CHAPTERDEMAND 3

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STATISTICS

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EconomicsC O M M E R C E | S T D - 1 1

CHAPTER 3 DEMAND

RACHNA SEKHANI 1

Desires

It is the most important factor affecting demand.

Demand depends upon the taste and preference of a consumer.

The demand for the goods increases when the income of a consumer increases and falls when the income of the consumer falls.

These goods can easily/alternatively be used in place of other goods.

An individual expectation of the future prices affects the demand

If the total population size is more, demand will be more and vice versa.

These goods are consumed together.

When the price of good falls, a rational consumer will buy more i.e. demand expands and when the price of a good rises, a rational consumer will buy less i.e. demand contracts.

This is related with his like and dislikes.

If a person is fond of something, he will buy that good whether the price increases or decreases

There is a direct relationship between demand and income of a consumer

They have similar characteristics

Goods cannot be consumed without its complimentary goods.

Demand for the goods falls when the price of the substitute falls.

If a consumer expect price rise in future, he will demand more and if he expects price fall in future, he will demand less.

If the age of the population belongs to young age, demand for commodities that are demanded by the youngsters will be more.

For example mobile phone and sim card, ink and ink pen, air conditioner and electricity

For example television of different brands, motorcycles, refrigerators etc.

There is a inverse relationship between price of complimentary goods and demand for the goods.

There is a direct relationship between demand of goods and price of substitute goods

Factors affecting demand of a commodity

Able and willing to buy

At a given price

Meaning – Demand is the quantityof a commodity which a buyer

01 | PRICE

02 | OTHER FACTORS

Taste and Preference of a consumer

Income of a consumer

Price of Related goods

Expectation of future prices

Size and Demographic Profile ofthe consumer

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SUSTITUTE GOODS

COMPLIMENTARY GOODS

At a given point of time

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03 | Demand Function

04 | LAW OF DEMAND

05 | ASSUMPTIONS

Dx = f(Px, Py, Pe, T, Y, U)

Dx = Demand of commodity X

F = Function Notation

Px = Price of commodity x

Py = Price of related commodity Y

Pe = Expectation of future price of x

T = Taste and Preference of consumer

Y = Consumer's income

U = Other factors

The cause and effect relationship between demand and other variables expressed in a mathematical equation is called demand function

It is stated as follows :

The law of demand was

presented by Prof. Alfred

Marshall as “When other

factors inuencing demand

remain unchanged, if price of

a good falls, its demand

expands and if price of a good rises, its demand

contracts”

The law of demand was

presented by Prof. Alfred

Marshall as “When other

factors inuencing demand

remain unchanged, if price of

a good falls, its demand

expands and if price of a

good rises, its demand

contracts”

The law of demand

was presented by

Prof. Alfred Marshall

a s “ W h e n o t h e r

factors inuencing

d e m a n d r e m a i n

unchanged, if price of

a g o o d f a l l s , i t s

demand expands and if price of a good rises,

its demand contracts”

Taste and preference of the consumer remains unchanged

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Income o f the consumer remain unchanged

2

Price of substitute and complimentary goods remain unchanged

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There is no anticipation of future prices

Size of the population remains the same

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5

The above diagram shows the price on Y axis and demand on X axis.

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By plotting all the points and joining the points, we get demand curve which slops downwards.

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It shows there is inverse relationship between price and demand.

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PRICE

50

40

30

20

10

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2

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4

5

DEMAND

Analysis of inverse relationship between price and demand

06 | SUBSTITUTION EFFECT

When the price of the concerned goods falls, demand for substitute falls because consumer will reduce the demand for substitute goods and increase demand for concerned goods.

This is called substitution effect

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RACHNA SEKHANI 3

08 | EXCEPTIONS TO THE LAW OF DEMAND

The cause and effect relationship between demand and other variables expressed in a mathematical equation is called demand function

Certain goods which are priced very high and are generally consumed by very rich people l ike jewellery, gems, expensive cars, expensive mobiles etc

Sometimes people get accustomed to some goods and they demand them irrespective of the price of such goods

Certain goods are extremely low priced.

When the price of the giffen goods or inferior goods falls but if the income of the consumer increases then they may reduce the demand for these goods.

Such goods are used as a status symbol

These goods forms a very small part of consumer's income

These goods are named a f ter Robert Giffen who for the rst time made such observation

Demand for these goods expands when their prices rises and rich people do not demand when their prices fall thinking that the goods are losing their prestige

Law of demand does not apply in such case.

For ex. Stapler pins, match box, pins etc

Such goods are necessary and purchased by low income group

Their demand do not change with change in price

For example if the price of jowar/bajra reduces, real income of the consumer rises and now he will demand more of wheat than bajra

PRESTIGIOUS GOODS

SPECIAL PREFERENCE OF PEOPLE

EXTREMELY LOW PRICED GOODS

GIFFEN GOODS

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09 | EXPANSION AND CONTRACTION OF DEMAND

10 | INCREASE AND DECREASE IN DEMAND

O t h e r f a c t o r s r e m a i n i n g constant, if the price of a commod i t y r i ses , i t s demand contracts and if the price of a commodity falls, its demand expands.

When one factor or more than one factor other than price change and due to which demand changes, it is known as increase or decrease in demand.

Expansion and contraction of demand occurs on the same demand curve.

In such a case, there is a shift in the demand curve.

Expansion is downward movement on the demand curve and contraction is a upward movement on the demand curve.

If there is increase in demand, there is rightward shift of the curve.

If there is decrease in demand, the curve shifts to left.

Hence increase and decrease in demand is caused by factors other than price.

CHAPTER 3 DEMAND

RACHNA SEKHANI 4

11 | INDIVIDUAL DEMAND & MARKET DEMAND

12 | ELASTICITY OF DEMAND

13 | PRICE ELASTICITY OF DEMAND

15 | INCOME ELASTICITY OF DEMAND

Individual demand is the demand for good by an individual at a given price at a particular point of time.

Elasticity of demand i s t h e e x t e n t o f change in demand due to change in its determinant s like price, income, taste and preference etc.

Proportion of change in demand of a commodity due to change in its price is called price elasticity of demand.

Percentage change in the demand of a good because of change in the income of the consumer is called income elasticity of demand.

The sum total of such demands of all the existing customers is called market demand at a given price at a particular point of time.

14 | TYPES OF PRICE ELASTICITY OF DEMAND

Price Elasticity of demand Income elasticity

= = Proportionate change in demand Proportionate change in demand

Proportionate change in price Proportionate change in income

PERFECTLY ELASTIC DEMAND : When there is innite change in the demand of a commodity because of negligible change or zero change in the price of a commodity, it is called perfectly elastic demand.

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PERFECTLY INELASTIC DEMAND : when there is no change in the demand of a commodity due to change in the price of the commodity, it is called perfectly inelastic demand.

UNITARY ELASTIC DEMAND : When the percentage change in the demand and percentage change in price is equal, it is called unitary elastic demand.

RELATIVELY ELASTIC DEMAND : When the percentage change in demand is more than the percentage change in price, it is called relatively elastic demand.

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3

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RELATIVELY INELASTIC DEMAND : When the percentage change in demand is less than the percentage change in price, it is called relatively inelastic demand.

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CHAPTER 3 DEMAND

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16 | TYPES OF INCOME ELASTICITY

W h e n t h e d e m a n d increases due to a rise in income of the consumer or demand decreases due to fall in income of a consumer, it is known as positive i n c o m e e l a s t i c i t y o f demand.

Unit income elastic demand : when proportionate change in demand is equal to the proportionate change in income, it is called unit income elasticity of demand.

Elasticity greater than unity : when the proportionate change in demand is more than proportionate change in income, it is called elasticity greater than unity.

Elasticity less than unity : when the proportionate change in demand is less than proportionate change in income, it is called elasticity of demand less than unity.

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POSITIVES INCOME ELASTICITY

NEGATIVE INCOME ELASTICITY

ZERO INCOME ELASTICITY

CROSS PRICE ELASTICITY OF DEMAND

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With the rise in income if the demand for certain goods decrease and with the fall in income, if demand for certain goods increase, it is called negative income elasticity of demand.

With the change in income of the consumer, if the demand for the goods remain unchanged, it is c a l l e d z e r o i n c o m e elasticity of demand.

When the demand of the concerned commodity changes with the demand of the related goods (substitute or complementary) goods, it is known as cross price elasticity of demand.

Some inferior goods have negative income elasticity of demand.

For example Bajra, coarse cloth, Palmolein Oil, Vegetable Ghee etc.

This concept was rst given by Robert Giffen.

INC

OM

E

D

DO Q

I1

I

I0

Quantity Demand

Cross Elasticity of demand

= % change in price of commodity X

% change in price of commodity Y

17 | MEHTODS OF MEASURING ELASTICITY OF DEMAND

Proportionate change method1

Total Outlay Method

Geometric Method

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3

CHAPTER 3 DEMAND