LAW OF DEMAND
COMMODITY MARKET GOODS  PRODUCED FOR SALE IN THE MARKET ALL AREAS IN WHICH BUYERS AND SELLERS ARE IN CONTACT WITH EACH OTH...
FACTORS AFFECTING DEMAND <ul><li>PRICE OF THE COMMODITY </li></ul><ul><li>THE MONEY INCOME OF THE INDIVIDUAL HOUSEHOLD </l...
GENERAL DEMAND FUNCTION   QD  =  f(P) SPECIFIC DEMAND FUNCTION  Dn  =  f(Pn) Y  =  Yº    T  =  Tº    Pºı……Pn- ıº º  means ...
TYPES OF DEMAND PRICE DEMAND INCOME DEMAND CROSS DEMAND DEMAND CHANGES WITH THE CHANGE IN PRICES PROVIDED INCOME, TASTES  ...
MANAGERIAL USES  DEMAND ANALYSIS FORECASTING DEMAND MANIPULATING DEMAND Serves Two Major Purposes Ancillary Functions 1. A...
DEFINITION ELASTICITY OF DEMNAND IS A CONCEPT WHICH MEASURES RELATIVE CHANGE IN DEMAND BECAUSE OF A CHANGE IN PRICE PERCEN...
ELASTICITY OF DEMAND Price Per Unit Of  X Quantity Demanded Of  X A B P P ı M  M ı N  N ı O Market A  : Expansion in the d...
MORE ELASTIC When the demand is proportional or more to the change in price LESS ELASTIC When there is a negligible respon...
FORMULA FOR MEASURING ELASTICITY OF DEMAND   Price Elasticity Of Demand   (E ) Proportionate Change In  Quantity Demanded ...
ORIGINAL PRICE  (P)   =  RS. 3 ORIGINAL DEMAND  (Q)   =  1 CHANGE IN PRICE  ( ΔP)   =  RS. 2 CHANGE IN DEMAND  ( ΔQ)   =  ...
TYPES OF DEMAND PRICE DEMAND INCOME DEMAND CROSS DEMAND DEMAND CHANGES WITH THE CHANGE IN PRICES PROVIDED INCOME, TASTES  ...
TYPES OF ELASTICITY THE EFFECT OF CHANGE IN PRICE ON QUANTITY DEMANDED IS CALLED THE PRICE ELASTICITY ODF DEMAND   PRICE E...
DETERMINANTS OF PRICE ELASTICITY OF DEMAND Availability of substitutes Nature of commodity Weightage  in total consumption...
INCOME ELASTICITY OF DEMAND MEANS THE RATIO OF THE PERCENTAGE CHANGE IN QUANTITY DEMANDED TO THE PERCENTAGE CHANGE IN INCO...
USE OF INCOME ELASTICITY OF DEMAND Production Planning & Management Estimating Future Demand Helps In Avoiding Over-Produc...
CROSS ELASTICITY IS THE MEASURE OF RESPONSIVENESS OF DEMAND FOR A COMMODITY TO THE CHANGES IN THE PRICES OF SUBSTITUTES AN...
USES OF CROSS ELASTICITY OF DEMAND CROSS ELASTICITY OF TWO GOODS ARE POSITIVE OR GREATER THAN ONE CROSS ELASTICITY  OF TWO...
ADVERTISING ELASTICITY OR PROMOTIONAL ELASTICITY OF DEMAND × = Δ S Δ A A S S   =   Sales  Δ S  =   Increase In Sales  A  =...
PRICE OF X   =  RS. 1.25 NUMBER OF UNITS BOUGHT   =  4 OUTLAY  =  RS.   1.25  X  4     =   RS.  5.00 NOW PRICE OF X  =   R...
MEASUREMENT OF ELASTICITY <ul><li>TOTAL OUTLAY METHOD </li></ul><ul><li>PROPORTIONAL METHOD </li></ul><ul><li>GEOMETRIC ME...
TOTAL OUTLAY METHOD
PROPORTIONAL METHOD Under this method, the percentage change in price is compared to the percentage change in the quantity...
PROBLEM A Company which generally sells a product for Rs. 200, decides to cut price to Rs. 160. As a result, the demand go...
SOLUTION Original Price  =  Rs. 200 New Price  =  Rs. 160 Change in Price  =  Rs.  40  Original Sales (Demand)  =  40,000 ...
GEOMETRIC METHOD The elasticity of demand can also be worked out geometrically The elasticity of demand has been considere...
. . . E 1 E 2 E 3 D D ' Y 0 x
D E 2 DE 2 = 1 Hence the elasticity at E 2  is Unity The elasticity between D E 2  and DE 2  is equal Therefore D E 2  =  ...
At Point E 3  the elasticity is D E 3 DE 3 In this case the distance between D and E3 is greater than the distance between...
. . . E 1 E 2 E 3 D D ' Y O X The elasticity between D E 2  and DE 2  is equal Therefore D E 2  =  DE 2 D E 2 DE 2 or = 1 ...
. . . E 1 E 2 E 3 D D ' Y O X Similarly the elasticity at point E 1  is written as : D E 1 DE 1 And the distance between D...
. . . E 1 E 2 E 3 D D ' Y O X In this case the distance between D and E3 is greater than the distance between D and E 3 . ...
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Law Of Demand

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Law Of Demand

  1. 1. LAW OF DEMAND
  2. 2. COMMODITY MARKET GOODS PRODUCED FOR SALE IN THE MARKET ALL AREAS IN WHICH BUYERS AND SELLERS ARE IN CONTACT WITH EACH OTHER FOR THE PURCHASE AND SALE OF THE COMMODITY
  3. 3. FACTORS AFFECTING DEMAND <ul><li>PRICE OF THE COMMODITY </li></ul><ul><li>THE MONEY INCOME OF THE INDIVIDUAL HOUSEHOLD </li></ul><ul><li>THE TASTES AND PREFERENCES OF THE INDIVIDUAL HOUSEHOLD </li></ul><ul><li>THE PRICES OF OTHER COMMODITIES </li></ul>D n = f(P n , P ı .....‚ P n - ı ‚Y‚T) D n is the demand for commodity n . P n is the price of commodity n P ı .....P n - ı is the prices of all other commodities ( other than P n) Y is the income of the household T stands for tastes and preferences of the household
  4. 4. GENERAL DEMAND FUNCTION QD = f(P) SPECIFIC DEMAND FUNCTION Dn = f(Pn) Y = Yº T = Tº Pºı……Pn- ıº º means there is no change in these variables ; their value is being held constant DEMAND FUNCTION
  5. 5. TYPES OF DEMAND PRICE DEMAND INCOME DEMAND CROSS DEMAND DEMAND CHANGES WITH THE CHANGE IN PRICES PROVIDED INCOME, TASTES & PREFERENCES AND PRICES OF OTHER GOODS REMAIN CONSTANT WHEN THE CONSUMER’S INCOME GOES UP, THE DEMAND FOR SUPERIOR QUALITY GOODS GOES UP. WHEN IT FALLS THE DEMAND FOR INFERIOR GOODS TEND TO RISE CHANGE IN THE QUANTITY DEMANDED FOR ONE PRODUCT AS A RESULT OF CHANGE IN THE PRICE OF ANOTHER COMMODITY
  6. 6. MANAGERIAL USES DEMAND ANALYSIS FORECASTING DEMAND MANIPULATING DEMAND Serves Two Major Purposes Ancillary Functions 1. Appraisal of performance of a salesman 2. Fixing sales quota 3. Company’s competitive position DEMAND ELASTICITY
  7. 7. DEFINITION ELASTICITY OF DEMNAND IS A CONCEPT WHICH MEASURES RELATIVE CHANGE IN DEMAND BECAUSE OF A CHANGE IN PRICE PERCENTAGE CHANGE IN QUANTITY DEMANDED DIVIDED BY THE PERCENTAGE CHANGE IN PRICE
  8. 8. ELASTICITY OF DEMAND Price Per Unit Of X Quantity Demanded Of X A B P P ı M M ı N N ı O Market A : Expansion in the demand is low Market B : Expansion in the demand is high
  9. 9. MORE ELASTIC When the demand is proportional or more to the change in price LESS ELASTIC When there is a negligible response for the quantity demanded despite a considerable change in price MORE ELASTIC LESS ELASTIC When the elasticity is less than one or less than unity When the elasticity is more than one or more than unity
  10. 10. FORMULA FOR MEASURING ELASTICITY OF DEMAND Price Elasticity Of Demand (E ) Proportionate Change In Quantity Demanded Proportionate Change In Price = = Change In Quantity Demanded ÷ Change In Price Initial Price Initial Quantity Demanded = P Q × ΔQ ΔP E = ΔQ Q ÷ ΔP P = ΔQ × Q ΔP P Q = Original Quantity Demanded P = Original Price ΔQ =Change In Quantity ΔP = Change In Price
  11. 11. ORIGINAL PRICE (P) = RS. 3 ORIGINAL DEMAND (Q) = 1 CHANGE IN PRICE ( ΔP) = RS. 2 CHANGE IN DEMAND ( ΔQ) = 3 ELASTICITY = ?
  12. 12. TYPES OF DEMAND PRICE DEMAND INCOME DEMAND CROSS DEMAND DEMAND CHANGES WITH THE CHANGE IN PRICES PROVIDED INCOME, TASTES & PREFERENCES AND PRICES OF OTHER GOODS REMAIN CONSTANT WHEN THE CONSUMER’S INCOME GOES UP, THE DEMAND FOR SUPERIOR QUALITY GOODS GOES UP. WHEN IT FALLS THE DEMAND FOR INFERIOR GOODS TEND TO RISE CHANGE IN THE QUANTITY DEMANDED FOR ONE PRODUCT AS A RESULT OF CHANGE IN THE PRICE OF ANOTHER COMMODITY
  13. 13. TYPES OF ELASTICITY THE EFFECT OF CHANGE IN PRICE ON QUANTITY DEMANDED IS CALLED THE PRICE ELASTICITY ODF DEMAND PRICE ELASTICITY % Change (Δ) In The Quantity Demanded % Change (Δ) In The Price E = % Change ΔQ = 4 % Change ΔP = 2 PRICE ELASTICITY (E p) = ?
  14. 14. DETERMINANTS OF PRICE ELASTICITY OF DEMAND Availability of substitutes Nature of commodity Weightage in total consumption Adaptability of consumption pattern Range of commodity use Proportion of market supplied
  15. 15. INCOME ELASTICITY OF DEMAND MEANS THE RATIO OF THE PERCENTAGE CHANGE IN QUANTITY DEMANDED TO THE PERCENTAGE CHANGE IN INCOME E y = Percentage Change In Quantity Demanded Percentage Change In Income E y = Y Q × ΔQ ΔY
  16. 16. USE OF INCOME ELASTICITY OF DEMAND Production Planning & Management Estimating Future Demand Helps In Avoiding Over-Production And Under-Production GROSS NATIONAL PRODUCT Income Of The Relevant class Income Of The Relevant Region Normal Goods/Inferior Goods
  17. 17. CROSS ELASTICITY IS THE MEASURE OF RESPONSIVENESS OF DEMAND FOR A COMMODITY TO THE CHANGES IN THE PRICES OF SUBSTITUTES AND COMPLEMENTARY GOODS E е = Proportionate Change in the Quantity Of X Proportionate Change in the Q Price Of Y E е = ΔQ x Q x ÷ ΔPQ x
  18. 18. USES OF CROSS ELASTICITY OF DEMAND CROSS ELASTICITY OF TWO GOODS ARE POSITIVE OR GREATER THAN ONE CROSS ELASTICITY OF TWO GOODS ARE NEGATIVE IS LESS THAN ONE Perfect Substitutes Complementary Inadvisable to increase the price rather a reduction in price will be proper Reducing the price may help in maintaining demand
  19. 19. ADVERTISING ELASTICITY OR PROMOTIONAL ELASTICITY OF DEMAND × = Δ S Δ A A S S = Sales Δ S = Increase In Sales A = Original Advertisement Cost Δ A = Additional Expenditure On Advertisement Δ S S ÷ Δ A A E A =
  20. 20. PRICE OF X = RS. 1.25 NUMBER OF UNITS BOUGHT = 4 OUTLAY = RS. 1.25 X 4 = RS. 5.00 NOW PRICE OF X = RS. 1.00 NUMBER OF UNITS BOUGHT = 5 TOTAL OUT LAY = RS. 1.00 X 5 = RS. 5.00
  21. 21. MEASUREMENT OF ELASTICITY <ul><li>TOTAL OUTLAY METHOD </li></ul><ul><li>PROPORTIONAL METHOD </li></ul><ul><li>GEOMETRIC METHOD </li></ul>
  22. 22. TOTAL OUTLAY METHOD
  23. 23. PROPORTIONAL METHOD Under this method, the percentage change in price is compared to the percentage change in the quantity demanded; in other words, the ratio is the change in quantity demanded to the change in price. The formula is written as follows: Price Elasticity Proportionate change in the quantity demanded Proportionate change in price = Alternatively = Change in demand Quantity demanded ÷ Change in price Price  Δ P Δ Q = Q P ÷
  24. 24. PROBLEM A Company which generally sells a product for Rs. 200, decides to cut price to Rs. 160. As a result, the demand goes up from 40,000 units to 60,000 units. Calculate the elasticity
  25. 25. SOLUTION Original Price = Rs. 200 New Price = Rs. 160 Change in Price = Rs. 40 Original Sales (Demand) = 40,000 Units New Sales (Demand) = 60,000 Units  = ?
  26. 26. GEOMETRIC METHOD The elasticity of demand can also be worked out geometrically The elasticity of demand has been considered as UNITY , as LESS than UNITY and as MORE than UNITY
  27. 27. . . . E 1 E 2 E 3 D D ' Y 0 x
  28. 28. D E 2 DE 2 = 1 Hence the elasticity at E 2 is Unity The elasticity between D E 2 and DE 2 is equal Therefore D E 2 = DE 2 or Similarly the elasticity at point E 1 is written as : D E 1 DE 1 And the distance between D and E 1 is less than the distance between D and E 1 In other words D E 1 < DE 1 D E 1 DE 1 =  is < 1 ( Elasticity at E 1 less than unity )
  29. 29. At Point E 3 the elasticity is D E 3 DE 3 In this case the distance between D and E3 is greater than the distance between D and E 3 . That is D E 3 is > DE 3 Hence D E 3 DE 3 =  = > 1 Elasticity is greater than Unity
  30. 30. . . . E 1 E 2 E 3 D D ' Y O X The elasticity between D E 2 and DE 2 is equal Therefore D E 2 = DE 2 D E 2 DE 2 or = 1 Hence the elasticity at E 2 is Unity UNITY
  31. 31. . . . E 1 E 2 E 3 D D ' Y O X Similarly the elasticity at point E 1 is written as : D E 1 DE 1 And the distance between D and E 1 is less than the distance between D and E 1 In other words D E 1 < DE 1 D E 1 DE 1 =  is < 1 ( Elasticity at E 1 less than unity ) LESS than UNITY
  32. 32. . . . E 1 E 2 E 3 D D ' Y O X In this case the distance between D and E3 is greater than the distance between D and E 3 . That is D E 3 is > DE 3 Hence D E 3 = DE 3  = > 1 Elasticity is greater than Unity MORE than UNITY
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