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| Demand in Economics | IndianTechnoEra |
Demand and Quantity Demanded
What is demand?
Demand is a concept specifying the different quantities of an item that will be bought at different prices. Demand is central to a market economy.
Demand is the quantities that buyers are willing and able to buy at alternative prices during a given period of time, other things being equal.
"Demand means the willingness and capacity to pay".
Demand involves two variables:
1. Price
2. Quantity of a specific product at a given point in time.
What is prices?
Prices are the tools by which the market coordinates individual desires.
What are the elements of Demand?
Desire for a commodity
Money to fulfill that desire
Readiness to spend money
What is Quantity Demanded?
Quantity demanded is a particular amount the buyers are willing and able to buy at a given price during a given time, and other things being equal.
Other things equal, buyers are willing and able to buy and able to pay about at given prics at a given time.
Other things
What do you mean by Other Things Constant?
Other things constant places a limitation on the application of the law of demand.
All other factors that affect quantity demanded are assumed to remain constant, whether they actually remain constant or not.
These factors may include changing tastes, prices of other goods, income, even the weather.
Technology
Note: The other things can be limitation or determinations of demand in law of demand.
Determinant of Demand
What are the determinants of demand?
They are the following different things that conducted as a determinants of demand or other factors.
Price of Product
Income of Consumer
Price of Related Good
Tastes and Preferences
Advertising
Consumer’s expectation of future Income
Price Growth of Economy
Seasonal conditions
Population
Law of demand
There is an inverse relationship between price and quantity demanded.
Quantity demanded rises as price falls, other things constant.
Quantity demanded falls as prices rise, other things constant.
It states that other things remaining constant; quantity demanded of a commodity increases with a fall in price and diminishes when price increases.
If price b p and quantity of demanded is Qd then it will be represent mathematically like;
p (1/∞) Qd
Assumptions of Demand
- Tastes and preferences of the consumer remain constant.
- No change in the income of the consumer.
- Prices of related goods do not change.
- Consumers do not except any change in the price of the commodity in the near future
Representation of demand (Schedule & Curve)
1. Demand Schedule
- Individual demand schedule
- Market demand schedule
2. Demand Curve
- Individual demand curve
- Market demand curve
What is demand schedule?
Demand Schedule is the tabular representation of the Law of Demand.
A demand schedule is a table that shows the relationship between the price of a good and the quantity of it that consumers are willing and able to purchase at each price. It typically shows the maximum amount of a good that consumers are willing to purchase at different prices, and can be used to calculate the demand curve for a good.
What is the Demand Curve?
The demand curve is the graphic representation of the law of demand.
The demand curve slopes downward and to the right.
As the price goes up, the quantity demanded goes down.
Market Demand Curves
What is Market Demand Curves?
A market demand curve is the horizontal sum of all individual demand curves.
This is determined by adding the individual demand curves of all the demanders.
Sellers estimate total market demand for their product which becomes smooth and downward sloping curve.
Slope of Demand Curve
What are the Reasons for Downward Sloping Demand Curve?
1. Law of Diminishing Marginal Utility
2. Income Effect: Positive/ Negative
3. Substitution effect
4. Size of the consumer group
5. Different Uses
What are the Exceptions to the Law of Demand?
Analyzed by Sir Robert Giffen Causes are:
Articles of Distinction
Ignorance
Giffen goods : All giffen goods are inferiors goods, but all inferior goods are not giffen goods.
Negative income effect is always stronger than positive substitution effect.
Shift vs Movement
A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded.
A shift in demand is the graphical representation of the effect of anything other than price on demand.
Shifts in Demand VS Movements Along a Demand Curve
Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.
Graphically, it refers to the entire demand curve. Shifts in Demand Versus Movements Along a Demand Curve
Shift factors of demand
Shift factors of demand are factors that cause shifts in the demand curve:
- Society's income.
- The prices of other goods.
- Tastes.
- Expectations.
- Taxes on subsidies to consumers
Income : An increase in income will increase demand for normal goods. An increase in income will decrease demand for inferior goods.
Price of Other Goods: When the price of a substitute good falls, demand falls for the good whose price has not changed. When the price of a complement good falls, demand rises for the good whose price has not changed.
Tastes: A change in taste will change demand with no change in price.
Expectations: If you expect your income to rise, you may consume more now. If you expect prices to fall in the future, you may put off purchases today.
Taxes and Subsidies: Taxes levied on consumers increase the cost of goods to consumers, there by reducing demand. Subsidies have an opposite effect
Elasticity & Demand
What is elasticity in economics?
Elasticity in economics is a measure of how much the quantity of a good or service responds to a change in price.
It is used to measure the responsiveness of customers to changes in prices and other economic factors. Elasticity can be used to determine the effect of changes in price on demand, revenue, and profit.
Elasticity of Demand
Law of demand indicates only direction of change in quantity demanded in response to change in price but ELASTICITY OF DEMAND states with how much or to what extent the quantity demanded will change in response to change in any determinants.
Definition by different authors:
By Professor Camfrog: The rate at which quantity bought change as the price change by.
By Marshall: Percentage change in quantity of demanded divided by percentage change in price.
Buy Building: Price in associate of demand measures the responsiveness of the quantity demanded to the change in price.
By Doolee: The price elasticity of demand measures the responsiveness of the quantity demanded to the change in its price.
Buy Antol Murad: Elasticity of demand is the ratio of relative change in quantity to relative change in price.
Elasticity of Demand measures the extent to which quantity demanded of a commodity increases or decreases in response to increase or decrease in any of its quantitative determinants.
Types of elasticity of demand
According to the source of the change in the demand there are the following types of elasticity of demand;
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Elasticity of Demand
What is Price Elasticity of Demand?
Price elasticity of demand is a measure of how sensitive the quantity demanded of a good is to changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
A good with a price elasticity of demand greater than one is considered elastic, meaning that a price change will cause a large change in the quantity demanded. A good with a price elasticity of demand less than one is considered inelastic, meaning that a price change will cause a small change in the quantity demanded.
What is Income Elasticity of Demand?
Income elasticity of demand is a measure of the responsiveness of demand for a good or service to a change in a consumer's income. It is calculated by dividing the percentage change in quantity demanded of a good or service by the percentage change in income. It is used to gauge the sensitivity of the demand for a good or service to changes in a consumer's income.
A good or service with a high income elasticity of demand tends to be more sensitive to changes in income, whereas a good or service with a low income elasticity of demand tends to be less sensitive to changes in income.
What is Cross Elasticity of Demand?
Cross elasticity of demand is a measure of the responsiveness in the quantity of a good or service demanded in relation to the change in the price of a related good or service. It measures the effect of a change in the price of one good or service (the independent variable) on the demand for another good or service (the dependent variable).
Cross elasticity of demand can be either positive or negative, depending on the relationship between the two goods or services.
Degrees of Price Elasticity of Demand
1. Perfectly Elastic Demand : It is a situation where a little change in price will cause an infinite change in Demand.
2.Perfectly Inelastic Demand : It is a situation in which a change in price produces no change in the quantity demanded.
Example: Petrol Salt, Tap water, Diamonds, Rail tickets, Cigarettes, Apple iPhones, iPads.
3.Unitary Elastic Demand : It is a situation when percentage change in price is same as change in quantity demanded.
4. Relatively Elastic Demand : It is a situation when percentage change in quantity demanded is greater then percentage change in price.
Example: Luxury goods, like TVs and designer brands,
5. Relatively Inelastic Demand : It is a situation where percentage change in quantity demanded is less than price.
Value of elasticity coefficients and their description
Measurement of Price Elasticity of Demand
There are the main methods
- Total Expenditure method/Total outlay method or total revenue method
- Percentage method or proportionate method
- Geometric method or point method Arc elasticity of demand
Bibliography / references
- Managerial Economics, GS Gupta, Tata-McGraw Hill, 2007
- Principles of Economics, DN Dwivedi, Prentice Hall India, 2004
- Economics, R L Varshney and KL Maheshwari, Sultan Chand & Sons, 2005
- Modern Economic Theory, KK Dewett, S. Chand & Company Ltd, 2005
- Managerial Economics, Dr. MS Subrahmanian, Ramesh Publications, 1995
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Key: Theory of Demand, Aim, Meaning of Demand, Meaning of Quantity Demanded, What do you mean by other things constant, Meaning of Demand and quantity demanded, Determinants of demand, Law of Demand, Shift and movement in demand, Demand: Concept and determinants of demand; Law of demand, Elasticity of demand: its types, measurement of price elasticity of demand, Factors determining Price, the elasticity of demand.