2 Meaning and Definition of Demand Meaning of DemandMeaning and Definition of DemandAccording 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:Desire for specific commodity.Sufficient resources to purchase the desired commodity.Willingness to spend the resources.Availability of the commodity at(i) Certain price (ii) Certain place (iii) Certain time.
3 Kinds of Demand Individual demand Market demand Income demand Demand for normal goods (price –ve, income +ve)Demand for inferior goods (eg., coarse grain)4. Cross demandDemand for substitutes or competitive goods (eg.,tea & coffee, bread and rice)Demand for complementary goods (eg., pen & ink)5. Joint demand (same as complementary, eg., pen & ink)6. Composite demand (eg., coal & electricity)7. Direct demand (eg., ice-creams)8. Derived demand (eg., TV & TV mechanics)9. Competitive demand (eg., desi ghee and vegetable oils)10.Demand of unrelated goods
4 FACTORS AFFECTING DEMAND 1. Prices of Goods2.Income of Consumer3.Prices of Related Goods4.Population5.Tastes,Habit6.Expectation about future prices7.Climatic Factors8.Demonstration Effect9.Distribution of national income
5 Types of Demand Schedules Demand Schedule: a tabular presentation showing different quantities of a commodity that would be demanded at different prices.Types of Demand SchedulesIndividual Demand schedule Market Demand SchedulePriceA150240330420PriceABCM.S15045401352303810833520854152560
6 Demand Curve Individual DC Types of Demand Curve Y Y Market DC The Graphical Representation of Demand Schedule is called a Demand Curve. It is of two types:Types of Demand CurveY YPrice Less Flatter Price More FlatterO Demand X O Demand XIndividual DCMarket DC
7 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.
8 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).
9 Demand Curve Movement along demand curve Vs. Shift in demand curve: Distinction between change in quantity demanded and change in demand.A. Change in quantity demanded – When quantity demanded changes ( rise or fall ) as a result of change in price alone, other factors remaining the same.Contraction/fall in quantity demandedExtension/Rise in quantity demandedThe change is depicted/ represented by the movement up or down on a given demand curve. This does not require drawing a new demand curve.
10 Figure 2.2 Shifts in the demand curve An increase in demand is represented by a rightward, outward, shift in the demand curve, from D1to D2. A decrease in demand is represented by a leftward, or inward, shift in the demand curve, from D1 to D3.
11 The Law of DemandProf. Samuelson: “Law of demand states that people will buy more at lower price and buy less at higher prices, others thing remaining the same.”Ferguson: “According to the law of demand, the quantity demanded varies inversely with price”.Chief Characteristics:Inverse relationship.Price independent and demand dependent variable.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
12 The Law of Demand EXPLAINERS: Why demand curve slopes downwards? 1. Income effect2. Substitution effect3. Diminishing Marginal Utility
13 Law of Demand Exceptions: Inferior goods Articles of snob appeal. (exception: Veblen goods, eg., diamonds)Expectation regarding future prices (shares, industrial materials)EmergenciesQuality-price relationshipConspicuous necessities.IgnoranceChange in fashion, habits, attitudes, etc..Importance:Price determination.To Finance MinisterTo farmersIn the field of Planning.
14 Market Research and Law of Demand The more confidence a person has in price information as a predictor of quality, the more likely he’ll be to choose a high-priced, rather than a low-priced item.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.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.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.Business executives also disbelieve that the consumer is rational. (Eg., Yale – the under priced lock)Purchasing behavior of the consumer is mostly repetitive.
15 change in quantity demanded The Law of DemandPQABPQD1D2P1P2Q1Q2CHANGE IN PRICE=change in quantity demandedCHANGE IN OTHER=change in demand
16 The Law of DemandPQD1D2CHANGE IN OTHER=change in demand
17 Determinants of Demand Things other than price that cause the whole curve to shiftIncrease: shift to the rightDecrease: shift to the left
18 Determinants of Demand Change in consumer tastesChange in people’s incomenormal goodsinferior goods
19 What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company:(a) people change their preference from hamburgers to hot dogs?
20 What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company:(b) U.S. negotiates a deal w/ China to trade hot dogs for egg rolls?
21 What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company:(c) the price of ground beef plummets?
22 What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company:(d) the minimum wage rises?
23 What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company:(e) the MWU threatens a strike if owners fail to meet their demands?
24 What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company:(f) unemployment hits an all-time high?
25 What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company:(g) the price of buns increases due to a wheat shortage?
26 Elasticity of demandDefinition: “Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends.”These variables are price of the commodity, prices of the related commodities, income of the consumer & other various factors on which demand depends. Thus, we have Price Elasticity, Cross Elasticity, Elasticity of Substitution & Income Elasticity. It is always price elasticity of demand which is referred to as elasticity of demandA.Price ElasticityMeasures how much the quantity demanded of a good changes when its price changes.OrIt may be defined as “Percentage Change in Quantity demanded over percentage change in price”
27 Factors affecting Elasticity of Demand Availability of substitutesPostponement of consumptionProportion of expenditure (needles: inelastic; TV: elastic)Nature of the commodity (necessity vs. luxury; durability/reparability eg., shoes)Different uses of the commodity (paper vs. ink)Time period (elastic in the long term)Change in income (necessaries: inelastic; milk and fruit for a rich man)HabitsJoint demandDistribution of incomePrice level (very costly & very cheap goods: inelastic)
28 Price Elasticity Price Elasticity Elastic Demand or more than 1 – When quantity demanded responds greatly to price changesInelastic 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 demandPerfectly elastic or infinite elastic demandEconomic 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.
29 Calculating Price Elasticity PED = % Change in Qty Demanded% Change in PricePoints 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 price elasticity stays the same.
30 Some business applications of Price Elasticity Price discriminationPublic utility pricing (electricity, railway)Joint supply (wool and mutton)Super marketsUse of machines (lower cost of production for elastic)Factor pricing (workers producing inelastic demand products)International trade (devalue when exports are price-elastic)Shifting of tax burden (shift commodity tax when demand is inelastic)Taxation policy
31 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.B. Income Elasticity of Demand: Is the degree of responsiveness of quantity demanded of a good to a small change in the income of the consumer.If the proportion of income spent on a good remains the same as income increases, then income elasticity for the good is equal to one.If the proportion spent on a good increases, then the income elasticity for the good is greater than one.If the proportion decreases as income rises, then income elasticity for the good is less than one.
32 Income elasticity Types: Zero Negative Positive (i) low (ii) unitary (iii) highEmpirical evidence suggests that income elasticity falls as income rises.Income elasticity and business decisionsIf ei is >0 but <1, sales will increase but slower than the general economic growth;If ei is >1, sales will increase more rapidly than general economic growthCorollary: in a growing economy while farmers suffer as their products have low income elasticity, industrialists gain as their products have high income elasticity.
33 Cross Elasticity: A change in the demand for one good in response to a change in the price of another good represents cross elasticity of demand of the former good for the latter good.If two goods are perfect substitutes for each other cross elasticity is infinite and if the two goods are totally unrelated, cross elasticity between them is zero.Goods between which cross elasticity is positive can be called Substitutes, the good between which the cross elasticity is negative are not always complementary as this is found when the income effect on the price change is very strong.
34 Degrees of Elasticity of Demand 1. Perfectly Elastic2. Perfectly Inelastic3. Unitary Elastic4. Relatively more elastic5. Relatively less elastic
40 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.
41 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.
42 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.
43 Methods of measurement of Elasticity Percentage or Proportionate Method= Percentage change in demand or;Percentage change in price= Proportionate change in demandProportionate change in price2. Total Outlay (Expenditure) MethodsTO=TQ * P ; where,TO=total outlay; TQ=total quantity; P=price of the commodity3. Geometric (Point) method – at any given point on the curve= lower segment of demand curveupper segment of demand curve
44 Figure 3.4 Maslow’s hierarchy of needs The pyramid orders human needs by broad categories from the most prepotent needs on the bottom to lesser and lesser prepotent needs as an individual moves up the pyramid. According to Maslow, an individual can be expected to satisfy her needs in the order of their prepotence, or will move from the bottom of the pyramid through the various levels to the top, so long as the individual’s resources to satisfy her needs last.
45 Figure 3.5(a) Demand, price, and need satisfaction The extent to which needs are satisfied depends, in the economists’ view of the world, on the nature of the need’s demand and its price. Physiological needs may indeed be more completely satisfied than other needs, but that may only be because physiological needs have relatively low prices (panel (a)). But then, as shown in this figure (panel (b)), the price of the means of satisfying physiological needs might be higher than the prices of the means of satisfying safety and love needs.