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    Demand and Elasticity of Demand

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    Pratham Chopra
    1) Demand is the quantity of a good that consumers are willing and able to buy at different prices within a given period. Demand is determined by factors like price, income, tastes, and prices of related goods. 2) The law of demand states that, all other things held constant, as the price of a good increases, the quantity demanded decreases, and vice versa. This is because consumers will buy more of a good when it is cheaper. 3) Changes in factors other than price, like income, tastes, or prices of related goods, cause a shift in the demand curve. This is known as a change in demand.

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    Demand and Elasticity of Demand

    Uploaded by

    Pratham Chopra
    63 views29 pages
    1) Demand is the quantity of a good that consumers are willing and able to buy at different prices within a given period. Demand is determined by factors like price, income, tastes, and prices of related goods. 2) The law of demand states that, all other things held constant, as the price of a good increases, the quantity demanded decreases, and vice versa. This is because consumers will buy more of a good when it is cheaper. 3) Changes in factors other than price, like income, tastes, or prices of related goods, cause a shift in the demand curve. This is known as a change in demand.

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    Demand and elasticity of demand

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    1) Demand is the quantity of a good that consumers are willing and able to buy at different prices within a given period. Demand is determined by factors like price, income, tastes, and prices of related goods. 2) The law of demand states that, all other things held constant, as the price of a good increases, the quantity demanded decreases, and vice versa. This is because consumers will buy more of a good when it is cheaper. 3) Changes in factors other than price, like income, tastes, or prices of related goods, cause a shift in the demand curve. This is known as a change in demand.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    63 views29 pages

    Demand and Elasticity of Demand

    Uploaded by

    Pratham Chopra
    1) Demand is the quantity of a good that consumers are willing and able to buy at different prices within a given period. Demand is determined by factors like price, income, tastes, and prices of related goods. 2) The law of demand states that, all other things held constant, as the price of a good increases, the quantity demanded decreases, and vice versa. This is because consumers will buy more of a good when it is cheaper. 3) Changes in factors other than price, like income, tastes, or prices of related goods, cause a shift in the demand curve. This is known as a change in demand.

    Copyright:

    © All Rights Reserved
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    of 29

    UNIT - 2

    Demand is the quantity of a good that a consumer is


    willing and able to buy at different prices within a given
    period of time.

    Demand function: It depicts the relationship between the


    quantity demanded and the determinants of demand. This can
    be expressed in the form of the following notion:
    Dx = f (Px, Pr, Y, T,F)
    Where Dx is the quantity demanded of commodity ‘x’ at a given time.
    f stands for function of.
    Px is the price of commodity ‘x’
    Pr indicates price of related commodities.
    Y shows the income of the consumer.
    T stands for the taste and preferences of the consumers.
    F is Future price expectation
    Determinants of individual demand:

    1. Price of the commodity: There exists an


    inverse relationship between the price of a
    commodity and its quantity demanded. When
    price rises, quantity demanded falls and vice
    versa.
    2. Prices of related goods: Related goods are
    kept in two categories namely, substitute goods
    and complementary goods.

    Prices of related goods

    Substitute Complementary
    Goods Goods
    Substitute goods – Substitute goods are those
    which can be used in place of each other. They are
    competitive goods, which can satisfy a given want
    with equal ease e.g. pepsi and coke, tea and coffee
    etc.

    If related good is substitute of the given good, then a rise in price of


    substitute good will leads to rise in demand for given good because
    it becomes relatively cheaper.

    For instance demand for jeep will be reduced (even if its price
    remains the same) if price of its substitute, say car falls. Graphically
    an increase in the price of a substitute shifts the demand curve for a
    product rightwards and vice versa.
    Complementary goods- Complementary goods are those
    goods which are used together to satisfy a given want. In
    other words, they are complementary to each other in the
    sense that they complete the deficiencies of each other. For
    instance car and petrol, fountain pen and ink, etc.

    A fall in the price of one commodity leads to rise in the demand


    of other commodity also. For e.g. If price of car falls, demand for
    its complementary good say, petrol will rise.

    Thus a fall in price of one complementary good increases the


    demand for the other complementary good. Graphically an
    increase in the price of a complementary good shifts the demand
    curve for a product leftwards and vice versa.
    3.Income of the consumer: With increase in income,
    a consumer’s demand for a good may increase or
    decrease depends upon whether the good is normal
    or inferior good.

    NORMAL GOOD

    INCOME OF THE
    CONSUMER

    INFERIOR GOOD
    Normal goods: Normal goods are those goods
    for which demand increases as income increases.
    Generally an increase in the money income of a
    consumer increases the demand for a normal
    good and a fall in income reduces the demand
    for it.

    Thus, there is direct relationship between income


    and demand for a normal good. As income
    increases, demand for normal good increases.
    Graphically an increase in income shifts the
    demand curve rightwards in case of normal goods.
    Inferior goods: Inferior goods are those goods for which
    demand falls as income increases.

    An increase in income generally leads to a fall in demand for


    inferior good because a household can now afford to buy normal
    goods. Thus there is inverse relationship between income and
    demand for an inferior good.

    Graphically an increase in income shifts the demand curve


    leftwards in case of inferior goods. In short income effect
    of normal goods is positive but that of inferior goods is
    negative.
    4.Tastes and preferences of the consumers: Demand
    for a commodity is directly related to the tastes,
    preferences and habits of the consumer.

    Demand for those goods increases for which the


    consumer develops favourable tastes. However,
    unfavourable change in the taste for a good will
    reduce the demand for that good.

    Graphically a favourable change in taste increases the


    demand for a good i.e. shifts the demand curve to the
    right and an unfavourable change in taste shifts the
    demand curve leftwards.
    Factors determining market demand:

    1) Price of the commodity.


    2) Price of related goods.
    3) Incomes of consumers in the market.
    4) Tastes and preferences of consumers.
    5) Size of population: With increase in population, the number
    of consumers increase which leads to increase in market
    demand and vice versa.
    6) Distribution of income: Market demand tends to be higher if
    income is equally distributed amongst the people and it is
    lower if there is inequitable distribution of income.
    Demand Schedule- A demand schedule is a tabular statement
    showing different quantities of a commodity demanded at
    different prices during a given period of time.

    Individual Demand Schedule: It refers to a table showing various


    quantities of a commodity that an individual consumer is willing to
    buy at various prices during a given period of time.
    Market Demand Schedule: It is a table showing various
    quantities of a commodity that all the consumers of that
    commodity are willing to buy at various levels of prices
    during a given period of time.

    Price of sugar Quantity


    per kg (Rs) Demanded
    (Kg)
    20 2
    16 3
    12 4
    8 5
    Demand curve: A demand curve is the graphical
    representation of the demand schedule. It is of two
    types:

    1.Individual demand
    curve: A demand curve,
    which shows the quantities
    of a commodity, demanded
    by an individual household
    at its different prices is
    called an individual demand
    curve.
    ii) Market demand curve: A demand curve, which
    shows quantity demanded of a commodity by all the
    individual households in the market at different
    prices of the commodity, is known as market
    demand curve.
    It is obtained by horizontally summing up individual
    demand curves. It is flatter than the individual demand
    curve
    Slope of Demand Curve

    Slope of Demand Curve = Change in Price / Change in Quantity

    Due to inverse relationship between price and quantity


    demanded, the demand curve slopes downwards. So, slope is
    negative.

    Slope of the demand curve


    measures the flatness or steepness
    of the demand curve. So it is based
    on the absolute change in the price
    and quantity.
    Law of Demand

    According to the law, ‘other things being constant,


    quantity demanded of a commodity is inversely related to
    the price of the commodity’.

    When price rises, quantity


    demanded falls and when price
    falls, quantity demanded rises.
    Why does the Law of Demand operate?

    Why does a consumer buy more at lower price


    than at a higher price?

    Causes of Law of
    Demand

    Law of Equi
    Marginal Utility
    Marginal Utility
    MARGINAL UTILITY = PRICE ( MU= P )
    According to single commodity equilibrium condition, consumer
    purchases that much quantity of a good at which marginal utility
    (MU) is equal to price.

    Law of Equi- Marginal Utility ( Mux / Px = Muy / Py)

    According to this law, a consumer will be at equilibrium when


    he spends his limited income in such a way that the ratios of
    MU and their respective prices are equal and MU falls as
    consumption increases.
    INFERIOR GOODS NORMAL GOODS

    Inferior goods are those goods Normal goods are those goods
    demand for which decreases with demand for which increases with
    increase in income. increase in income.
    It has negative income effect. It has positive income effect.

    DIAGRAM DIAGRAM
    COMPLEMENTARY GOODS SUBSTITUTE GOODS

    Complementary goods are those Substitute goods are those goods


    goods which are used together to which can be used in place of one
    satisfy human wants directly. another without any difficulty.

    The demand for a commodity The demand for a commodity


    decreases with increase in price of increases with increase in price of
    complementary goods and vice- substitute goods and vice-versa.
    versa.

    For eg. Pen and refill For eg. Tea and coffee
    Change in Demand:
    If more or less quantity of a commodity is demanded due to
    change in factors other than price, it is known as change in
    demand or shift in demand curve. It includes increase and
    decrease in demand.

    Change in Quantity Demanded:


    Other things being equal, if the quantity demanded rises or falls
    due to a fall or rise in the price of the commodity, other factors
    remaining unchanged, it is known as change in quantity
    demanded or movement along the same demand curve. It
    includes expansion and contraction of demand.
    Change in Quantity Demanded Change in Demand

    (i) When demand for a commodity (i) When demand for a commodity changes due to
    changes due to fall or rise in its price, change in other factors, price remaining constant, it is
    other factors remaining constant, it is called change in demand.
    called change in quantity demand.

    (ii) Reason – Change in the price of the (ii) Reasons –


    commodity.
    a. Change in the price of the complementary goods.
    b.Change in the price of substitute goods
    c.Change in the income of the consumer
    d. Change in taste and preferences.
    (iii) Depicted by movement along the (iii) Demand curve shifts.
    same demand curve
    Elasticity of demand: Price elasticity of demand is a
    measure of the degree of responsiveness of demand for
    a commodity due to a one percent change in its price.
    Percentage Method of Measuring Price Elasticity of
    Demand

    According to this method, price elasticity of demand (eD ) is


    measured by taking ratio of percentage change in demand to the
    percentage change in price.
    Elasticity of demand (eD ) = (-)Percentage change in demand
    eD =(-) Q x P Percentage change in price
    P Q
    eD = Price elasticity of demand
    Q= Change in quantity demanded
    P= Change in price
    P = Original price
    Q = Original quantity
    Factors Affecting Elasticity of Demand

    1)Availability of substitute goods -Demand of a commodity will be highly


    elastic if a commodity has many substitutes. Demand is relatively
    inelastic if substitutes are not available.

    2)Nature of the commodity -Demand for necessary and essential goods is


    highly inelastic because consumers have to buy these goods irrespective
    of their price. Demand for luxuries is relatively elastic. Demand for
    comfort goods is relatively more elastic than that of necessities but less
    elastic than that of luxuries.

    3)Different uses of the commodity: If the commodity has different uses,


    its demand will be elastic.
    4)Taste & preferences -If the consumer is bound to use particular
    brand of a commodity then its demand will be inelastic because
    consumer will buy that particular commodity even at higher price.

    5)Level of Income- If consumer belongs to richer section then his


    demand will not be affected by change in price, hence demand will
    be inelastic.

    6)Habit of Consumer - Goods to which a person becomes accustomed


    or habitual will have inelastic demand like cigarette, coffee, tobacco,
    etc.

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