Meaning…

Refers to the desire, backed by the necessary ability to pay.

Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or service.

Demand refers to how much (quantity) of a product or service is desired by buyers at various prices. The quantity demanded is the amount of a product people are willing to buy at a certain price.

The relationship between price and quantity demanded is known as the demand.

Aspects of Demand…

Desire for specific commodity.+

Sufficient resources to purchase the desired commodity.

+Willingness to spend the resources.

+a.Availability of the commodity at (i) Certain price (ii) Certain place

(iii) Certain time.

Willing to purchase:Being willing to purchase simply means that

one likes an item enough to want to buy it, and this is usually what people think of when they encounter the concept of demand. However, it's important to remember that, while it's good to want things, desire to purchase is not the only requirement for economic demand.

Able to purchase:Wanting to purchase an item doesn't mean a

whole lot if one doesn't have the means to make the transaction happen. Therefore, ability to purchase is another important factor of demand. Economists don't specify how an individual must be able to pay for an item- she can pay with cash, check, credit card, money borrowed from friends or taken from the piggy bank, etc.

Ready to purchase:Demand is, by its nature, a current quantity,

so an individual is only said to demand something if she is willing and able to purchase it now as opposed to some point in the future.

Types of DemandTypes of Demand -Consumer Goods and producer goods Perishable and durable goods Autonomous and derived demand Individual demand and market Demand Firm and Industry demand

Others:1. Income demand- Demand for normal goods (price –ve, income +ve)- Demand for inferior goods (eg., coarse grain)

Cross demand- Demand for substitutes or competitive goods (eg.,tea & coffee,

bread and rice)- Demand for complementary goods (eg., pen & ink)

Joint demand (same as complementary, eg., pen & ink) Composite demand (eg., coal & electricity) Direct demand (eg., ice-creams) Derived demand (eg., TV & TV mechanics) Competitive demand (eg., desi ghee and vegetable oils)

Demand Schedule and CurveDemand curve:

a curve showing the relation between the price of a good and quantity demanded during a given period, other things constant.

Suppose we are making pizza.

Price of Good

Quantity Demand

ed

3 200

4 150

5 100

6 75

7 50

The geometrical representation of demand schedule is called the demand curve.

Determinants of Demand

Economic demand- how much of an item one is willing, ready and able to purchase- depends on a number of different factors. For example, people probably care about how much an item costs when deciding how much to purchase. They might also consider how much money they make when making purchasing decisions, and so on.

Determinants of DemandPrice of ProductIncome of ConsumerPrice of Related Good Complementary Goods Substitute GoodsTastes and PreferencesAdvertisingConsumer’s expectation of future Income and

PriceGrowth of EconomySeasonal conditionsPopulation

Price as a Determinant of Demand Price, in many cases, is likely to be the most

fundamental determinant of demand, since it's often the first thing that people think about when deciding how much of an item to buy. The vast majority of goods and services obey what economists call the law of demand- that, all else being equal, the quantity demanded of an item decreases when the price increases and vice versa. (There are some exceptions to this rule, but they are few and far between.)

Income as a Determinant of Demand People certainly look at their incomes when

deciding how much of an item to buy, but the relationship between income and demand isn't as straightforward as one might think. Do people buy more or less of an item when their incomes increase? As it turns out, that's a more complicated question than it might initially seem. For example, if a person were to win the lottery, he would likely take more rides on private jets than he did before. On the other hand, the lottery winner would probably take fewer rides on the subway than before.

Economists categorize items as normal goods or inferior goods on exactly this basis. If a good is a normal good, then the quantity demanded goes up when income increases, and the quantity demanded goes down when income decreases. If a good is an inferior good, then the quantity demanded goes down when income increases and goes up when income decreases.

In our example, private jet rides are a normal good and subway rides are an inferior good. There are two things to note about normal and inferior goods:

What is a normal good for one person may be an inferior good for another person, and vice versa. For an overall market, a good is normal if market demand increases when income increases, on average, for the people in that market, and a good is inferior if market demand decreases when average income increases.

It's possible for a good to be neither normal nor inferior- for example, it's quite possible that the demand for toilet paper neither increases nor decreases when income changes!

Prices of Related Goods as Determinants of Demand When deciding how much of a good they

want to purchase, people take into account the prices of both substitute goods and complementary goods. Substitute goods, or substitutes, are goods that are used in place of one another. For example, Coke and Pepsi are substitutes because people tend to, well, substitute one for the other. Complementary goods, or complements, on the other hand, are goods that people tend to use together. DVD players and DVDs are examples of complements, as are computers and high-speed internet access.

The key feature of substitutes and complements is the fact that a change in price of one of the goods has an impact on the demand for the other good. For substitutes, an increase in the price of one of the goods will increase demand for the substitute good. (It's probably not surprising that an increase in the price of Coke would increase the demand for Pepsi as some consumers switch over from Coke to Pepsi.) It's also the case that a decrease in the price of one of the goods will decrease demand for the substitute good.

For complements, an increase in the price of one of the goods will decrease demand for the complementary good. Conversely, a decrease in the price of one of the goods will increase demand for the complementary good. (For example, decreases in the prices of video game consoles serves in part to increase demand for video games.)

Goods that don't have either the substitute or complement relationship are called unrelated goods. In addition, sometimes goods can have both a substitute and a complement relationship to some degree- for example, gasoline is a complement to even fuel-efficient cars, but a fuel-efficient car is a substitute for gasoline to some degree.

Tastes as a Determinant of Demand How much of a particular good or service

also depends on an individual's taste for the item. In general, economists use the term "tastes" as a catchall category for consumers' attitude towards a product. In this sense, if consumers' tastes for a good or service increase, then their quantity demanded increases, and vice versa.

Expectations as a Determinant of Demand Today's demand can also depend on

consumers' expectations of future prices, incomes, prices of related goods, and so on. For example, consumers demand more of an item today if they expect the price to increase increase in the future. Similarly, people who expect their incomes to increase in the future will often increase their consumption today.

Number of Buyers as a Determinant of Market Demand Although not a determinant of individual

demand, the number of buyers in a market is clearly an important factor in calculating market demand. Not surprisingly, market demand increases when the number of buyers increases, and market demand decreases when the number of buyers decreases.

Law of DemandStates that a quantity of a good demanded

during a given period relates inversely to its price, other things constant.

Price increases Quantity Demanded decreases

Price decreases Quantity demanded increases

Creates a downward sloping demand curve

Demand Curve

Price

Quantity0

3

4

5

6

50 75 100 150 200

Demand

Point on the line that matches the schedule Every point on the line matches the schedule. It is a price/quantity demanded that consumers are willing and able to buy.

A curve showing the relation between the price of a good and the quantity demanded.

Movement Along the Demand CurveCaused by a change in price

Only a change in priceOnly a change in price Move from one point to another on the same

graphCalled a

Change in quantity demanded.

Quantity

Price

0

5

100

Demand

6

75

Movement along the Demand Curve

A

B

DemandIndividual demand

The demand of an individual consumerMarket demand

Sum of individual demands of all consumers in the market

Aggregate or Market Demand Curve

The market demand curve describes the quantity demanded by the entire market for a category of goods or services. An example of this is gasoline prices overall. When the cost of oil goes up, all gas stations must raise their prices to cover their costs. Even if the price drops 50%, drivers aren't going to increase the amount bought by that much. That's why, when the price skyrockets from $3.20 - $4.00 a gallon, people get very upset. They can't cut back their driving to work, school and the grocery store very easily, and so they are forced to pay more for gas.

By the way, this lowers their incomes for things other than gas. Income is another determinant of demand, so that means the demand curve for other things they would like to buy, like ice cream, will drop. This is called a demand shift. In this case, the entire demand curve for ice cream shifts to the left. Since buyers have less income, they will purchase a lower quantity of ice cream even at the same price.

Change in DemandShift in demand CurveMovement along with demand curve

Shifts in the Demand CurveA demand curve isolates the relation between

prices of a good and quantities demanded when other factors that could affect demand remain unchanged.

Factors called assumptions or determinants

Changes in determinantsResults in changes to the RELATIONSHIP

BETWEEN PRICE AND QUANTITY DEMANDED.

At each and every price a DIFFERENT DIFFERENT quantity is demanded.

Results in a shift in the demand curveNew curve must be drawn

Changes in DemandIncrease in

demandAt each and every

price MOREMORE of the good is demanded

Shifts to the rightP Qd1 Qd2

4 150 200

5 100 150

6 75 100

D1

5

D2

A B

Price

Quantity100 150

Causes of Increase in DemandIncrease in

consumer incomeCauses consumers

to buy more of the product at each and every price.

Normal goodsInferior goods

Change in consumer incomeNormal goods

A good for which demand increases as consumer income rise

Inferior goodsA good which demand

increases as consumer income falls

Changes in Price of Related GoodsSubstitutes

Goods that are not consumed jointly

Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward.

Increase in price of Increase in price of Coke leads to increase Coke leads to increase in demand for Pepsiin demand for Pepsi

Changes in Price of Related GoodsSubstitutes

Suppose that the price of Coke rises from 1 to 1.50, then the demand for Pepsi will decrease from 75 to 100.

Price

Qty

D2

1

100

D1

75

Changes in the price of related goodsComplements

Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward

Two goods that are consumed jointly.

An decrease in An decrease in the price of one the price of one will increase will increase demand for the demand for the otherother

Changes in Price of Related GoodsComplements

An decrease in the price of DVD players, increases the demand for DVDs

Suppose that DVD players decrease in price from 145 to 100, now the demand for DVDs will decrease from 750 at 20 to 900.

D

20

750 900

D2

Changes in Consumer ExpectationsSuch as expectations in

Prices and incomeAffect how consumers

spend their money and their demand

If product cheaper today than tomorrow, then increase in demand

Changes in consumer tastesConsumer preferences

likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve

Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.

Changes in tasteConsumers

prefer platform shoes.

At 50, demand increases from 100 to 200.

D

50

100

D2

200

Change in the number and composition of consumersThe market demand curve is the sum of the

individual demand curves. If the number of consumers falls then the

sum will be smaller thus shifting the demand curve

Changes in DemandDecrease in

demandAt each and every

price LessLess of the good is demanded

Shifts to the LeftP Qd1 Qd2

4 150 110

5 100 90

6 75 60

D2

5

D1

A

Price

Quantity90 100

Causes of Decrease in DemandDecrease in

consumer incomeCauses consumers

to buy less of the product at each and every price.

Exceptions to law of demandSome special varieties of inferior goods are termed as Giffen

goods. Cheaper varieties of this category like bajra, cheaper vegetable like potato come under this category. A few goods like diamonds etc are purchased by the rich and wealthy sections of the society. The prices of these goods are so high that they are beyond the reach of the common man.

Certain things become the necessities of modern life. So we have to purchase them despite their high price. A consumer’s ignorance is another factor that at times induces him to purchase more of the commodity at a higher price. Emergencies like war, famine etc. negate the operation of the law of demand. Households also act speculators. A change in fashion and tastes affects the market for a commodity. When a broad toe shoe replaces a narrow toe, no amount of reduction in the price of the latter is sufficient to clear the stocks.

Though as a rule when the prices of normal goods rise, the demand for them decreases but there may be a few cases where the law may not operate.

The law of demand does not apply in every case and situation. The circumstances when the law of demand becomes ineffective are known as exceptions of the law. Some of these important exceptions are as under.

(1) Prestige goods/Veblen goods. There are certain commodities like diamond, sports, cars etc., . which are purchased as a mark of distinction in society. If the price of these goods rise, the demand for them may increase instead of falling.

(2) Price expectations. If people expect a further rise in the price of a particular commodity, they may buy more inspite of rise in price: The violation of the law in this case is only temporary.

(3) Ignorance of the consumer. If, the Consumer is ignorant *about the rise in price of goods, he may buy more at a higher price.

(4) Giffen goods. If the prices of basic goods, (potatoes, bajra, sugar etc) on which the poor spend a large part of their incomes declines, the poor increase the demand for superior goods, hence when the price of Giffen good falls, its demand also falls. There is a positive price effect in the case of Giffen goods. •

Elasticity – the conceptThe responsiveness of one variable to

changes in anotherWhen price rises, what happens

to demand?Demand fallsBUT!How much does demand fall?

Types..Price elasticity of demandIncome elasticity of demandCross elasticity of demandPromotional elasticity of demandExpectations elasticity of demand

Kinds Of Price Elasticity Of Demand1) Perfectly elastic demand (Ed= ∞)2) Perfectly inelastic demand (Ed=0)3) Elasticity of demand equal to

utility(Ed=1)4) Relatively inelastic demand (Ed<1)5) Relatively elastic demand(Ed>1)

Measurement Of Price Elasticity Of Demand

There are main methods like1. Percentage method or proportionate

method2. Total outlay method or total revenue

method3. Geometric method or point method 4. Arc elasticity of demand

Percentage method or proportionate methodPrice elasticity of demand (ep)Proportionate change in quantity demanded of good X

Proportionate change in price of good X

(Q2-Q1) Q1

= (P2-P1) P1

Where Q1 and P1 are original quantity and price respectively, and Q2 and P2 are the new quantity and price respectively

Perfectly elastic demand

P

R

I

C

E

y

0 x

Perfectly elastic demand curve

D D

When the demand for a product changes –increases or decreases even when there is no change in price, it is known as perfect elastic demand.

demand

D

D

Perfectly inelastic demand curve

0

Y

X

P

R

I

C

E

When a change in price, howsover large, change no changes in quality demand, it is known as perfectly inelastic demand

Relatively inelastic demand curve

XO

Y

demand

D

D

P

R

I

C

E

When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand

Relatively elastic demand curve

P

R

I

C

E

demand0 x

y

D

D

When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.

DD1

D2D3

D4

D5

Y

X0

DEMAND

P

R

I

C

E

WHERED1) Perfectly elastic

demandD2)Relatively elastic

demandD3)Elasticity of demand

equal to utilityD4)Relatively inelastic

demandD5)Perfectly inelastic

demand

Factors Affecting Price Elasticity Of DemandNature of the CommodityAvailability of SubstitutesVariety of uses of commodityPostponementInfluence of habits Proportion of Income spent on a commodity

Range of prices

Factors Affecting Price Elasticity Of Demand

Income GroupsElements of time Pattern of income distribution

Practical Importance of the Concept of Price Elasticity Of DemandThe concept is helpful in taking Business

DecisionsImportance of the concept in formatting Tax

Policy of the governmentFor determining the rewards of the Factors

of ProductionTo determine the Terms of Trades Between

the Two Countries

Practical Importance of the Concept of Price Elasticity Of DemandDetermination of Rates of Foreign ExchangeFor Nationalization of Certain Industries In economic Analysis ,the concept of price

elasticity of demand helps in explaining the irony of poverty in the midst of plenty.

Determinants of Price Elasticity of Demand

Demand for a commodity will be more elastic if:

It has many close substitutesThe share of the commodities in

buyers’ budget is highNature of the commodities, luxuries More time is available to adjust to a

price change

Determinants of Price Elasticity of Demand

Demand for a commodity will be less elastic if:

It has few substitutesThe share of the commodities in

buyers’ budget is lowNature of the commodities, Essentials Less time is available to adjust to a

price change

Types Of Income Elasticity Of DemandPositive Income elasticity of demandNegative Income elasticity of demand

Zero Income elasticity of demand

Y

P

A

D

D

B SO XQuantity Demanded

Inco

me

Positive Income elasticity of demand

Income Elasticity Equal to Unity or One (Edy =1)

Income Elasticity Greater Than Unity Or One (Edy >1)

Income Elasticity Less Than Unity or One (Edy < 1)

Pri

ce

P

B

A

S

Total Revenue

Quantity Demanded (000s)

Y

XO D

D

Quantity Demanded

Inco

me

Income Elasticity Of Demand =

Proportionate change in Demand

Proportionate change in Income

i.e.

Income Elasticity Of Demand =

∆q

Q Y

∆ y+

Measurement Of Income Elasticity Of DemandHere , ∆q = Change in the quantity demanded.

Q = Original quantity demanded.

∆y = Change in income.Y = Original income.

For e.g. ,when Income of the consumer = 2,500/- , he purchases 20 units of X, when income = 3,000/- he purchases 25 units of X

Measurement Of Income Elasticity Of DemandThus Income Elasticity of Demand =

= (5/20) + (500/2500)= 1.5therefore here the IED is 1.5 which is more than one.

∆q

Q Y

∆ y+

Factors Affecting Income Of Demand

Income Itself Only.Price Of the Commodity

Importance Of the Concept of Income Elasticity Of DemandIn production planning and managementIn forecasting demand when change in consumers income is expected

In classifying goods as normal and inferior

In expansion and contraction of the firm by the figure of income elasticity of demand

Markets situations could be studied with the help of IED

(8) Elasticity Of SubstitutionThe selection between two product or thing is called substitution

So Elasticity of Substitution measures the rate at which the particular product is substituted .

Thus EOS is the degree to which one product could be substituted in context of price and proportion

Elasticity Of SubstitutionElasticity of Substitution= Proportionate change in the quantity ratios of goods x & y DIVIDED BY Proportionate change in the price ratios of goods x & y.

Types of Elasticity Of SubstitutionZero Elasticity of Substitution.Infinite Elasticity Of SubstitutionElasticity of Substitution greater than unityor1

Elasticity of Substitution is equal to one

Elasticity of Substitution is less than one

Ch

ange

in Q

UA

NT

ITIY

rat

io o

f go

od x

&

y

Change in PRICE ratio of good x & yO X

Y

E4

E1

E2

E3

E5

Relationship Between Price Elasticity, Income Elasticity and Substitution Elasticity As Price is depended on income and substitution effect similarly Price Elasticity is depended on Income Elasticity an Substitution Elasticity .

These relationship can be represented by

Ep = Kx E1 + ( 1 – Kx ) es

Price elasticity of demand depends on:

Proportion of income spent on particular good say X.

Income elasticity of demand.Elasticity of substitution.Proportion of income spent on product other than X.

Cross Elasticity of DemandCross elasticity of demand express a relationship between the change in the demand for a given product in response to a change in the price of some other product

E.g. if the X tea demand reduces tremendously than it effect could be seen in demand of sugar and milk.

Types of Cross Elasticity of DemandCross Elasticity of Demand Equal to Unity or One

Cross Elasticity of Demand Greater than Unity or one

Cross Elasticity of demand less than unity or one

Proportionate change in Demand for product X

Proportionate change in Price of product Yi.e.

∆qx

Qx Py

∆p y+

Cross Elasticity of Demand =

Cross Elasticity of Demand =

Pri

ce o

f Y

Demand for YO

Y

X

D

D

Pri

ce o

f Y

O

Y

XD

D

Demand for Y

Pri

ce o

f Y

O

Y

X

D

Demand for Y

Importance of Cross Elasticity Of DemandThe concept is of very great importance in

changing the price of the products having substitutes and complementary goods .

In demand forecastingHelps in measuring interdependence of

price of commodity .Multiproduct firms use these concept to

measure the effect of change in price of one product on the demand of their other product

Advertising Elasticity of DemandAdvertising elasticity of demand is the measure of the rate of change in demand due to change in advertising expenditure

The amount of change in demand of goods due to advertisement is known as Advertisement Elasticity of Demand .

Proportionate change in Demand for product

Proportionate change in Advertising expenditurei.e.

∆qx

Q A

∆a÷

Advertising Elasticity of Demand =

Advertising Elasticity of Demand =

O X

Y

S

S

Sal

es

Advertising Expenditure

Factors Affecting Advertising Elasticity Of DemandThe stage of the Product’s Market Development .

Reaction of market Rival Firms.Cumulative Effect of Past Advertisement.

Influence of Other Factors.

Importance of the Advertising Elasticity Of Demand in Business DecisionsIt is useful in competitive industries.Though advertisement shifts the demand curve to right path but it also increases the fixed cost of the firm.

Limitation of Advertising Elasticity of the DemandThe impact of advertising on sales is different under different conditions, even if other demand determinants are constant.

Like wise, it is difficult to establish any co-relationship between advertising expenditure and volume of sales when there counter advertisements by rival firm in the market . The effect on sales depend on what the rivals are doing.

Review of DemandA change in quantity demanded is not a

change in demandChange in quantity demanded is caused by

a change in priceChange in quantity demanded is a

movement along the demand curveChange is demand is caused by a change in

the determinantsChange in demand shifts the demand curve