DEMAND

DEWETT Page nos 85/95

 DEMAND
• The word demand refers to the
quantity of a commodity or service
that the consumers are –
• Willing to Purchase
• Able to purchase
• At various prices during a period
• “Demand i s an ef fe ctive de si re ”
-
 Demamd
The word effective desire includes the
following 5 elements
• Desire
• Means to purchase ( if a poor man desires
for a car, his desire cannot be called
demand)
• Willingness to use those “ Means to fulfill
the desire”- if a rich miser desires for a car,
then his desire will not be called demand,
also there is desire and means to purchase.
• 4. Price. Demand in economics is
always at a price. For example, you will
be willing to purchase a pen for Rs 10/=
but you may not buy that pen, if the
price is Rs 100/-
• 5 Time Period – Demand is always
expressed with reference to a particular
time period. For example, cars per day,
1000 cars per week etc
 Demand and Price
• The demand for a commodity is
closely related to the price.
• At lower prices he will buy
more of the commodity and
only less at higher prices”
 Demand schedule
• Demand schedule means a table
showing different quantities demanded
by the consumer at various prices
• Demand schedules are of two types
3. Individual demand schedule
4. Market demand schedule
 Individual Demand
Schedule
Sl Price Quantity • Individual demand schedule
demanded
no per in Kgs • The table gives the demand
Kg schedule of an individual for
1 50 5 sugar. The quantity demanded
increases when the price falls
2 40 10 and decreases when price
rises. At a price of Rs 50/ Kg,
3 30 15 the individual demands 5 Kgs.
But when the price falls to Rs
4 20 20 10, his demand increases to
Rs 25 kg.
5 10 25
 Market demand schedule

• Market demand schedule is also known

as Industry demand schedule.

• This is the total quantity of a

commodity demanded at different
prices by all the buyers of the
commodity in the market
• It is assumed Sl
no
price Deman
d by A
D
ema
nd
D
ema
nd
MKT
DEMAN
D

here that there by B by C

are only three 1 50 30 20 0 50

buyers in the
2 40 40 40 20 100
market A,B and
C. 3 30 60 60 30 150

4 20 80 70 50 200

5 10 100 90 60 250
 DEMAND CURVE

50

price
40

30

20

10
Units demanded

0 5 10 15 20 25
 THE LAW OF DEMAND
• From the demand schedule, we know that
Demand varies with price
• We can now formulate the law of demand.
• This law states that Demand varies inversely
(in the opposite direction) with price. ie the
price rises demand contracts and if the price
falls, demand extends.
• In other words, demand increases with a
falling price and decreases with a rising price
 Exceptions to the Law of
Demand
1. CONSPICIOUS CONSUMPTION
Where a consumer regards the
consumption of a commodity as a mark of
distinction, he will go in for higher price
commodity. Eg-Diamonds. Such consumers
measure utility of a commodity entirely by
its price. Hence more will be purchased
when its price goes up where according to
the law od demand, less is purchased at a
higher price than at a lower price.
 2. GIFFIN PARADOX
• Sir Robert Giffin observed in mid 19th
century that when the price of bread
increased, the low paid workers in
Britain spent more on it- since it was
their main food and they cut on meat.
• This means that demand of bread
increased when its price went up,
which is an exception to the law of
demand
 3. Changes in expectation
• When prices are expected to
continue rising, buy more
even though prices has
risen
 4. Trade cycle.
• In times of general economic
prosperity, people buy more,
even when prices have gone
up.
 5. Brands v/s Status
• Some persons conscious of
their higher status buy more of
the higher priced brands as
status symbol.
 6. Other Misc situation
• When commodity goes out of
fashion, its demand may fall
despite its falling price
 Factors which bring changes in
Demand (other than price)
1. Change in fashion (less demand even
though price is less)
2. Change in weather ( a fall in price of
woolen clothes does not increase
their demand in summer)
3. Changes in quantity of money in
circulation. (if money circulation
increases, purchasing power
increases)
• 4. Changes in population (if birth rate increases,
more toys will be sold. More old age population
means more demand for walking stick, falls teeth
and medicine)
• 5. Habits/Taste and Customs (if people develop
taste for tea in place of lassie, the demand for Tea
will be more )
• 6. Technical progress ( due to this, old things are
not wanted. Gramophone was replaced by Radio,
Radio sets replaced by TV sets
• 7. Advertisement (an advertisement may create a
new type of Demand- medicine, toilet, accessories
etc)
 INTER RELATED DEMANDS
• JOINT DEMAND
When different things are demanded for a
joint purpose, it is a joint demand
Milk, Sugar and Tea are wanted for making
Tea
Bricks, mortar, wood etc are needed for a
building
when commodities are jointly demanded
their prices are influenced by the demand for
ultimate object. For eg, prices of bricks,
wages of masons etc are greatly affected by
the demand for houses.
DIRECT AND DERIVED DEMAND
• In the previous example, the demand
for the ultimate object is called DIRECT
DEMAND
• The demand for labor and accessories
which go to make final product is
called Derived Demand
• It is really the house we want, other
things are wanted only because we
want a house
 COMPOSITE DEMAND
• The demand for a commodity that
can be put to several uses is a
composite demand.
• For eg, coal can be used for
heating, cooking and for running
steam engines
 ELASTICITY OF
DEMAND
• TYPES
• FACTORS
• MEASUREMENT
• SIGNIFICANCE
 ELASTICITY OF DEMAND
• We have seen that demand extends or
contracts respectively with a fall or rise in
price,
• This quality of demand by virtue of which it
changes (increases or decreases) when price
changes (decreases or increases) is called
Elasticity of Demand
• Elasticity means sensitiveness or
responsiveness of demand to the change in
price.
• Take the case of salt.
• A big fall in price may not induce an
extension of its demand. On the other
hand, a slight fall in orange may cause
a considerable extension in their
demand.
• We say the demand in former case is
“inelastic” and in the latter case
“elastic”
• The demand is elastic when
with a small change in price
there is a great change in
demand. It is inelastic or less
elastic when a big change in
price induces only a small
change in demand.
 TYPES OE ELASTICITY

Types of elasticity

Price Income Cross

elasticity elasticity elasticity
 ELASTICITY
• Price elasticity is the responsiveness
of demand to change in price.
• Income elasticity is a responsiveness
of demand to a change in consumer’s
income.
• Cross elasticity means a change in
demand for a commodity owing to
change in the price of another
commodity
 PRICE- DEGREES OF
ELASTICITY OF DEMAND
• The demand of an article may
be
2. Perfect Elasticity of Demand
3. Perfectly Inelastic Demand
4. Very Elastic Demand
5. Less Elastic Demand
PERFECT (INFINITE) ELASTICITY
OF DEMAND
Y • In this case, demand
varies considerably even
P
R without any variation in
I price whatsoever. The
C price may remain the
E
same, but the demand
D D’
may still increase or fall
considerably
• The demand curve would
be perfectly parallel to the
X base
O QTY
 PERFECT INELASTIC DEMAND
Y D • This is the other
extreme limit
P
R • It means, whatsoever,
I the rise or fall in the
C
E price of the commodity
in question, its demand
D
remain remains
absolutely unchanged.
No amount of change in
price induces a change
D' X in demand
O QTY
 VERY ELASTIC DEMAND
• Demand is said to be
Y
very elastic when even
a small change in price D
of a commodity leads to N
a considerable
extension/contraction N’
of the amount P D’
demanded of it. As a r
result of change of ‘f’ in I
price the qty demanded c
extends/ contracts MM’- e
CLEARLY A LARGE
CHANGE IN DEMAND O M M’ X
CHANGE IN DEMAND
 LESS ELASTIC DEMAND
• When a substantial
change in price brings y
D
only a small
C N N
extension/ contraction H
G N
in demand , it is said I
N
N
to be less elastic. A P
R N’
I
fall of NN’ in price C
E
extends demand only
D’
by MM (in the figure) 0
M M’ x
which is very small CHANGE IN DEMAND
 ELASTICITY OF DEMAND

• FACTORS
DETERMING
THE SAME
 NECESSARIES
• We must buy them whatever be the price.
The price may rise or fall but demand will
remain the same
• The demand is less elastic or
comparatively inelastic
 FOR LUXURIES
• The demand is more elastic. A little fall in
their price stimulates the demand and a little
rise discourages it
• It must be remembered that necessaries and
luxuries are relative terms. For the same
commodity, the demand may be elastic for
some and inelastic for others. Hence it is
necessary to refer to the class of people with
respect to whom the demand is elastic or
inelastic.
 Existence of substitutes.
• Eg – Tea and coffee
For commodities having
substitutes, the demand is elastic.
If the price of any one falls, it will
be purchased in large quantities. If
the price rises, the demand for it
will contract and the substitutes
will be purchased.
 SEVERAL USES
• When a commodity has several uses demand
for it is elastic
• If a commodity has only one use, a change in
price of the commodity will influence its one
use only. Even if its price falls considerably,
it cannot be put to any other use. Hence the
demand is inelastic. But if it is possible to
use for a number of purposes, the demand
will be obviousely elastic.
• It may be borne in mind that demand for a
commodity may be elastic for one and
inelastic for another. Foe eg, the demand
for coal in railway engines is inelastic
because there is no alternative. But its use
for domestic purpose is not so essential.
More of it will be used only if the price
falls. Hence for domestic use the demand
for coal is elastic.
 POSSIBILITY OF
POSTPONEMENT
• When we can postpone buying a
commodity, the demand is elastic.
More is purchased when price falls,
less when it raises. For instance, if the
price of warm suiting goes up, its
demand will considerably contract
because its purchase can be
conveniently postponed. If it becomes
cheap, demand will extend.
 RANGE OF PRICES
• Elasticity of demand depends also
on the level of prices. If price is too
high or too low, the demand will be
comparatively inelastic. For
moderate prices it is elastic.
• when the prices are already too
high or too low, a small change in
them will not affect demand much
• example:- take the case of FM Radio which is
becoming popular. But whether the demand for it is
elastic or inelastic will depend upon the price range.
If the price of radio is about Rs 1000/-, a fall in price
by about Rs 100/= or so will not affect its demand
much. In other words, the demand will be inelastic.
Now take the other extreme. If the price is Rs 50/-
everybody who is interested would have purchased
it and a fall in price will not lead to any extension of
demand, hence the demand may again be inelastic.
But if the price is Rs 250-300, the demand will be
elastic
 PROPORTION OF INCOME
SPENT
• Another factor on which elasticity of demand
for a commodity depends is the proportion
on one’s income spent on the commodity.
For instance, a person spends a small
amount out of his income on newspaper. Any
change, in its rate will not marginally affect
its demand. In other words, the demand is
inelastic. But, quite a large amount is spent
on Milk. If the price of milk rises, less of it
will be purchased and if its price falls, more
will be purchased- demand is elastic
MEASURMENT OF PRICE
ELASTICITY
• There are 3 methods

Geometrical
method
Total
Proportional Expenditure
method method
 PROPORTIONAL METHOD
• Price elasticity of demand measures how
much the quantity demanded of a good
changes when price changes.
• The precise definition of price elasticity Ep
is the % change in Qty demanded devided
by % change in price. (for convenience we
drop minus sign, so elasticities are all +ve)
• ED (price elasticity of demand)=
%change in Qty demanded
% change in Price

The exact formula ED =

< Q <P
(QI +Q2) /2 (P1+P2) /2

Where P1 and QI represent the original price and Qty

and P2 and Q2 stand for the new price and Qty
 Q1+Q2 P1+P2 < Q <P
Q Q P P (QI +Q2) /2 (P1+P2) /2
2 2

0 10 6 2 5 5 10/5 by 2/5 =5(elastic)

10 4
10/15 by 2/3 =1(unity
20 10 2 2 15 3 elastic)

30 10 0 2 25 1 10/25 by 2/1= (inelastic)

 GEOMETRIC METHOD
• This method is used to measure
the elasticity of demand at any
given point on the demand D
curve
• Elasticity is represented by the
fraction. Distance from D1 to
the point on the curve decided P3
by the distance from the other
end to that point
P
• D1P1/DP1,DIP2/DP2,DIP3/DP3 P2
• If P2 is the middle point of DDI,
then elasticity at P2 will be
D1P2/DP2 =1 (D1P2 being equal
to DP2) P1
• At anypoint lower than P2,
elasticity will be less than unity
D1
• At any point above P2, it will be
greater than unity. Q
Ep = l ow er se gme nt
Up pe r seg me nt
If demand is not a straight line?
Y
• DRAW A TANGENT P
D
• DDI is the demand
curve. PM is the P1

tangent. P
R
• At point T, elasticity I T
will be TM/PT C
TI
E
• ELASTICITY=
LOWER SEGMANT D1
UPPER SEGMANT
X
O MI M
QUANTITY
 TOTAL EXPENDITURE METHOD
• Refer the demand schedule Price No Total
relating to kerchief
• UNITY ELASTICITY per demand amount
When the amount spent remains kerc- ed spent
same (2-3) the elasticity is said hief
to be unity
• GREATER THAN UNITY
When amount spent increases
7 2 14 1
with fall in price(or decreases
with a rise in price), the
elasticity is said to be greater
than unity (between prices 3 4 3 12 2
and 4)
• LESS THAN UNITY
When the total amount spent
decreases with a fall in price 3 4 12 3
(or increases with a rise in
price), the elasticity is said to
be less than unity ( between 1
and 2)
2 8 16 4
 Graphical method – total
expenditure method
• Take total expenditure M
along the X- axis and price y
along Y- axis. We get a
backward bending curve.
The portion 0L represents
less than unity elasticity, P U
because an increase or R
decrease in price increases I
or decreases the total
expenditure. The portion LU C L
represents unity elasticity E
because a change in price
has got no effect on total
expenditure. The portion
UM represents more than
unity elasticity because an
increase in price decreases
the total expenditure and a
decrease in price increases
the total expenditure. o x
TOTAL
EXPENDITURE
 INCOME ELASTICITY OF
DEMAND
• Income elasticity of Demand means the
change in demand which occurs as a
result of change in income
• Proportionate change in Qty purchased
Proportionate change in income.
While price remains constant
 Income elasticity
• When our income increases, we desire
to purchase more of the things than we
were previously purchasing, unless the
commodity happens to be an inferior
one. It is Zero when change in income
makes no change to our purchase and
it is negative when with an increase in
income, the consumer purchases less.
Eg in the case of inferior goods.
 CROSS ELASTICITY OF
DEMAND
• Cross elasticity of demand refers to the
change in demand for a good as a
result of change in price of another
good.
• Proportionate change in Qty demanded of X
Proportionate change in the price of Y
Cross elasticity of demand arises in cases of
inter-related goods, such as substitutes and
complementary goods.
 Significance-Elasticity of
Demand
• FOR BUSINESS MEN AND MONOPOLISTICS
• It guides the businessmen in fixing the prices
of his goods. If the demand for a good is
inelastic, he knows that people must buy it
whatsoever be the price. He can raise the
price
• When demand is elastic , a small fall in price
will increase the sales and bring more profit.
 FOR FINANCE MINISTER
• FM also takes note of elasticity of
demand when selecting commodities
for taxation. In case he wants to be
certain of the revenue he takes these
commodities for which the demand is
inelastic(liquor/cigarettes). People
must continue buying them even
though the prices rise with tax. If the
demand is elastic, people will buy less
of them and govt would get less
revenue.
 For industries
• The volume of industrial output
depends on the nature of
demand. If demand is elastic,
by slightly reducing the price,
sales can be increased and
output also can be increased.
 Internatinal trade
• The country will benefit the most from
international trade, the demand for whose
imports is very elastic and that for exports is
inelastic.
• The present position in respect of India’s
exports and imports is reverse of it. Because
her demand for imports of crude oil,
machineries etc are inelastic while foreign
countries demand for exports from India are
elastic
• Therefore , India. Is unable to benefit fro IT