Micro Economics Handout 1

Tanaya Bose

DEMAND ANALYSIS Definition of Demand Curve: While demand (dd) means the optimum purchase of commodities which maximize utility subject to budget constraint, demand curves are downward sloping( from left to right) curves which depicts the inverse relation between price and quantity demanded. Demand Curves are graphical representation of preferences for a particular good. Law of Demand: When price of a commodity falls quantity demanded of that commodity rises and vice versa, ceteris paribus, i.e. other things remaining constant. Factors affecting demand: In the law of demand when we make the assumption of other things remaining constant we talk of other things like: 1) Taste and Preference of the consumers 2) Income level or the purchasing power of the consumers 3) Level of Technology existing in the economy. 4) Price of Substitute goods. 5) Price of Complementary Goods. 6) ..And any other factor other than price of that commodity itself. Change in demand vs Change in quantity demanded: Change in demand 1) Change in demand essentially happens due to a change in the factors affecting demand. 2)Change in demand causes a shift in the Demand Curve,i.e., an increase in demand Causes the demand curve to shift outwards Whereas a decrease causes an inward shift. Change in quantity demanded 1)Change in quantity demanded happens essentially due to a change in the price Of that commodity. 2) Change in quantity demanded causes a shift along the demand curve.

Micro Economics Handout 1

Tanaya Bose

Exceptions to the Law of Demand: a) Giffen Goods: Giffen goods are those goods whose demand decreases with the increase in income. b) Inferior Goods: Inferior Goods are those goods whose demand decreases if its price decrease. All Giffen goods are Inferior goods, but all inferior goods are not Giffen goods. Elasticity of Demand: Until and unless mentioned Elasticity of Demand essentially means Price Elasticity of Demand a) Price Elasticity of demand: The percentage change in quantity demanded of a commodity due to one percent change in price of that commodity. I.e . Ep = % change in quantity demanded ____________________________ % change in price of that commodity = Q ________ Q _____________= Q P P ________.____ _____ P Q P

b) Point Elasticity of demand:

Point Elasticity = (% change in Quantity)/(% change in Price) Point Elasticity = (Q/Q)/(P/P) Point Elasticity = (P Q)/(Q P) Point Elasticity = (P/Q)(Q/P) Note: In the limit (or "at the margin"), "(Q/P)" is the derivative of the demand function with respect to P. "Q" means 'Quantity' and "P" means 'Price'.

Micro Economics Handout 1

Tanaya Bose

Example demand curve: Q = 1,000 - .6P a.) Given this demand curve determine the point price elasticity of demand at P = 80 and P = 40 as follows. i.) obtain the derivative of the demand function when it's expressed Q as a function of P.

c) Arc Elasticity: Arc elasticity is the elasticity of one variable with respect to another between two given points. It is used when there is not a general function for the relationship of two variables. Therefore, point elasticity may be seen as an estimator of elasticity; this is because point elasticity may be ascertained whenever a function is defined. The y arc elasticity of x is defined as:

d) Income Elasticity of demand: Percentage change in the quantity demanded of a commodity due to one percent change in the income of the consumer. . Em= % change in quantity demanded ____________________________ % change in price of that commodity = Q ________ Q _____________= Q M M ________.____ _____ M Q M

Micro Economics Handout 1

Tanaya Bose

e) Cross elasticity of Demand: Percentage change in the quantity demanded of a commodity due to one percent change in the price of some other commodity. . Ex,y = % change in quantity demanded of x _______________________________ % change in price of commodity y = Qx ________ Qx _____________= Py _____ Py

Qx Py _______.____ Py Qx