Post on 13-Jan-2016
transcript
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THEORY OF DEMANDTHEORY OF DEMAND
P. BharathiP. Bharathi
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What is What is Demand?Demand?• The willingness to buy a good or The willingness to buy a good or
service at all pricesservice at all prices
• What is the law of Demand?What is the law of Demand?
• If nothing else changes, the quantity If nothing else changes, the quantity demanded of a demanded of a
good or service is greater at lower good or service is greater at lower prices than higher.prices than higher.
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Determinants of Determinants of DemandDemand
• Prices of other goods ( substitute or Prices of other goods ( substitute or complementary)complementary)
• Outlook (consumer expectation of Outlook (consumer expectation of future income and prices)future income and prices)
• Income (normal goods versus inferior Income (normal goods versus inferior goods)goods)
• Number of potential customers (pop. Number of potential customers (pop. of market)of market)
• Tastes (or fashions)Tastes (or fashions)
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Reasons for inverse relation between Reasons for inverse relation between price & demandprice & demand
1.1. Income EffectIncome Effect –current buyers buy more. –current buyers buy more.
2. 2. Substitution EffectSubstitution Effect– new buyers now purchase.– new buyers now purchase.
3. 3. Diminishing Marginal UtilityDiminishing Marginal Utility - because buyers - because buyers of successive units receive less marginal utility,of successive units receive less marginal utility,
they will buy more only when the price is lowered.they will buy more only when the price is lowered.
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Rs.54321
……a specified time a specified time periodperiod……other things remaining other things remaining constantconstant
P QD
1020355580
Price decreasesPrice decreases;; QD increasesQD increasesConsumers Consumers “willingness to buy”“willingness to buy”
Rs.5Rs.5
Rs.Rs.44
Rs.Rs.33
Rs.Rs.22
Rs.Rs.11
D
0 10 20 35 55 80Quantity Demanded
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GRAPHING GRAPHING DEMANDDEMAND
PP
QQoo
Rs5Rs5
44
33
22
11
PP QQDD
$5$544332211
10102020353555558080
Price of CornPrice of Corn
Quantity of CornQuantity of Corn
CORNCORN
10 20 30 40 50 60 70 10 20 30 40 50 60 70 8080
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5555
PP
QQoo
Rs.5Rs.5
44
33
22
11
PP QQDD
Rs.5Rs.544332211
10102020353555558080
Price of CornPrice of Corn
Quantity of CornQuantity of Corn
CORNCORN
10 20 30 40 50 60 70 10 20 30 40 50 60 70 8080
GRAPHING GRAPHING DEMANDDEMAND
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3535
PP
QQoo
Rs.5Rs.5
44
33
22
11
PP QQDD
Rs.5Rs.544332211
10102020353555558080
Price of CornPrice of Corn
Quantity of CornQuantity of Corn
CORNCORN
10 20 30 40 50 60 70 10 20 30 40 50 60 70 8080
GRAPHING GRAPHING DEMANDDEMAND
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PP
QQoo
Rs.5Rs.5
44
33
22
11
PP QQDD
Rs.5Rs.544332211
10102020353555558080
Price of CornPrice of Corn
Quantity of CornQuantity of Corn
CORNCORN
10 20 30 40 50 60 70 8010 20 30 40 50 60 70 80
GRAPHING GRAPHING DEMANDDEMAND
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PP
QQoo
Rs.Rs.55
44
33
22
11
PP QQDD
Rs.5Rs.544332211
10102020353555558080
Price of CornPrice of Corn
Quantity of CornQuantity of Corn
CORNCORN
1010 20 30 40 50 60 70 20 30 40 50 60 70 8080
GRAPHING GRAPHING DEMANDDEMAND
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PP
QQoo
Rs.5Rs.5
44
33
22
11
PP QQDD
Rs.5Rs.544332211
10102020353555558080
DD
Price of CornPrice of Corn
Quantity of CornQuantity of Corn
CORNCORN
10 20 30 40 50 60 70 8010 20 30 40 50 60 70 80
GRAPHING GRAPHING DEMANDDEMAND
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…a specifiedspecified time periodtime period……other things remaining other things remaining constantconstant
Price decreasesPrice decreases;; QD increasesQD increases
Rs.5
Rs.4
Rs.3
Rs.2
Rs.1
DD
0 10 20 35 55 80Quantity DemandedQuantity Demanded
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““C”C”
Rs.3Rs.3 Rs.3Rs.3 Rs.3Rs.3++ ++
3535 3939 2626
Rs.3Rs.3
100100
FromFrom “individual”“individual” demand todemand to “market”“market” demanddemand
[Total][Total]
““A”A” ““B”B”
DD DD DD DD
==
And, what if the price of this product drops from Rs.3 to Rs.2?And, what if the price of this product drops from Rs.3 to Rs.2?
Individual Demand and Market DemandIndividual Demand and Market Demand
Rs.2Rs.2
4040
Rs.2Rs.2
4545
Rs.2Rs.2
3030
Rs.2Rs.2
115115
““Market Demand”Market Demand”
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QDQD22QDQD11
PricePrice
QDQD
InverseInverse relationshirelationshipp
Rs.10Rs.10
DD
Change in QDChange in QD1. 1. Price changePrice change2. 2. MovementMovement [up/down the demand curve][up/down the demand curve]3. 3. Point to pointPoint to point [along the curve] [along the curve]
Rs.8Rs.8
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““Demand Shifters”Demand Shifters”
1.1.TasteTaste2.2.IncomeIncome3.3.Market SizeMarket Size4.4.Expectations of consumers Expectations of consumers
about future price, Income, about future price, Income, availability of goodavailability of good
5.5.Prices of related goodsPrices of related goods
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ComplementComplement[[iinnvveerrssee]]
ButterButter
DD11 DD22
PP
SubstituteSubstitute
[[DirectDirect]]
CoffeeCoffee
DD11
DD22
PP
BreadBread
PP11
QDQD11 QDQD22
PP22
DD
““Demand Shifters”Demand Shifters”
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PP
DD33 DD11 DD33
QDQD33 QDQD11 QDQD22
““Demand Shifters”Demand Shifters”
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ELASTICITY OF DEMANDELASTICITY OF DEMAND “ “ The degree of responsiveness of change The degree of responsiveness of change
in demand to a change in price ”in demand to a change in price ”Importance of Elasticity of demand:Importance of Elasticity of demand:• Determination of price under monopoly, Determination of price under monopoly, • Determination of price under Determination of price under
discriminating monopolydiscriminating monopoly• Determination of price of product mix,Determination of price of product mix,• Determination of price of public utilities, Determination of price of public utilities, • Determination of international trade Determination of international trade
policypolicy
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Type of elasticity of demand:Type of elasticity of demand: Income elasticity of Demand:Income elasticity of Demand: The degree of The degree of
responsiveness of change in demand to a responsiveness of change in demand to a change in income change in income
Type of Income Elasticity of Demand: Type of Income Elasticity of Demand: – ZeroZero– NegativeNegative– PositivePositive
Price Elasticity of Demand:Price Elasticity of Demand: The degree of responsiveness of change in The degree of responsiveness of change in
demand to a change in price demand to a change in price Methods of Measuring Price Elasticity:Methods of Measuring Price Elasticity:
» Total outlay or expenditure Total outlay or expenditure methodmethod
» Point MethodPoint Method» Arc MethodArc Method
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Cross Elasticity of Demand: Cross Elasticity of Demand: The degree of responsiveness of The degree of responsiveness of
change in demand for good ‘B’ to a change in demand for good ‘B’ to a change inprice of good ‘A’change inprice of good ‘A’
Type of Cross elasticity of demand:Type of Cross elasticity of demand:– Zero,Zero,– Negative, Negative, – Positive: Positive:
a) >1 (b) <1, (c) =1a) >1 (b) <1, (c) =1– InfinitiveInfinitive
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Factors governing the elasticity of Factors governing the elasticity of demand:demand:
• Number and closeness of substitutesNumber and closeness of substitutes• Significance of commodity in budgetsSignificance of commodity in budgets• Degree of necessity of goodsDegree of necessity of goods• Habits and temperaments of Habits and temperaments of
consumerconsumer• Number of the use of commodityNumber of the use of commodity• Period of time for demandPeriod of time for demand
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Factors influencing demand:Factors influencing demand:
– Number of consumersNumber of consumers– Price levelPrice level– Availability of substitutesAvailability of substitutes– Distribution of wealthDistribution of wealth– TasteTaste– FashionFashion– Possibility of change in pricePossibility of change in price– ClimateClimate– AdvertisementAdvertisement
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