Analysis of Demand
Transcript of Analysis of Demand
Analysis of Demand
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Meaning Desire for a commodity backed by the ability and willingness to pay for
it.A want with three attribute1. Desire to buy2. Willingness to pay3. Ability to pay
Becomes effective demand
A meaning full statement regarding the demand for a commodity should contain
• The quantity demanded • Price• Time• Place
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What factor affect the demand for a commodity
• Price of the commodity• Income of the consumer• Price of related goods (substitute & complementary)• Fashion, tastes and preferences of consumers• Number of consumers• Future expectation of change in price• Seasonal goods• Credit facility• Advertisement of the product• Demonstration effect• Distribution pattern of national income 8/14/2013 3
Demand function
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preference P tastesT
xcommodity of price Pxcommodity for Demand
....),,,,,,(
21
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Law of demand
Other things remaining the same, demand will be more when price is less and it will be less when price is more.
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Demand schedule and curve
Price (Rs.) Quantity demand (units)
2 25
4 20
6 15
8 10
10 5
P
P1
Q Q1
D
PRICE
Quantity Demand8/14/2013 6
Exceptions of the law of demand
• Inferior goods (Giffen goods)• Expectations of changes in the price in
future• Fashion• Possibility of war• Ignorance• Snobbery : status symbol ( snob effect)
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Why does a demand curve slope downwards to the right
• Law of diminishing marginal utility• Income effect• Substitution effect• Many uses of a commodity• Band wagon effect
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Increase and decrease in demand
Increase in demand
Price Shift in demand curve upward
Quantity demand
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Increase and decrease in demand
Decrease In demand
Price Shift in demand curve downwards
Quantity demand
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Increase and decrease in demand
Increase in demand
Decrease In demand
Price Shift in demand curve
Quantity demand
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Extension and contraction in demand
extension
Price
Quantity demand
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Extension and contraction in demand
contraction
Price
Quantity demand
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Extension and contraction in demand
contraction
extension
MovementAlong The demand curve
Price
Quantity demand
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Market demand schedule and curve
Price Demand of A Demand of B Market demand (A+B)
2 25 20 454 20 18 386 15 14 298 10 10 2010 5 6 11
15
PRICE
Quantity demand
A B
Market demandA+B
PRICE
PRICE
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Types of demand
• Derived demand• Joint demand • Composite demand (many use of a
commodity)• Direct demand (autonomous demand)
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Band wagon effect
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In layman’s term the bandwagon effect refers to people
doing certain things because other people are doing
them, regardless of their own beliefs, which they may
ignore or override. The perceived "popularity" of an
object or person may have an effect on how it is viewed
on a whole. For instance, once a product becomes
popular, more people tend to "get on the bandwagon"
and buy it, too. 8/14/2013
Snob effect
In microeconomics, the snob effect is a phenomenon referring to the situation
where the demand for a certain good by individuals of a higher income level
is inversely related to the demand for the good by individuals of a lower
income level.
The "snob effect" contrasts most other microeconomic models, in that the
demand curve can have a positive slope, rather than the typical negatively
sloped demand curve of normal goods.
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Elasticity of demand
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Elasticity of demand
The degree of responsiveness of the demand for a good to a change in its price is called elasticity of demand.
qp
pq
pp
qqep ×
∆∆
=∆
÷∆
=
=pricein change percentage
demandedquantity in change percentage elasticity price
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Categories of Elasticity
– Relative elasticity of demand: EP > 1– Relative inelasticity of demand: 0 < EP < 1– Unitary elasticity of demand: EP = 1– Perfect elasticity: EP = ∞– Perfect inelasticity: EP = 0
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Determinants of elasticity of demand
• Price level (very costly & very cheap are elastic)• Substitutes are available (elastic) • Nature of the commodities
– Necessaries (inelastic)– Comforts(elastic)– Luxuries(elastic)
• Various uses (elastic)• Postponement (some time elastic)• Habit (inelastic)• Joint demand (both are same)
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Point method
ASAT
curvedemandtheofsgementuppercurvedemandtheofsgementlowered ==
islinestraight aon point aat demand of elasticity
A
T
SPRIC
QUANTITY
Lower segment
Upper segmentE
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Point Elasticity of Demand
• Elasticity differs along a linear demand curve.
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Total outlay method
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• If price and total expenditure move in the same
direction= elasticity < 1
• If price and total expenditure move in the opposite
direction= elasticity > 1
• If total expenditure remains the same whether price
increases or decreases = elasticity = 1
E=1
E<1
E>1
Price
Total 8/14/2013
Income Elasticity
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The percentage change in quantity demanded caused by a percent change in income.
• Y = IncomeYQEY ∆
∆=
%%
Consumer goods
Coefficient of income ed
Effect on sales with change in income
Essential E<1 Less than proportionate change in sale
Comfort E=1 Almost proportionate change in sale
Luxuries E>1 More than proportionate increase in sale8/14/2013
The Cross-Elasticity of Demand
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The percentage change in quantity consumed of one product as a result of a percent change in the price of a related product, i.e. complementary goods or substitutes goods.
B
AX P
QE∆∆
=%%
For a +ve cross-elasticity the products are substitutes productFor a –ve cross-elasticity the products are complimentary 8/14/2013
Arc Elasticity of DemandElasticity which is measured over a discrete
interval of a demand curve.
• Ep = Coefficient of arc price elasticity• Q1 = Original quantity demanded• Q2 = New quantity demanded• P1 = Original price• P2 = New price
2/)(2/)( 21
12
21
12
PPPP
QQQQEp +
−÷
+−
=
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Uses of elasticity in business decisions
• Price and cross elasticity's of demand are of greater significance in the pricing of a product aimed at maximizing the total revenue in the short run.
• Income elasticity of a product is of a greater significance in production planning and management in the long run particularly during the period of a business cycle.
• The income elasticity also used to define the normal and inferior goods. – +ve income elasticity is normal goods– -ve income elasticity is inferior goods
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Example
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Assignment - 31.The price of a commodity falls from Rs. 10
to Rs. 5 and its coefficient of price elasticity of demand is 2. how much quantity will be demanded to the changed price where original quantity demanded is 40.
2.A decline of Rs.2 in the price leads to an increase o f 10 units in the demand as a result of which demand goes up to 100 units and price declines to Rs.8. calculate price elasticity of demand.
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Assignment - 33. If the demand function is q=100-5p find
the elasticity of the demand at p=10.4. the demand law is given by x=10-p near
the point x=4, and p=6. if the price increases by 5%; determine the percent decrease in demand and hence an approximation to the elasticity of demand.
5. If the demand law is x=20/(p+1), find elasticity of demand with respect to price at the point where p=3.
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Assignment - 36. What is meant by elasticity of demand?
Explain what are different methods of measuring elasticity of demand. Suppose price elasticity co-efficient for a commodity is estimated at -2. what does it mean?
7. What do you mean by demand . Explain the difference between change in demand and change in quantity demand for a commodity.
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Thank you8/14/2013 35