Demand & Supply.PPT

8/14/2019 Demand & Supply.PPT

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DEMAND


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Meaning of Demand

Meaning and Definition of Demand

According to Benham: The demand for anything, at a givenprice, is the amount of it, which will be bought per unit of time, atthat price.

According to Bobber, By demand we mean the variousquantities of a given commodity or service which consumerswould buy in one market in a given period of time at variousprices.

Requisites:

a. Desire for specific commodity.

b. Sufficient resources to purchase the desired commodity.c. Willingness to spend the resources.

d. Availability of the commodity at

(i) Certain price (ii) Certain place (iii) Certain time.


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Kinds of Demand1. Individual demand

2. Market demand

3. Income demand

- Demand for normal goods (priceve, income +ve)

- Demand for inferior goods (eg., coarse grain)

4. Cross demand

- Demand for substitutes or competitive goods (eg.,tea & coffee, bread and

rice)- Demand for complementary goods (eg., pen & ink)

5. Joint demand (same as complementary, eg., pen & ink)

6. Composite demand (eg., coal & electricity)

7. Direct demand (eg., ice-creams)

8. Derived demand (eg., TV & TV mechanics)

9. Competitive demand (eg., desi ghee and vegetable oils) 10.Demand of unrelated goods


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FACTORS AFFECTINGDEMAND 1. Prices of Goods

2.Income of Consumer

3.Prices of Related Goods

4.Population

5.Tastes,Habit

6.Expectation about future prices

7.Climatic Factors

8.Demonstration Effect

9.Distribution of national income


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Demand Schedule Demand Schedule: a tabular presentation showing different quantities of

a commodity that would be demanded at different prices.

Types of Demand Schedules

Individual Demand schedule Market Demand Schedule

Price A

1 50

2 40

3 30

4 20

Price A B C M.S

1 50 45 40 135

2 40 30 38 108

3 35 20 30 85

4 20 15 25 60


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Demand Curve

The Graphical Representation of Demand Schedule is called a DemandCurve. It is of two types:

Types of Demand Curve

Y Y

Price Less Flatter Price MoreFlatter

O Demand X O

Demand X

Individual DC Market DC


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Figure 2.1 Market demand for tomatoesDemand, the assumed inverse relationship between price and quantity purchased, can berepresented by a curve that slopes down toward the right. Here, as the price falls from 11to zero, the number of bushels of tomatoes purchased per week rises from zero to 110,000.


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Figure 7.2 Market demand curveThe market demand curve for Coke, DA B, is obtained by summing the quantities thatindividuals A and B are willing to buy at each and every price (shown by the individualdemand curves DAandDB).


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Demand Curve Movement along demand curve Vs. Shift in demand curve:

Distinction between change in quantity demanded and change in demand.

A. Change in quantity demandedWhen quantity demanded changes (rise or fall ) as a result of change in price alone, other factors remainingthe same.

Contraction/fall in quantity demanded Extension/Rise in quantity demanded

The change is depicted/ represented by the movement up or down on agiven demand curve. This does not require drawing a new demandcurve.


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Figure 2.2 Shifts in the demand curveAn increase in demand is represented by a rightward, outward, shift in the demand curve,from D1to D2. A decrease in demand is represented by a leftward, or inward, shift in thedemand curve, from D1toD3.


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The Law of Demand Prof. Samuelson: Law of demand states that people will buy more at

lower price and buy less at higher prices, others thing remaining thesame.

Ferguson: According to the law of demand, the quantity demandedvaries inversely with price.

Chief Characteristics:

1. Inverse relationship.

2. Price independent and demand dependent variable.

3. Income effect & substitution effect.

Assumptions:

No change in tastes and preference of the consumers.

Consumers income must remain the same.

The price of the related commodities should not change.

The commodity should be a normal commodity


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The Law of Demand

EXPLAINERS:

Why demand curve slopes downwards?

1. Income effect

2. Substitution effect

3. Diminishing Marginal Utility


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Law of Demand Exceptions:

Inferior goods

Articles of snob appeal. (exception: Veblen goods, eg., diamonds) Expectation regarding future prices (shares, industrial materials)

Emergencies

Quality-price relationship

Conspicuous necessities.

Ignorance

Change in fashion, habits, attitudes, etc..

Importance:

Price determination.

To Finance Minister

To farmers

In the field of Planning.


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Market Research and Law ofDemand1. The more confidence a person has in price information as a

predictor of quality, the more likely hell be to choose a high-

priced, rather than a low-priced item.2. A person who perceived himself as experienced in purchasing

a product will generally choose a low-priced item, but aninexperienced person will select a high-priced one.

3. A person who selects a high-priced item will (i) believe itsmore difficult to judge product quality, and (ii) feel he has less

ability to make accurate quality judgments than one whochooses a low-priced item.

4. A person who purchases a high-priced product wouldperceive large quality differentials. He would also feel that it isrisky and uncertain to go in for a low-priced product.

5. Business executives also disbelieve that the consumer isrational. (Eg., Yalethe under priced lock)

6. Purchasing behavior of the consumer is mostly repetitive.


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The Law of Demand

P

Q

A

B

P

Q

D1D2

CHANGE IN PRICE=

change in quantity

demanded

CHANGE IN OTHER=

change in demand

P1

P2

Q1 Q2


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The Law of Demand

P

Q

D1D2

CHANGE IN OTHER=

change in demand


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Determinants of Demand

Things other than price that cause the whole

curve to shift

Increase: shift to the right

Decrease: shift to the left


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Determinants of Demand

Change in consumer tastes

Change in peoples income

normal goods

inferior goods


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if?

SITUATION: Youre the owner of a hot dog making

company:

(a) people change their preference from

hamburgers to hot dogs?


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if?


company:

(b) U.S. negotiates a deal w/ China to trade

hot dogs for egg rolls?


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if?


company:

(c) the price of ground beef plummets?


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if?


company:

(d) the minimum wage rises?


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if?


company:

(e) the MWU threatens a strike if owners

fail to meet their demands?


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if?


company:

(f) unemployment hits an all-time high?


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if?


company:

(g) the price of buns increases due to a

wheat shortage?


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as c y o eman Definition: Elasticity of demand is defined as the responsiveness of

the quantity demanded of a good to changes in one of the variables onwhich demand depends.

These variables are price of the commodity, prices of the relatedcommodities, income of the consumer & other various factors onwhich demand depends. Thus, we have Price Elasticity, CrossElasticity, Elasticity of Substitution & Income Elasticity. It is alwaysprice elasticity of demand which is referred to as elasticity of demand

A.Price Elasticity Measures how much the quantity demanded of a good changes when

its price changes.

Or

It may be defined as Percentage Change in Quantity demanded overpercentage change in price


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Factors affecting Elasticity ofDemand1. Availability of substitutes

2. Postponement of consumption

3. Proportion of expenditure (needles: inelastic; TV: elastic)4. Nature of the commodity (necessity vs. luxury; durability/reparability

eg., shoes)

5. Different uses of the commodity (paper vs. ink)

6. Time period (elastic in the long term)

7. Change in income (necessaries: inelastic; milk and fruit for a richman)

8. Habits

9. Joint demand

10. Distribution of income

11. Price level (very costly & very cheap goods: inelastic)


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Price Elasticity Price Elasticity

Elastic Demand or more than 1When quantity demandedresponds greatly to price changes

Inelastic Demand or less than 1When quantity demandedresponds little to price changes.

Unitary ElasticWhen quantity demanded responds equally tothe price changes.

Perfectly inelastic or 0 elastic demand

Perfectly elastic or infinite elastic demand

Economic factors determine the size of price elasticity forindividual goods. Elasticity tends to be higher when the goods areluxuries, when substitutes are available and when consumer havemore time to adjust their behavior.


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Calculating Price Elasticity PED = % Change in Qty Demanded

% Change in Price

Points to Remember:

We drop the minus sign from the numbers by treatingall % changes as positive. That means all elasticitys

are positive, even though prices and quantities movein the opposite direction because of the law ofdownward sloping demand.

Definition of elasticity uses percentage changes inprice and demand rather than actual changes. Thatmeans that a change in the units of measurement does

not affect the elasticity. So whether we measure pricein Rupees or paisa, the price elasticity stays the same.


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Some business applications of PriceElasticity Price discrimination

Public utility pricing (electricity, railway)

Joint supply (wool and mutton)

Super markets

Use of machines (lower cost of production forelastic)

Factor pricing (workers producing inelastic

demand products)

International trade (devalue when exports areprice-elastic)

Shifting of tax burden (shift commodity tax when

demand is inelastic)

Taxation policy


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Elasticity & Revenue: When demand is price inelastic, marginal revenue is

negative and a price decrease reduces total revenue. When demand is price elastic, marginal revenue is positive

and a price decrease increases total revenue.

In the borderline case of unit elastic demand, marginalrevenue is 0 and a price change leads to no change in thetotal revenue.

B. Income Elasticity of Demand: Is the degree ofresponsiveness of quantity demanded of a good to a smallchange in the income of the consumer.

If the proportion of income spent on a good remains thesame as income increases, then income elasticity for thegood is equal to one.

If the proportion spent on a good increases, then theincome elasticity for the good is greater than one.

If the proportion decreases as income rises, then income

elasticity for the good is less than one.


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Income elasticity Types:

Zero

Negative Positive (i) low (ii) unitary (iii) high

Empirical evidence suggests that income elast ic i ty fal ls asincome rises.

Income elasticity and business decisions

1. If ei is>0 but 1, sales will increase more rapidly than general

economic growth Corollary: in a growing economy while farmers suffer as

their products have low income elasticity, industrialists gainas their products have high income elasticity.


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Cross Elasticity: A change in the demand for one

good in response to a change in the price ofanother good represents cross elasticity ofdemand of the former good for the latter good.

If two goods are perfect substitutes for each other

cross elasticity is infinite and if the two goods aretotally unrelated, cross elasticity between them iszero.

Goods between which cross elasticity is positivecan be called Substitutes, the good between whichthe cross elasticity is negative are not alwayscomplementary as this is found when the incomeeffect on the price change is very strong.


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Degrees of Elasticity ofDemand 1. Perfectly Elastic

2. Perfectly Inelastic

3. Unitary Elastic

4. Relatively more elastic

5. Relatively less elastic


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1. Perfectly Elastic

dO X

Y

p

d1

Ed =


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2. Perfectly Inelastic

p1

OX

Y

p

d

Ed = 0


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3. Unitary Elastic

p1

OX

Y

p

d1

Ed = 1

d


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4. Relatively more Elastic

p1

OX

Y

p

d1

Ed > 1

d


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5. Relatively less Elastic

p1

OX

Y

p

d1

Ed < 1

d


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Figure 7.3 Elastic andinelastic demandDemand curves differ intheir relative elasticity.Curve D is more elasticthan curve D2, in the sensethat consumers on curveD are more responsive toa given price change (P2toP) than are consumers oncurve D2.


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Figure 7.4 Changes in theelasticity coefficientThe elasticity coefficientdecreases as a firm movesdown the demand curve. Theupper half of a lineardemand curve is elastic,meaning that the elasticitycoefficient is greater thanone. The lower half isinelastic, meaning that theelasticity coefficient is lessthan one. This means thatthe middle of the lineardemand curve has anelasticity coefficient equalto one.

As the price falls from P3toP2, the quantity demanded in the short run rises from Q to Q2.However, sales build on sales, causing the demand in the future to expand outward to, say,


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D2. The lower the price in the current time period, the greater the expansion of demand inthe future. The more the demand expands over time in response to greater sales in thecurrent time period, the more elastic is the long-run demand.


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e o s o measuremen oElasticity1. Percentage or Proportionate Method = Percentage change in demand or;

Percentage change in price = Proportionate change in demand Proportionate change in price

2. Total Outlay (Expenditure) Methods

TO=TQ * P ; where, TO=total outlay; TQ=total quantity;

P=price of the commodity

3. Geometric (Point) methodat anygiven point on the curve

= lower segment of demand curve upper segment of demand curve

The pyramid orders human needs by broad categories from the most prepotent needs onthe bottom to lesser and lesser prepotent needs as an individual moves up the pyramid.


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According to Maslow, an individual can be expected to satisfy her needs in the order oftheir prepotence, or will move from the bottom of the pyramid through the various levelsto the top so long as the individuals resources to satisfy her needs last.

gure . a eman , pr ce, an neesatisfaction


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The extent to which needs aresatisfied depends in the economistsview of the world, onthe nature of the needs demand andits price. Physiological needs mayindeed be morecompletely satisfied than other needs,but that may only be becausephysiological needshave relatively low prices (panel (a)).But then, as shown in this figure(panel (b)), theprice of the means of satisfyingphysiological needs might be higherthan the prices of themeans of satisfying safety and loveneeds.

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