. What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(f) unemployment hits an all-time high?

22. What Happens to Demand if…?
SITUATION: You’re the owner of a hot dog making
company:
(g) the price of buns increases due to a
wheat shortage?

23. Elasticity of demand
Definition: “Elasticity of demand is defined as the responsiveness of the quantity demanded of a
good to changes in one of the variables on which demand depends.”
These variables are price of the commodity, prices of the related commodities, income of the
consumer & other various factors on which demand depends. Thus, we have Price Elasticity,
Cross Elasticity, Elasticity of Substitution & Income Elasticity. It is always price elasticity of
demand which is referred to as elasticity of demand
A.Price Elasticity
Measures how much the quantity demanded of a good changes when its price changes.
 Or
It may be defined as “Percentage Change in Quantity demanded over percentage change in
price”

24. Factors affecting Elasticity of Demand
1.Availability of substitutes
2.Postponement of consumption
3.Proportion of expenditure (needles: inelastic; TV: elastic)
4.Nature of the commodity (necessity vs. luxury; durability/reparability eg., shoes)
5.Different uses of the commodity (paper vs. ink)
6.Time period (elastic in the long term)
7.Change in income (necessaries: inelastic; milk and fruit for a rich man)
8.Habits
9.Joint demand
10.Distribution of income
11.Price level (very costly & very cheap goods: inelastic)

25. Price Elasticity
Price Elasticity
•Elastic Demand or more than 1 –When quantity demanded responds greatly to price
changes
•Inelastic Demand or less than 1 –When quantity demanded responds little to price
changes.
•Unitary Elastic –When quantity demanded responds equally to the price changes.
•Perfectly inelastic or 0 elastic demand
•Perfectly elastic or infinite elastic demand
Economic factors determine the size of price elasticity for individual goods. Elasticity
tends to be higher when the goods are luxuries, when substitutes are available and when
consumer have more time to adjust their behavior.

26. Calculating Price Elasticity
PED = % Change in Qty Demanded
 % Change in Price
Points to Remember:
•We drop the minus sign from the numbers by treating all %
changes as positive. That means all elasticity’s are positive, even
though prices and quantities move in the opposite direction
because of the law of downward sloping demand.
•Definition of elasticity uses percentage changes in price and
demand rather than actual changes. That means that a change in
the units of measurement does not affect the elasticity. So whether
we measure price in Rupees or paisa, the price elasticity stays the
same.

27. Some business applications of Price
Elasticity
•Price discrimination
•Public utility pricing (electricity, railway)
•Joint supply (wool and mutton)
•Super markets
•Use of machines (lower cost of production for elastic)
•Factor pricing (workers producing inelastic demand products)
•International trade (devalue when exports are price-elastic)
•Shifting of tax burden (shift commodity tax when demand is
inelastic)
•Taxation policy

28. Elasticity & Revenue:
•When demand is price inelastic, marginal revenue is negative and a price
decrease reduces total revenue.
•When demand is price elastic, marginal revenue is positive and a price
decrease increases total revenue.
•In the borderline case of unit elastic demand, marginal revenue is 0 and
a price change leads to no change in the total revenue.
B. Income Elasticity of Demand: Is the degree of responsiveness of
quantity demanded of a good to a small change in the income of the
consumer.
•If the proportion of income spent on a good remains the same as income
increases, then income elasticity for the good is equal to one.
•If the proportion spent on a good increases, then the income elasticity
for the good is greater than one.
•If the proportion decreases as income rises, then income elasticity for
the good is less than one.

29. Income elasticity
Types:
•Zero
•Negative
•Positive (i) low (ii) unitary (iii) high
Empirical evidence suggests that income elasticity falls as income rises.
Income elasticity and business decisions
1.If e
iis >0 but <1, sales will increase but slower than the general
economic growth;
2.If e
iis >1, sales will increase more rapidly than general economic
growth
Corollary:in a growing economy while farmers suffer as their products
have low income elasticity, industrialists gain as their products have high
income elasticity.

30. Cross Elasticity:A change in the demand for one good in
response to a change in the price of another good represents
cross elasticity of demand of the former good for the latter
good.
•If two goods are perfect substitutes for each other cross
elasticity is infinite and if the two goods are totally unrelated,
cross elasticity between them is zero.
•Goods between which cross elasticity is positive can be
called Substitutes, the good between which the cross
elasticity is negative are not always complementary as this is
found when the income effect on the price change is very
strong.


31. Degrees of Elasticity of Demand
1. Perfectly Elastic
2. Perfectly Inelastic
3. Unitary Elastic
4. Relatively more elastic
5. Relatively less elastic

32. 1.Perfectly Elastic
d
O
X
Y
p
d1
Ed = ∞

33. 2. Perfectly Inelastic
p1
O
X
Y
p
d
Ed = 0

34. 3. Unitary Elastic
p1
O
X
Y
p
d1
Ed = 1
d

35. 4. Relatively more Elastic
p1
O
X
Y
p
d1
Ed > 1
d

36. 5. Relatively less Elastic
p1
O
X
Y
p
d1
Ed < 1
d

37. Figure 7.3 Elastic and inelastic demand
Demand curves differ in their relative elasticity. Curve D
1is more elastic than curve D
2, in
the sense that consumers on curve D
1are more responsive to a given price change (P
2to
P
1) than are consumers on curve D
2.

38. Figure 7.4 Changes in the elasticity coefficient
The elasticity coefficient decreases as a firm moves down the demand curve. The upper half
of a linear demand curve is elastic, meaning that the elasticity coefficient is greater than
one. The lower half is inelastic, meaning that the elasticity coefficient is less than one. This
means that the middle of the linear demand curve has an elasticity coefficient equal to one.

39. Figure 7.8 Network effects and demand
As the price falls from P
3to P
2, the quantity demanded in the short run rises from Q
1to Q
2.
However, sales build on sales, causing the demand in the future to expand outward to, say,
D
2. The lower the price in the current time period, the greater the expansion of demand in
the future. The more the demand expands over time in response to greater sales in the
current time period, the more elastic is the long-run demand.

40. Methods of measurement of Elasticity
1.Percentage or Proportionate Method
= Percentage change in demand or;
Percentage change in price
= Proportionate change in demand
Proportionate change in price
2. Total Outlay (Expenditure) Methods
TO=TQ * P ; where,
TO=total outlay; TQ=total quantity; P=price of the commodity
3. Geometric (Point) method–at any given point on the curve
= lower segment of demand curve
upper segment of demand curve

41. Figure 3.4 Maslow’s hierarchy of needs
The pyramid orders human needs by broad categories from the most prepotent needs on
the bottom to lesser and lesser prepotent needs as an individual moves up the pyramid.
According to Maslow, an individual can be expected to satisfy her needs in the order of
their prepotence, or will move from the bottom of the pyramid through the various levels
to the top, so long as the individual’s resources to satisfy her needs last.

42. Figure 3.5(a) Demand, price, and need
satisfaction
The extent to which needs are satisfied depends,
in the economists’ view of the world, on
the nature of the need’s demand and its price.
Physiological needs may indeed be more
completely satisfied than other needs, but that
may only be because physiological needs
have relatively low prices (panel (a)). But then, as
shown in this figure (panel (b)), the
price of the means of satisfying physiological
needs might be higher than the prices of the
means of satisfying safety and love needs.