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Published byEmma Greer Modified over 9 years ago
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THEORY OF “DEMAND”
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INTRODUCTION How much to produce and what price to charge? Factors determining demand for a product. Explores the relationship between price and demand for a product. Examines likely impact of the potential factors that influence its demand.
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WHAT IS DEMAND? The quantity of a product consumers are willing and able to buy at different prices in a specified time period. Types of Demand - Direct and derived demands -Individual and market demand
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DETERMINANTS OF DEMAND Price of Product Income of Consumer Price of Related Good Tastes and Preferences Advertising Consumer’s expectation of future Income and Price Growth of Economy Seasonal conditions Population
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DEMAND SCHEDULE It shows the price and output relationship. Tabular representation of price and demand.
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DEMAND CURVE The geometrical representation of demand schedule is called the demand curve.
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LAW OF DEMAND As the price of a good rises, quantity demanded of that good falls. As the price of a good falls, quantity demanded of that good rises. Ceteris paribus.
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DEMAND FUNCTION When we express the relationship between demand and its determinant mathematically, the relationship is known as demand function. The demand for product X can be written in functional form as- Qd= f (Px, Y, Po, T, A, Ef, N )
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CHANGE IN DEMAND VS. CHANGE IN QUANTITY DEMANDED A shift of the entire demand curve to a new position is called change in demand. Changes in non-price determinants of demand.
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QUANTITY DEMANDED Fluctuations in price, another determinant of demand, cause movement along the demand curve.
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Why the demand curve slope downwards? Law of diminishing marginal utility. Income effect. Substitution effect. New consumers. Multiple use of commodity.
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ELASTICITY OF DEMAND Elasticity of demand is defined as the responsiveness of the quantity of a good to changes in one of the variables on which demand depends- Price of the commodity Income of the Consumer Various other factor DEFINATION-’’The elasticity of demand measures the response of the demand for the commodity to change in price”.
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PRICE ELASTICITY OF DEMAND Point Definition
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Perfectly Inelastic Demand: Elasticity Equals 0 city of Demand Copyright©2003 Southwestern/Thomson Learning $5 4 Quantity Demand 100 0 1. An increase in price... 2.... leaves the quantity demanded unchanged. Price
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Inelastic Demand: Elasticity Is Less Than 1 Quantity 0 $5 90 Demand 1. A 22% increase in price... Price 2.... leads to an 11% decrease in quantity demanded. 4 100
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Unit Elastic Demand: Elasticity Equals 1 Copyright©2003 Southwestern/Thomson Learning 2.... leads to a 22% decrease in quantity demanded. Quantity 4 100 0 Price $5 80 1. A 22% increase in price... Demand
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Elastic Demand: Elasticity Is Greater Than 1 Demand Quantity 4 100 0 Price $5 50 1. A 22% increase in price... 2.... leads to a 67% decrease in quantity demanded.
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Perfectly Elastic Demand: Elasticity Equals Infinity Quantity 0 Price $4 Demand 2. At exactly $4, consumers will buy any quantity. 1. At any price above $4, quantity demanded is zero. 3. At a price below $4, quantity demanded is infinite.
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