Demand
Law of demand
Utility
Law of Diminishing marginal utility
Movement and shift of demand curve
Elasticity of demand
Price elasticity of demand
Uses of price elasticity
3. INTRODUCTION OF DEMAND:
A consumer's desire and willingness to pay a price for a
specific good or service.
Holding all other factors constant, an increase in the price
of a good or service will decrease Demand, and vice
versa.
Demand is always related to Price and Time.
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4. Three Components Of Demand:
1. Need.
2. Purchasing Power.
3. Willingness to buy.
If a customer has all three components then the
Demand is called as “Effective Demand”.
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5. DETERMINANTS OF DEMAND:
Price of a commodity.
Price of Related goods.
Income of Consumer.
Taste and Preferences.
Future Expectations.
Advertisement Expenditure.
Climate Conditions.
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6. DEMAND CURVE:
The demand
curve is a
graphical
representation of
the relationship
between the price
of a good and the
quantity
demanded.
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7. DEMAND SCHEDULE:
It is a table of the quantity demanded of a
good at different price levels.
Example:
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9. LAW OF DEMAND
The Law of Demand is a microeconomic law that
states, all other factors being equal, as the price
of a good or service increases, consumer demand
for the good or service will decrease, and vice
versa. The Law of Demand says that the
higher the price, the lower the quantity demanded.
There is an inverse relationship between Quantity
Demanded and its Price. The people know that
when price of a commodity goes up its demand
comes down. When there is decrease in price the
demand for a commodity goes up.
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11. WHY DEMAND CURVE
SLOPES DOWNWARDS ?
Marginal Utility Decreases
Price Effect
Income Effect
Same Price of Substitution
Demand of Poor People
Different Uses of Goods
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12. ASSUMPTIONS OF LAW OF
DEMAND :
No Change in Price of Related Commodities
No Change in the Income of the Consumer
No Change in Taste and Preferences,
Customs, Habit and Fashion of the Consumer
No Change in Size of the Population
No expectation regarding Future Change in
Price
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14. UTILITY:-
Utility refers to want satisfying power of
a commodity. It is the satisfaction, actual
or expected, derived from the
consumption of a commodity. Utility
differs from person- to-person, place-to-
place and time-to-time. In the words of
Prof. Hobson, “Utility is the ability of a
good to satisfy a want”.
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15. APPROACHES:-
CARDINAL APPROACH:-
According to this approach, the utility is
measurable and can be expressed in
quantitative terms. Cardinal utility approach is
also known as classical approach because it
was presented by classical economists.
Although utility cannot be measured but in
cardinal approach of consumer behaviour, the
term which is used as a unit of utility is known
as util and arithmetic numbers (1, 2, 3, .......)
are used. For example X ate an apple and got
10 util of utility.
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16. TOTAL UTILITY (TU):-
Total utility is the aggregate level of
satisfaction or fulfilment that a consumer
receives through the consumption of a
specific good or service. Each individual
unit of a good or service has its own
marginal utility, and the total utility is
simply the sum of all the marginal
utilities of the individual units.
FORMULA:15
17. MARGINAL UTILITY (MU):-
Marginal utility is the additional
satisfaction a consumer gains from
consuming one more unit of a good or
service.
FORMULA:-
Marginal utility = Change in total utility
/ Change in quantity consumed
or
MU = ∆TU / ∆Q16
18. ORDINAL APPROACH:-
This means that the utility can be ranked
qualitatively. The ordinal utility approach
differs from the cardinal utility approach in the
sense that the satisfaction derived from
various commodities cannot be measured
objectively.
DEFINITION: The ordinal utility approach is
based on the fact that the utility of a
commodity cannot be measured in absolute
quantity, but however, it will be possible for a
consumer to tell subjectively whether the
commodity derives more or less or equal17
19. LAW OF DIMINISHING MARGINAL
UTILITY:-
The law of diminishing marginal utility is
a law of economics stating that as a
person increases consumption of a
product while keeping consumption of
other products constant, there is a
decline in the marginal utility that
person derives from consuming each
additional unit of that product.
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21. ASSUMPTIONS:-
Cardinal measurement of utility.
Monetary measurement of utility.
Consumption of reasonable quantity.
Continuous consumption.
No change in Quality.
Rational consumer.
Independent utilities.
MU of money remains constant.
Fixed Income and prices.20
23. Movement and Shift of Demand Curve
• Movement in Demand Curve- change in price
• Shift in Demand Curve- price remains constant
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24. Movement in Demand Curve
Downward movement (Expansion in demand)
Upward movement (Contraction in demand)
Change in Quantity Demanded
Change in Price
Movement along the
Demand Curve
Downward
Movement
Upward
Movement
Expansion in
Demand
Contraction in
Demand
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26. Change in Demand
Change in factors other
than Price
Shift in Demand Curve
Rightward Shift Leftward Shift
Increase in
Demand
Decrease in
Demand
Shift in Demand Curve
• Rightward Shift
• Leftward Shift
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27. Factors Affecting Shift in Demand
Curve
Income
Quality
Advertising
Substitutes
Expectations
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30. Price elasticity of demand is a measure of the relationship
between a change in the quantity demanded of a particular
good and a change in its price. Price elasticity of demand is a
term in economics often used when discussing price
sensitivity. The formula for calculating price elasticity of
demand is:
PRICE ELASTICITY OF DEMAND =
Change in quantity demand
Change in price
WHAT IS ELASTICITY OF DEMAND
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31. TYPES OF ELASTICITY OF DEMAND
Elasticity of demand can be classified as follows:
Price Elasticity of Demand
Cross Elasticity of Demand
Income Elasticity of Demand
Advertisement Elasticity of Demand
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32. Price Elasticityof Demand
The price elasticity of
demand is the proportional
change in the quantity
demanded, relative to the
proportional change in the
price of the good.
Price elasticity of demand =
Percentage change in
quantity demanded /
percentage change in price
= ΔQ/Q / ΔP/P31
33. Cross Elasticityof Demand
The cross elasticity of
demand is the proportional
change in the quantity
demanded, relative to the
proportional change in the
price of another good.
Price elasticity of demand =
Percentage change in
quantity demanded /
percentage change in price
of another good32
34. Income Elasticity of Demand
The income elasticity of demand
is the proportional change in the
quantity demanded, relative to
the proportional change in
the income.
Income elasticity of demand =
Percentaje change in quantity
demanded / percentaje change
in the income = ΔQ/Q / ΔI/I
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35. ADVERTISEMENTELASTICITYOF DEMAND
The advertisement elasticity of
demand is the proportional
change in the quantity
demanded, relative to the
proportional change in the price
of another good.
Advertisement elasticity of
demand = Percentage change
in quantity demanded /
percentage change in
expenditure in advertising
= ΔQ1/Q1 / ΔAd2/Ad2
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36. PRICE ELASTICITY OF DEMAND
“Price elasticity of demand is the ratio
of percentage change in quantity
demanded to the percentage change in
price.”
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37. ELASTIC DEMAND
The % change in quantity > % change in price
From the diagram below we see a small change in
price brings about a large change in the quantity
demanded.
This happens when there are many substitutes in the
marketplace.
Diagram :
Degrees of Price Elasticity
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38. INELASTIC DEMAND
It is the reverse of elastic. The % change in quantity < %
change in price.
From the diagram below we see a large change in price
brings about a small change in the quantity demanded.
This happens when there are few substitutes in the
marketplace, and the good is an essential commodity.
Thus even if prices go up, we cannot reduce consumption
by a lot.
Diagram:
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39. PERFECTLY ELASTIC DEMAND
The % change in price is zero.
At the market going price P*, the quantity demanded is
infinite.
So by the formula of elasticity:
Ed = % change in Qd
% change in price
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40. PERFECTLY INELSTIC DEMAND
The % change in quantity is zero.
At any price, the quantity demanded is the same.
The consumption of this commodity is fixed, and not
dependent on price.
So by the formula of elasticity:
Ed = % change in Qd
% change in price
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41. UNITARY DEMAND
The % change in quantity = % change in price.
From the diagram below we see a change in price
brings about an exact change in the quantity
demanded.
A 2% change in price brings about a 2% change in
quantity demanded
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42. Determinants of Price Elasticity of Demand
• Nature of Commodity
• Number of uses of the Commodity
• Time period
• Consumer habits
• Postponement
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44. WAGE BARGAINING
The capacity of trade unions to raise
wages depends on the elasticity of
demand for the product in which labour
is used as a major input. If wages are
permitted to rise cost and prices will also
rise. If demand in inelastic sales will not
fall much due to price rise. Thus a wage
rise is economically feasible in the food
industry than in the automobile sector.43
45. BUMPER CROPS
Everyone knows that the demand for most
agricultural commodities is highly inelastic. As
a result, an increase in the output of wheat or
jute due to good harvest (or productivity rise
due to technological progress) may lead to a
sharp fall in their prices. This will lead to a fall
in the revenue of the farmers. So help the
farmers the government will have to impose
restriction of agricultural output
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46. AIRLINE DEREGULATION
Since the demand for air travel is elastic,
lower fares will surely increase total
revenue. When airlines are flying with
many empty seats the additional costs
of carrying extra passengers is very
little. So revenue increases faster than
costs and profits rise.
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47. MINIMUM WAGE
In some countries the government has
imposed minimum wage above the
equilibrium level. It is felt that this will
cause unemployment particularly. If the
demand for child labour is inelastic, mini
mum wage will raise workers’ welfare:
the income gain associated with the
minimum wage exceeds the income
losses. If, on the other hand, the
demand minimum wage would be
stronger.
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