For project only..

1. LAW OF DEMAND

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. FACTORS AFFECTING DEMAND
1. PRICE OF THE COMMODITY
2. THE MONEY INCOME OF THE INDIVIDUAL HOUSEHOLD
3. THE TASTES AND PREFERENCES OF THE INDIVIDUAL
HOUSEHOLD
4. THE PRICES OF OTHER COMMODITIES
Dn = f(Pn , Pı .....‚ Pn-ı‚Y‚T)
Dn is the demand for commodity n.
Pn is the price of commodity n
Pı.....Pn-ı is the prices of all other commodities
(other than Pn) Y is the income of the
household T stands for tastes and

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. 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. 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
DEMAND ELASTICITY

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. ELASTICITY OF DEMANDPricePerUnitOfX
Quantity Demanded Of X
A
B
P
Pı
M Mı N NıO
Market A : Expansion in the demand is low
Market B : Expansion in the demand is high

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. 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 PriceInitial 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. ORIGINAL PRICE (P) = RS. 3
ORIGINAL DEMAND (Q) = 1
CHANGE IN PRICE (ΔP) = RS. 2
CHANGE IN DEMAND (ΔQ) = 3
ELASTICITY = ?

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. 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 (Ep) = ?

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. INCOME ELASTICITY OF DEMAND
MEANS THE RATIO OF THE PERCENTAGE
CHANGE IN QUANTITY DEMANDED TO
THE PERCENTAGE CHANGE IN INCOME
Ey =
Percentage Change In Quantity Demanded
Percentage Change In Income
Ey = Y
Q
× ΔQ
ΔY

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. CROSS ELASTICITY
IS THE MEASURE OF RESPONSIVENESS OF
DEMAND FOR A COMMODITY TO THE
CHANGES IN THE PRICES OF SUBSTITUTES
AND COMPLEMENTARY GOODS
Eе =
Proportionate Change in the Quantity Of X
Proportionate Change in the Q Price Of Y
Eе = ΔQx
Qx
÷
ΔPQx

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. ADVERTISING ELASTICITY OR PROMOTIONAL
ELASTICITY OF DEMAND
×= ΔS
ΔA
A
S
S = Sales
ΔS = Increase In Sales
A = Original Advertisement Cost
ΔA = Additional Expenditure On Advertisement
ΔS
S ÷
ΔA
AEA =

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

21. MEASUREMENT OF ELASTICITY
1. TOTAL OUTLAY METHOD
2. PROPORTIONAL METHOD
3. GEOMETRIC METHOD

22. TOTAL OUTLAY METHOD

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
η ΔPΔQ
= Q P
÷

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. 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
η = ?

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. .
.
.E1
E2
E3
D
D'
Y
0 x

28. D E2
DE2
= 1
Hence the elasticity at E2 is Unity
The elasticity between D E2 and DE2 is equal
Therefore D E2 = DE2
or
Similarly the elasticity at point E1 is written as :
D E1
DE1
And the distance between D and E1 is less than the distance
between D and E1 In other words D E1< DE1
D E1
DE1
= η is < 1 ( Elasticity at E1 less
than unity )

29. At Point E3 the elasticity is
D E3
DE3
In this case the distance between D and E3 is greater than
the distance between D and E3 . That is
D E3 is > DE3
Hence
D E3
DE3
= η = > 1
Elasticity is greater than Unity

30. .
.
.E1
E2
E3
D
D'
Y
O X
The elasticity between D E2 and DE2 is equal
Therefore D E2 = DE2
D E2
DE2
or = 1
Hence the elasticity at E2 is Unity
UNITY

31. .
.
.E1
E2
E3
D
D'
Y
O X
Similarly the elasticity at point E1 is written as :
D E1
DE1
And the distance between D and E1 is less than the distance
between D and E1 In other words D E1< DE1
D E1
DE1
= η is < 1 ( Elasticity at E1 less than unity )
LESS than UNITY

32. .
.
.E1
E2
E3
D
D'
Y
O X
In this case the distance between D and E3 is greater than
the distance between D and E3 . That is
D E3 is > DE3
Hence
D E3
=DE3
η = > 1
Elasticity is greater than Unity
MORE than UNITY