Demand 2003

Demand Analysis : 

230-202_F03 1 Demand Analysis Presented by- V.S.Patel

Learning objectives : 

Learning objectives Meaning of demand Determinants of demand Individual & Market demand Law of demand Shift in demand & change in demand Elasticity of demand 230-202_F03 2

Demand, Wants, and Needs : 

230-202_F03 3 Demand, Wants, and Needs Consumer demand is different from “wants” or “needs” Wants ignore the importance of ability to buy as expressed by a person’s budget Need focuses on the willingness and again ignores the ability to purchase Demand is a relation showing the quantities of goods consumers are both willing and able to buy at each possible price during a given time period.

Determinants of Demand : 

230-202_F03 4 Determinants of Demand Price Money income of consumers Prices of related goods Consumer expectations Number and composition of consumers Advertisement Consumer tastes, habits & fashion Macroeconomic conditions Credit conditions Whether conditions Festivals, customs & traditions Taxation policy

Individual Demand Schedule & Demand Curve for Pizza : 

230-202_F03 5 Individual Demand Schedule & Demand Curve for Pizza The price is for a 12 inch regular pizza and the time period is 1 week. The demand schedule lists possible prices, along with the quantity demanded at each price. The demand curve at the right shows each price / quantity combination listed in the demand schedule as a point on the demand curve.

Market demand Schedule The demand for potatoes (monthly) : 

Market demand Schedule The demand for potatoes (monthly)

Market demand for potatoes (monthly) : 

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 60 80 100 Market demand (tonnes 000s) 700 500 350 200 100 A B C D E Point A B C D E Demand Market demand for potatoes (monthly)

Law of Demand : 

230-202_F03 8 Law of Demand The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded! Ceteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.” Law of Demand Says that quantity demanded varies inversely with price, other things being constant

Movement along demand curve : 

Movement along demand curve A change in demand curve is the graphical representation of the effect of a change in price on the quantity demanded. Change in Quantity Demanded A change in price, other things constant, causes a movement along a demand curve  changing quantity demanded (because price is on the Y-axis) There can be contraction or expansion of quantity demanded. 230-202_F03 9

Changes in Quantity Demanded: Contraction : 

Changes in Quantity Demanded: Contraction 0 D1 Price of Cigarettes per Pack Number of Cigarettes Smoked per Day A tax that raises the price of cigarettes results in a contraction of the demand curve. A 20 2.00

Changes in Quantity Demanded: Expansion : 

Changes in Quantity Demanded: Expansion 0 D1 Price of Cigarettes per Pack Number of Cigarettes Smoked per Day A subsidy that decrease the price of cigarettes results in a expansion of demand curve. A 20 2.00 4.00 12

Slide 12: 

A shift in demand is the graphical representation of the effect of anything other than price on demand. Change in Demand If the change increases the willingness of consumers to acquire the good, the demand curve shifts right If the change decreases the willingness of consumers to acquire the good, the demand curve shifts left Shifts in Demand curve

Slide 13: 

Price P O Q0 Q1 Quantity An increase in demand

Slide 14: 

Price P O Q0 Q1 Quantity A decrease in demand

Concept of Elasticity . . . : 

Concept of Elasticity . . . When price rises, what happens to demand? Demand falls BUT! How much does demand fall? If price rises by 10% - what happens to demand? We know demand will fall By more than 10%? By less than 10%? By 10%? Elasticity measures the extent to which demand will change

CONCEPT OF ELASTICITY : 

CONCEPT OF ELASTICITY measure of sensitiveness of one variable to changes in some other variable expressed in terms of a percentage Example:- elasticity of a variable X with respect to variable Y ex,y = Percentage change in x x / x Percentage change in y y/ y X is dependent variable and Y is a independent variable

DEMAND ELASTICITY : 

DEMAND ELASTICITY It refers to elasticities of demand for a good with respect to the determinants of demand … allows us to analyze demand with greater precision. … is a measure of how much buyers respond to changes in market conditions Since there is more than one determinant of demand, it is assumed that all the ‘other’ determinants are constant

Different methods : 

Different methods Important elasticities are: Price elasticity of demand Income elasticity of demand Cross elasticity of demand Promotional (advertising) elasticity of demand

Price Elasticity of Demand : 

Price Elasticity of Demand Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. It is a measure of how much the quantity demanded of a good responds to a change in the price of that good.

Critical values for price elasticity : 

Critical values for price elasticity Demand is Perfectly price inelastic (zero) Relatively price inelastic (less than unity) Unitary price elastic (equals to unity) Relatively price elastic (more than unity) Perfectly price elastic (infinite)

Ranges of Elasticity : 

Ranges of Elasticity Inelastic Demand Percentage change in quantity demanded is less than percentage change in price. Price elasticity of demand is less than one. If answer is between 0 and -1: the relationship is inelastic Elastic Demand Percentage change in quantity demand is greater than percentage change in price. Price elasticity of demand is greater than one. If the answer is between -1 and infinity: the relationship is elastic

IN DETAIL : 

IN DETAIL Perfectly price inelastic (zero) When demand is invariant to all changes in prices Hardly any commodity Inexpensive and essential consumption item e.g.:- Salt Relatively price inelastic (less than unity) When changes in price leads to less than proportionate change in demand Goods and services which are essential

CONTI….. : 

CONTI….. Unitary price elastic (equals to Unity) When percentage change in demand and price are equal Relatively price elastic (more than unity) When percentage change in demand exceeds its price Luxury items have elastic demands Perfectly price elastic (infinite) Where demand is unlimited and unbound at a given price and an small increase in price the demand effects a lot. Purely competitive market

Perfectly Inelastic Demand Elasticity equals 0 : 

Perfectly Inelastic Demand Elasticity equals 0 Quantity Price 2. ...leaves the quantity demanded unchanged.

Relatively Inelastic Demand Elasticity is less than 1 : 

Relatively Inelastic Demand Elasticity is less than 1 Quantity Price

Unit Elastic Demand Elasticity equals 1 : 

Unit Elastic Demand Elasticity equals 1 Quantity Price

Relatively Elastic Demand Elasticity is greater than 1 : 

Relatively Elastic Demand Elasticity is greater than 1 Quantity Price

Perfectly Elastic Demand Elasticity equals infinity : 

Perfectly Elastic Demand Elasticity equals infinity Quantity Price

Determinants of Price Elasticity of Demand : 

Determinants of Price Elasticity of Demand Necessities versus Luxuries Availability of Close Substitutes Definition of the Market Time Horizon

Contd… : 

Contd… Demand tends to be more inelastic If the good is a necessity. If the time period is shorter. The smaller the number of close substitutes. The more broadly defined the market. Demand tends to be more elastic : if the good is a luxury. the longer the time period. the larger the number of close substitutes. the more narrowly defined the market.

Income Elasticity of Demand : 

Income Elasticity of Demand Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income. It is computed as the percentage change in the quantity demanded divided by the percentage change in income.

Computing Income Elasticity : 

Computing Income Elasticity

Income Elasticity : 

Income Elasticity Normal Goods Income Elasticity is positive. Inferior Goods Income Elasticity is negative. Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. Income elasticity > 1: superior goods Income elasticity > 0, and <1: normal goods Income elasticity < 0: inferior goods

Income elasticity : 

Income elasticity 230-202_F03 34

Cross Price Elasticity : 

Cross Price Elasticity The responsiveness of demand of one good to changes in the price of a related good – either a substitute or a complement Cross elasticity will be: Positive-Substitutes Negative-Complements. Zero-Unrelated goods

Promotional Elasticity : 

Promotional Elasticity Responsiveness of change in demand due to advertisement. Elasticity of advt. = % change in quantity demanded % change in advertisement Expd.

Q: 1 : 

Q: 1 Which of the following goods will have the most inelastic demand? a.   A Burger King hamburger b.    A can of generic brand juices c.     Prescription medication d.     Food in the campus dining hall e. All of the above

Q: 2 : 

Q: 2 By increase in demand, we mean a.  Movement upwards on demand curve b.  Movement downwards on demand curve c.  Movement upwards of demand curve d.   None of these e. All of these

Q: 3 : 

Q: 3 In the typical demand schedule, quantity demanded a.   Varies directly with price b.    Varies indirectly with price c.    Varies inversely with price d.    Is indirect with price

Q: 4 : 

Q: 4 Which of the following is not a determinant of price elasticity of demand?  a.  Substitute possibilities b.   Budget share c.   Time d. All of the above are determinants of price elasticity of demand. e.  None of the above are determinants of price elasticity of demand.

Q:5 : 

Q:5 Which of the following is true if income elasticity of demand is positive for goods X and Y? a.      They are substitutes. b.      They are complements. c.       They are normal goods. d.      They are inferior goods. e Their demands are elastic

Q: 6 : 

Q: 6 If flashlights and batteries are complements, which of the following is true?   a. Price elasticity of demand is 0. b. Income elasticity of demand is negative. c.   Income elasticity of demand is positive. d.   Cross-price elasticity of demand is negative. e. Cross-price elasticity of demand is positive.

Q: 7 : 

Q: 7 David buys less beer when he gets a raise. This means that his a.  Income elasticity of demand is perfectly elastic. b. Price elasticity of demand is perfectly elastic. c. Income elasticity of demand is negative. d.   Price elasticity of supply is negative.

Q: 8 : 

Q: 8 The demand for a commodity is elastic, if the amount spent on it is a.  Less when the price is low than when the price is high b. More when the price is low than when the price is high c. Same whether the price is high or low d. None of the above e. All of the above

Q: 9 : 

Q: 9 Demand elasticity for electricity is elastic because a.  It has number of close substitute b. it has alternative uses c. none of the above d. all of the above

Q: 10 : 

Q: 10 Along the elastic portion of the demand curve, the point price elasticity is a.  Infinity b. positive c. between -1 & zero d. between -1 & infinity

Q: 11 : 

Q: 11 Recently personal computer market experienced spurt of a price war, consequently prices of PC fell by 10% & quantity demanded for software increased by 20%, this implies that a.  PC cross price elasticity for software is 2 b. PC cross price elasticity for software is -2 c. software cross elasticity for PC is 2 d. software cross elasticity for PC is -2

Q: 12 : 

Q: 12 A downward sloping demand curve shifts to the right due to advertising campaign & becomes steeper. If the selling price remained unchanged then the price elasticity at new selling point, relative to initial selling point a.  Is the same b. is larger c. can not compare d. is smaller