Law Of Demand And Elasticity.pdf 4k1p33
This document was ed by and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this report form. Report 445h4w
Overview 1s532p
& View Law Of Demand And Elasticity.pdf as PDF for free.
More details 6h715l
- Words: 4,140
- Pages: 79
Law of Demand & Elasticity of Demand General Economics
1
Demand Willing to Purchase at Various Prices during Period of Time
Able to Purchase at Various Prices during Period of Time
General Economics: Law of Demand and Elasticity of Demand
2
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 Alternative Prices in a given Time Period, Ceteris Paribus. By : B. R. Schiller General Economics: Law of Demand and Elasticity of Demand
3
Determinants of Demand • Price of the Commodity • Price of Related Commodities • Level of Income of the Household • Taste & Preferences of Consumers • Other Factors General Economics: Law of Demand and Elasticity of Demand
4
Determinants of Demand • Price of the Commodity Ceteris paribus i.e. Other Things Being Equal,
1 D ∝ P
This Happens Because of Income & Substitution Effect. General Economics: Law of Demand and Elasticity of Demand
5
Determinants of Demand • Price of Related Commodities Complementary Goods e.g. Pen & Ink Price of one Good Demand of Other Good
Substituting Goods e.g. Tea & Coffee Price of one Good Demand of Other Good General Economics: Law of Demand and Elasticity of Demand
6
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
General Economics: Law of Demand and Elasticity of Demand
7
Determinants of Demand • Taste & Preferences of Consumers • Other Factors –Size of the Population –Composition of Population
General Economics: Law of Demand and Elasticity of Demand
8
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 Increases, other things being equal. By : Marshall General Economics: Law of Demand and Elasticity of Demand
9
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 Y = Income of the Consumer T = Tastes E = Expectation of the Consumer General Economics: Law of Demand and Elasticity of Demand
10
Explanation • According to Law of Demand, Ceteris Paribus
1 Quantity Demanded ∝ 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. This simply indicates the Direction of Change in Demand as a result of Change in Price. General Economics: Law of Demand and Elasticity of Demand
11
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 –Market Demand Schedule
General Economics: Law of Demand and Elasticity of Demand
12
Individual Demand Schedule • It is defined as a Table which shows Quantities of a Given Commodity which an Individual Consumer will buy at all Possible Prices at a given Time.
Price per unit (in Rs.)
Quantity Demanded (Units)
1
4
2
3
3
2
4
1
General Economics: Law of Demand and Elasticity of Demand
13
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 aggregating their Individual Demand, the Market Demand Schedule is constructed. General Economics: Law of Demand and Elasticity of Demand
14
Price of Demand of Demand of Commodity ‘X’ A B (in Rs.) 1
4
5
Market Demand (Units) 4+5=9
2
3
4
3+4=7
3 4
2 1
3 2
2+3=5 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. General Economics: Law of Demand and Elasticity of Demand
15
Demand Curve • A Demand Curve is a Locus of Points showing various Alternative PriceQuantity Combinations. • It shows the Inverse Relationship between Price & Quantity Demanded. • It Slopes Downwards to the Right.
General Economics: Law of Demand and Elasticity of Demand
16
Individual Demand Curve X
X Axis – Price (Rs.) Y Axis – Quantity DD – Demand Curve
D
Price
4 3 2 1
D
0 1
2 3 Quantity
4
The Demand Curve Slopes Downwards from Left to Right, meaning thereby that when Price is High Y Demand is Low and vice versa.
General Economics: Law of Demand and Elasticity of Demand
17
Market Demand Curve Y
D
Price
4 3 2 1
0
D
3
5
7
9
General Economics: Law of Demand and Elasticity of Demand
Quantity
X 18
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 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. Substitutes are Goods that can be used in place of each other. General Economics: Law of Demand and Elasticity of Demand
19
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 its Previous Price, Come Forward to buy it. General Economics: Law of Demand and Elasticity of Demand
20
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 consider a Commodity to be of Low Quality if its Price is Low and of High Quality if its Price is High. General Economics: Law of Demand and Elasticity of Demand
21
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 people may Demand more Units of the Commodity in the Present and vice versa. General Economics: Law of Demand and Elasticity of Demand
22
Expansion & Contraction in Demand Expansion
• Price ↓, QD ↑ • Downward Movement Along the Demand Curve
Contraction
• Price ↑, QD ↓ • Upward Movement Along the Demand Curve General Economics: Law of Demand and Elasticity of Demand
23
Expansion & Contraction in Demand Y D
Price
P``
Contraction of Demand
P
Expansion of Demand
P` O
D L M Quantity Demanded General Economics: Law of Demand and Elasticity of Demand
N
X
24
Increase & Decrease in Demand • Price Same, QD ↑ due to Increase Change in Other Factors • Rightward Shift • Price Same, QD ↓ due to Decrease Change in Other Factors • Leftward Shift General Economics: Law of Demand and Elasticity of Demand
25
Increase & Decrease in Demand Increase in Demand D`
D`
D
Price
D`
Price
D
Decrease in Demand
D
D Quantity Demanded
General Economics: Law of Demand and Elasticity of Demand
D` Quantity Demanded
26
Distinction between Extension & Increase in Demand • Extension in Demand • Increase in Demand means Rise in Demand refers to the Rise in in Response to fall in Demand in Response to the Price of a the Change in the Commodity, Other Determinants of things being equal. Demand other then Price. • It is expressed by the Movement from a • It is expressed by the Higher Point to a Upward Shift of the Lower Point along the Entire Demand Curve. same Demand Curve. General Economics: Law of Demand and Elasticity of Demand
27
Distinction between Contraction & Decrease in Demand • Contraction in Demand • Decrease in Demand means Fall in Demand means Fall in Demand in Response to a Rise in Response to Change in the Price of a in Determinants of Commodity, Other Demand, Other then things being Equal. the Price. • It is expressed by the • It is expressed by a Movement from a Downward Shift of the Lower Point to a Entire Demand Curve. Higher Point on the Same Demand Curve. General Economics: Law of Demand and Elasticity of Demand
28
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 General Economics: Law of Demand and Elasticity of Demand
29
Types of Elasticity of Demand
Price Elasticity
Income Elasticity
General Economics: Law of Demand and Elasticity of Demand
Cross Elasticity
30
Price Elasticity of Demand It 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 General Economics: Law of Demand and Elasticity of Demand
31
Price Elasticity of Demand ∆Q P Ep = × Q ∆P Where,
Ep ∆ P Q
Price Elasticity Very Small Change Price Quantity Demanded
Note: Ep is (-)ve due to Inverse Relationship Between Price & Quantity Demanded. General Economics: Law of Demand and Elasticity of Demand
32
Degrees of Price Elasticity of Demand
Perfectly Elastic
Perfectly Inelastic
Unit Elastic
E=∞
E=0
E=1
More than Unit Elastic (Elastic)
Less than Unit Elastic (Inelastic)
E>1
E<1
General Economics: Law of Demand and Elasticity of Demand
33
Perfectly Elastic Demand Y 6
Price (Rs.)
D
E = infinite
4
0
10 20
30
Quantity
• A Perfectly Elastic Demand is one in which a Little Change in Price will Cause an Infinite Change in D Demand. • A very little Rise in Price causes the Demand to Fall to Zero and a very little Fall in Price causes Demand to Extend to Infinity. X • Under Perfect Competition, Demand Curve of a Firm is General Economics: Law of Demand and 34 Elasticity ofPerfectly Demand Elastic.
Perfectly Inelastic Demand • Perfectly Inelastic Demand is one in which a Change in Price Produces No Change in the Quantity Demanded. • In this case, Elasticity of Demand is Zero.
Y D
Price (Rs.)
E=0 6
4
2 0
D 2
4
Quantity
6
X General Economics: Law of Demand and Elasticity of Demand
35
Unitary Elastic Demand Y
Price (Rs.) (%)
D P
E=1
D
T
O
M
N
X
• Unitary Elastic Demand is one in which a % Change in Price Produces an Equal % Change in Demand. • This type of Demand Curve is called Rectangular Hyperbola.
Quantity (%)General Economics: Law of Demand and Elasticity of Demand
36
Y
Greater than Unitary Elastic Demand D
Price (Rs.) (%)
P
E>1 T
O
D
M
N
Quantity (%)
X
• Greater than Unitary Elastic Demand is one in which a Given %Change in Price Produces Relatively more %Change in Demand. • In this case Elasticity of Demand is Greater than Unitary.
General Economics: Law of Demand and Elasticity of Demand
37
Y
Less than Unitary Elastic Demand D
Price (Rs.) (%)
P
E< 1
T D
O
M
N
Quantity (%)
X
• Less than Unitary Elastic Demand is one in which a given % Change in Price Produces Relatively Less % Change in Demand • In this case, Elasticity of Demand is Less then Unitary.
General Economics: Law of Demand and Elasticity of Demand
38
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. • Defined As: dq p × dp q dq Where, is the derivative of Quantity w.r.t. Price dp at a point on Demand Curve. General Economics: Law of Demand and Elasticity of Demand
39
Point Elasticity of Demand =
PM PN
• As we Move from N to M, Elasticity Goes on Increasing. At Mid Point, Ep = 1, at N Ep = 0 & at M Ep = ∞
E=∞ M
E>1
Price (Rs)
Upper Segment Point Elasticity = Lower Segment
Y
A
E =1 P
E<1 Mid Point
O
General Economics: Law of Demand and Elasticity of Demand
B
E =0 N
X
Quantity
40
Arc Elasticity of Demand • When Elasticity is to be found between 2 Points, we use Arc Elasticity.
P1
Price (Rs)
q1 − q 2 p1 + p 2 Elasticity = × q1 + q 2 p1 − p 2 Where, p1 = Original Price q1 = Original Quantity p2 = New Price q2 = New Quantity
Y Arc Elasticity
A
B
P2
O
General Economics: Law of Demand and Elasticity of Demand
Q1
Q2
Quantity
X
41
Arc Elasticity of Demand For Example, Find Elasticity of Radios Between: p1 = Rs. 500 q1 = 100 p2 = Rs. 400 q2 = 150 q1 − q 2 p1 + p 2 Elasticity = × q1 + q 2 p1 − p 2
50 900 Ep = × 250 100
Ep = 1.8
General Economics: Law of Demand and Elasticity of Demand
42
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 Price of a Good. General Economics: Law of Demand and Elasticity of Demand
43
Total Expenditure (Outlay) Method Elasticity of Demand
Price
Total Expenditure
Same Same
Unchanged Unchanged
Greater than Unity i.e. Ep > 1 Unity i.e. Ep = 1 Less than Unity i.e. Ep < 1 General Economics: Law of Demand and Elasticity of Demand
44
Total Expenditure (Outlay) Method Y T
A E>1
Price (Rs.)
R
B N E=1 M P O
C E<1 E
D
Total Expenditure General Economics: Law of Demand and Elasticity of Demand
X 45
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 General Economics: Law of Demand and Elasticity of Demand
46
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.
Ey =
% Change in Quantity Demanded % Change in Income
General Economics: Law of Demand and Elasticity of Demand
47
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 Elasticity of Demand • Negative Income Elasticity of Demand • Zero Income Elasticity of Demand General Economics: Law of Demand and Elasticity of Demand
48
Positive Income Elasticity of Demand Y
DY A
Income
• Income Elasticity of Demand for a Good is Positive, When with an Increase in the Income of a Consumer, his Demand for the Good Increases and Vice Versa. • It is Positive in case of Normal Goods.
General Economics: Law of Demand and Elasticity of Demand
B
DY O
Q
X
Q
Quantity
49
Negative Income Elasticity of Demand Y
DY
Income
• Income Elasticity of Demand is Negative when Increase in the Income of the Consumer is Accompanied by Fall in Demand of a Good • It is Negative in case of Inferior Goods which are known as Giffen Goods.
20 15 10 DY
5 O
General Economics: Law of Demand and Elasticity of Demand
1
2
3
Quantity
4
X 50
Zero Income Elasticity of Demand DY
B
20
Income
• Income Elasticity of Demand is Zero, When Change in the Income of Consumer evokes No Change in his Demand. • Demand for Necessaries like oil, salt, etc., have Zero Income Elasticity of Demand.
Y
15 A
10 5
DY O
General Economics: Law of Demand and Elasticity of Demand
1
2
3
4
Quantity
X
5 51
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.
Ec Where,
∆q x = ∆p y
×
py qx
Ec = Cross Elasticity qx = Original Q.D. of X ∆qx = Change in Q.D. of X py = Original Price of Y ∆py = Change in Price of Y General Economics: Law of Demand and Elasticity of Demand
52
Positive Cross Elasticity of Demand Y DS P1
E1
P
E DS
O
Q
Q1
X
• It is positive in case of Substitute Goods. • For example, Rise in the Price of Coffee will lead to Increase in Demand for Tea. • The Curve slopes Upward from Left to Right.
General Economics: Law of Demand and Quantity of Tea Elasticity of Demand
53
Negative Cross Elasticity of Demand Y DC
Price of Bread
• It is Negative in Case of Complementary Goods. • For example, Rise in Price of Bread will bring Down the Demand for Butter. • The Curve slopes Downwards from Left to Right.
P1
E1
E
P
DC O
General Economics: Law of Demand and Elasticity of Demand
Q1
Q
Quantity of Butter54
X
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. General Economics: Law of Demand and Elasticity of Demand
55
Q1 The Concept of Elasticity of Demand was developed by: a) Alfred Marshall b) Edwin Camon c) Paul Samuelson d) Fredric Bonham General Economics: Law of Demand and Elasticity of Demand
56
Q2 Demand Curve in most cases Slopes a) Downward towards Right b) Vertical And Parallel to Y-axis c) Upward Towards Left d) Horizontal And Parallel to X-axis General Economics: Law of Demand and Elasticity of Demand
57
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 – The Demand for Y increases from 25 units to 50 units – The Demand for Commodity Z decreases from 150 to 75 units General Economics: Law of Demand and Elasticity of Demand
58
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
General Economics: Law of Demand and Elasticity of Demand
59
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 General Economics: Law of Demand and Elasticity of Demand
60
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 General Economics: Law of Demand and Elasticity of Demand
61
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 d) Demand is Inelastic General Economics: Law of Demand and Elasticity of Demand
62
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 General Economics: Law of Demand and Elasticity of Demand
63
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 General Economics: Law of Demand and Elasticity of Demand
64
Q9 Positive Income Elasticity implies that as Income Rises, Demand for the Commodity a) Rises b) Falls c) Remains Unchanged d) Becomes Zero General Economics: Law of Demand and Elasticity of Demand
65
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 General Economics: Law of Demand and Elasticity of Demand
66
Q 11 In Case of Inferior Goods, Income Elasticity is: a) Zero b) Positive c) Negative d) None General Economics: Law of Demand and Elasticity of Demand
67
Q 12 In Case of Giffen Goods, Demand Curve will Slope: a) Upward b) Downward c) Horizontal d) Vertical General Economics: Law of Demand and Elasticity of Demand
68
Q 13 Cross Elasticity of Demand between Tea & Coffee is: a) Positive b) Negative c) Zero d) Infinity General Economics: Law of Demand and Elasticity of Demand
69
Q 14 The Exception to the Law of Demand are: a) Veblen Goods b) Giffen Goods c) Both d) None General Economics: Law of Demand and Elasticity of Demand
70
Q 15 If the Income Elasticity is Greater than One, the commodity is : a) Necessity b) Luxury c) Inferior Goods d) None of these General Economics: Law of Demand and Elasticity of Demand
71
Q 16 When Quantity Demanded changes by Larger Percentage than does Price, Elasticity is termed as: a) Inelastic b) Perfectly Elastic c) Elastic d) Perfectly Inelastic General Economics: Law of Demand and Elasticity of Demand
72
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 General Economics: Law of Demand and Elasticity of Demand
73
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 Other Goods d) Decrease in the Income of Purchasers General Economics: Law of Demand and Elasticity of Demand
74
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 General Economics: Law of Demand and Elasticity of Demand
75
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 General Economics: Law of Demand and Elasticity of Demand
76
Q 21 All of the Following are Determinants of Demand Except a) Taste & Preferences b) Quantity Supplied c) Income d) Price of Related Goods General Economics: Law of Demand and Elasticity of Demand
77
Q 22 The Law of Demand refers to______ a) Price-Supply Relationship b) Price-Cost Relationship c) Price-Demand Relationship d) Price-Income Relationship General Economics: Law of Demand and Elasticity of Demand
78
THE END Law of Demand & Elasticity of Demand
79
1
Demand Willing to Purchase at Various Prices during Period of Time
Able to Purchase at Various Prices during Period of Time
General Economics: Law of Demand and Elasticity of Demand
2
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 Alternative Prices in a given Time Period, Ceteris Paribus. By : B. R. Schiller General Economics: Law of Demand and Elasticity of Demand
3
Determinants of Demand • Price of the Commodity • Price of Related Commodities • Level of Income of the Household • Taste & Preferences of Consumers • Other Factors General Economics: Law of Demand and Elasticity of Demand
4
Determinants of Demand • Price of the Commodity Ceteris paribus i.e. Other Things Being Equal,
1 D ∝ P
This Happens Because of Income & Substitution Effect. General Economics: Law of Demand and Elasticity of Demand
5
Determinants of Demand • Price of Related Commodities Complementary Goods e.g. Pen & Ink Price of one Good Demand of Other Good
Substituting Goods e.g. Tea & Coffee Price of one Good Demand of Other Good General Economics: Law of Demand and Elasticity of Demand
6
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
General Economics: Law of Demand and Elasticity of Demand
7
Determinants of Demand • Taste & Preferences of Consumers • Other Factors –Size of the Population –Composition of Population
General Economics: Law of Demand and Elasticity of Demand
8
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 Increases, other things being equal. By : Marshall General Economics: Law of Demand and Elasticity of Demand
9
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 Y = Income of the Consumer T = Tastes E = Expectation of the Consumer General Economics: Law of Demand and Elasticity of Demand
10
Explanation • According to Law of Demand, Ceteris Paribus
1 Quantity Demanded ∝ 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. This simply indicates the Direction of Change in Demand as a result of Change in Price. General Economics: Law of Demand and Elasticity of Demand
11
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 –Market Demand Schedule
General Economics: Law of Demand and Elasticity of Demand
12
Individual Demand Schedule • It is defined as a Table which shows Quantities of a Given Commodity which an Individual Consumer will buy at all Possible Prices at a given Time.
Price per unit (in Rs.)
Quantity Demanded (Units)
1
4
2
3
3
2
4
1
General Economics: Law of Demand and Elasticity of Demand
13
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 aggregating their Individual Demand, the Market Demand Schedule is constructed. General Economics: Law of Demand and Elasticity of Demand
14
Price of Demand of Demand of Commodity ‘X’ A B (in Rs.) 1
4
5
Market Demand (Units) 4+5=9
2
3
4
3+4=7
3 4
2 1
3 2
2+3=5 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. General Economics: Law of Demand and Elasticity of Demand
15
Demand Curve • A Demand Curve is a Locus of Points showing various Alternative PriceQuantity Combinations. • It shows the Inverse Relationship between Price & Quantity Demanded. • It Slopes Downwards to the Right.
General Economics: Law of Demand and Elasticity of Demand
16
Individual Demand Curve X
X Axis – Price (Rs.) Y Axis – Quantity DD – Demand Curve
D
Price
4 3 2 1
D
0 1
2 3 Quantity
4
The Demand Curve Slopes Downwards from Left to Right, meaning thereby that when Price is High Y Demand is Low and vice versa.
General Economics: Law of Demand and Elasticity of Demand
17
Market Demand Curve Y
D
Price
4 3 2 1
0
D
3
5
7
9
General Economics: Law of Demand and Elasticity of Demand
Quantity
X 18
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 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. Substitutes are Goods that can be used in place of each other. General Economics: Law of Demand and Elasticity of Demand
19
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 its Previous Price, Come Forward to buy it. General Economics: Law of Demand and Elasticity of Demand
20
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 consider a Commodity to be of Low Quality if its Price is Low and of High Quality if its Price is High. General Economics: Law of Demand and Elasticity of Demand
21
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 people may Demand more Units of the Commodity in the Present and vice versa. General Economics: Law of Demand and Elasticity of Demand
22
Expansion & Contraction in Demand Expansion
• Price ↓, QD ↑ • Downward Movement Along the Demand Curve
Contraction
• Price ↑, QD ↓ • Upward Movement Along the Demand Curve General Economics: Law of Demand and Elasticity of Demand
23
Expansion & Contraction in Demand Y D
Price
P``
Contraction of Demand
P
Expansion of Demand
P` O
D L M Quantity Demanded General Economics: Law of Demand and Elasticity of Demand
N
X
24
Increase & Decrease in Demand • Price Same, QD ↑ due to Increase Change in Other Factors • Rightward Shift • Price Same, QD ↓ due to Decrease Change in Other Factors • Leftward Shift General Economics: Law of Demand and Elasticity of Demand
25
Increase & Decrease in Demand Increase in Demand D`
D`
D
Price
D`
Price
D
Decrease in Demand
D
D Quantity Demanded
General Economics: Law of Demand and Elasticity of Demand
D` Quantity Demanded
26
Distinction between Extension & Increase in Demand • Extension in Demand • Increase in Demand means Rise in Demand refers to the Rise in in Response to fall in Demand in Response to the Price of a the Change in the Commodity, Other Determinants of things being equal. Demand other then Price. • It is expressed by the Movement from a • It is expressed by the Higher Point to a Upward Shift of the Lower Point along the Entire Demand Curve. same Demand Curve. General Economics: Law of Demand and Elasticity of Demand
27
Distinction between Contraction & Decrease in Demand • Contraction in Demand • Decrease in Demand means Fall in Demand means Fall in Demand in Response to a Rise in Response to Change in the Price of a in Determinants of Commodity, Other Demand, Other then things being Equal. the Price. • It is expressed by the • It is expressed by a Movement from a Downward Shift of the Lower Point to a Entire Demand Curve. Higher Point on the Same Demand Curve. General Economics: Law of Demand and Elasticity of Demand
28
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 General Economics: Law of Demand and Elasticity of Demand
29
Types of Elasticity of Demand
Price Elasticity
Income Elasticity
General Economics: Law of Demand and Elasticity of Demand
Cross Elasticity
30
Price Elasticity of Demand It 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 General Economics: Law of Demand and Elasticity of Demand
31
Price Elasticity of Demand ∆Q P Ep = × Q ∆P Where,
Ep ∆ P Q
Price Elasticity Very Small Change Price Quantity Demanded
Note: Ep is (-)ve due to Inverse Relationship Between Price & Quantity Demanded. General Economics: Law of Demand and Elasticity of Demand
32
Degrees of Price Elasticity of Demand
Perfectly Elastic
Perfectly Inelastic
Unit Elastic
E=∞
E=0
E=1
More than Unit Elastic (Elastic)
Less than Unit Elastic (Inelastic)
E>1
E<1
General Economics: Law of Demand and Elasticity of Demand
33
Perfectly Elastic Demand Y 6
Price (Rs.)
D
E = infinite
4
0
10 20
30
Quantity
• A Perfectly Elastic Demand is one in which a Little Change in Price will Cause an Infinite Change in D Demand. • A very little Rise in Price causes the Demand to Fall to Zero and a very little Fall in Price causes Demand to Extend to Infinity. X • Under Perfect Competition, Demand Curve of a Firm is General Economics: Law of Demand and 34 Elasticity ofPerfectly Demand Elastic.
Perfectly Inelastic Demand • Perfectly Inelastic Demand is one in which a Change in Price Produces No Change in the Quantity Demanded. • In this case, Elasticity of Demand is Zero.
Y D
Price (Rs.)
E=0 6
4
2 0
D 2
4
Quantity
6
X General Economics: Law of Demand and Elasticity of Demand
35
Unitary Elastic Demand Y
Price (Rs.) (%)
D P
E=1
D
T
O
M
N
X
• Unitary Elastic Demand is one in which a % Change in Price Produces an Equal % Change in Demand. • This type of Demand Curve is called Rectangular Hyperbola.
Quantity (%)General Economics: Law of Demand and Elasticity of Demand
36
Y
Greater than Unitary Elastic Demand D
Price (Rs.) (%)
P
E>1 T
O
D
M
N
Quantity (%)
X
• Greater than Unitary Elastic Demand is one in which a Given %Change in Price Produces Relatively more %Change in Demand. • In this case Elasticity of Demand is Greater than Unitary.
General Economics: Law of Demand and Elasticity of Demand
37
Y
Less than Unitary Elastic Demand D
Price (Rs.) (%)
P
E< 1
T D
O
M
N
Quantity (%)
X
• Less than Unitary Elastic Demand is one in which a given % Change in Price Produces Relatively Less % Change in Demand • In this case, Elasticity of Demand is Less then Unitary.
General Economics: Law of Demand and Elasticity of Demand
38
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. • Defined As: dq p × dp q dq Where, is the derivative of Quantity w.r.t. Price dp at a point on Demand Curve. General Economics: Law of Demand and Elasticity of Demand
39
Point Elasticity of Demand =
PM PN
• As we Move from N to M, Elasticity Goes on Increasing. At Mid Point, Ep = 1, at N Ep = 0 & at M Ep = ∞
E=∞ M
E>1
Price (Rs)
Upper Segment Point Elasticity = Lower Segment
Y
A
E =1 P
E<1 Mid Point
O
General Economics: Law of Demand and Elasticity of Demand
B
E =0 N
X
Quantity
40
Arc Elasticity of Demand • When Elasticity is to be found between 2 Points, we use Arc Elasticity.
P1
Price (Rs)
q1 − q 2 p1 + p 2 Elasticity = × q1 + q 2 p1 − p 2 Where, p1 = Original Price q1 = Original Quantity p2 = New Price q2 = New Quantity
Y Arc Elasticity
A
B
P2
O
General Economics: Law of Demand and Elasticity of Demand
Q1
Q2
Quantity
X
41
Arc Elasticity of Demand For Example, Find Elasticity of Radios Between: p1 = Rs. 500 q1 = 100 p2 = Rs. 400 q2 = 150 q1 − q 2 p1 + p 2 Elasticity = × q1 + q 2 p1 − p 2
50 900 Ep = × 250 100
Ep = 1.8
General Economics: Law of Demand and Elasticity of Demand
42
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 Price of a Good. General Economics: Law of Demand and Elasticity of Demand
43
Total Expenditure (Outlay) Method Elasticity of Demand
Price
Total Expenditure
Same Same
Unchanged Unchanged
Greater than Unity i.e. Ep > 1 Unity i.e. Ep = 1 Less than Unity i.e. Ep < 1 General Economics: Law of Demand and Elasticity of Demand
44
Total Expenditure (Outlay) Method Y T
A E>1
Price (Rs.)
R
B N E=1 M P O
C E<1 E
D
Total Expenditure General Economics: Law of Demand and Elasticity of Demand
X 45
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 General Economics: Law of Demand and Elasticity of Demand
46
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.
Ey =
% Change in Quantity Demanded % Change in Income
General Economics: Law of Demand and Elasticity of Demand
47
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 Elasticity of Demand • Negative Income Elasticity of Demand • Zero Income Elasticity of Demand General Economics: Law of Demand and Elasticity of Demand
48
Positive Income Elasticity of Demand Y
DY A
Income
• Income Elasticity of Demand for a Good is Positive, When with an Increase in the Income of a Consumer, his Demand for the Good Increases and Vice Versa. • It is Positive in case of Normal Goods.
General Economics: Law of Demand and Elasticity of Demand
B
DY O
Q
X
Q
Quantity
49
Negative Income Elasticity of Demand Y
DY
Income
• Income Elasticity of Demand is Negative when Increase in the Income of the Consumer is Accompanied by Fall in Demand of a Good • It is Negative in case of Inferior Goods which are known as Giffen Goods.
20 15 10 DY
5 O
General Economics: Law of Demand and Elasticity of Demand
1
2
3
Quantity
4
X 50
Zero Income Elasticity of Demand DY
B
20
Income
• Income Elasticity of Demand is Zero, When Change in the Income of Consumer evokes No Change in his Demand. • Demand for Necessaries like oil, salt, etc., have Zero Income Elasticity of Demand.
Y
15 A
10 5
DY O
General Economics: Law of Demand and Elasticity of Demand
1
2
3
4
Quantity
X
5 51
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.
Ec Where,
∆q x = ∆p y
×
py qx
Ec = Cross Elasticity qx = Original Q.D. of X ∆qx = Change in Q.D. of X py = Original Price of Y ∆py = Change in Price of Y General Economics: Law of Demand and Elasticity of Demand
52
Positive Cross Elasticity of Demand Y DS P1
E1
P
E DS
O
Q
Q1
X
• It is positive in case of Substitute Goods. • For example, Rise in the Price of Coffee will lead to Increase in Demand for Tea. • The Curve slopes Upward from Left to Right.
General Economics: Law of Demand and Quantity of Tea Elasticity of Demand
53
Negative Cross Elasticity of Demand Y DC
Price of Bread
• It is Negative in Case of Complementary Goods. • For example, Rise in Price of Bread will bring Down the Demand for Butter. • The Curve slopes Downwards from Left to Right.
P1
E1
E
P
DC O
General Economics: Law of Demand and Elasticity of Demand
Q1
Q
Quantity of Butter54
X
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. General Economics: Law of Demand and Elasticity of Demand
55
Q1 The Concept of Elasticity of Demand was developed by: a) Alfred Marshall b) Edwin Camon c) Paul Samuelson d) Fredric Bonham General Economics: Law of Demand and Elasticity of Demand
56
Q2 Demand Curve in most cases Slopes a) Downward towards Right b) Vertical And Parallel to Y-axis c) Upward Towards Left d) Horizontal And Parallel to X-axis General Economics: Law of Demand and Elasticity of Demand
57
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 – The Demand for Y increases from 25 units to 50 units – The Demand for Commodity Z decreases from 150 to 75 units General Economics: Law of Demand and Elasticity of Demand
58
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
General Economics: Law of Demand and Elasticity of Demand
59
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 General Economics: Law of Demand and Elasticity of Demand
60
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 General Economics: Law of Demand and Elasticity of Demand
61
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 d) Demand is Inelastic General Economics: Law of Demand and Elasticity of Demand
62
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 General Economics: Law of Demand and Elasticity of Demand
63
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 General Economics: Law of Demand and Elasticity of Demand
64
Q9 Positive Income Elasticity implies that as Income Rises, Demand for the Commodity a) Rises b) Falls c) Remains Unchanged d) Becomes Zero General Economics: Law of Demand and Elasticity of Demand
65
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 General Economics: Law of Demand and Elasticity of Demand
66
Q 11 In Case of Inferior Goods, Income Elasticity is: a) Zero b) Positive c) Negative d) None General Economics: Law of Demand and Elasticity of Demand
67
Q 12 In Case of Giffen Goods, Demand Curve will Slope: a) Upward b) Downward c) Horizontal d) Vertical General Economics: Law of Demand and Elasticity of Demand
68
Q 13 Cross Elasticity of Demand between Tea & Coffee is: a) Positive b) Negative c) Zero d) Infinity General Economics: Law of Demand and Elasticity of Demand
69
Q 14 The Exception to the Law of Demand are: a) Veblen Goods b) Giffen Goods c) Both d) None General Economics: Law of Demand and Elasticity of Demand
70
Q 15 If the Income Elasticity is Greater than One, the commodity is : a) Necessity b) Luxury c) Inferior Goods d) None of these General Economics: Law of Demand and Elasticity of Demand
71
Q 16 When Quantity Demanded changes by Larger Percentage than does Price, Elasticity is termed as: a) Inelastic b) Perfectly Elastic c) Elastic d) Perfectly Inelastic General Economics: Law of Demand and Elasticity of Demand
72
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 General Economics: Law of Demand and Elasticity of Demand
73
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 Other Goods d) Decrease in the Income of Purchasers General Economics: Law of Demand and Elasticity of Demand
74
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 General Economics: Law of Demand and Elasticity of Demand
75
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 General Economics: Law of Demand and Elasticity of Demand
76
Q 21 All of the Following are Determinants of Demand Except a) Taste & Preferences b) Quantity Supplied c) Income d) Price of Related Goods General Economics: Law of Demand and Elasticity of Demand
77
Q 22 The Law of Demand refers to______ a) Price-Supply Relationship b) Price-Cost Relationship c) Price-Demand Relationship d) Price-Income Relationship General Economics: Law of Demand and Elasticity of Demand
78
THE END Law of Demand & Elasticity of Demand
79
Related Documents 2w1qw
Law Of Demand And Elasticity.pdf 4k1p33
November 2019 44
03 - Law Of Demand 76p43
August 2021 0
Difference Between The Law Of Demand And Elasticity Of Demand 301z69
October 2019 73
Law Of Demand And Equi Marginal Utility 3r3y4n
December 2019 40
Exceptions To The Law Of Demand 6th3a
December 2019 34
1.1 Law Of Demand Practice Activity 4ma5s
December 2021 0More Documents from "PS Virk" 4fq4s
Law Of Demand And Elasticity.pdf 4k1p33
November 2019 44
2016-9-27 Thlefonikos Katalogos Ypekaa 65u4g
December 2021 0
Leon-battista-alberti.pdf 3c2e
November 2019 150
Cdma Scott Baxter 6f3l23
November 2021 0
Chattanooga Ionto Tdcs Usage Manual 4b435b
October 2019 79