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THEORY OF DEMAND
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THEORY OF DEMAND

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  • The demand of a commodity (Dx) is a function of the price of the good x with other factors such as the price of related goods (Pr), the income (Y), the population (P), wealth (W) and so on being constant. In other words, Dx = f(Px; W_; Y_; T_; Pr_; etc.) where '_' denotes 'constant'.
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  • Rishabh
  • Shabaz
  • anupam
  • mintu
  • mintu
  • Mintu
  • Mintu
  • BABA
  • Rishabh
  • Rishabh
  • rishabh
  • shahbaz
  • baba
  • baba
  • shahbaz
  • deepak
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  • Transcript

    • 1. THEORY OF “DEMAND”
    • 2. INTRODUCTION • How much to produce and what price to charge? • Factors determining demand for a product. • Explores the relationship between price and demand for a product. • Examines likely impact of the potential factors that influence its demand.
    • 3. WHAT IS DEMAND? The quantity of a product consumers are willing and able to buy at different prices in a specified time period. Types of Demand -Direct and derived demands -Individual and market demand -Recurring and replacement -Complementary and competing -New and replacement demands
    • 4. DETERMINANTS OF DEMAND • • • • • • • • • Price of Product Income of Consumer Price of Related Good Tastes and Preferences Advertising Consumer’s expectation of future Income and Price Growth of Economy Seasonal conditions Population
    • 5. DEMAND SCHEDULE • It shows the price and output relationship. • Tabular representation of price and demand.
    • 6. DEMAND CURVE • The geometrical representation of demand schedule is called the demand curve.
    • 7. LAW OF DEMAND • As the price of a good rises, quantity demanded of that good falls. • As the price of a good falls, quantity demanded of that good rises. • Ceteris paribus.
    • 8. DEMAND FUNCTION • When we express the relationship between demand and its determinant mathematically, the relationship is known as demand function. • The demand for product X can be written in functional form as- Dx= f (Px, Y, Po, T, A, Ef, N )
    • 9. EXCEPTIONS TO THE LAW OF DEMAND • • • • • • Inferior Goods Snob Appeal Demonstration Effect Future Expectation of Prices Insignificant proportion of income spent Goods with no Substitutes
    • 10. CHANGE IN DEMAND VS. CHANGE IN QUANTITY DEMANDED • A shift of the entire demand curve to a new position is called change in demand. • Changes in non-price determinants of demand.
    • 11. QUANTITY DEMANDED • Fluctuations in price, another determinant of demand, cause movement along the demand curve.
    • 12. Why the demand curve slope downwards? • • • • • Law of diminishing marginal utility. Income effect. Substitution effect. New consumers. Multiple use of commodity.
    • 13. ELASTICITY OF DEMAND • Elasticity of demand is defined as the responsiveness of the quantity of a good to changes in one of the variables on which demand depends Price of the commodity  Income of the Consumer  Various other factor DEFINATION-’’The elasticity of demand measures the response of the demand for the commodity to change in price”.
    • 14. PRICE ELASTICITY OF DEMAND • The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Percentage change in quantity demanded Price elasticity of demand = Percentage change in price
    • 15. PRICE ELASTICITY OF DEMAND Point Definition Arc Definition EP EP Q/Q P/P Q P P Q Q2 Q1 P2 P 1 P2 P Q2 Q1 1
    • 16. Perfectly Inelastic Demand: Elasticity Equals 0 city of Demand Price Demand $5 4 1. An increase in price . . . 0 Quantity 100 2. . . . leaves the quantity demanded unchanged. Copyright©2003 Southwestern/Thomson Learning
    • 17. Inelastic Demand: Elasticity Is Less Than 1 Price $5 4 1. A 22% increase in price . . . Demand 0 90 100 Quantity 2. . . . leads to an 11% decrease in quantity demanded.
    • 18. Unit Elastic Demand: Elasticity Equals 1 Price $5 4 Demand 1. A 22% increase in price . . . 0 80 100 Quantity 2. . . . leads to a 22% decrease in quantity demanded. Copyright©2003 Southwestern/Thomson Learning
    • 19. Elastic Demand: Elasticity Is Greater Than 1 Price $5 4 Demand 1. A 22% increase in price . . . 0 50 100 Quantity 2. . . . leads to a 67% decrease in quantity demanded.
    • 20. Perfectly Elastic Demand: Elasticity Equals Infinity Price 1. At any price above $4, quantity demanded is zero. $4 Demand 2. At exactly $4, consumers will buy any quantity. 0 3. At a price below $4, quantity demanded is infinite. Quantity
    • 21. INCOME ELASTICITY • The degree of responsiveness of the demand for the commodity to a change in the income of the consumer. • It is defined as Ratio of percentage change in the quantity demanded of a commodity to the percentage change in the income of consumer
    • 22. INCOME ELASTICITY • Negative ( inferior commodities ) • Zero ( neutral commodities ) • Greater than zero but less than 1( normal commodities ) • Greater than unity ( Luxurious commodity )
    • 23. INCOME ELASTICITY • Point Definition EI • Arc Definition EI Q/Q Q I I/I I Q Q2 Q1 I 2 I1 I 2 I1 Q2 Q1
    • 24. Cross Elasticity of Demand (CED) • Cross price elasticity (CED) measures the responsiveness of demand for good X following a change in the price of good Y (a related good) • CED = % change in quantity demanded of product A % change in price of product B • With cross price elasticity we make an important distinction between substitute products and complementary goods and services.
    • 25. Substitutes Price of Two Weak Substitutes Good S Demand + Goods S and T are weak substitutes A rise in the price of Good S leads to a small rise in the demand for good T P2 P1 tea and coffee Quantity demanded of Good T
    • 26. - Complements Price of Two Close Complements Good X Goods X and Y are close complements A fall in the price of good X leads to a large rise in the demand for good Y Petrol and petrol car Demand P1 P2 Quantity demanded of Good Y
    • 27. Goods with zero cross-price elasticity of demand . INDEPENDENT Price of Demand Good A Goods A and B have no relationship. P1 A fall in the price of good A leads to no change in the demand for good B P2 Therefore the cross-price elasticity of demand is zero salt! P3 Quantity demanded of Good B