1. UNIVERSITY OF PETROLEUM AND ENERGYSTUDIES,DEHRADUN
NAME:-ANIK KUMAR BHATTACHERJEE
SAP ID:-500051548
ENROLLMENT NO:-R130216004
2. THEORY OF DEMAND:-
Demand is the quantity of a good or service that consumers are willing and able to buy at a
given price in a given time period
Each of us has an individual demand for particular goods and services and our demand at each
price reflects the value that we place on a product, linked usually to the enjoyment or usefulness
that we expect from consuming it. Economists give this a term - utility
Effective Demand
Demand is different to desire! Effective demand is when a desire to buy a product is
backed up by an ability to pay for it
Latent Demand
Latent demand exists when there is willingness to buy among people for a good or
service, but where consumers lack the purchasing power to be able to afford the product.
Derived Demand
The demand for a product X might be connected to the demand for a related product Y – giving
rise to the idea of a derived demand. For example, demand for steel is strongly linked to the
demand for new vehicles and other manufactured products, so that when an economy goes into a
recession, so we expect the demand for steel to decline likewise.
Steel is a cyclical industry which means that market demand for steel is affected by changes in
the economic cycle and also by fluctuations in the exchange rate.
Zinc is a good example of a product with a strong derived demand. It has a wide-range of end
users such as galvanised zinc used in cars and new buildings, die-casting used in door furniture
and toys, brass and bronze used in taps and pipes. And also rolled zinc (used in roofing, guttering
and batteries) and in chemicals used in making tyres and zinc cream.
Transport as a Derived Demand
The demand for transport is the number of journeys consumers or firms are willing and able to
purchase at various prices in a given time period. Transport is rarely demanded for its own sake,
the journey, but for what the journey enables e.g. commuting, taking a holiday or distribution.
When an economy is growing, there is an increase in derived demand for commuting, business
logistics and transport for holiday purposes.
The Law of Demand
3. There is an inverse relationship between the price of a good and demand.
1. As prices fall, we see an expansion of demand.
2. If price rises, there will be a contraction of demand.
Ceteris paribus assumption
Many factors affect demand. When drawing a demand curve, economists assume all factors are
held constant except one – the price of the product itself. Ceteris paribus allows us to isolate the
effect of one variable on another variable
The Demand Curve
A demand curve shows the relationship between the price of an item and the quantity demanded
over a period of time. There are two reasons why more is demanded as price falls:
1. The Income Effect: There is an income effect when the price of a good falls because the
consumer can maintain the same consumption for less expenditure. Provided that the good is
normal, some of the resulting increase in real income is used to buy more of this product.
2. The Substitution Effect: There is a substitution effect when the price of a good falls because
the product is now relatively cheaper than an alternative item and some consumers switch their
spending from the alternative good or service.
4. The Law of Demand
As price falls, a person switches away from rival products towards the product
As price falls, a person's willingness and ability to buy the product increases
As price falls, a person's opportunity cost of purchasing the product falls
Note: Many demand curves are drawn as straight lines to make the diagrams easier to interpret
The chart below shows average season ticket prices for English Premier League clubs. What
factors affect the willingness and ability to pay for a season ticket? Why is there such a large
difference in prices?
6. In contrast, the electricity demand of the commercial sector was rapidly growing nationwide
(Table-1). The area with the highest growth rate is Tokyo. Rural regions such as Kyushu,
Hokuriku, and Tohoku are also considered high-growth areas. Among the economic factors,
production accounts for about 60 % of the increase. This result suggests that electricity demand
has markedly increased in the commercial sector because of factors, such as an increase in the
floor space used by businesses and developments in office automation across the country.
Table 1
Contribution to regional electricity demand in the commercial sector, 1990–2010 (%)
Growth rate of
electricity demand
(total)
Price Production Cooling
degree days
Heating
degree days
Margin of
error
Hokkaido 1.59 0.03 0.79 0.04 0.02 0.70
Tohoku 1.71 0.02 1.14 0.02 0.04 0.49
Tokyo 2.04 0.02 1.38 0.01 0.06 0.57
Chubu 1.89 0.01 1.33 0.01 0.08 0.46
Hokuriku 1.79 0.02 1.04 0.01 0.08 0.63
Kansai 1.51 0.01 0.66 0.00 0.07 0.77
Chugoku 1.57 0.02 1.10 0.01 0.09 0.35
Shikoku 1.67 0.03 1.27 0.00 0.06 0.31
Kyushu 1.93 0.03 1.31 0.00 0.10 0.48
Okinawa 1.66 0.01 2.11 0.00 1.16 −1.61
Average 1.74 0.02 1.11 0.01 0.07 0.53
Notes: The growth rate of electricity demand (total) is the finite difference approximation of the
logarithm (annual average). The regional classification is as follows: Hokkaido (Hokkaido),
Tohoku (Aomori, Iwate, Miyagi, Akita, Yamagata, Fukushima, and Niigata), Tokyo (Ibaraki,
Tochigi, Gunma, Saitama, Chiba, Tokyo, Kanagawa, and Yamanashi), Hokuriku (Toyama,
Ishikawa, and Fukui), Chubu (Nagano, Gifu, Shizuoka, Aichi, and Mie), Kansai (Shiga, Kyoto,
Osaka, Hyogo, Nara, and Wakayama), Chugoku (Tottori, Shimane, Okayama, Hiroshima, and
Yamaguchi), Shikoku (Tokushima, Kagawa, Ehime, and Kochi), Kyushu (Fukuoka, Saga,
Nagasaki, Kumamoto, Oita, Miyazaki, and Kagoshima), and Okinawa (Okinawa)
The electricity rate continued decreasing over time during the measurement period, which led to
an increase in the demand for power. However, this effect was marginal in both the industrial
and commercial sector. These results suggest that the electricity rates had only minimal effects
on fluctuations in the demand for power, as the observed price elasticity was extremely low.
Therefore, we can infer that the current hikes in the electricity rate will not lead to a significant
change in future power demands.
7. Elasticity Of Demand:-
When the price of a goods falls, its quantity demanded rises and when the price of the
goods rises, its quantity demanded falls. This is generally known as law of demand. This
law of demand indicates only the direction of change in quantity demanded in response to
change in price. This does not tell us by how much or to what extent the quantity
demanded of goods will change in response to a change in its price.
This information as to how much or to what extent the quantity demanded of a good will
change as a result of a change in its price is provided by the concept of elasticity of
demand. The concept of elasticity has a very great importance in economic theory as well
as for formulation of suitable economic policy.
Various Concepts of Demand Elasticity:
It is price elasticity of demand which is usually referred to as elasticity of demand. But,
besides price elasticity of demand, there are various other concepts of demand
elasticity.Demand for a good is determined by its price, incomes of the people, prices of
related goods, etc. Quantity demanded of a good will change as a result of a change in the
size of any of these determinants of demand.
The concepts of elasticity of demand, therefore, refers to the degree of responsiveness of
quantity demanded of a goods to a change in its price, income and prices of related
goods. Accordingly, there are three concepts of demand elasticity: price elasticity,
income [elasticity, and cross elasticity. Price elasticity of demand relates to the
responsiveness of quantity demanded of a good to the change in the price. Income
elasticity of demand refers to the sensitiveness of quantity demanded in the change in
incomes.
Cross elasticity of demand means the degree of responsiveness of demand of a goods to a
change in the price of a related goods, which may be either a substitute for it or a
complementary with it. Besides these three kinds of elasticity’s, there is another type of
elasticity of demand called elasticity of substitution which refers to the change in quantity
demanded of a good in response to the change in its relative price alone, real income of
the individual remaining the same.
As said above, price elasticity of demand expresses the response of quantity demanded of
a good to changes in its price, given the consumer’s income, his tastes and prices of all
other goods. Thus, price elasticity means the degree of responsiveness or sensitiveness of
quantity demanded of a goods to change in its prices.
In other words, price elasticity of demand is a measure of the relative change in its price.
Price elasticity can be precisely defined as ‘the proportionate change in quantity
demanded in response to a small change in price, divided by the proportionate change in
price’ (Mrs. Robinson). Thus,
8. where ep stands for price elasticity
q stands for quantity
p stands for price
∆ stands for a small change
Mathematically speaking, price elasticity of demand is negative, since the change in quantity
demanded is in opposite direction to the change in price. When price falls, quantity demanded
rises and vice versa. But for the sake of convenience in understanding the magnitude of response
of quantity demanded to the change in price we ignore the negative sign and take into account
only the numerical value of the elasticity.
Thus, if 2 per cent change in price leads to 4 per cent change in quantity demanded of goods A
ads 8 per cent change in that of B, then the above formula of elasticity will give the value of
price elasticity of goods A equal to 2 and that of goods B equal to 4. It indicates that the quantity
demanded of goods B changes much more than that of goods an in response to a given change in
price.
But if we had written minus signs before the numerical values of elasticity’s of two goods, that
is, if we had written the elasticity’s as -2 and -1 respectively as strict mathematics would require
us to do, then since -1 is smaller than-2, we would have been misled in concluding that price
elasticity of demand of B is less than that of 4.
But, as we have noted above, response of demand for B to the change in price is greater than that
of A, it is better to ignore minus sign and draw conclusions from the numerical values of
elasticity’s. Hence by convention minus sign before the value of price elasticity of demand is
generally ignored in economics.
9. It is a matter of common knowledge and observation that there is a considerable difference
between different goods in regard to the magnitude of response of demand to the changes in
price. The demand for some goods is more responsive to the changes in price than those of
others.
In terminology of economies, we would say that the demand for some goods is more elastic than
those for the others or the price elasticity of demand of some goods is greater than those of the
others.
Marshall who introduced the concept of elasticity in economic theory remarks that the elasticity
or responsiveness of demand in a market is great or small according as the amount demanded
increases much or little for a given full in price, and diminishes much or little for a given rise in
price.
10. This will be clear from Figures 14 and 15 which represent two demand curves. For a given fall in
price, from OP to OF’, increase in quantity demanded is much greater in Figure 14 than in Figure
15. Therefore, demand curve in figure 14 as more elastic than the demand curve in figure 15 for
a given fall in price. Demand for the goods represented in Figure 14 is generally said to be elastic
and the demand for the goods in figure 15 to be inelastic.
It should, however, be noted that terms elastic and inelastic are used in the relative sense. In
other words, elasticity is a matter of degree only. Demand for some goods is only more or less
elastic than others. There is no commodity in the real world for which the demand is completely
inelastic.
Similarly, in the actual world we find no example of goods whose demand is perfectly elastic.
Thus, when we say that demand for a good is elastic, we mea only that the demand for it is
relatively more elastic. Likewise, when we say that demand for a good inelastic, we do not mean
that its demand is absolutely inelastic but only that it is relatively less elastic.
In economic theory elastic and inelastic demands have come to acquire precise meanings.
Demand for goods is said to be elastic if the elasticity of demand for it is greater than ani.
Similarly, the demand for goods is called inelastic if elasticity of demand for it is less than one.
Elasticity of demand equal to one, or in other words; unit elasticity of demand, therefore,
represents the dividing line between elastic and inelastic demand.
11. It will now be clear that by inelastic demand we do not mean perfectly inelastic but only that the
elasticity of demand is less than unity; and by elastic demand we do not mean absolutely elastic
but that the elasticity of demand is greater than one.
As said above, goods great variation in respect of elasticity of demand, i.e., their responsiveness
to changes in price. Some goods like common salt, wheat and rice are very unresponsive to the
changes in their prices. The demand for salt remains practically the same for a small rise or fall
in its price. Therefore, demand for common salt is said to be ‘inelastic.’ Demand for goods like
radios, refrigerators etc. Is elastic, since changes in their prices bring about large changes in their
quantity demanded.
We shall explain later at length those factors which are responsible for the differences in
elasticity of demand of various goods. It will suffice here to say that the main reason for
differences in elasticity of demand is the possibility of substitution, i.e., the presence or absence
of competing substitutes.
The greater the case with which substitutes can be found for a commodity or with which it can be
substituted for other commodities the greater will be the price elasticity of demand of that
commodity.
Goods are demanded because they satisfy some particular wants and in general wants can be
satisfied in a variety of alternative ways. For instance, the want for entertainment can be gratified
by having a radio set, or by possessing a gramophone, or by going to cinema or by visiting
theatres. If the price of radio set falls, the quantity demanded of radio sets will rise greatly since
fall in the price of radio will induce some people to buy radios in place of having gramophones
or visiting cinemas and theatres.
Thus, the demand for radios is elastic. Likewise, if the price of ‘Lux’ falls its demand will greatly
rise because it will be substituted for other varieties of soap—such as Jai, Hamam and Oasis etc.
On the contrary the demand for necessary goods like salt is inelastic.
The demand for salt is inelastic since it satisfies a basic human want and no substitutes for it are
available. People would consume almost the same quantity of salt whether it becomes slightly
cheaper or dearer than before.
Daily Energy Demand Curve:-
The energy demand on the gird varies by the time of day, the day of the week, the temperature,
the latitude of the location, and the seasons (and many other factors). As instant energy
generation must follow instant demand, the shape of the daily energy demand is fairly critical.
Thankfully, its shape and amplitude are reasonably predictable.
12. Daily demand across seasons (Source: New England ISO)
This display of the daily demand for the New England Independent System Operator (which
operates the grid in real-time for that region) captures some reasonably typical properties:
the average load is n general lower in fall and spring, and higher in summer and winter.
In many developed countries (but not all), it will be highest in summer, due to the high
energy cost of air conditioning.
in summer, for many most developed countries, there is a single maximum for the daily
demand in the mid afternoon. This peak is often the overall peak for the whole year.
in other seasons, there is often a double peak, in the morning and in the evening, as
people have come back from work and start appliances, TVs, hot water heaters etc. The
evening peak is in general the daily peak for that season. In some cases, there is no
morning peak, as demand remains stable during the work day, or keeps on increasing
slowly until the evening peak.
14. Daily Demand for Florida winter and summer (source Florida Public Utility Commission)
Again, we recognize the patterns: single afternoon peak for summer, double peak for winter (in
this case where the morning peak is higher). Unexpectedly (at least for me), the peak high in
winter has been higher than the peak high summer over the past few years (48,872 MW vs.
48,385 MW for 2010 – source Florida Public Utility Commission).
As a last example, following are the daily demand curves for a single winter and summer day for
California:
Daily Demand for one California winter day (Source CAISO)
We recognize the characteristic evening peak for this winter day.
15. Daily demand for a California summer day (source CAISO)
… and we recognize the characteristic mid-afternoon peak for this California summer day.
It is interesting to look at what actually constitutes the actual demand for summer and winter
days. Following are detailed analyses of winter and summer demand curves for New South
Wales in Australia.
16. Daily Demand, winter, by application, New South Wales (source: Australia Dept of Industry/
Energy Efficiency)
We recognize the characteristics double winter peak, particularly accented in this example.
Interestingly, night usage is higher than day use, primarily due to off-peak hot water usage.
17. Daily demand, summer, by application, for New South Wales (source: Australia dept of Industry/
Energy Efficiency)
The characteristic single summer peak occurs comparatively very late, and is also topped by
night usage, as in the winter demand curve., despite the heavy air conditioning use in mid- and
late-afternoon. In both cases, outside of AC, the largest uses of energy are hot water and
refrigeration.
The shape of the daily demand curve is particularly important because, as it must be exactly
matched instant by instant by the generation on the grid, its requirements are absolute and point
at a specific structure for solutions to the generation problem.
