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Understanding Demand Analysis: Law, Determinants, and Elasticity

This article provides an overview of demand analysis, including the concept of demand, the law of demand, determinants of demand, and elasticity of demand. It also covers various types of price elasticity and methods used to measure elasticity.

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Understanding Demand Analysis: Law, Determinants, and Elasticity

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  1. UNIT - 2 DEMAND ANALYSIS

  2. DEMAND Demand refers to the given quantity of a commodity or service that are purchased by the consumer in the market at a particular price and at a particular time. DEMAND = DESIRE + WILLINGNESS + ABILITY TO PAY

  3. LAW OF DEMAND The law of demand states that as the price of a product is increases, its demand will be decreases & vice-versa, other things remaining constant. D = f (P) FEATURES • Inverse relationship. • Price is independent & demand is dependent variable. • It’s a qualitative statement.

  4. DEMAND CURVE D D’ P1 p2 PRICE Q1 Q2 QUANTITY DEMANDED

  5. DEMAND SCHEDULE INDIVIDUAL DEMAND SCHEDULE PRICE (in Rs.) QUANTITY DEMANDED IN UNITS 5 200 4 300 3 400 2 500 1 600

  6. MARKET DEMAND SCHEDULE PRICE (Rs.) TOTAL MARKET DEMAND C A B 5 100 200 300 600 4 200 300 400 900 3 300 400 500 1200 2 400 500 600 1500 1 500 600 700 1800

  7. EXCEPTIONS TO THE LAW OF DEMAND • Giffen’s Paradox. • Veblen’s effect. • Fear of shortage. • Fear of future rise in price. • Speculation • Conspicuous necessaries

  8. Emergencies • Necessaries

  9. DETERMINANTS OF LAW OF DEMAND • Price of commodity & prices of substitutes. • Living standards of the people. • Taste, preferences, customs, habits, fashion & style. • Quality of product. • Profit margin kept by sellers. • Climatic conditions.

  10. Government policy, taxation, restrictions. • Level of savings & expenditure pattern. • Improvement of educational standards.

  11. DEMAND FUNCTION Dx= f (Ps, Pc, Ep, Y, Ey, T, W, A, U……etc). Where, Dx = demand for commodity X Pc = prices of complements Ps = prices of substitutes Y= income of the consumer Ep = expected future price Ey = expected income in future W = wealth of consumer U = all other determinants

  12. SHIFT IN DEMAND CURVE Y D2 D D1 Forward shift PRICE Backward shift D2 D D1 X QUANTITY DEMANDED

  13. ELASTICITY OF DEMAND Elasticity of demand is defind as the responsiveness or sensitiveness of demand to a given change in the price of a commodity. PRICE ELASTICITY OF DEMAND percentage change in quantity demanded Ep = percentage in price

  14. TYPES OF PRICE ELASTICITY • Perfectly elastic demand (Ep = ∞). • Perfectly inelastic demand (Ep = 0). • Relative elastic demand (Ep > 1). • Relatively inelastic demand (Ep < 1). • Unitary elastic demand (Ep = 1).

  15. MEASUREMENT OF PRICE ELASTICITY TOTAL EXPENDITURE METHOD In this method, the price elasticity is measured by comparing the total expenditure of the consumers before and after variation in price. Total expenditure = price per unit * total quantity purchased

  16. POINT METHOD Point method measures price elasticity of demand at different points on a demand curve. PED = percentage change in demand / percentage change in price

  17. ARC METHOD This method is suggested to measure large changes in price and demand. When elasticity is measured over an interval of a demand curve, that is called interval or arc elasticity. It’s the average elasticity. Arc elasticity = Q2-Q1/Q2+Q1 * P2+P1/P2-P1 Where, P1= original price Q1= original quantity P2= new price Q2= new quantity

  18. INCOME ELASTICITY OF DEMAND It may be defined as the ratio or proportionate change in the quantity demanded of a commodity to a given proportionate change in the income. Ey = percentage change in demand/percentage change in income

  19. CROSS ELASTICITY OF DEMAND It may be defined as the proportionate change in the quantity demanded of a particular commodity in response to a change in the price of another related commodity. percentage change in quantity demanded of commodity X Ec= percentage change in the price of Y

  20. ADVERTISING OR PROMOTIONAL ELASTICITY OF DEMAND It refers to the responsiveness of demand or sales to change in advertising or other promotional expenses. percentage change in demand or sale Ea = percentage change in advertisement expenditure

  21. SUBSTITUTION ELASTICITY OF DEMAND It may be defined as the proportionate change in the demand ratios of two substitute goods X & Y to the proportionate change in the price ratio of two goods X & Y. percentage change in the demand ratio of 2 goods X & Y Es = percentage change in the price ratio of 2 goods X & Y

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