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Meaning of Demand
Meaning and Definition of Demand
According to Benham: “The demand for anything, at a given price, is the
amount of it, which will be bought per unit of time, at that price.”
According to Bobber, “By demand we mean the various quantities of a
given commodity or service which consumers would buy in one market in a
given period of time at various prices.”
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.
Kinds of Demand
1. Individual demand
2. Market demand
3. Income demand
- Demand for normal goods (price –ve, 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)
Individual DC Market DC
Y Y
Price Less Flatter Price More Flatter
O Demand X O Demand X
Figure 2.1 Market demand for tomatoes
Demand, the assumed inverse relationship between price and quantity purchased, can be
represented by a curve that slopes down toward the right. Here, as the price falls from $11
to zero, the number of bushels of tomatoes purchased per week rises from zero to 110,000.
Figure 7.2 Market demand curve
The market demand curve for Coke, DA+B, is obtained by summing the quantities that
individuals A and B are willing to buy at each and every price (shown by the individual
demand curves DA and DB).
Demand Curve
Movement along demand curve Vs. Shift in demand curve:
Distinction between change in quantity demanded and change in demand.
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.
Consumer’s income must remain the same.
The price of the related commodities should not change.
The commodity should be a normal commodity
The Law of Demand
EXPLAINERS:
Why demand curve slopes downwards?
1. Income effect
2. Substitution effect
3. Diminishing Marginal Utility
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.
Market Research and Law of
1. The more confidence a person has in price information as a predictor of
Demand
quality, the more likely he’ll 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 an inexperienced person will
select a high-priced one.
3. A person who selects a high-priced item will (i) believe it’s more difficult
to judge product quality, and (ii) feel he has less ability to make accurate
quality judgments than one who chooses a low-priced item.
4. A person who purchases a high-priced product would perceive large
quality differentials. He would also feel that it is risky and uncertain to go
in for a low-priced product.
5. Business executives also disbelieve that the consumer is rational. (Eg.,
Yale – the under priced lock)
6. Purchasing behavior of the consumer is mostly repetitive.
The Law of Demand
P P
A
P1
B
P2
D1 D2
Q1 Q2
Q Q
CHANGE IN PRICE= CHANGE IN OTHER=
change in quantity change in demand
demanded
The Law of Demand
D1 D2
Q
CHANGE IN OTHER=
change in demand
Determinants 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 over percentage
change in price”
Factors affecting Elasticity of
1. Availability of substitutes
2. Demandof consumption
Postponement
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 rich man)
8. Habits
9. Joint demand
10. Distribution of income
11. Price level (very costly & very cheap goods: inelastic)
Price Elasticity
Price Elasticity
• Elastic Demand or more than 1 – When quantity demanded responds greatly
to price changes
• Inelastic Demand or less than 1 – When quantity demanded responds little
to price changes.
• Unitary Elastic – When quantity demanded responds equally to the price
changes.
• Perfectly inelastic or 0 elastic demand
• Perfectly elastic or infinite elastic demand
Economic factors determine the size of price elasticity for individual goods.
Elasticity tends to be higher when the goods are luxuries, when substitutes
are available and when consumer have more time to adjust their behavior.
Calculating Price Elasticity
PED = % Change in Qty Demanded
% Change in Price
Points to Remember:
• We drop the minus sign from the numbers by
treating all % changes as positive. That means all
elasticity’s are positive, even though prices and
quantities move in the opposite direction because
of the law of downward sloping demand.
• Definition of elasticity uses percentage changes in
price and demand rather than actual changes.
That means that a change in the units of
measurement does not affect the elasticity. So
whether we measure price in Rupees or paisa, the
Some business applications of
Price Elasticity
• Price discrimination
• Public utility pricing (electricity, railway)
• Joint supply (wool and mutton)
• Super markets
• Use of machines (lower cost of production for
elastic)
• Factor pricing (workers producing inelastic
demand products)
• International trade (devalue when exports are
price-elastic)
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,
marginal revenue is 0 and a price change leads to no
change in the total revenue.
Ed = ∞
p
O
d d1 X
2. Perfectly Inelastic
p1
Ed = 0
p
O
d X
3. Unitary Elastic
p1
Ed = 1
p
O
d d1 X
4. Relatively more
Elastic
Y
p1
Ed > 1
p
O
d d1 X
5. Relatively less
Elastic
p1
Ed < 1
p
O
d d1 X
Figure 7.3 Elastic and inelastic demand
Demand curves differ in their relative elasticity. Curve D1 is more elastic than curve D2, in
the sense that consumers on curve D1 are more responsive to a given price change (P2 to
P1) than are consumers on curve D2.
Figure 7.4 Changes in the elasticity coefficient
The elasticity coefficient decreases as a firm moves down the demand curve. The upper half
of a linear demand curve is elastic, meaning that the elasticity coefficient is greater than
one. The lower half is inelastic, meaning that the elasticity coefficient is less than one. This
means that the middle of the linear demand curve has an elasticity coefficient equal to one.
Figure 7.8 Network effects and demand
As the price falls from P3 to P2, the quantity demanded in the short run rises from Q1 to Q2.
However, sales build on sales, causing the demand in the future to expand outward to, say,
D2. The lower the price in the current time period, the greater the expansion of demand in
the future. The more the demand expands over time in response to greater sales in the
current time period, the more elastic is the long-run demand.
Methods of measurement of
Elasticity
1. Percentage or Proportionate Method
= Percentage change in demand or;
Percentage change in price
= Proportionate change in demand
Proportionate change in price