The Basic Decision-Making Units A firm is an organization that
transforms resources (inputs) into products (outputs). Firms are
the primary producing units in a market economy. An entrepreneur is
a person who organizes, manages, and assumes the risks of a firm,
taking a new idea or a new product and turning it into a successful
business. Households are the consuming units in an economy.
Slide 3
The Circular Flow of Economic Activity The circular flow of
economic activity shows the connections between firms and
households in input and output markets.
Slide 4
Input Markets and Output Markets Output, or product, markets
are the markets in which goods and services are exchanged. Input
markets are the markets in which resourceslabor, capital, and
landused to produce products, are exchanged. Payments flow in the
opposite direction as the physical flow of resources, goods, and
services (counterclockwise).Payments flow in the opposite direction
as the physical flow of resources, goods, and services
(counterclockwise).
Slide 5
Input Markets Input markets include: The labor market, in which
households supply work for wages to firms that demand labor. The
capital market, in which households supply their savings, for
interest or for claims to future profits, to firms that demand
funds to buy capital goods. The land market, in which households
supply land or other real property in exchange for rent.
Slide 6
Determinants of Household Demand The price of the product in
question. The income available to the household. The households
amount of accumulated wealth. The prices of related products
available to the household. The households tastes and preferences.
The households expectations about future income, wealth, and
prices. A households decision about the quantity of a particular
output to demand depends on:
Slide 7
Quantity Demanded Quantity demanded is the amount (number of
units) of a product that a household would buy in a given time
period if it could buy all it wanted at the current market
price.
Slide 8
Demand in Output Markets A demand schedule is a table showing
how much of a given product a household would be willing to buy at
different prices. Demand curves are usually derived from demand
schedules.
Slide 9
The Demand Curve The demand curve is a graph illustrating how
much of a given product a household would be willing to buy at
different prices.
Slide 10
The Law of Demand The law of demand states that there is a
negative, or inverse, relationship between price and the quantity
of a good demanded and its price. This means that demand curves
slope downward.This means that demand curves slope downward.
Slide 11
Other Properties of Demand Curves Demand curves intersect the
quantity (X)-axis, as a result of time limitations and diminishing
marginal utility. Demand curves intersect the (Y)-axis, as a result
of limited incomes and wealth.
Slide 12
Income and Wealth Income is the sum of all households wages,
salaries, profits, interest payments, rents, and other forms of
earnings in a given period of time. It is a flow measure. Wealth,
or net worth, is the total value of what a household owns minus
what it owes. It is a stock measure.
Slide 13
Related Goods and Services Normal Goods are goods for which
demand goes up when income is higher and for which demand goes down
when income is lower. Inferior Goods are goods for which demand
falls when income rises.
Slide 14
Related Goods and Services Substitutes are goods that can serve
as replacements for one another; when the price of one increases,
demand for the other goes up. Perfect substitutes are identical
products. Complements are goods that go together; a decrease in the
price of one results in an increase in demand for the other, and
vice versa.
Slide 15
Shift of Demand Versus Movement Along a Demand Curve A change
in demand is not the same as a change in quantity demanded.A change
in demand is not the same as a change in quantity demanded. In this
example, a higher price causes lower quantity demanded.In this
example, a higher price causes lower quantity demanded. Changes in
determinants of demand, other than price, cause a change in demand,
or a shift of the entire demand curve, from D A to D B.Changes in
determinants of demand, other than price, cause a change in demand,
or a shift of the entire demand curve, from D A to D B.
Slide 16
When demand shifts to the right, demand increases. This causes
quantity demanded to be greater than it was prior to the shift, for
each and every price level. A Change in Demand Versus a Change in
Quantity Demanded
Slide 17
To summarize : Change in price of a good or service leads to
Change in quantity demanded (Movement along the curve). Change in
income, preferences, or prices of other goods or services leads to
Change in demand (Shift of curve).
Slide 18
The Impact of a Change in Income Higher income decreases the
demand for an inferior good Higher income increases the demand for
a normal good
Slide 19
The Impact of a Change in the Price of Related Goods Price of
hamburger rises Demand for complement good (ketchup) shifts left
Demand for substitute good (chicken) shifts right Quantity of
hamburger demanded falls
Slide 20
From Household to Market Demand Demand for a good or service
can be defined for an individual household, or for a group of
households that make up a market. Market demand is the sum of all
the quantities of a good or service demanded per period by all the
households buying in the market for that good or service.
Slide 21
From Household Demand to Market Demand Assuming there are only
two households in the market, market demand is derived as
follows:
Slide 22
Mobile phone ( electronic product)
Slide 23
Demand curve of mobile phone(electronic product)
Slide 24
ELASTICITY OF DEMAND It is three types *price elasticity
*income elasticity *cross elasticity
Slide 25
Definition Of Price Elasticity Of Demand The change in the
quantity demanded of a product due to a change in its price is
known as Price elasticity of demand. Thus, the sensitiveness or
responsiveness of demand to change in price is as called elasticity
of demand
Slide 26
Price elasticity curve
Slide 27
Kinds Of Price Elasticity Of Demand 1)Perfectly elastic demand
2)Relatively elastic demand 3)Elasticity of demand equal to utility
4)Relatively inelastic demand 5)Perfectly inelastic demand Let Us
See Some Views On Them
Slide 28
Perfectly elastic demand PRICEPRICE y 0x 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.
Slide 29
Relatively elastic demand Relatively elastic demand curve
PRICEPRICE demand 0x y D D When the proportionate change in demand
is more than the proportionate changes in price, it is known as
relatively elastic demand.
Slide 30
Elasticity of demand equal to utility Elasticity of demand
equal to utility curve y x 0 demand PRICEPRICE D D When the
proportionate change in demand is equal to proportionate changes in
price, it is known as unitary elastic demand
Slide 31
Relatively inelastic demand Relatively inelastic demand curve X
O Y demand D D PRICEPRICE When the proportionate change in demand
is less than the proportionate changes in price, it is known as
relatively inelastic demand
Slide 32
Perfectly inelastic demand demand D D Perfectly inelastic
demand curve 0 Y X PRICEPRICE When a change in price, howsover
large, change no changes in quality demand, it is known as
perfectly inelastic demand
Slide 33
ALL KINDS OF DEMAND CAN BE SHOWN IN ONE DIAGRAM AS FOLLOW D D1
D2 D3 D4 D5 Y X0 DEMAND PRICEPRICE WHERE D1) Perfectly elastic
demand D2)Relatively elastic demand D3)Elasticity of demand equal
to utility D4)Relatively inelastic demand D5)Perfectly inelastic
demand
Slide 34
Price elasticity survey on mobile phone 11 year
Slide 35
Practical Importance of the Concept of Price Elasticity Of
Demand The concept is helpful in taking Business Decisions
Importance of the concept in formatting Tax Policy of the
government For determining the rewards of the Factors of Production
To determine the Terms of Trades Between the Two Countries
Slide 36
(2) Income Elasticity Of Demand
Slide 37
Types Of Income Elasticity Of Demand Positive Income elasticity
of demand Negative Income elasticity of demand Zero Income
elasticity of demand
Slide 38
Positive Income elasticity of demand Y P A D D BS OXQuantity
Demanded Income
Slide 39
Positive Income elasticity of demand Income Elasticity Equal to
Unity or One Income Elasticity Greater Than Unity Or One Income
Elasticity Less Than Unity or One
Slide 40
Negative Income elasticity of demand Price P B A S Total
Revenue Quantity Demanded (000s)
Slide 41
Zero Income elasticity of demand Y X O D D Quantity Demanded I
n c o m e
Slide 42
Case study of income elasticity of demand of electronic
product(mobile phone)
Slide 43
All Income Graphs Representation O Y Income A B C D E F X
Quantity Demanded
Slide 44
Measurement Of Income Elasticity Of Demand Income Elasticity Of
Demand = Proportionate change in Demand Proportionate change in
Income i.e. Income Elasticity Of Demand = q QY y +
Slide 45
Here, 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
Slide 46
Thus Income Elasticity of Demand = = (5/20) + (500/2500) = 1.5
therefore here the IED is 1.5 which is more than one. q Q Y y
+
Slide 47
Factors Affecting Income Of Demand Income Itself Only. Price Of
the Commodity
Slide 48
Types of Elasticity Of Substitution on Graph C h a n g e i n Q
U A N T I T I Y r a t i o o f g o o d x & y Change in PRICE
ratio of good x & y O X Y E4 E1 E2 E3 E5
Slide 49
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.
Slide 50
Cross Elasticity of Demand Cross 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.
Slide 51
Cross elasticity of demand of mobile phone survey in mobile
industry
Slide 52
Types of Cross Elasticity of Demand of electronic product Cross
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
Slide 53
Measurement Cross Elasticity of Demand Proportionate change in
Demand for product X Proportionate change in Price of product Y
i.e. qx QxPy p y + Cross Elasticity of Demand = Cross Elasticity of
Demand =
Slide 54
Cross Elasticity of Demand For Substitutes P r i c e o f Y
Demand for Y O Y X D D
Slide 55
Cross Elasticity of Demand For Complementary Products P r i c e
o f Y O Y X D D Demand for Y
Slide 56
Cross Elasticity of Demand For Neutral Products P r i c e o f Y
O Y X D Demand for Y
Slide 57
Importance of Cross Elasticity Of Demand The concept is of very
great importance in changing the price of the products having
substitutes and complementary goods. In demand forecasting Helps 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
Slide 58
Advertising Elasticity of Demand Advertising 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.
Slide 59
Advertising by HTML playback of mobile phone
Slide 60
Importance of the Advertising Elasticity Of Demand in Business
Decisions It is useful in competitive industries. Though
advertisement shifts the demand curve to right path but it also
increases the fixed cost of the firm.
Slide 61
Other electronic product( laptops) elasticity of demand
Slide 62
Supply in Output Markets A supply schedule is a table showing
how much of a product firms will supply at different prices.A
supply schedule is a table showing how much of a product firms will
supply at different prices. Quantity supplied represents the number
of units of a product that a firm would be willing and able to
offer for sale at a particular price during a given time
period.Quantity supplied represents the number of units of a
product that a firm would be willing and able to offer for sale at
a particular price during a given time period.
Slide 63
The Supply Curve and the Supply Schedule A supply curve is a
graph illustrating how much of a product a firm will supply at
different prices.A supply curve is a graph illustrating how much of
a product a firm will supply at different prices.
Slide 64
The Law of Supply The law of supply states that there is a
positive relationship between price and quantity of a good
supplied. This means that supply curves typically have a positive
slope.
Slide 65
Determinants of Supply The price of the good or service. The
cost of producing the good, which in turn depends on: The price of
required inputs (labor, capital, and land), The technologies that
can be used to produce the product, The prices of related
products.
Slide 66
A Change in Supply Versus a Change in Quantity Supplied A
change in supply is not the same as a change in quantity supplied.A
change in supply is not the same as a change in quantity supplied.
In this example, a higher price causes higher quantity supplied,
and a move along the demand curve.In this example, a higher price
causes higher quantity supplied, and a move along the demand curve.
In this example, changes in determinants of supply, other than
price, cause an increase in supply, or a shift of the entire supply
curve, from S A to S B.In this example, changes in determinants of
supply, other than price, cause an increase in supply, or a shift
of the entire supply curve, from S A to S B.
Slide 67
When supply shifts to the right, supply increases. This causes
quantity supplied to be greater than it was prior to the shift, for
each and every price level. A Change in Supply Versus a Change in
Quantity Supplied
Slide 68
To summarize : Change in price of a good or service leads to
Change in quantity supplied (Movement along the curve). Change in
costs, input prices, technology, or prices of related goods and
services leads to Change in supply (Shift of curve).
Slide 69
From Individual Supply to Market Supply The supply of a good or
service can be defined for an individual firm, or for a group of
firms that make up a market or an industry. Market supply is the
sum of all the quantities of a good or service supplied per period
by all the firms selling in the market for that good or
service.
Slide 70
Market Supply As with market demand, market supply is the
horizontal summation of individual firms supply curves.
Slide 71
Market Equilibrium The operation of the market depends on the
interaction between buyers and sellers. An equilibrium is the
condition that exists when quantity supplied and quantity demanded
are equal. At equilibrium, there is no tendency for the market
price to change.
Slide 72
Market Equilibrium Only in equilibrium is quantity supplied
equal to quantity demanded. At any price level other than P 0, the
wishes of buyers and sellers do not coincide.At any price level
other than P 0, the wishes of buyers and sellers do not
coincide.
Slide 73
Market Disequilibria Excess demand, or shortage, is the
condition that exists when quantity demanded exceeds quantity
supplied at the current price. When quantity demanded exceeds
quantity supplied, price tends to rise until equilibrium is
restored.When quantity demanded exceeds quantity supplied, price
tends to rise until equilibrium is restored.
Slide 74
Market Disequilibria Excess supply, or surplus, is the
condition that exists when quantity supplied exceeds quantity
demanded at the current price. When quantity supplied exceeds
quantity demanded, price tends to fall until equilibrium is
restored.When quantity supplied exceeds quantity demanded, price
tends to fall until equilibrium is restored.
Slide 75
Increases in Demand and Supply Higher demand leads to higher
equilibrium price and higher equilibrium quantity. Higher supply
leads to lower equilibrium price and higher equilibrium
quantity.
Slide 76
Decreases in Demand and Supply Lower demand leads to lower
price and lower quantity exchanged. Lower supply leads to higher
price and lower quantity exchanged.
Slide 77
Relative Magnitudes of Change The relative magnitudes of change
in supply and demand determine the outcome of market
equilibrium.The relative magnitudes of change in supply and demand
determine the outcome of market equilibrium.
Slide 78
Relative Magnitudes of Change When supply and demand both
increase, quantity will increase, but price may go up or down.When
supply and demand both increase, quantity will increase, but price
may go up or down.