law of demand
DESCRIPTION
its use full to students of managementTRANSCRIPT
LAW OF DEMAND
COMMODITY
MARKET
GOODS PRODUCED FOR SALE IN THE MARKET
ALL AREAS IN WHICH BUYERS AND SELLERS ARE IN CONTACT WITH EACH OTHER FOR THE PURCHASE AND SALE OF THE COMMODITY
FACTORS AFFECTING DEMAND
1. PRICE OF THE COMMODITY
2. THE MONEY INCOME OF THE INDIVIDUAL HOUSEHOLD
3. THE TASTES AND PREFERENCES OF THE INDIVIDUAL HOUSEHOLD
4. THE PRICES OF OTHER COMMODITIES
Dn = f(Pn , Pı .....‚ Pn-ı‚Y‚T)
Dn is the demand for commodity n. Pn is the price of commodity n Pı.....Pn-ı is the prices of all other commodities (other than Pn) Y is the income of the household T stands for tastes and preferences of the household
GENERAL DEMAND FUNCTION QD = f(P)
SPECIFIC DEMAND FUNCTION Dn = f(Pn)
Y = Yº T = Tº Pºı……Pn- ıº
º means there is no change in these variables ; their value is being held constant
DEMAND FUNCTION
TYPES OF DEMAND
PRICE DEMAND
INCOME DEMAND
CROSS DEMAND
DEMAND CHANGES WITH THE CHANGE IN PRICES PROVIDED INCOME, TASTES & PREFERENCES AND PRICES OF OTHER GOODS REMAIN CONSTANT
WHEN THE CONSUMER’S INCOME GOES UP, THE DEMAND FOR SUPERIOR QUALITY GOODS GOES UP. WHEN IT FALLS THE DEMAND FOR INFERIOR GOODS TEND TO RISE
CHANGE IN THE QUANTITY DEMANDED FOR ONE PRODUCT AS A RESULT OF CHANGE IN THE PRICE OF ANOTHER COMMODITY
MANAGERIAL USES
DEMAND ANALYSIS
FORECASTING DEMAND
MANIPULATING DEMAND
Serves Two Major Purposes
Ancillary Functions
1. Appraisal of performance of a salesman 2. Fixing sales quota 3. Company’s competitive position
DEMAND ELASTICITY
DEFINITION
ELASTICITY OF DEMNAND IS A CONCEPT WHICH MEASURES RELATIVE CHANGE IN DEMAND BECAUSE OF A CHANGE IN PRICE
PERCENTAGE CHANGE IN QUANTITY DEMANDED DIVIDED BY THE PERCENTAGE CHANGE IN PRICE
ELASTICITY OF DEMANDP
rice
Per
Un
it O
f X
Quantity Demanded Of X
AB
P
Pı
M Mı N NıO
Market A : Expansion in the demand is lowMarket B : Expansion in the demand is high
MORE ELASTICWhen the demand is proportional or more to the change in price
LESS ELASTIC
When there is a negligible response for the quantity demanded despite a considerable change in price
MORE ELASTIC
LESS ELASTICWhen the elasticity is less than one or less than unity
When the elasticity is more than one or more than unity
FORMULA FOR MEASURING ELASTICITY OF DEMAND
Price Elasticity Of Demand (E)
Proportionate Change In Quantity Demanded Proportionate Change In Price
=
= Change In Quantity Demanded÷
Change In PriceInitial PriceInitial Quantity Demanded
= PQ
× ΔQ
ΔP
E =ΔQQ
÷ΔPP
= ΔQ ×Q ΔP
P
Q = Original Quantity Demanded P = Original Price ΔQ =Change In Quantity ΔP = Change In Price
ORIGINAL PRICE (P) = RS. 3
ORIGINAL DEMAND (Q) = 1
CHANGE IN PRICE (ΔP) = RS. 2
CHANGE IN DEMAND (ΔQ) = 3
ELASTICITY = ?
TYPES OF DEMAND
PRICE DEMAND
INCOME DEMAND
CROSS DEMAND
DEMAND CHANGES WITH THE CHANGE IN PRICES PROVIDED INCOME, TASTES & PREFERENCES AND PRICES OF OTHER GOODS REMAIN CONSTANT
WHEN THE CONSUMER’S INCOME GOES UP, THE DEMAND FOR SUPERIOR QUALITY GOODS GOES UP. WHEN IT FALLS THE DEMAND FOR INFERIOR GOODS TEND TO RISE
CHANGE IN THE QUANTITY DEMANDED FOR ONE PRODUCT AS A RESULT OF CHANGE IN THE PRICE OF ANOTHER COMMODITY
TYPES OF ELASTICITY
THE EFFECT OF CHANGE IN PRICE ON QUANTITY DEMANDED IS CALLED THE PRICE ELASTICITY ODF DEMAND
PRICE ELASTICITY
% Change (Δ) In The Quantity Demanded
% Change (Δ) In The PriceE =
% Change ΔQ = 4
% Change ΔP = 2
PRICE ELASTICITY (Ep) = ?
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
Availability of substitutes
Nature of commodity
Weightage in total consumption
Adaptability of consumption
pattern
Range of commodity use
Proportion of market supplied
INCOME ELASTICITY OF DEMAND
MEANS THE RATIO OF THE PERCENTAGE CHANGE IN QUANTITY DEMANDED TO THE PERCENTAGE CHANGE IN INCOME
Ey =Percentage Change In Quantity Demanded
Percentage Change In Income
Ey = YQ
× ΔQΔY
USE OF INCOME ELASTICITY OF DEMAND
Production Planning & Management
Estimating Future Demand
Helps In Avoiding Over-Production And Under-Production
GROSS NATIONAL PRODUCT
Income Of The Relevant class
Income Of The Relevant Region
Normal Goods/Inferior Goods
CROSS ELASTICITY
IS THE MEASURE OF RESPONSIVENESS OF DEMAND FOR A COMMODITY TO THE CHANGES IN THE PRICES OF SUBSTITUTES AND COMPLEMENTARY GOODS
Eе =Proportionate Change in the Quantity Of X
Proportionate Change in the Q Price Of Y
Eе = ΔQx
Qx÷
ΔPQx
USES OF CROSS ELASTICITY OF DEMAND
CROSS ELASTICITY OF TWO GOODS ARE
POSITIVE OR GREATER THAN ONE
CROSS ELASTICITY OF TWO GOODS ARE NEGATIVE IS LESS THAN ONE
Perfect Substitutes Complementary
Inadvisable to increase the price rather a reduction in price will be proper
Reducing the price may help in maintaining demand
ADVERTISING ELASTICITY OR PROMOTIONAL ELASTICITY OF DEMAND
×= ΔS ΔA
AS
S = Sales
ΔS = Increase In Sales
A = Original Advertisement Cost
ΔA = Additional Expenditure On Advertisement
ΔS S ÷
ΔA AEA =
PRICE OF X = RS. 1.25
NUMBER OF UNITS BOUGHT = 4
OUTLAY = RS. 1.25 X 4 = RS. 5.00
NOW PRICE OF X = RS. 1.00
NUMBER OF UNITS BOUGHT = 5
TOTAL OUT LAY = RS. 1.00 X 5
= RS. 5.00
MEASUREMENT OF ELASTICITY
1. TOTAL OUTLAY METHOD
2. PROPORTIONAL METHOD
3. GEOMETRIC METHOD
TOTAL OUTLAY METHOD
PROPORTIONAL METHOD
Under this method, the percentage change in price is compared to the percentage change in the quantity demanded; in other words, the ratio is the change in quantity demanded to the change in price. The formula is written as follows: Price Elasticity
Proportionate change in the quantity demanded
Proportionate change in price =
Alternatively
=Change in demand
Quantity demanded÷ Change in price
Price
ΔP ΔQ=Q P
÷
PROBLEM
A Company which generally sells a product for Rs. 200, decides to cut price to Rs. 160. As a result, the demand goes up from 40,000 units to 60,000 units. Calculate the elasticity
SOLUTION
Original Price = Rs. 200
New Price = Rs. 160
Change in Price = Rs. 40
Original Sales (Demand) = 40,000 Units
New Sales (Demand) = 60,000 Units
= ?
GEOMETRIC METHOD
The elasticity of demand can also be worked out geometrically The elasticity of demand has been considered as UNITY, as LESS than UNITY and as MORE than UNITY
..
.E1
E2
E3
D
D'
Y
0 x
D E2
DE2= 1
Hence the elasticity at E2 is Unity
The elasticity between D E2 and DE2 is equal
Therefore D E2 = DE2
or
Similarly the elasticity at point E1 is written as :
D E1
DE1
And the distance between D and E1 is less than the distance between D and E1 In other words D E1< DE1
D E1
DE1= is < 1 ( Elasticity at E1 less than unity )
At Point E3 the elasticity is
D E3
DE3
In this case the distance between D and E3 is greater than the distance between D and E3 . That is
D E3 is > DE3
HenceD E3
DE3= = > 1
Elasticity is greater than Unity
..
.E1
E2
E3
D
D'
Y
O X
The elasticity between D E2 and DE2 is equal
Therefore D E2 = DE2
D E2
DE2
or = 1
Hence the elasticity at E2 is Unity
UNITY
..
.E1
E2
E3
D
D'
Y
O X
Similarly the elasticity at point E1 is written as :
D E1
DE1
And the distance between D and E1 is less than the distance between D and E1 In other words D E1< DE1
D E1
DE1= is < 1 ( Elasticity at E1 less than unity )
LESS than UNITY
..
.E1
E2
E3
D
D'
Y
O X
In this case the distance between D and E3 is greater than the distance between D and E3 . That is
D E3 is > DE3
HenceD E3 =DE3
= > 1
Elasticity is greater than Unity
MORE than UNITY