Law of Demand

And
Elasticity of
Demand
Presentation
By:
 Demand

to V Purchase at sVarious
a rio u s P rice d u rin g PPrices
e rio d o fd
 Definitions of
• Demand
Demand
refers to the
Quantities of Commodity that
the Consumers are Able to
Buy at each possible Price
during a given Period of Time,
other things being equal.
 By : Ferguson

• Demand is the Ability and

Willingness to buy Specific
Quantity of a Good at
 Determinants of
Demand
• Price of the Commodity
• Price of Related
Commodities
• Level of Income of the
Household
• Taste & Preferences of
Consumers
 Determinants of
Demand
• Price of the Commodity
 Ceteris paribus i.e. Other
Things Being Equal,

1
 D ∝
P
This Happens Because of


Income & Substitution

 Determinants of
Demand
• Price of Related Commodities

Complementary Goods e . g . Pen & Ink
rice of one Good ↓
emand of Other Good ↑

Substituting Goods e . g . Tea & Coffee

rice of one Good ↓
emand of Other Good ↓
 Determinants of
Demand
• Level of Income of the
Household
Average Money Income ↑
Quantity Demanded of a Good ↑

Exception : Inferior Goods

Average Money Income ↑
Quantity Demanded of a Good ↓
 Determinants of
Demand
• Taste & Preferences of
Consumers
• Other Factors
–Size of the Population
–Composition of
Population
 Law of Demand
• Law of demand states that
People will Buy more at Lower
Prices and Buy less at Higher
Prices, Ceteris paribus, or
other things Remaining the
Same.
 By : Samuelson

• The Law of Demand states that

Quantity Demanded Increases
with a Fall in Price and
Diminishes when Price
 Assumption to Law of
•
Demand
Law of demand holds Good when
“Other Things Remain the Same”
meaning thereby, the factors
affecting demand ,other then price,
are assumed to be constant.


• Demand Function: Dx= f(PX, Pr, Y,

T, E)
 where, Dx = Demand for
Commodity
 Px = Price of Commodity X
 Pr = Price of Other Goods
 Explanation
• According to Law of Demand,
Ceteris Paribus
• Quantity Demanded ∝
1

Price
•
 However, this Relation is not
Proportional, meaning thereby
that it is not necessary that
when Price Falls by ½, Demand
for Goods will be Doubled.

Demand Schedule
• Demand Schedule is a Series
of Quantities which
Consumer would like to Buy
per unit of Time at Different
Prices.
• Two Aspects of Demand
Schedule
–Individual Demand
Schedule
 Individual Demand
Schedule
• It is defined Price per Quantity
unit ( in Demanded
as a Table Rs .) ( Units )
which shows
Quantities of 1 4
a Given 2 3
Commodity
3 2
which an
Individual 4 1
Consumer
will buy at
 Market Demand
Schedule
• It is defined as the Quantities
of a Given Commodity which
all Consumers will buy at all
Possible Prices at a given
Moment of Time. In Market
there are many Consumers of
a Single Commodity. The
Schedule is based on the
Assumption that there are in
all, 2 Consumers ‘A’ & ‘B’ of
Commodity ‘X’. By
Price of Demand of Demand of Market
Commodity ‘X’ A B Demand
(in Rs.) (Units)
1 4 5 4+5=9
2 3 4 3+4=7
3 2 3 2+3=5
4 1 2 1+2=3

It indicates that when price of ‘X’ is Rs 1.00

per unit, Demand of ‘A’ is for 4 units and that
of ‘B’ is for 5 units. Thus the Market Demand
is 9 units. As the Price Increases, Demand
Decreases.
 Demand Curve
• A Demand Curve is a Locus of
Points showing various
Alternative Price-Quantity
Combinations.
• It shows the Inverse
Relationship between Price
& Quantity Demanded.
• It Slopes Downwards to the
Right.
 Individual Demand
X
Curve
X Axis – Price (Rs.)
D Y Axis – Quantity
DD – Demand Curve
4
De

3
m

The Demand Curve

Price

an
d

Slopes Downwards
Cu

2
rv

from Left to Right,

e

1 meaning thereby that

D when Price is High
0
1 2 3 4 Y Demand is Low and
Quantity vice versa.
Market Demand
Curve
Y

D
em
Price

3
an
d
C
ur
2

1 ve
D
X
0
3 5 7 9
Quantity
 Why does Demand
Curve Slope Downward?
• Income Effect : It is the Effect that a
Change in a Person’s Real Income
caused by Change in the Price of a
Commodity has on the Quantity of that
Commodity. In other words, the
Increase in Demand on Account of
Increase in Real Income is known as
Income Effect.
• Substitution Effect : It is the Effect that a
Change in Relative Prices of Substitute
Goods has on the Quantity Demanded.
 Why does Demand
Curve Slope Downward?
• Different Uses: Demand for
Commodities with
Alternative Uses tends to
Extend Consequent upon
the fall in their prices.
• Size of Consumer Group:
When the Price of a
Commodity falls, then many
Consumers, who are unable
to buy that Commodity at
Exceptions to Law of
Demand
• Article of Distinction or Veblen
Goods: Goods like Jewellery,
Diamonds & Gems are
considered as Articles of
Distinction. These Goods
command More Demand when
their Prices are High.
• Ignorance: Many a time,
Consumers out of sheer
Ignorance or Poor Judgment
Exceptions to Law of
Demand
• Giffen Goods : Giffen Goods are
those Inferior Goods whose
Demand falls even when their
Prices Falls. For example, ‘Bajra’.
Only those Inferior Goods are
called Giffen Goods where Law
of Demand Fails.
• Expectation of Rise or Fall in Price
in Future: If Prices are likely to
Rise More in the Future then
even at the Existing Higher Price
Expansion & Contraction
in Demand
Expansion & Contraction
Y
in Demand
D

P``
Price Contraction of Demand

P
Expansion of Demand

P`
D

O X
L M N
Quantity Demanded
Increase & Decrease in
Demand
 Increase & Decrease in
Demand
Increase in Demand Decrease in Demand
D` D
D D`

Price
Price
D` D
D D`

Quantity Demanded Quantity Demanded

 Distinction between
Extension & Increase in
• Extension Demand
in • Increase in
Demand means Demand refers
Rise in to the Rise in
Demand in Demand in
Response to Response to
fall in the Price the Change in
of a the
Commodity, Determinants
Other things of Demand
being equal. other then
• It is expressed Price.
by the
 Distinction between
Contraction & Decrease
in
• Contraction Demand
in • Decrease in
Demand means Demand means
Fall in Demand Fall in Demand
in Response to in Response to
a Rise in the Change in
Price of a Determinants
Commodity, of Demand,
Other things Other then the
being Equal. Price.
• It is expressed • It is expressed
by the by a Downward
Movement
 Elasticity of
Demand
• It answers the Question “BY HOW
MUCH?”
• Elasticity of Demand is defined as
the Responsiveness of the
Quantity Demanded of a Good to
Change on one of the Variables
on which % Demand Depends.
Change in Q.D.
 E=
% Change in one of the Variables
on which Demand depends
Types of Elasticity of
Demand
 Price Elasticity of
 It
Demand
is Measured as a Percentage
Change in Quantity Demanded
Divided by the Percentage Change
in Price, Other things Remaining
Same. % Change in Q.D.
Ep =
% Change in Price
Change in Quantity Original Price
Ep = ×
Change in Price Original Quantity
 Price Elasticity of
Demand
∆Q P
Ep = ×
∆P Q
 Where, Ep Price Elasticity
 ∆ Very Small Change
 P Price
 Q Quantity Demanded


 Note: Ep is (-)ve due to Inverse

Relationship Between Price &
Quantity Demanded.
 Degrees of Price
Elasticity of Demand
 Perfectly Elastic
Y
Demand
• A Perfectly Elastic
6 Demand is one in
which a Little
D
E =
infinite D
Change in Price
Price ( Rs .)

4 will Cause an
Infinite Change in
Demand.
• A very little Rise in
Price causes the
Demand to Fall to
0 10 20 30 X
Zero and a very
Quantity little Fall in Price
causes Demand to
 Perfectly Inelastic
Demand
Y • Perfectly
E = D Inelastic
0 Demand is
6
Price ( Rs .)

one in which a
Change in
4
Price
Produces No
2
D Change in the
0 2 4 6
X
Quantity
Demanded.
Quantity
• In this case,
 Unitary Elastic
Y
Demand
• Unitary Elastic
Demand is
D
one in which
a % Change
Price ( Rs .) (%)

E =
in Price
1 Produces an
Equal %
T D
Change in
Demand.
O M N X
• This type of
Quantity (%) Demand
 Greater than Unitary
Elastic Demand
Y • Greater than
D Unitary Elastic
P
Demand is one
Price ( Rs .) (%)

E>
1 in which a
T
D
Given %Change
in Price
Produces
Relatively more
X
%Change in
O M N
Demand.
Quantity (%) • In this case
 Less than Unitary
Y
Elastic Demand
• Less than
D Unitary Elastic
Demand is one
Price ( Rs .) (%)

P
E< 1
in which a
given %
T Change in Price
Produces
D
Relatively Less
X
% Change in
M N
O Demand
Quantity (%) • In this case,
 Point Elasticity of
Demand
• Refers to Measuring the Elasticity
at a Particular Point on Demand
Curve.
• Makes Use of Derivative Changes
Rather than Finite Changes in
Price & Quantity.
dq p
×
• Defined As:
dp q
• dq
• dp
Where, is the derivative of
 Point Elasticity of
Demand
Upper Segment
Y

Point Elasticity = E = ∞
Lower Segment
M
PM E>1
=
PN A

Price ( Rs )
E =1
• As we Move
P
from N to M, E<1
Elasticity Goes Mid
B
E =0
Poi
on Increasing. nt X
O N
At Mid Point, Quantity

Ep = 1, at N Ep
 Arc Elasticity of
Demand
• When Elasticity is Y
to be found
between 2 Points, P1 A Arc Elasticity

we q use Arc
1 − q2 p1 + p2

Price ( Rs )
Elasticity =
Elasticity. × B
q1 + q 2 p1 − p2 P2

Where ,
p1 = Original
Price
q1 = Original Q1 Q2
X
O
Quantity Quantity
p 2 = New Price
 Arc Elasticity of
Demand
 For Example, Find Elasticity of Radios
Between:
 p1 = Rs. 500 q1 = 100
 p2 = Rs. 400q1 − qq22 =p1150+ p2
Elasticity = ×
 q1 + q 2 p1 − p2

50 900
Ep = ×
250 100
Ep = 1.8
Total Expenditure (Outlay)
Method
• This Method was evolved by
Dr. Alfred Marshall.
• According to this Method, To
Measure the Elasticity of
Demand it is Essential to
Know How Much & In What
Direction the Total
Expenditure has Changed as
a Result of Change in the
 Total Expenditure
(Outlay) Method
Elasticity of Price Total
Demand Expenditure
Greater than ↑ ↓
Unity i . e . E p ↑
> 1 ↓
Unity Same Unchanged
i.e. Ep = 1 Same Unchanged
Less than ↑ ↑
Unity ↓ ↓
i.e. Ep < 1
Total Expenditure
(Outlay)
Y
Method
T
A
R E>1
Price ( Rs .) B
N

E = 1

M C

P E<1
E D
X
O
Total Expenditure
 Determinants of Price
Elasticity of Demand
• Availability of Substitutes
• Position of Commodity in
Consumer’s Budget
• Nature of Need that a
Commodity Satisfies
• Number of Uses to which a
Commodity is Put
• Period
• Consumer Habits
 Income Elasticity of
Demand
• Income Elasticity of Demand is
the Degree of Responsiveness of
Quantity Demanded of a Good to
a Small Change in the Income of
Consumer.
% Change in Quantity
Ey Demanded
= % Change in
Income
 Degrees of Income
Elasticity of Demand
• Positive Income Elasticity of
Demand
 - Unitary Income Elasticity of
Demand
 - Less than Unitary Income
Elasticity of Demand
 - More than Unitary Income
 Positive Income Elasticity
• Income
of Demand
Y
Elasticity of
Demand for a DY
Good is
A
Positive, When

Income
with an B
Increase in the
Income of a
Consumer, his DY
Demand for O Q Q X
the Good
Quantity
Increases and
 Negative Income
Elasticity of Demand
• Income Elasticity
Y
of Demand is
Negative when
DY
Increase in the
Income of the 20

Income
Consumer is 15
Accompanied
by Fall in 10

Demand of a 5
DY

Good
O 1 2 3 4
• It is Negative in X
Quantity
case of Inferior
Zero Income Elasticity of
DemandY
• Income DY

Elasticity of
Demand is
Zero, When 20 B
Change in the

Income
15
Income of
Consumer 10 A

evokes No 5
Change in his DY
X
Demand. O 1 2 3 4 5

• Demand for Quantity

 Cross Elasticity of
•
Demand
Cross Elasticity of Demand is a Change in
the Demand of One Good in Response
to a Change in the Price of Another
Good. ∆q p y

E c= x
×
 ∆p y qx


 Where, Ec = Cross Elasticity

 qx = Original Q.D. of X
 ∆qx = Change in Q.D. of X
 py = Original Price of Y
 Positive Cross Elasticity of
Demand
Y • It is positive in
DS
case of
Substitute
Price of Coffee

P1 E1 Goods.
• For example,
( Rs .)

P E
Rise in the
Price of
DS Coffee will
lead to
O Q Q1 X Increase in
Quantity of Tea Demand for
Negative Cross Elasticity
of Demand
• It is Negative Y
in Case of
Complementa DC

Price of Bread
ry Goods.
E1
P1
• For example,
Rise in Price
of Bread will E
P
bring Down
the Demand DC

for Butter. O Q1 Q X

• The Curve Quantity of

Butter
Zero Cross Elasticity of
Demand
• Cross Elasticity of Demand is
Zero when Two Goods are
Not Related to each other.
• For example, Rise in the
Price of Wheat will have No
Effect on the Demand for
Shoes.
Q1
The Concept of Elasticity of


Demand was developed

by:
a)Alfred Marshall
b)Edwin Camon
c)Paul Samuelson
d)Fredric Bonham
Q2
Demand Curve
 in most
cases Slopes
a)Downward towards Right
b)Vertical And Parallel to Y-
axis
c)Upward Towards Left
Read the following Data & Answer


Q3 to Q8
• XYZ are 3 Commodities where X &
Y are Complements whereas X &
Z are Substitutes.
• A Shopkeeper sells Commodity X at
Rs.40 per piece. At this price he is
able to sell 100 pieces of X per
month. After some time he
decreases the price of X to Rs. 20.
Following the Price Decrease:
– He is able to sell 150 pieces of X per
month
 Q3
The Price Elasticity of Demand


when the price of X decreases

from Rs.40 per piece to Rs.20
per piece will be equal to:
a)1.5
b)1.0
c)1.66
d)0.6
 Q4
 The Cross Elasticity of Monthly
Demand for Y When the Price of
X Decrease from Rs.40 to Rs.20
is Equal to:

a)+1

b)-1

c)-1.5

d)+1.5
 Q5
The Cross Elasticity of Z when


the Price of X Decreases from

40 to 20 is Equal to:
a)-0.6
b)+0.6
c)-1
d)+1
 Q6
What can be said about


Price Elasticity of Demand

for X?
a)Demand is Unit Elastic
b)Demand is Highly Elastic
c)Demand is Perfectly
Elastic
 Q7
Suppose
 Income of the
Residents of Locality increase
by 50% & the Quantity of X
Commodity increases by 20%.
What is Income Elasticity of
Demand for Commodity X?
a)0.6
b)0.4
c)1.25
d)1.35
Q8
We
 can say that
Commodity X in Economics
is a/an
a)Luxury Good
b)Inferior Good
c)Normal Good
d)None of the Above
 Q9
Positive
 Income Elasticity
implies that as Income Rises,
Demand for the Commodity
a)Rises
b)Falls
c)Remains Unchanged
d)Becomes Zero
e)
 Q
10
The ‘Substitution Effect’


takes place due to Change

in
a)Income of the Consumer
b)Prices of the Commodity
c)Relative Prices of the
Commodity
d)All of the Above
 Q
11
In Case of Inferior Goods,


Income Elasticity is:

a)Zero
b)Positive
c)Negative
d)None

 Q
12
In Case of Giffen Goods,


Demand Curve will Slope:

a)Upward
b)Downward
c)Horizontal
d)Vertical
 Q
13
Cross Elasticity of Demand


between Tea & Coffee is:

a)Positive
b)Negative
c)Zero
d)Infinity
 Q
14
The Exception to the Law of


Demand are:
a)Veblen Goods
b)Giffen Goods
c)Both
d)None
 Q
15
If the Income Elasticity is


Greater than One, the

commodity is :
a)Necessity
b)Luxury
c)Inferior Goods
d)None of these
 Q
16
When Quantity Demanded


changes by Larger
Percentage than does
Price, Elasticity is termed
as:
a)Inelastic
b)Perfectly Elastic
c)Elastic
 Q
17
If the Price of Good A


increases relative to the Price

of Substitute B & C, the
Demand for:
a)B will Increase
b)C will Increase
c)B & C will Increase
d)B & C will Decrease
 Q
18
Contraction of Demand is the


Result of:
a)Decrease in the number of
Consumers
b)Increase in the Price of the
Good Concerned
c)Increase in the Prices of
 Q
19
In
 case of Straight Line
Demand Curve meeting the
two axes, the Price Elasticity
of Demand at the mid-point of
the line would be:
a)0
b)1
c)1.5
d)2
 Q
20
If the Demand of a Good is


Inelastic, an increase in its

price will cause the Total
Expenditure of the
Consumers of the Good to:
a)Remain the Same
b)Increase
c)Decrease
d)Any of These
 Q
21
All of the Following are


Determinants of Demand
Except
a)Taste & Preferences
b)Quantity Supplied
c)Income
d)Price of Related Goods
 Q
22
The Law of Demand refers


to______
a)Price-Supply Relationship
b)Price-Cost Relationship
c)Price-Demand
Relationship
d)Price-Income
Relationship