Law of demand and elasticity of demand

Economics - CA Foundation

1. Chapter2:Theory of Demand & Supply

2. Meaning of Demand Unit 1: Law of Demand & Elasticity of Demand CA Foundation 2 The quantity of a good or service that consumers are willing and able to purchase at various prices during a given period of time.

3. Meaning of Demand CA Foundation 3 Unit 1: Law of Demand & Elasticity of Demand

4. Determinants of Demand CA Foundation 4 Unit 1: Law of Demand & Elasticity of Demand

5. 1. Price of Commodity CA Foundation 5 Unit 1: Law of Demand & Elasticity of Demand

6. 2. Price of Related Commodities CA Foundation 6 Unit 1: Law of Demand & Elasticity of Demand

7. 3. Income of the Consumer CA Foundation 7 Unit 1: Law of Demand & Elasticity of Demand

8. 3. Income of the Consumer CA Foundation 8 Unit 1: Law of Demand & Elasticity of Demand

9. 4.Taste & Preferences of Consumers CA Foundation 9 Bandwagon Effect: Demand because Others have it Unit 1: Law of Demand & Elasticity of Demand

10. 4.Taste & Preferences of Consumers CA Foundation 10 Snob Effect: Don’t want to be Common among all Unit 1: Law of Demand & Elasticity of Demand

11. 4.Taste & Preferences of Consumers CA Foundation 11 Veblen Effect: Want it because of status symbol Unit 1: Law of Demand & Elasticity of Demand

12. 5.Consumers Expectations CA Foundation 12 Unit 1: Law of Demand & Elasticity of Demand

13. 6.Other Factors CA Foundation 13 Unit 1: Law of Demand & Elasticity of Demand

14. CA Foundation 14 Law of Demand Negative Slope Unit 1: Law of Demand & Elasticity of Demand

15. CA Foundation 15 Individual Demand & Market Demand Sum of Individual Demands for a Product Unit 1: Law of Demand & Elasticity of Demand

16. CA Foundation 16 Rationale of Law of Demand Why do demand curves slope downwards? Unit 1: Law of Demand & Elasticity of Demand

17. CA Foundation 17 Why do demand curves slope downwards? 1. Law of Diminishing Marginal Utility: It states that the amount of satisfaction provided by the consumption of every additional unit of a good decrease as we increase the consumption of that good. Unit 1: Law of Demand & Elasticity of Demand

18. CA Foundation 18 Why do demand curves slope downwards? 2 . Price Effect : Unit 1: Law of Demand & Elasticity of Demand

19. CA Foundation 19 Why do demand curves slope downwards? 2 . Price Effect : Substitution Effect How a change in price of a good affects demand compared to others. If price of apples rises, consumers will substitute apples for other goods like bananas. Income Effect How a change in demand for a good is affected by a change in real disposable income. If price of school fees rises, this reduces disposable income and therefore, demand will fall. Unit 1: Law of Demand & Elasticity of Demand

20. CA Foundation 20 Why do demand curves slope downwards? 3. Arrival of New Consumers : Price of commodity falls , more consumers start buying it Because some of those who could not afford to buy it earlier may now be able to buy it . Unit 1: Law of Demand & Elasticity of Demand

21. CA Foundation 21 Why do demand curves slope downwards? 4. Different Uses : As price of a multipurpose product increases its demand decreases limiting its use Milk = Rs . 30/ ltr Milk = Rs . 45/ ltr Unit 1: Law of Demand & Elasticity of Demand

22. CA Foundation 22 Exceptions to Law of Demand Unit 1: Law of Demand & Elasticity of Demand

23. CA Foundation 23 Exceptions to Law of Demand 1. Conspicuous Goods Conspicuous Goods Articles of prestige value Unit 1: Law of Demand & Elasticity of Demand

24. Goods which exhibit direct price-demand relationship are called ‘ Giffen goods’. Generally those goods which are inferior, with no close substitutes easily available and which occupy a substantial place in consumer’s budget are called ‘ Giffen goods’. CA Foundation 24 Exceptions to Law of Demand 2. Giffen Goods Unit 1: Law of Demand & Elasticity of Demand

25. CA Foundation 25 Exceptions to Law of Demand 3. Conspicuous Necessities Unit 1: Law of Demand & Elasticity of Demand

26. CA Foundation 26 Exceptions to Law of Demand 4. Future Expectations about prices Example : Gold Gold Price in Jan’20 Rs . 43,000 Gold Price in Feb’20 Rs . 42,000 Gold Price Future Expectation Rs . 39,000 As there is expectation for future price fall demand will not rise even though the price fell from Jan to Feb. Unit 1: Law of Demand & Elasticity of Demand

27. CA Foundation 27 Exceptions to Law of Demand 5. Irrational Consumers Consumers tend to be irrational and make impulsive purchases without any rational calculations about the price and usefulness of the product and in such contexts the law of demand fails. Unit 1: Law of Demand & Elasticity of Demand

28. CA Foundation 28 Exceptions to Law of Demand 6. Demand for necessaries Irrespective of price changes, people have to consume the minimum quantities of necessary commodities. Unit 1: Law of Demand & Elasticity of Demand

29. CA Foundation 29 Exceptions to Law of Demand 7. Speculative Goods In the speculative market, particularly in the market for stocks and shares, more will be demanded when the prices are rising and less will be demanded when prices decline. Unit 1: Law of Demand & Elasticity of Demand

30. CA Foundation 30 Expansion & Contraction of Demand Other Factors remain Constant Unit 1: Law of Demand & Elasticity of Demand

31. CA Foundation 31 Increase & Decrease in Demand Other Factors Change Unit 1: Law of Demand & Elasticity of Demand

32. CA Foundation 32 Movement along the demand curve VS. Shift of demand curve Other Factors remain Constant Other Factors Change Unit 1: Law of Demand & Elasticity of Demand

33. CA Foundation 33 Elasticity of Demand Responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends. Degree of Change in demand in relation to Change in determinants Unit 1: Law of Demand & Elasticity of Demand

34. CA Foundation 34 Price Elasticity Response of quantity demanded of a good to a change in its price, other things remaining equal. Unit 1: Law of Demand & Elasticity of Demand

35. CA Foundation 35 Point Elasticity Used for measuring price elasticity where the change in price is infinitely small. Unit 1: Law of Demand & Elasticity of Demand

36. CA Foundation 36 Arc Elasticity Used for measuring price elasticity where the change in price is somewhat larger or when price elasticity is to be found between 2 prices (i.e. 2 points on demand curve). Unit 1: Law of Demand & Elasticity of Demand

37. CA Foundation 37 Numerical Values of Elasticity of Demand Unit 1: Law of Demand & Elasticity of Demand

38. CA Foundation 38 Total Outlay method of calculating Price Elasticity Unit 1: Law of Demand & Elasticity of Demand

39. CA Foundation 39 Determinants of Price Elasticity of Demand Unit 1: Law of Demand & Elasticity of Demand

40. CA Foundation 40 Income Elasticity of Demand Unit 1: Law of Demand & Elasticity of Demand 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 of income spent on a good increase as income increases , then the income elasticity for the good is greater than one . If the proportion of income spent on a good decrease as income rises , then income elasticity for the good is less than one .

41. CA Foundation 41 Cross Elasticity of Demand Unit 1: Law of Demand & Elasticity of Demand

42. CA Foundation 42 Advertisement Elasticity Unit 1: Law of Demand & Elasticity of Demand

43. CA Foundation 43 Demand Forecasting Unit 1: Law of Demand & Elasticity of Demand Refers to estimating demand scientifically and objectively on the basis of certain facts and events relevant to forecasting. Types of Forecasts: Macro-level forecasting : deals with the general economic environment prevailing in the economy Industry- level forecasting : concerned with the demand for the industry’s products as a whole. Firm- level forecasting : refers to forecasting the demand for a particular firm’s product ( 2) Based on time period : demand forecasts may be short-term demand forecasting and long-term demand forecasting. Short-term demand forecasting : covers a short span of time, depending of the nature of industry. It is done usually for six months or less than one year and is generally useful in tactical decisions. Long-term forecasts : for longer periods of time, say two to five years and more. It provides information for major strategic decisions of the firm such as expansion of plant capacity .

44. CA Foundation 44 Demand Distinctions: Unit 1: Law of Demand & Elasticity of Demand Sr No. Particulars 1 Particulars 2 1 Producers Goods: Used for production of other goods Consumers Goods: Used for final Consumption 2 Durable Goods: Consumed more than once (do not quickly wearout ) Non-durable Goods: Cannot be consumed more than once 3 Derived Demand: arises because of the demand for some other commodity (Dependent Demand) Autonomous Demand: demand for a product is independent of the demand for other goods 4 Demand for Firm’s product: demand for the products of a particular firm eg . Demand for steel produced by Tata Steel Co. Industry Demand: total demand for the products of a particular industry, e.g. the total demand for steel in the country 5 Short -run Demand: Demand with its immediate reaction to changes in other factors (price, income, etc ) Long Run Demand: Demand which exists over a long period

45. CA Foundation 45 Methods of Demand Forecasting: Unit 1: Law of Demand & Elasticity of Demand Survey of Buyers’ Intentions: To ask customers what they are planning to buy during the forthcoming time period. Collective opinion method : Firms having a wide network of sales personnel can use the knowledge, experience and skills of the sales force to forecast future demand. Expert Opinion method: I nstead of depending upon the opinions of buyers and salesmen, firms solicit the opinion of specialists or experts through a series of carefully designed questionnaires. Statistical methods: Forecasts using statistical methods are considered as superior methods because they are more scientific, reliable and free from subjectivity. Controlled Experiments: Future demand is estimated by conducting market studies and experiments on consumer behaviour under actual, though controlled, market conditions . Barometric method of forecasting: These methods are based on past experience and try to project the past into the future.

46. CA Foundation 46 Thank You All!! Bored Na!!! Unit 2 Awaiting…… Still I’m going to Continue…….. By CA Shubhalaxmi Bagret