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M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 1.

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Presentation on theme: "M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 1."— Presentation transcript:

1 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 1

2 2 MARKET DEMAND Business can not sell anything unless there is a demand for it. People must both want a product and have to money to buy it. Business can not sell anything unless there is a demand for it. People must both want a product and have to money to buy it. The quantity demanded by people of a specific product, how ever, does not only depend upon price but also some other factors. The quantity demanded by people of a specific product, how ever, does not only depend upon price but also some other factors.

3 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 3 DETERMINANTS OF DEMAND The important determinants of demand are as follows: The important determinants of demand are as follows: (a) Price (b) Price of substitutes (c) Price of complementary goods (d) Taste of the consumer

4 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 4 DETERMINANTS OF DEMAND (e) Advertising and social factors (f) Demography (g) External factors (h) The level of income

5 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 5 DETERMINANTS OF DEMAND Price Price has a negative relationship with demand and as price increases less of the commodity is demanded. Price has a negative relationship with demand and as price increases less of the commodity is demanded. However it does not follow that as price falls, more and more will be demanded with no upper limits. This is for two reasons: However it does not follow that as price falls, more and more will be demanded with no upper limits. This is for two reasons:

6 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 6 DETERMINANTS OF DEMAND (1) People only want a certain amount of a good and cannot buy an infinite amount. (2) Many people assume that price indicates quality. Example: If cheese is offered at Rs. 100 a Kg, people may assume that it is of poor quality and not buy it.

7 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 7 DETERMINANTS OF DEMAND Substitutes People may change from one product to another, as the relative prices change, but they may not. People may change from one product to another, as the relative prices change, but they may not. Some people simply like a good and will not change to another just because it becomes relatively cheap Some people simply like a good and will not change to another just because it becomes relatively cheap

8 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 8 DETERMINANTS OF DEMAND Complementary products Complementary good influence the demand of each other. Complementary good influence the demand of each other. If there is a change in the price of one good the demand for the other can be affected. If there is a change in the price of one good the demand for the other can be affected. Example: Tea and sugar Bat and Ball Bat and Ball Car and petrol

9 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 9 DETERMINANTS OF DEMAND Income The demand is expected to rise with an increase in the income of the consumer. The demand is expected to rise with an increase in the income of the consumer. The demand of some goods decrease with the increase in income or with the increase in income after a certain level; such a good is called inferior good. The demand of some goods decrease with the increase in income or with the increase in income after a certain level; such a good is called inferior good. As income rise, people usually buy expensive products and as income fall people buy cheaper goods. As income rise, people usually buy expensive products and as income fall people buy cheaper goods.

10 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 10 DETERMINANTS OF DEMAND Advertising and social factors Advertising and social factors Advertising and other sales promotional measures can greatly affect the demand. Advertising and other sales promotional measures can greatly affect the demand. However, if a producer runs a successful advertising campaign for a soap, we should not automatically assume that overall consumption of soap has increased as people could have switched from some other band of soap. However, if a producer runs a successful advertising campaign for a soap, we should not automatically assume that overall consumption of soap has increased as people could have switched from some other band of soap. Fashion can also effect the demand for products. Fashion can also effect the demand for products.

11 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 11 DETERMINANTS OF DEMAND Demography Population and its composition affects demand for a product Population and its composition affects demand for a product Demand increases with an increase in population and vice versa Demand increases with an increase in population and vice versa If there is a greater proportion of kids in population then demand for play stations may increase; composition of population is also important If there is a greater proportion of kids in population then demand for play stations may increase; composition of population is also important

12 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 12 DETERMINANTS OF DEMAND External Factors Demand for Pepsi Cola is likely to increase during a spell of hot weather. Demand for Pepsi Cola is likely to increase during a spell of hot weather.

13 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 13 DERIVED DEMAND Derived demand is a term where demand for one good or service occurs as a result of demand for another. For example, the demand for labour in the automobile industry is derived from the demand of the automobilies. If the demand for automobiles increases so does the demand for labour working in automobile factories. Another example would be production and demand for fertilizer. If the demand for the particular crop increases so does the demand for fertilizer.

14 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 14 DEMAND SCHEDULE & CURVE The Demand schedule is a tabular representation of the quantities demanded of a particular good at different prices in the market per period of time. The Demand schedule is a tabular representation of the quantities demanded of a particular good at different prices in the market per period of time. Demand curve is the graphical representation of the demand schedule. Demand curve is the graphical representation of the demand schedule.

15 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 15 MARKET DEMAND The market demand for a commodity is obtained by adding up the total quantity demanded at various prices by all the individuals over a specified period of time. The market demand for a commodity is obtained by adding up the total quantity demanded at various prices by all the individuals over a specified period of time. The market demand is the horizontal summation of individual demand for a commodity at various possible prices in market. The market demand is the horizontal summation of individual demand for a commodity at various possible prices in market.

16 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 16 CHANGES IN DEMAND There can be two types of changes in demand. (1) Movement in demand (2) Shift in demand

17 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 17 CHANGES IN DEMAND (1) Movement in Demand Change in quantity demand because of a change in price of that commodity Change in quantity demand because of a change in price of that commodity Here demand curve remains the same, but we either move up or down on the same demand curve Here demand curve remains the same, but we either move up or down on the same demand curve

18 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 18 CHANGES IN DEMAND When we move up the demand curve with a rise in price, it is called contraction in demand When we move up the demand curve with a rise in price, it is called contraction in demand When we move down the demand curve with a fall in price, it is called extention in demand. When we move down the demand curve with a fall in price, it is called extention in demand.

19 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 19 CHANGES IN DEMAND (2) Shift in demand A change in demand because of a change in any factor, other than the price of the commodity A change in demand because of a change in any factor, other than the price of the commodity Here the whole demand curve shifts either to the right or to the left Here the whole demand curve shifts either to the right or to the left

20 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 20 CHANGES IN DEMAND When the demand curve shifts to the right, it shows an increase in demand and is called rise in demand When the demand curve shifts to the right, it shows an increase in demand and is called rise in demand When the demand curve shifts to the left, it shows a fall in demand and is called fall in demand When the demand curve shifts to the left, it shows a fall in demand and is called fall in demand (WHY DEMAND CURVE SHIFTS)????

21 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 21 ELASTICITY OF DEMAND Elasticity of demand is the responsiveness of demand to changes in the prices of the commodity Elasticity of demand is the responsiveness of demand to changes in the prices of the commodity Elasticity of demand is the ratio of the percentage change in the demand of a commodity to the percentage change in the price of the commodity Elasticity of demand is the ratio of the percentage change in the demand of a commodity to the percentage change in the price of the commodity

22 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 22 ELASTICITY OF DEMAND Elasticity of demand = Percentage change in quantity dd Percentage change in price = Q P X P Q E d

23 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 23 ELASTICITY OF DEMAND Here are some examples: (a) Price rises from $10 to $11, a 10% rise, and demand falls from 4000 units to 3200 units, a 20% fall: the elasticity is 20/10=2. (b) Price rises from $15 to $18, a 20% rise, and demand falls from 1000 units to 800 units: the elasticity is 20/20=1.

24 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 24 ELASTICITY OF DEMAND Some points to remember: (a) A product is said to have an elastic demand if the elasticity is greater than 1. a small change in price (up or down) leads to a larger change in quantity demanded. The demand of luxuries is usually elastic. (b) If the elasticity equals 1, then a given percentage change in price leads to an equal percentage change in demand: this is called unit elasticity

25 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 25 ELASTICITY OF DEMAND ( c ) A product is said to have an inelastic demand if the elasticity is less than 1. a large change in price (up or down) leads to a small change in quantity demanded. The demand for necessities is usually inelastic. The demand for necessities is usually inelastic.

26 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 26 ELASTICITY OF DEMAND Importance of price elasticity of demand Price elasticity of demand is important when working out how much to charge for a product and it can help to make sensible decisions on price. Price elasticity of demand is important when working out how much to charge for a product and it can help to make sensible decisions on price.

27 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 27 ELASTICITY OF DEMAND In case of a product having an inelastic demand, the company can seriously consider increasing the price because in spite of the loss in demand the total revenue of the firm will increase and it will incur less cost because of less quantity of output being manufactured. In case of a product having an inelastic demand, the company can seriously consider increasing the price because in spite of the loss in demand the total revenue of the firm will increase and it will incur less cost because of less quantity of output being manufactured.

28 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 28 ELASTICITY OF DEMAND In case of a product having an elastic demand, a price rise will not be a good idea. In case of a product having an elastic demand, a price rise will not be a good idea. Sales will fall fast and total revenue will fall. Sales will fall fast and total revenue will fall. A price cut will be a good idea, because it will lead to a lot of extra sales, but of course costs will rise as well. A price cut will be a good idea, because it will lead to a lot of extra sales, but of course costs will rise as well.

29 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 29 ELASTICITY OF DEMAND To find out the elasticity of demand, a company may conduct a market research to find out how much of a product people would buy at different prices. To find out the elasticity of demand, a company may conduct a market research to find out how much of a product people would buy at different prices.

30 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 30 The elasticity of demand generally changes as the price changes. Here is the demand schedule with elasticity worked out for the first price change. Work out the elasticity of demand for the other prices and complete the table. Price (Per Kg) Quantity demanded (Per month in Kg) Price elasticity of demand 1 $ $ $6.25? 4 $4.5? 5 $2.75? 6 $1?

31 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 31 INCOME ELASTICITY OF DEMAND Income elasticity of demand is the responsiveness of quantity demanded of a product to the changes in the income of the consumer Income elasticity of demand is the responsiveness of quantity demanded of a product to the changes in the income of the consumer Income elasticity of demand is the ratio of percentage change in the quantity demanded of a product to the percentage change in the income of the consumer Income elasticity of demand is the ratio of percentage change in the quantity demanded of a product to the percentage change in the income of the consumer

32 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 32 INCOME ELALSTICY OF DEMAND Elasticity of demand = Percentage change in quantity dd Percentage change in income = Q Y X Y Q E Y

33 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 33 INCOME ELASTICITY OF DEMAND If with a rise in income, the consumer increases the demand of a commodity then such a good is called normal good. If with a rise in income, the consumer increases the demand of a commodity then such a good is called normal good. If with a rise in income, the consumer decreases the quantity demanded of a good, then such a good is called inferior good. If with a rise in income, the consumer decreases the quantity demanded of a good, then such a good is called inferior good.

34 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 34 INCOME ELASTICITY OF DEMAND Demand for a good is income elastic if income elasticity is greater than 1 so that quantity demanded rises by a larger proportion than the rise in income. Demand for a good is income elastic if income elasticity is greater than 1 so that quantity demanded rises by a larger proportion than the rise in income. Demand for a good is income inelastic if income elasticity is less than 1 and the quantity demanded changes by less than the proportionate change in income. Demand for a good is income inelastic if income elasticity is less than 1 and the quantity demanded changes by less than the proportionate change in income.

35 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 35 CROSS PRICE ELASTICITY OF DEMAND Cross price elasticity of demand is the responsiveness of the quantity demanded of a good Y to changes in the price of an other good X. Cross price elasticity of demand is the responsiveness of the quantity demanded of a good Y to changes in the price of an other good X. Cross price elasticity of demand is the ratio of the percentage change in quantity demanded of good X to the percentage change in the price of good Y. Cross price elasticity of demand is the ratio of the percentage change in quantity demanded of good X to the percentage change in the price of good Y.

36 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 36 CROSS PRICE ELASTICITY OF DEMAND = % age change in quantity dd of good X = % age change in quantity dd of good X % age change in price of good Y = Q P X P Q E XY X Y Y X Cross price elasticity of demand

37 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 37 CROSS PRICE ELASTICITY OF DEMAND If the value of the cross price elasticity of two goods X and Y is positive, then goods X and Y are substitutes. If the value of the cross price elasticity of two goods X and Y is positive, then goods X and Y are substitutes. If the value of cross price elasticity of demand of two goods X and y is zero, then goods X and y are unrelated goods. If the value of cross price elasticity of demand of two goods X and y is zero, then goods X and y are unrelated goods. Example: price of newspaper and demand for holidays holidays

38 M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 38 CROSS PRICE ELASTICITY OF DEMAND If the value of cross price elasticity of two goods X and Y is negative, then goods X and Y are complementary goods If the value of cross price elasticity of two goods X and Y is negative, then goods X and Y are complementary goods


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