Transcript Hand Carrying Earth

THEORY OF DEMAND
P. Bharathi
Page 1
What is Demand?
• The willingness to buy a good or service at all
prices
• What is the law of Demand?
• If nothing else changes, the quantity
demanded of a
good or service is greater at lower prices than
higher.
Page 2
Determinants of Demand
• Prices of other goods ( substitute or
complementary)
• Outlook (consumer expectation of future
income and prices)
• Income (normal goods versus inferior goods)
• Number of potential customers (pop. of
market)
• Tastes (or fashions)
Page 3
Reasons for inverse relation between
price & demand
1. Income Effect –current buyers buy more.
2. Substitution Effect– new buyers now purchase.
3. Diminishing Marginal Utility - because buyers
of successive units receive less marginal utility,
they will buy more only when the price is lowered.
Page 4
Consumers “willingness to buy”
P
Rs.5
4
3
2
1
Price decreases; QD increases
D
Rs.5
QD
10
20
35
55
80
Rs.4
Rs.3
Rs.2
Rs.1
0 10 20 35 55 80
Quantity Demanded
…a specified time period
…other things remaining constant
Page 5
GRAPHING DEMAND
Price of Corn
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
P
Rs5
4
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
Page 6
GRAPHING DEMAND
Price of Corn
P
CORN
P
Rs.5
4
3
2
1
Rs.5
QD
10
20
35
55
80
4
3
2
1
o
10 20 30 40 505560 70 80
Quantity of Corn
Q
Page 7
GRAPHING DEMAND
Price of Corn
P
CORN
P
Rs.5
4
3
2
1
Rs.5
QD
10
20
35
55
80
4
3
2
1
o
10 20 30 40 50 60 70 80
35
Quantity of Corn
Q
Page 8
GRAPHING DEMAND
Price of Corn
P
CORN
P
Rs.5
4
3
2
1
Rs.5
QD
10
20
35
55
80
4
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
Page 9
GRAPHING DEMAND
Price of Corn
CORN
P
Rs.5
4
3
2
1
P
Rs.5
QD
10
20
35
55
80
4
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
Page 10
GRAPHING DEMAND
Price of Corn
CORN
P
Rs.5
4
3
2
1
QD
10
20
35
55
80
P
Rs.5
4
3
2
1
o
D
10 20 30 40 50 60 70 80
Quantity of Corn
Q
Page 11
Price decreases; QD increases
D
Rs.5
Rs.4
Rs.3
Rs.2
Rs.1
0 10 20
35
55
80
Quantity Demanded
…a specified time period
…other things remaining constant
Page 12
Individual Demand and Market Demand
D
Rs.3
“C”
“B”
“A”
D
+
Rs.2
35 40
“Market Demand”
D
D
Rs.3
+Rs.3
= Rs.3
Rs.2
Rs.2
Rs.2
39 45
30
[Total]
100
115
26
From “individual” demand to “market” demand
And, what if the price of this product drops from Rs.3 to Rs.2?
Page 13
D
Change in QD
Rs.10
1. Price change
2. Movement
[up/down the demand curve]
3. Point to point [along the curve]
Inverse
Price
relationship
Rs.8
QD1 QD2
QD
Page 14
“Demand Shifters”
1.Taste
2.Income
3.Market Size
4.Expectations of consumers about
future price, Income, availability of
good
5.Prices of related goods
Page 15
“Demand Shifters”
D1
D2
P
Substitute
[Direct]
Coffee
D1 D2
P
P1
D
P2
Complement
[inverse]
Butter
QD1 QD2
Bread
Page 16
“Demand Shifters”
D3
D
1
D3
P
QD3 QD1 QD2
Page 17
Page 18
ELASTICITY OF DEMAND
“ The degree of responsiveness of change in
demand to a change in price ”
Importance of Elasticity of demand:
• Determination of price under monopoly,
• Determination of price under
discriminating monopoly
• Determination of price of product mix,
• Determination of price of public utilities,
• Determination of international trade policy
Page 19
Type of elasticity of demand:
Income elasticity of Demand: The degree of
responsiveness of change in demand to a change in
income
Type of Income Elasticity of Demand:
– Zero
– Negative
– Positive
Price Elasticity of Demand:
The degree of responsiveness of change in demand
to a change in price
Methods of Measuring Price Elasticity:
» Total outlay or expenditure method
» Point Method
» Arc Method
Page 20
Cross Elasticity of Demand:
The degree of responsiveness of change in
demand for good ‘B’ to a change inprice of
good ‘A’
Type of Cross elasticity of demand:
– Zero,
– Negative,
– Positive:
a) >1 (b) <1, (c) =1
– Infinitive
Page 21
Factors governing the elasticity of
demand:
•
•
•
•
•
•
Number and closeness of substitutes
Significance of commodity in budgets
Degree of necessity of goods
Habits and temperaments of consumer
Number of the use of commodity
Period of time for demand
Page 22
Factors influencing demand:
–
–
–
–
–
–
–
–
–
Number of consumers
Price level
Availability of substitutes
Distribution of wealth
Taste
Fashion
Possibility of change in price
Climate
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