demand , law of demand and elasticity of demand with explanation

demand , law of demand and elasticity of demand with explanation

1. P.G College of Palamaru University, Mahabubnagar. Department of Commerce DEMAND,DEMAND ANALYSIS , LAW OF DEMAND, & ELASTICITY OF DEMAND TOPIC : BUSINESS ECONOMICS Mohammed Arif By… M.Com

2. Demand : Demand in economics means “ demand backed up by enough money to pay for goods demanded .” In other words demand means – “ The desire backed by the willingness to buy a commodity and purchasing power to pay. Hence desire alone is not enough”. Thus the demand has three essentials – Desire Purchasing power Willingness to purchase

3. Demand Analysis : Demand analysis means an attempt to determine the factors affecting the demand of a commodity or service and to measure such factors and their influences. To determine the factors affecting the demand To measure the elasticity of demand To forecast the demand To increase the demand To allocate the resource efficiently

4. Law of Demand : The law of demand is know as the ‘first law in demand ”. Law of demand shows the relation between price and quality demanded of a commodity in the market. In other words “ law of demand states that people will buy more at lower price and buy less at higher price ”. While other things remaining the same an increase in the price of a commodity will decreases the quantity demanded of that commodity and decrease in the price will increase the demand of that commodity. So the relationship described by law of demand is an inverse or negative relationship .

5. Individual demand schedule Example given below... Quantity demand of Apples in individual schedule Price of Apple (in Rs.) Quantity demanded 14 1 12 2 10 3 8 4 6 4 2 5 6 7

6. PRICE Quantity X- axis Y-ax I s 14 12 10 8 6 4 2 1 2 3 4 5 6 7 Demand curve

7. Assumptions of law of demand There is no change in consumer s’ taste preferences. Income should remain constant. Price of the other goods should not change. There should be substitute for the commodity. The commodity should not the confer any distinction. The demand for the commodity should be continuous. People not expect any changes in the price of the commodity.

8. Elasticity of demand This concept explains the relationship between a change in price and consequent change in quality demanded. Nutshell, it shows the rate at which changes in demand tack place. Elasticity of demand can be defined as “ The degree of responsiveness in quantity demanded to a change in price ”. Thus in it represents the rate of change in quality demanded due to a change in price. There are mainly three types of elasticity of demand : Price Elasticity of Demand Income Elasticity of Demand Cross Elasticity of Demand

9. Price Elasticity of Demand: Price elasticity in demand measure the change in quantity demanded to a change in the price. It is the ratio of percentage change in quantity demanded to a percentage change in price. This can be measured by the following formula. Proportionate change in Quantity demand proportionate change in price (Q2-Q1) or Q1 (P2-P1) or P1 EP = EP =

10. Price Elasticity of demand Perfectly inelastic demand Perfectly elastic demand Relatively elastic demand Relatively inelastic demand Unit inelastic of demand

11. Perfectly elastic demand: When the a small change in price leads to infinite change in quantity demanded. Its is called perfectly elastic demand. In this curve is a horizontal line as given below. Price Quality Demand curve

12. Perfectly inelasticity demand: In this case , even a large change in price falls to bring about a change in quantity demanded. I.e. the change in price will not affect the quantity demanded and quantity remains the same whatever the change in price. Here demand curve will be vertical line as follows. Price Quality Demand curve

13. Relatively elastic demand: Here a small change in price leads to very big change in quantity demanded. In this case demand curve will be fatter one. P1 P Q1 D D Q Price Quality

14. Relatively inelastic demand Here quantity demanded changes less than proportionate to change in the price. A large change in price leads to small change in demanded. In this case demand curve will be steeper. Q Q1 P1 P D D Price Quality

15. Unity elasticity of demand Here the change in the demand is exactly equal to the change in the price. When both are equal. The elasticity is said to be unitary. D D Q1 Q P1 P Quality Price

16. Thanking you… Mohammed Arif M.com