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Consumer Behaviour
Demand and UtilityAnalysis
Indifference CurveAnalysis
Reveal Preference
Theory
Game Theory
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Be Nice to the Ones who SMOKE..
Every Cigarette might be their last..
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Demand = Desire or Want+ Willingness to Buy+ Ability to Pay
At a specific price andper unit of time
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Case: 1.Which of the following statements depictingdemand are correct. Give reasons
a. In Boregaon village, the total population isone lakh
b. 50 buffaloes give 150 litres of milk every day
which is consumed by an entire village in onedayc. In a bustling part of a city, 100 packets of idlis
are sold within an hour
d. A fruit vendor sell 50 fruits (of differentvarieties) in a daye. A toy shop selling different types of toys, each
priced at Rs. 20 at a hill station makes abusiness of Rs. 3500 each day.
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Demand Functions
Long Run function QDx = f{ Px, Y, Pr, A, T, N, Fe, Tx, O..}
Independent VariableDependant Variable
Short Run Function
QDx = f (Px)
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Demand Determinants
Price of the product demanded.Income of the consumer.
Prices of related goods. Advertising expenditure.Future Expectations of theConsumer about the Price of the product.
Habits.
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Demand Determinants
Growth of Population, Agestructure, Sex ratio etc
Direct TaxesFashion, Tastes, Trends etc
Climatic ConditionsCredit FacilitiesBrand Name
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Income of the ConsumerLuxurygoods
EssentialConsumergoods (ECG)
InferiorGoods
Normal Goods
Quantity Demanded
C o n s u m e r s
I n c o m e
0X
Y
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Advertisement Expenditure
Sales Curve
Advertisement Expenditure (Rs.)0
V o
l u m e o
f S a l e s
X
Y
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Case: 2Following are some instances explain howdemand will be affected for that product inspecific or in general? Why?
a. A firm announces a double bonus for all itsemployees this Diwali.
b. Right next to a busy snack centre, a new onecomes up.c. VAT is announced on all saleable commoditiesd. A vegetable hawker announces that all
customers after 9.30pm to his shop will enjoy a25% off on any good
e. An epidemic in a country kills thousands ofpeople, mostly affecting the older generation
f. Prices of washing machines go down drastically
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Case: 3 Point out the factors
determining the demandfor a
virus- proof laptop .
OrPen-cum- pendrive
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Individual Demand Scheduleof Pizza
Price (Rs) Quantity Demandedby Gautam
(In units)100 6
200 5
300 4400 3
500 2
600 1
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Individual Demand Curve ofPizza
Quantity Demanded
X
Y
DD
P
P
P
Q Q Q O
P R I C E
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Demand Curve
Why does a demand curveslope downwards?
Price Quantity relationshipLaw of Diminishing MarginalUtility
Income EffectSubstitution Effect
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Price(Rs.)
QD byGautam(Smokin
Joes)
QD byGayatri(Pizza
Hut)
QD byJay(Dominos)
MarketdemandOr Total
Demand400 1 3 3
300 2 4 5
200 3 5 7
100 5 9 10
Market Demand Schedule ofPizza
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Price(Rs.)
QD byGautam(Smokin
Joes)
QD byGayatri(Pizza
Hut)
QD byJay(Dominos)
MarketDemandOr Total
Demand400 1 3 3 7
300 2 4 5 11
200 3 5 7 15
100 5 9 10 24
Market Demand Schedule ofPizza
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Market Demand
is a horizontalsummation of individual
demand.
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Law of Demand states that Other things remaining the same
(Ceterius Paribus) the higher theprice the lower will be the demandand vice versa.
QDx = f {Px}
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Other things remaining thesame
No change in consumers incomeNo change in prices of relatedgoodsNo change in advertisingexpenditure
No change in fashion, tastes,preferencesNo expectations about future
change in price
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Other things remaining thesame
No change in age-composition andsex ratio of the population
No change in government policyNo change in climatic conditions
No change in credit facilities, brandname, habits etc
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Exceptions to the Law ofDemand1. Giffen Paradox2. Prestigious goods or conspicuous
consumption or status symbolgoods
3. Speculation4. Consumers ignorance5. Emergency
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Case: 4
1. With news floating about a possibleoutbreak of war in the Gulf, whatwould be the reaction of the peoplein terms of demand (if for anyparticular product) and why?
2. Some people only buy branded
products. Comment3. Some people are addicted to few
products. Discuss.
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Changes In Quantity Demanded
Expansion in quantitydemandedContraction in quantity
demanded.
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Changes In Quantity Demanded
QUANTITY DEMANDED
X
Y
DD
P
R
I
C
E
P
P
P
Q Q Q
b
c
o
a
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Changes in Demand
Increase in demandDecrease in demand
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QUANTITY DEMANDED
X
Y
DD
PR
I
C
E
P
Q
Increase in Demand
DD
Q o
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Increase in Income of Consumer Taste, Fashion in favor of The Products
Increase in Price of SubstituteDecrease in price of ComplementaryConsumers Ignorance
EmergencyFuture Expectations About Rise in PriceIncrease in population
Increase in Demand Can beDue to ------
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QUANTITY DEMANDED
X
Y
DD
PR
I
C
E
P
Q
Decrease in Demand
DD
Qo
d b
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Decrease in Demand Can beDue to ------
Decrease in Income of Consumer Taste, Fashion Against The Products
Decrease in Price of SubstituteIncrease in price of ComplementaryFuture Expectations About Fall in Price
Decrease in Populationetc etc..
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Case: 5
1. A farmer gets a bumper crop thisseason and makes a lot of money.He goes to the market and buys a
lot of things for his family. This isexpansion of demand Justify.
2. Making door-to-door calls for the
product Tide washing power hasbrought in lot of orders for theproduct. How is the demand
behaving? Explain.
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Case: 6Given the following features,describe the effect of each of thefollowing in terms of whether itwould increase or decrease the
quantity demanded or the demandfor housing.a) An increase in housing prices.b) A fall in interest rates on Home loanc) A rise in interest rates on Home
loand) A severe economic recessione) A robust economic ex ansion
MISTAKES ARE NEW LESSONS FOR
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MISTAKES ARE NEW LESSONS FOR
SUCCESS
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The degree of responsiveness of quantity demanded due to change in anyfactor affecting demand.
Percentage change in quantitydemanded
Ep= -------------------------------------------------Percentage change in any factor
affecting demand
Elasticity of Demand
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Price elasticity
Percentage change in quantitydemanded
Ep= -------------------------------------------------Percentage change in price
QDx = f (Px)
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Income Elasticity
Percentage change in
quantity demandede i=------------------------------------------------------
Percentage change in the
Income of consumer
QD = f (Y)
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Cross Elasticity
Percentage change in Quantity demandedof good X
QD X
Exy =
Percentage change in price of good Y
= f (P Y)
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Price elasticity
The degree of responsiveness of quantity demanded due to change inprice.
Percentage change in quantitydemanded
Ep= -------------------------------------------------Percentage change in price
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Method of Price Elasticity
e P =Q
P
P
Q
.. .
Q 2 - Q 1
P 2 - P 1
P 1
Q 1
Ratio or Percentage Method
X
Xe P =
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Ratio or Percentage Method
Where, P1 = Initial PriceP2 = New PriceQ1 = Initial QuantityQ2 = New Quantity
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Types of Price Elasticity
1. Perfectly elastic (ep = )2. Perfectly inelastic (ep = 0 )
3. Relatively elastic demand (ep > 1) 4. Relatively inelastic demand
(ep< 1) 5. Unitary elastic demand (ep = 1)
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1. Perfectly elastic (ep= )
X
Y
QUANTITY DEMANDED
PR
I
C
EP DD
Q
Q
=
Q Q Q 0
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2. Perfectly inelastic (ep=0)
X
Y
QUANTITY DEMANDED
PR
I
CE
DD
Q
P
P
P
Q
Q
= 0
0
3 Relatively elastic demand
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3. Relatively elastic demand(ep > 1) Luxury goods
X
Y
QUANTITY DEMANDED
PR
I
C
E
DD
QQ
P
P
Q
Q
>P
P
Q
P
o
4 R l i l i l i d d
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4. Relatively inelastic demand(Ep < 1) Necessary Goods
X
Y
QUANTITY DEMANDED
PR
I
C
E
DD
QQ
P
P
Q
Q1
ep=1
ep
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Method of Price Elasticity
ep =
Q2 Q1
PP 2 + P 1
Q2 + Q 1
ARC Method
X
Q
Q2 + Q 1 2
2
P 2 P 1P 2 + P 1
ep =
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Method of Price Elasticity
X
Y
DD
a
b
Arc
Quantity Demanded
P r i c e
0
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Method of Calculating Price Elasticity:Total Revenue or Total Expenditure or
Total Outlay Method
Total Revenue = Price x Quantity
T l R /T l E di /
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Total Revenue/Total Expenditure/Total Outlay Method- More elastic
o
DD
PP
Q Q
ab
P TR P r i c e
Quantity Demanded
P
Q
C
P TR
T t l R /T t l E dit /
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Total Revenue/Total Expenditure/Total Outlay Method- less elastic
o
P
P
Q Q
a
b
P TR P r i c e
Quantity Demanded
DD
P
Q
P TR
T t l R /T t l E dit / T t l
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Total Revenue/Total Expenditure/ TotalOutlay Method- Unitary elastic
PP
Q Q
DD
a
b
Quantity Demanded
P r i c e
0
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Total Revenue MethodType of
Elasticity(Ep)
Price(Rs)
QDD(in units)
TR(in Rs.)
Ep = 1
241
105
20
202020
Ep > 1
2
41
10
424
20
1624
EP < 1
24
1
106
16
2024
16
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Total Revenue Method
Price Total Revenue(TR) Type ofElasticity(Ep)
IncreaseDecrease
ConstantConstant
E = 1(Unitary)
Increase
Decrease
Decrease
Increase
E > 1
(More elastic)
IncreaseDecrease
IncreaseDecrease
E < 1(Less elastic)
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Case: 11The Serpell Report (1983) on
Railway finances in England, forinstances, measured price elasticity ofdemand for rail services on someroutes to be fairly inelastic (-0.15);hence suggested fares rise of 40 percent for London commuters. In thiscase, work out the revenue effect iffare is raised from pound 10 to pound
14 and daily 1000 passengers aretraveling on this route. Should theauthorities accept this suggestion?Give your comment.
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Case: 11 Answer
% Q QEp = _________ = -0.15 = _________
% P 40%
Therefore, Q = 6%
as TR = P X QInitially, TR = 10 X 1000 = Pound 10,000
Q = 6%
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Case: 11 cont.
Therefore, with therise in fare new Q =940
At the new pricePound 14TR = 14 X 940
= pound 13,160
Price Qty TR
10 1000 10,000
14 940 13,160
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Case: 12
Suppose the demand for insulinconsists of two types of consumers,those who must have a dose each
day and those who are able to gowithout the drug for several weeks.Suppose the price elasticity of
demand for the first group is 0.01and that for the second group is 4.0.Explain how the firms producinginsulin might price the insulin.
Factors influencing elasticity of
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Factors influencing elasticity ofdemand-
(1) Nature of the commodity :Necessaries
Comforts and Luxuries
(2) Availability of substitutes :No substitutes Close substitutes
Factors influencing elasticity of
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Factors influencing elasticity ofdemand-(3) Number of Uses :
Single Use Multi Use
(4) Range of Price Change:
Highly Priced Low Priced
Factors influencing elasticity of
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Factors influencing elasticity ofdemand-
(5)Proportion of Expenditure :Less expenditure
More expenditure
(6)Time Period :Short Period Long Period
Factors influencing elasticity of
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Factors influencing elasticity ofdemand-
(7) Possibility of Postponement :
Can be Postpone --Cannot be Postpone
(8)Influence by Habits & Customs
Factors influencing elasticity of
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Factors influencing elasticity ofdemand-
(1) Nature of the commodity :Necessaries Inelastic
Comforts and Luxuries Elastic
(2) Availability of substitutes :No substitutes InelasticClose substitutes Elastic
Factors influencing elasticity of
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Factors influencing elasticity ofdemand-(3) Number of Uses :
Single Use InelasticMulti Use Elastic
(4) Range of Price Change:
Highly Priced ElasticLow Priced Inelastic
Factors influencing elasticity of
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Factors influencing elasticity ofdemand-
(5)Proportion of Expenditure :Less expenditure Inelastic
More expenditure Elastic
(6)Time Period :Short Period InelasticLong Period elastic
Factors influencing elasticity of
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Factors influencing elasticity ofdemand-
(7) Possibility of Postponement :
Can be Postpone -- ElasticCannot be Postpone Inelastic
(8)Influence by Habits & Customs Inelastic
Practical Applications of Price
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ppelasticity
1. To a Businessman By knowing the type of elasticity ofdemand it is easy to know whether a pricecut is better or a price rise for increasingthe sales, total revenue and the profits.If the demand is more elastic, a price cutwould lead to an increase in total
revenue.It the demand is inelastic, by raising aprice, no significant decrease in sales willbe effected so the total revenue and theprofit would rise.
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Case : 9
Just think of the product Mangoes. Ita.Is a perishable commodityb.Has no substitutec.Has a high demand in the domestic
as well as the foreign market-- what can you say about its demand
elasticity in each of the aboveaspects?
Practical Applications of Price
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Practical Applications of Priceelasticity 2. To the Finance Minister
Finance minister has to consider theelasticity of demand while selecting
commodities for tax. Tax imposition oncommodities for getting substantialrevenue becomes worthwhile only if thetaxed goods have an inelastic demand.
Taxes are levied on commodities whichhas inelastic demand like cigarettes,wine, sugar etc.
Practical Applications of
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Practical Applications ofPrice elasticity
3. In International Trade Elasticity is important in
formulating export and importpolicies of a country. The relativeelasticities of demand forcommodities in the two countries
are very important. Export thosecommodities which are inelastic inthe international market.
Practical Applications of
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Practical Applications ofPrice elasticity
4. To Trade Unionists The concept of price elasticity is
useful to trade unions in wage
bargaining. The union leaders,when they find that demands fortheir industrys product is fairlyelastic, will ask for a higher wage toworkers and use the producer tocut the price and increase saleswhich will compensate for his lossin total profit.
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Case: 13
Rainbow Crayons, Inc. as amarketing specialist has just hiredyou. The CEO comes to you for
advice on how to raise revenue. Shewants to know if the companyshould lower product prices or raise
product prices to increase revenue.What information must you know? Ifyou have this information, what doyou advise?
Case: 14 Calculate the price elasticity of
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demand for different years from thefollowing data
Year Percentagechange in price
Percentagechange inquantity
2001 5.0 -3.2
2002 -2.5 5.6
2003 zero 1.2
2004 6.5 -2.5
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Case: 14 Answer
2001 0.64 Relatively inelastic.2002 2.24 Relatively elastic2003 infinity Perfectly elastic.2004 -- 0.38 Relatively inelastic.
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Income Elasticity
the degree ofresponsiveness of thequantity demanded due tothe change in income of theconsumer.
Measurement of Income
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Measurement of IncomeElasticity
Percentage change inquantity demanded
e i=------------------------------------------------------Percentage change in the
Income of consumer
Measurement of Income
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Measurement of IncomeElasticity Ratio Method
ei =Q
Y
Y
Q
ei =Q2 - Q1
Y2 - Y1
Y1
Q1
X
X
f
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Measurement of Income
Elasticity
Where, Y1 = Initial IncomeY2 = New IncomeQ1 = Initial QuantityQ2 = New Quantity
Mesurement of Income
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esu e e t o co eElasticity
ei =
Q2 Q1
YY2 + Y1
Q2 + Q 1
ARC Method
X
Q
Q2 + Q 1 2
2
Y2 Y1Y2 + Y1
ei =
T f I l i i
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Types of Income elasticity
(1)Positive income elasticity canbe :
Greater than one ei > 1 -LuxuriesLess than one ei < 1 -Necessaries
P i i I El i i
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Positive Income Elasticity
X
Y
QUANTITY DEMANDED
DD
ei < 1 (necessary goods)
0 Q Q
Y
Y
Y
Q
P i i I El i i
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Positive Income Elasticity
X
Y
QUANTITY DEMANDED
DD
ei > 1 (Luxury goods)
0
Y
Y
Q Q
Y
Q
N i I El i i
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Negative Income Elasticity
X
Y
QUANTITY DEMANDED
I
N
COME
DD
0
ei < 0 (Inferior goods)
Y
Q
Y
Y
QQ
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Case: 15
Paul purchases 10 Kgs per monthon sugar when his income is Rs1500/- per month, when his income
increases to Rs 1800/- per month hespends 12 Kgs on sugar .FindIncome elasticity.
Answer: ei = 1 (sugar is a normalgood)
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Case: 16 Find income elasticity from thefollowing information and interpretthe result.
Initial Income = Rs. 3000Initial Quantity = 1600 unitsNew Income = Rs. 3200
New Quantity = 1300 units
Answer: Ey = -2.81( it is an inferiorgood)
C 17
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Case: 17
There are three income bracketpeople, very poor, middle class andelite class. In one particular monththe prices of each of these rise. Whatwill be the income elasticity?PotatoesDiamondsCottonPaperWheat
Practical Applications of
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Income elasticity
K. K. Seo points out the income elasticityof demand is applicable to many planningand strategy problems, such as
1. Long term Business Planning In the long run, demand for comfortsand luxury goods may tend to be highlyincome elastic. Hence, prospects for longrun growth in sales for these goods arevery bright. The firm can plan out itsbusiness accordingly.
Practical Applications of
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Income elasticity
2. Market Strategy Income elasticity of demand is
helpful in developing marketstrategies.
3. Housing Development Strategies On the basis of income elasticity,
housing development requirementcan be predicted and constructionwork can be effectively launched
upon Practical Applications of
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Income elasticity
4. To the Businessman Income elasticity is important to certain
producers in their demand and sales
forecasting and planning businessexpansion. For instance, the demand forTV sets is highly income elastic, so whenper capital income or income levels of a
class of consumers is found to be rising,TV manufacturers can expect a greatersale even at slightly higher prices.
Cross Elasticity
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Cross Elasticity
..is the degree of responsiveness ofquantity demanded of good X due tothe change in Price of good Y( where
good X and Y are either substitutes orcomplementary)
Percentage change in Quantity demandedof good X
Percentage change in price of good YExy =
Measurement of Cross
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Elasticity
ey =QX
PY
P Y
QX
ey =QX2 - Q X1
P Y2 - P Y1
P Y1
QX1
X
X
Ratio Method
Mesurement of Cross
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Elasticity
ey =
QX2 QX1
P YP Y2 + P Y1
QX2 + Q X1
ARC Method
X
QX
QX2 + Q X1 2
2
P Y2 P Y1P Y2 + P Y1
ey =
Cross elasticity in case of
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Substitutes
P r i c e o
f c o
f f e e
Demand for tea
P
P
Q Q
DD Tea
Exy > 0
X
Y
0
Cross elasticity in case of
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yComplementary goods
P r i c e o
f p e
t r o l
Demand for vehicles
DD Vehicles
P
P
Q Q
Exy < 0
0X
Y
Cross elasticity in case of
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Unrelated goods
P r i c e o
f I c e c r e a m
Demand for Cloths
DD Cloths
P
P
Q
Exy = 0
0X
Y
P
Practical Applications of
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Cross elasticity
To determine the competitiveprice strategy and policy in thealternative rivals modes ofservices such as rail-roadservices. Cross elasticity, here istaken, as a measure of the effectof a change in the fares on thedemand for the rail service andvice versa.
Case: 18 Calculate cross
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elasticity and interpret results
Instances Price ofGood X
Qtydemandedof Good Y
Results
01 10 100
20 200
02 15 150
10 150
03 8 10020 0
04 20 100
15 50
Case: 18 Calculate cross
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elasticity and interpret results
Instances Price ofGood X
Qtydemandedof Good Y
Results
01 10 100 Exy = 1
20 200 Substitutes
02 15 150 Exy = 0
10 150 Unrelated
03 8 100 Exy = -0.6620 0 Complementary
04 20 100 Exy = 2
15 50 Substitutes
Case: 19
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There was a sale of 10,000 units of
Acer Laptop in the year 2004 when itsprice was Rs. 40,000. During the sameperiod 10,500 Toshiba Laptop were atthe price of Rs. 45,000. when the priceof Acer was brought down to Rs.38,000 its sales increased to 12,000units and the demand for Toshiba
declined to 9,500 units without thechange in its own price. Calculatecross elasticity and interpret your
result
Case: 19 Answer
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Case: 19 Answer
Exy = 1.90 (Subsitutes)
Case: 20
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Case: 20When the price of bread was Rs. 20,the demand for bread for 80 units.During the same time price of butterwas Rs. 75 and demand for butter
was 30 units. Price of breadremaining same, if the Price for butterreduces to Rs. 60, then its demandincreases to 40 units and demand forbread also increases to 90 units.
Answer: Exy = - 0.625
(Complementary goods) Case: 21 . Weekly demand of the Household isgiven below. Find the price elasticity of
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g p ydemand for rice and cross elasticity of demandbetween rice and wheat.
Originalprice (Rs)
OriginalQuty (Kgs)
NewPrice
(Rs)
New Quty(Kgs)
Wheat 8 50 8 70
Rice 20 50 23 40
Case: 21 Answer
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Case: 21 Answer
Ep= 1.33 ,
Exy = 2.66 (Substitutes)
Case: 22
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Case: 22
The Times of lndia, is one of theleading newspapers in India. InSeptember 1972, it lowered itsprice from 45 paise to 30 paisewhile prices of its rivalsremained unchanged. Thenumber of newspapers sold byTOI and its rivals was as follows:
Case: 22 conti
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Case: 22 conti..
August2005
May2006
Times of India 3,55,000 5,18,000
Statesman 10,24,000 9,93,000
Hindu 3,92,000 4,02,000
Hindustan
Times
3,25,000 2,77,000
Case: 22 conti
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Case: 22 conti..
1. Based on the figures, find theprice elasticity of demand for
TOI.
2. Was the cross elasticity ofdemand between Statesmanand TOI positive or negative ?
Case: 23 Work out the type ofl ti it th f ll i d t
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elasticity the following products
will have:-ElectricitySoaps
Exotic VacationsCigarettesWineACTea
Genius does what it must, and Talent doeswhat it can
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Demand Forecasting
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Demand Forecasting
Isthe method of predictingthe future demand of afirms product.
Demand Forecasting
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Demand Forecasting
Short Run ForecastingSurvey Method
Long Run ForecastingStatistical Method
Survey MethodOpinion Polling MethodCollective opinion MethodPanel of Experts
Correlation & Regression
Time Series MethodBarometric Method
Methods of DemandF ti
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Forecasting
For a Established product :(1) Interview and Survey Approach
(2)Opinion Polling Method(3)Collective Opinion Method(4) Panel of Experts Or Delphi
method.(5) Projection Approach (for Long
Period)
Projection Approach (LongP i d)
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Period)
S A L E S
0 YEAR
Y
X
For a New Product
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Evolutionary MethodSubstitution Method
Growth Pattern MethodOpinion Polling MethodSample Survey Method
C 24
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Case: 24
Mention which method offorecasting will be suitable forthe following products:
a. Toysb. Getz
c. Washing Powderd. Coffee
Case: 25
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A cartel has been entered into by various
firms into the manufacture of kids schoolshoes. Price has been set, which the firmshave to respect. To increase profits, thefirms have to increase the quantitysupplied. Your firm is one of them. It is themonth of April. Just 2 more months to gofor the schools to re-open, the time whenmost parents do shoe-shopping for theirchildren. Certain factors are in yourhands, while some are not. Which ones do