module 3.pptx demand and supply introduction

demand and supply impact

1. Meaning of Demand Demand is the desire or want for something. In economics, however, demand means much more than that. The economic meaning of demand refers the effective demand, i.e., the amount the buyers are willing to purchase at given price and over a given period of time. From marginal economics, point of view, thus, the concept of demand may be looked up on as Follows:

2. Demand is the desire or want backed up by money: Demand means effective desire or want for a commodity which is backed up by the ability( i.e money or purchasing power) and willingness to pay for it. Obviously, to a businessmen, a buyers wish for the product without processing money to buy it or unwillingness to pay given price for it will not constitute a demand for it. For instance, a pauper’s wish for a Maruti car will not constitute its potential market demand, as he has no ability to pay for it. Likewise, a miser’s desire for the same, however rich he may be, will not become an effective demand when he is unlikely to spend the money for the fulfillment of that desire. In short: Demand= Desire + Ability to pay (Money or Purchasing power to pay)+Willingness to spend.

3. Demand is always related to Price and Time Demand is not an absolute term. It is a relative concept. Demand for a commodity should always have a reference to price and Time. For instance, an economists would say that the demand for a grapes by a household, at a price of 40Rs/Kg. is 10kg/week. Economists always mention the amount of demand for a commodity with reference to a particular price and specific time period, s uch as per day, per week, per month or per year. “They are not concerned over with a single isolated purchase, but with a continuous flow of purchases”(Chrystal and Lipsey : 1977, P. 47). Therefore, demand is expressed as so much per time period of time – 1million Oranges per day, or 7million oranges per week. Demand is refers to the mount of product which will bought per unit of time at a particular price.

4. Demand may be viewed ex-ante or ex-post: Demand for a commodity may be viewed as ex-ante i.e intended or ex post i.e what is already purchased. The former denotes potential demand, while the latter refers to the actual amount purchased.

5. Individual Demand It refers to the demand for a commodity from the individual point of view. The quantity of a product consumers would buy at a given price over a given period of time is individual demand for that particular product. Individual demand is considered from one person’s point of view or from that of a family or household’s point of view. Individual demand is a single consuming entity’s demand.

6. Market Demand It refers to the total demand of all the buyers, taken together. It is an aggregate of the quantities of a product demand by all the individual buyers at a given price over a given period of time. It is the sum total of individuals demand function. It is derived by aggregating all individual buyers demand functions in the market. Market demand is important from business point of view. Sales, Business policy and planning, Price determination of product are made on basis of market demand for the product.

7. Determinants of Individual Demand Factors influencing Individual Demand: Price Income Tastes, Habits and Preferences People with different tastes and habits have different preferences Relative prices of other goods-substitute an Complementary goods.

8. Determinants of Individual Demand Price : A consumer usually decides to buy with consideration of price. More quantity is demanded at low prices and less is purchased at high prices. Income : With the increase in income one can buy more goods. Rich consumers usually demand more and more goods than poor consumers. Demand for luxuries and expensive goods is related to income. Tastes, habits and Preferences: Demand for several products like ice-cream, chocolates, beverages and so on depends on individual’s tastes. Demand for tea, betel, cigarettes, tobacco is matter of habits. People with different tastes and habits have different preferences for different goods: A strict vegetarian will have no demand for meat at any price, whereas a non vegetarian who has liking for chicken may demand it even at a high price. Similar is the case with demand for cigarettes by non-smokers and smokers. Prices of Substitute and complementary goods: How much the consumer would like to buy of a given commodity, however, also depends on the relative prices of other related goods such as substitute or complementary goods to a commodity.

9. Determinants of Market Demand Factors influencing Market Demand: Price Distribution of income and wealth in the community Community’s common habits and scale of preference General standards of living and spending habits of the people Number of buyers in the market and growth of population Age structure and sex ratio of the population Future expectations Level of taxation and tax structure Inventions and innovations Fashions Climate and weather conditions Customs Advertisements and sales propaganda

10. Determinants of Market Demand Price of a product: At a low market price, market demand for the product tends to be high and vice versa Distribution of income and wealth in the community: If there is equal distribution of income and wealth, the market demand for many products of common consumption tends to be greater than in the case of unequal distribution. Community’s tastes and scale of Preferences: When a large section of population shifts its preferences from vegetarian foods to non-vegetarian foods, the demand for the former will tend to decrease and that for the latter will increase. General standards of living and spending habits of the people: When people in general adopt a high standard of living and are ready to spend more, demand for many comforts and luxury items will tend to be higher than other wise. Number of buyers in the market and the growth of population: The size of market demand for a product depends on the number of buyers in the market. A large number of buyers will usually constitute a large demand and vice-versa. As such, growth of population over a period of time tends to imply a rising demand for essential goods and services in general.

11. Determinants of Market Demand Age structure and sex ratio of the population: If the population pyramid of a country is broad based with a large proportion of juvenile population, then the market demand for toys, school bags i.e goods and services required by children will be much higher than the market demand for goods needed by the elderly people. Similarly sex ratio has its impact in demand for many goods. An adverse sex ratio i.e females exceeding males in number(or males exceeding females as in Mumbai) would mean a greater demand for goods required by the female population than by make population. Future expectation: If buyers in general expect that prices of a commodity will rise in future, then present market demand would be more as most of them would like to hoard the commodity, The reverse happens if a fall in the future prices is expected. Level of taxation and tax structure: A progressively high tax rate would generally mean low demand for goods in general and vice versa. But, a highly taxed commodity will have a relatively lower demand than an untaxed commodity-if that happens to be a remote substitute. Fashions: Market demand for many products is affected by changing fashions. Ex: demand for commodities like jeans, salwar kameej is based on current fashion

12. Determinants of Market Demand Inventions and innovations: Introduction of new goods or substitutes as result of inventions and innovations in a dynamic modern economy tends to adversely affect the demand for the existing products, which as a result of innovations, definitely become obsolete, Ex: the advent of electronic calculators has made adding machine obsolete. Climate or weather conditions: ex: in summer, there is a greater demand for cold drinks, fans, coolers. Similarly demand for umbrellas and rain coats is seasonal. Customs : Diwali days there is greater demand for sweets and crackers, during Christmas cakes are more in demand. Advertisement and sales propagandas: Market demand for many products in present days is influenced by the sellers’ efforts through advertisements and sales propaganda. Demand is manipulated through sales promotion. When these factors change, the general demand pattern will be affected, causing a change in the market demand as a whole. OF course there is always a limit.

13. Law of Demand It describes the general tendency of consumers’ behaviour in demanding a commodity in relation to the changes in its price. The law of demand expresses the functional relationship between two variables of the demand relation viz the price and the quantity demanded. It simply states that demand varies inversely to changes in price. The nature of this inverse relationship stressed by the law of demand which forms one of the best known and most significant laws in economics

14. Law of Demand In other words, the demand for a commodity extends(i.e., the demand rises) as the price falls and contracts(i.e., the demand falls) as the price rises. Or briefly stated, the law of demand stresses that, other things remaining unchanged, demand varies inversely with price. The conventional law of demand, however, relates to the much simplified demand function D=f(P) Where D=Demand, P=Price and f connotes a functional relationship

15. Law of Demand In other words, the demand for a commodity extends(i.e., the demand rises) as the price falls and contracts(i.e., the demand falls) as the price rises. Or briefly stated, the law of demand stresses that, other things remaining unchanged, demand varies inversely with price. The conventional law of demand, however, relates to the much simplified demand function D=f(P) Where D=Demand, P=Price and f connotes a functional relationship

16. Law of Demand Price of Commodity X Quantity demanded(Units per week) 10 50 8 60 6 70 4 80 2 90

17. Law of Demand When the data are plotted graphically, a demand curve is drawn. OX axis denotes Demand for commodity and OY axis denotes Price of commodity. DD is a downward sloping demand curve indicating an inverse relationship between price and demand. We can read that with a fall in price at each stage demand tends to rise. There is an inverse relationship between price and the quantity demanded.

18. Assumptions underlying the Law of Demand The law of demand is conditional. It is based on certain conditions. It is therefore, always stated with the ‘other things being equal’. It relates to the change in price variable only, assuming other determinants of demand to be constant. The following are assumptions: No change in consumer’s income No change in consumer’s preferences No change in fashion No change in the price of related goods No exception of future price changes or shortages No change in size, age composition and sex ratio of the population No change in the range of goods available to the consumers No change in the distribution of income and wealth of the community No change in government policy No change in weather conditions

19. Assumptions underlying the Law of Demand No change in consumer’s income: Throughout the operation of the law, the consumer’s income should remain the same. If the level of a buyer’s income changes, he may buy more even at a higher price, invalidating the law of demand. No change in the price of related goods: Prices of complementary and substitute goods should remain unchanged. If the prices of related goods change, the consumer’s preferences would change which may invalidate the law of demand. No exception of future price changes or shortages: The law requires that the given price change for the commodity is a normal one and has no speculative consideration. That is to say, the buyers do not expect any shortages in the supply of the commodity in the market and consequent future changes in the prices. The given price change is assumed to be final at a time. No change in government policy: The level of taxation and fiscal policy of the government remains the same throughout the operation of the law. Otherwise, changes in income tax, for instance, may cause changes in consumer’s income or commodity taxes and may lead to distortion in consumer’s preferences.

20. Extension and Contraction of Demand In economics, the extension and contraction in demand are used when the quantity demanded rises or falls as a result of changes in price and we move along a given demand curve. When the quantity demanded of a good rises due to the fall in price, it is called extension of demand and when the quantity demanded falls due to the rise in price, it is called contraction of demand.

21. Extension and Contraction of Demand For instance, suppose the price of bananas in the market at any given time is Rs.12 per dozen and a consumer buys one dozen of them at that price. Now, if other things such as tastes of the consumer, his income, prices of other goods remain the same and price of bananas falls to Rs . 8 per dozen and the consumer now buys 2 dozen bananas, then extension in demand is said to have occurred. On the contrary, if the price of bananas rises to Rs . 15 per dozen and consequently the consumer now buys half a dozen of the bananas, then contraction in demand is said to have occurred.

22. Extension and Contraction of Demand It should be remembered that extension and contraction in the demand takes place as a result of changes in the price alone when other determinants of demand such as tastes, income, propen­sity to consume and prices of the related goods remain constant. These other factors remaining constant means that the demand curve remains the same, that is, it does not change its position; only the consumer moves downward or upward on it.

23. Extension and Contraction of Demand Assuming other things such as income, tastes and fashion, prices of related goods remaining constant, a demand curve DD goods remaining constant, a demand curve DD has been drawn. It will be seen in this figure that when the price of the good is OP, then the quantity demanded of the good is OM. Now , if the price of the good falls to OP’ the quantity de­manded of the good rises to ON. Thus, there is extension in demand by the amount MN. On the other hand, if price of the good rises from OP to OP” the quantity demanded of the good falls to OL. Thus, there is contraction in demand by ML. We thus see that as a result of changes in price of a good the consumers move along the given demand curve; the demand curve remains the same and does not change its position.

24. Extension and Contraction of Demand

25. Exceptions to the law of demand It is universally phenomenal the law of demand that when the price falls the demand extends and it contracts when the price rises. But sometimes, it may be observed, though of course very rarely, that with a fall in price, demand also falls and with a rise a price, demand also rises. This is a paradoxical situation or a situation which apparently is contrary to the law of demand. Cases in which this tendency is observed are referred to as exception to the general law of demand. The demand curve for such cases will be typically unusual. It will be upward sloping demand curve.

26. Exceptions to the law of demand There are few such exceptional cases, which may be categorised as follows: Giffen goods Articles of snob appeal/Veblen’s effect Speculation Consumer’s psychological bias or illusion.

27. Giffen goods In the case of certain inferior goods called Giffen goods(named after Sir Robert Giffen ), when the price falls, quite often less quantity will be purchased than before because of the negative income effect and people’s increasing preference for a superior commodity with the rise in their real income. Probably, a few appropriate examples of inferior goods may be listed such as staple food stuffs like cheap potatoes, cheap bread, pucca rice, vegetable ghee, as against superior commodities like good potatoes, cake, basmati rice and pure ghee.

28. Articles of snob appeal Sometimes, certain commodities are demanded just because they happen to be expensive or prestige goods, and have a ‘snob appeal’. They satisfy the aristocratic desire to preserve exclusiveness for unique goods. These are generally ostentatious articles, and purchased by the fewer rich people or using them as ‘status symbol’. It is observed that when prices of such articles like, say diamonds, rise their demand also rises. Similarly Rolls Royce cars another outstanding illustrations.

29. Speculation When people speculate about changes in the price of a commodity in the future, they may not according to the law of demand at the present price say when people are convinced that the price of a particular commodity will rise still further, they will not contract their demand with the given price rise; on the contrary, they may purchase more for the purpose of hoarding. In the stock exchange market, some people tend to buy more shares when their prices are rising in the hope that the rising trend would continue, so they can make a good fortune in future.

30. Consumer’s psychological bias or illusion When the consumer is wrongly biased against the quality of a commodity with the price change, he may contract this demand with a fall in price. Some sophisticated consumers do not buy when there is stock clearance sale at reduced prices, thinking that the goods may be of bad quality.

31. Types of Demand Demand for Consumer’s goods and Producer’s goods Demand for Perishable goods and Durable goods. Autonomous demand and Derived demand. Industry demand and Company demand Long run demand and Short run demand Joint demand and Composite demand Price demand, Income demand and Cross demand

32. Types of Demand Consumer’s goods Producer’s goods Goods and services demanded by consumers for the direct satisfaction of their wants i.e consumption purpose Goods which are demanded by the producers in the process of production Eg - Food, clothes, house, services of a lawyer, doctor, teacher, cobbler Eg -Tools and Machinery, equipments , raw materials, factory buildings, office spaces. Direct or autonomous Derived. Based on the demand for output Depends on marginal utility Depends on its marginal productivity

33. Types of Demand Perishable goods Durable goods Goods have no durability. Cannot be stored for a long time Goods last long. Storable for a long period Eg - Milk, egg, fish, Vegetables Eg -House furniture, car, clothes Use of non-durable goods or perishable goods gives one short service Can be used for several years

34. Types of Demand Autonomous Demand Derived Demand Spontaneous demand for goods which is based on an urge to satisfy some wants directly When the demand for a product depends on the demand for some other commodities. Demand for Consumer goods Demand for capital goods Direct demand Demand of the dependent product

35. Types of Demand Industry Demand Company Demand Total demand for the commodity produced by a particular industry Market demand for the firm’s output Eg - total demand for cars in India is the demand for automobile industry’s output in aggregate Eg -Demand for a Toyota Cars

36. Types of Demand Short run Demand Long run Demand Existing demand with its immediate reaction to price changes, income fluctuation Demand exist as a result of the changes in pricing, promotion or product improvement, after enough time is allowed to let the market adjust itself to the new situation

37. Types of Demand Joint Demand Composite Demand When two goods are demanded in conjunction with one another at the same time to satisfy a single want. Commodity is said to be in composite demand when it is wanted for several different uses. Ex-Pens and ink, cars and petrol, bread and butter Ex- Steel is needed for manufacturing cars, building construction of railways. Houseeholds , factories, railways, chemical industries demand coal.

38. Types of Demand Price demand Income demand Cross demand Various quantities of a product purchased by the consumer at alternative prices Various quantities of a commodity demanded by the consumer at alternative levels of his changing money income Various quantities of a commodity(say X) purchased by the consumer in relation to changes in the price of a related commodity(say Y which may substitute or complementary) Demand function is based on single price Demand function is based on the income variable Demand function is based on the price of substitute or Complementary good D=f(p) p=price of a commodity D=f(M) M=Income Dx =f( Py ) Dx =demand for commodity x and Py =Price of commodity y

39. Elasticity of Demand Demand usually varies with price. But the extent of variations is not uniform in all cases. In some cases, the variation is extremely wide; in some others, it may just be nominal. That means sometimes demand is greatly responsive to changes in price; at other times, it may not be so responsive. The economists, to measure this responsiveness or the extent of variation, use the term “Elasticity”. In measuring the elasticity of demand, two variables are considered demand and the determinants of demand.

40. Elasticity of Demand Elasticity of Demand= % change in quantity demanded % Change in Determinants of demand The term elasticity of demand measure the responsiveness of demand for a commodity to changes in the variables confined to its demand function. There are, thus, as many kinds of elasticity of demand as its determinants. They are: Price Elasticity of demand Income Elasticity of demand Cross Elasticity of demand

41. Importance of Elasticity of Demand In the Determination of Output Level In the Determination of Price In Price Discrimination by Monopolist In Price Determination of Factors of Production In Demand Forecasting In Dumping In the Determination of Prices of Joint Products and Other . In determination of Government policies Helpful in adopting the policy of protection In determination of Gains from Trade from International Trade

42. Importance of Elasticity of Demand In the Determination of Output Level : For making production profitable, it is essential that the quantity of goods and services should be produced corresponding to the demand for that product. Since the changes in demand is due to the change in price, the knowledge of elasticity of demand is necessary for determining the output level. In the Determination of Price : The elasticity of demand for a product is the basis of its price determination. The ratio in which the demand for a product will fall with the rise in its price and vice versa can be known with the knowledge of elasticity of demand. If the demand for a product is inelastic, the producer can charge high price for it, whereas for an elastic demand product he will charge low price. Thus, the knowledge of elasticity of demand is essential for management in order to earn maximum profit.

43. Importance of Elasticity of Demand 3. In Price Discrimination by Monopolist: Under monopoly discrimination the problem of pricing the same commodity in two different markets also depends on the elasticity of demand in each market. In the market with elastic demand for his commodity, the discriminating monopolist fixes a low price and in the market with less elastic demand, he charges a high price. 4 . In Price Determination of Factors of Production: The concept of elasticity for demand is of great importance for determining prices of various factors of production. Factors of production are paid according to their elasticity of demand. In other words, if the demand of a factor is inelastic, its price will be high and if it is elastic, its price will be low.

44. Importance of Elasticity of Demand 5. In Demand Forecasting : The elasticity of demand is the basis of demand forecasting. The knowledge of income elasticity is essential for demand forecasting of producible goods in future. Long- term production planning and management depend more on the income elasticity because management can know the effect of changing income levels on the demand for his product. 6 . In Dumping : A firm enters foreign markets for dumping his product on the basis of elasticity of demand to face foreign competition. 7 . In the Determination of Prices of Joint Products: The concept of the elasticity of demand is of much use in the pricing of joint products, like wool and mutton, wheat and straw, cotton and cotton seeds, etc. In such cases, separate cost of production of each product is not known. Therefore , the price of each is fixed on the basis of its elasticity of demand. That is why products like wool, wheat and cotton having an inelastic demand are priced very high as compared to their byproducts like mutton, straw and cotton seeds which have an elastic demand.

45. Importance of Elasticity of Demand 8 . In the Determination of Government Policies: The knowledge of elasticity of demand is also helpful for the government in determining its policies. Before imposing statutory price control on a product, the government must consider the elasticity of demand for that product. The government decision to declare public utilities those industries whose products have inelastic demand and are in danger of being controlled by monopolist interests depends upon the elasticity of demand for their products. 9 . Helpful in Adopting the Policy of Protection: The government considers the elasticity of demand of the products of those industries which apply for the grant of a subsidy or protection. Subsidy or protection is given to only those industries whose products have an elastic demand. As a consequence, they are unable to face foreign competition unless their prices are lowered through sub­sidy or by raising the prices of imported goods by imposing heavy duties on them .

46. Importance of Elasticity of Demand 10 . In the Determination of Gains from International Trade: The gains from international trade depend, among others, on the elasticity of demand. A country will gain from international trade if it exports goods with less elasticity of demand and import those goods for which its demand is elastic. In the first case, it will be in a position to charge a high price for its products and in the latter case it will be paying less for the goods obtained from the other country. Thus, it gains both ways and shall be able to increase the volume of its exports and imports

47. Price Elasticity of Demand The extent of response of demand for a commodity to a given change in price, other demand determinants remaining constant, is termed as the price elasticity of demand. The co-efficient of price elasticity is measured as: e= The percentage change in quantity demanded The percentage change in price Representing it in symbols dQ /Q dP /P dQ = the change in demand. It is measured as the difference between the new demand(Q2) and the old demand(Q1). Thus dQ =Q2-Q1 dP = the change in price. It is measured as the difference between the new price(P2) and the old Price(P1). Thus dP =P2-P1

48. Types of Price Elasticity of Demand Five kinds of Price elasticity of demand as under: Perfectly Elastic demand Perfectly Inelastic demand Relatively Elastic demand Unitary Elastic demand

49. Perfectly Elasticity of Demand When a small change in price of a product causes a major change in its demand, it is said to be perfectly elastic demand. In perfectly elastic demand, a small rise in price results in fall in demand to zero, while a small fall in price causes increase in demand to infinity. In such a case, the demand is perfectly elastic or ep = 00(infinity). From an organization’s point of view, in a perfectly elastic demand situation, the organization can sell as much as much as it wants as consumers are ready to purchase a large quantity of product. However, a slight increase in price would stop the demand.

50. Perfectly Inelasticity of Demand A perfectly inelastic demand is one when there is no change produced in the demand of a product with change in its price. The numerical value for perfectly inelastic demand is zero ( ep =0 ). Perfectly inelastic demand is a theoretical concept and cannot be applied in a practical situation. However, in case of essential goods, such as salt, the demand does not change with change in price. Therefore, the demand for essential goods is perfectly inelastic.

51. Relatively Elasticity of Demand Relatively elastic demand refers to the demand when the proportionate change produced in demand is greater than the proportionate change in price of a product. The numerical value of relatively elastic demand ranges between one to infinity . Mathematically , relatively elastic demand is known as more than unit elastic demand ( ep >1). For example, if the price of a product increases by 20% and the demand of the product decreases by 25%, then the demand would be relatively elastic . If the price of a product decreases by 10% and the demand of the product increases by 30%, then the demand would be relatively elastic Relatively elastic demand has a practical application as demand for many of products respond in the same manner with respect to change in their prices . For example, the price of a particular brand of cold drink increases from Rs . 15 to Rs . 20. In such a case, consumers may switch to another brand of cold drink. However, some of the consumers still consume the same brand. Therefore, a small change in price produces a larger change in demand of the product.

52. Relatively Inelasticity of Demand Relatively inelastic demand is one when the percentage change produced in demand is less than the percentage change in the price of a product. For example, if the price of a product increases by 30% and the demand for the product decreases only by 10%, then the demand would be called relatively inelastic. The numerical value of relatively elastic demand ranges between zero to one ( ep <1). Marshall has termed relatively inelastic demand as elasticity being less than unity.

53. Unitary Elasticity of Demand When the proportionate of change in demand is exactly the same as the change in price the demand is said to be unitary elastic. The numerical value of unitary elastic demand is exactly 1.

54. Income Elasticity of Demand It is defined as a ratio percentage or proportional change in the quantity demanded to the percentage or proportional change in income. e= Percentage change in quantity demanded Percentage change in Income Symbolically Em = dQ /Q M/ dM M=initial Income and dM = Change in income

55. Types of Income Elasticity of Demand Unitary Income elasticity of demand ( em =1) Income Elasticity of demand Greater than Unity ( em >1) Income Elasticity of demand Less than Unity ( em <1) Zero Income Elasticity of demand ( em =0) Negative Income Elasticity of demand ( em <0)

56. Types of Income elasticity of demand Unitary Income Elasticity: When the Percentage change in demand is equal to the percentage change in income the demand is unitary Income Elasticity. Income Elasticity Greater than Unity: When the percentage change in quantity demand is greater than the percentage change in income, the income elasticity of demand is greater than unity. Income Elasticity Less than Unity: When the percentage change in quantity demand is less than the percentage change in income, the income elasticity of demand is less than unity . Zero Income Elasticity: When the income change in any direction or in any proportion but carries no effect on demand, so that the quantity demanded remains unchanged, it is referred to as Zero income elasticity of demand. Negative Income Elasticity: When an increase in income causes a decrease in the demand for a commodity, the demand is said to be negative income elastic.

57. Income elasticity of demand When income elasticity is positive, the commodity is of normal type When income elasticity is negative, the commodity is inferior. For instance, cereals like Jowar , bajra are inferior goods, so their income elasticity is negative. If income elasticity co-efficient is positive and greater than one, the commodity is a luxury. Ex: Demand for TV sets, cars is highly elastic. If income elasticity co-efficient is positive but less than unity, the commodity is an essential one. Ex: Demand for foodgrains is income elastic. If income elasticity co-efficient is zero the commodity is neutral. Ex: Consumption of commodities like salt, match-box has Zero income elasticity.

58. Application of Income elasticity of demand K.K. Sen points out that income elasticity of demand is applicable to many planning and strategy problems such as: Long term business planning: In the long run, demand for comforts and luxury goods may tend to be highly income elastic. Hence, prospects for long run growth in sales for these goods are very bright. The firm can plan out its business accordingly. Market strategy: Income elasticity of demand is helpful in developing market strategies. Housing Development strategies: On the basis of income elasticity, housing development requirement can be predicted and construction work can be effectively launched upon.

59. Cross elasticity of demand In this elasticity, we take into account the change in the price of commodity Y and its effect on the demand for commodity X. The concept of cross elasticity is important in the case of commodities which are substitutes and complementary. The cross elasticity of demand refers to the degree of responsiveness of demand for a commodity to a given change in the price of some related commodity. Ec = dQx / Qx dPy / Py dQx = Change in quantity demanded for commodity X dPy =Change in price of commodity Y

60. Cross elasticity of demand A positive cross elasticity of demand indicates that the two products in consideration are substitutes, since an increase/decrease in the price of one causes an increase /decrease in the quantity demand of the other. A negative cross elasticity of demand indicates that the two products in consideration are complementary to each other, since an increase/decrease in the price of one leads to a contraction/extension in demand for the other.

61. Application of Cross elasticity of demand It can useful in determining competitive price strategy and policy in the alternative rival modes of services such as rail road services.