2. Meaning of Demand
Demand is defined as the consumer’s willingness
and ability to pay for a good or service per unit of
time at a particular price
Demand of a consumer/household for a particular
good or service is Individual demand and
summation of individual demand is called as
market demand
3. DEMAND FUNCTION
A demand function for a good expresses a causal
relationship between quantity demanded of the
good and its own price. In other words, it is a
functional relationship between demand and
price.
If the good is X , Qx is quantity demand and Px is
the price of good X then the general form of the
demand function will be
Qx = f( Px )
4. Law of Demand
The law states that “other factors remaining the
same”, price and quantity demand of any good and
service are inversely related to each other. When the
price of a good increases, the demand for the same
good will fall and vice-versa.
“Other factors remaining same” means the factors
other than its price do not change i.e. income, the
prices of substitutes and complements, consumer
tastes and preferences and expectations of future
prices etc. remain the same.
5. Law of Demand
Let demand function be:
Qx = f( Px, Pr, I,T, E, Y) where
Qx= quantity demanded of good X
Px= Price of good X
Pr= Price of related goods
I= Income of the consumer
T= Tastes and preferences of the consumer
E= Expectations of price changes
Y= any other changes (economic, social, demographic
factors etc.)
6. Demand Schedule and Demand Curve
The relationship between the price of a good and
the quantity demanded is given by the demand
schedule.
A demand curve / schedule shows the
relationship between price and demand over a
hypothetical range of prices.
8. Why does demand curve slope downwards?
Causes of downward sloping of demand curve:
Law of diminishing marginal utility and equi-
marginal utility
Price effect
Income effect
Substitution effect
Different uses of the good
9. Exceptions to the Law of Demand
Situations under which the law of demand may not hold
true i.e. demand increases with increase in price and it
falls with fall in price:
Articles of distinction like costly jewelery
Expectations of price changes
Ignorance
Emergency situation like war, floods, droughts etc.
Giffen goods
10. Elasticity of demand
Proportionate change in quantity demanded of a good due
to proportionate change in each of the determinants
affecting its demand (its price or income of the consumer
or price of related goods) keeping others as constant.
Ed =
proportionate change in quantity demanded
proportionate change in its determinant
=
∆q
∆p
x
p
q
where ∆ denotes a change and p , q are initial price
and quantity respectively
11. Types of Elasticity of demand
Main three types of elasticity of demand
are:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
12. Price Elasticity of demand
1. Price elasticity of demand (Ep)– It is the degree of
responsiveness of quantity demanded of a good due to a change in its
own price, other things remaining the same.
Ep = -
percentage change in quantity demanded of a good
percentage change in its price
=
∆q
∆p
x
p
q
where ∆ denotes a change and p , q are initial price and quantity
respectively.
Negative sign is ignored due to inverse relationship between price and
demand
13. Price elasticity of demand - Types
Price elasticity of demand is of five types:
a) Relatively elastic demand (Ed >1): If a change in the price will lead to a
larger percentage/proportionate change in the quantity demanded. A
good with a price elastic demand has a relatively flat demand curve
14. Price elasticity of demand - Types
b) Unitary elastic demand (Ed =1): If a change in price leads to the same
percentage/proportionate change in the quantity demanded. The demand curve
for a good with a unit price elastic demand is a rectangular hyperbola
15. Price elasticity of demand - Types
c) Relatively inelastic demand (Ed <1): If a change in the price leads to a
smaller percentage/proportionate change in the quantity demanded. A good
with a price inelastic demand has a relatively steep demand curve
16. Price elasticity of demand - Types
Two Extreme cases:
d) Perfectly elastic demand (Ed=∞): if a small fall in price increases the
quantity demanded infinitely or with a small rise in price, quantity
demanded becomes zero. A good with a perfectly price inelastic demand
has a vertical demand curve.
17. Price elasticity of demand - Types
e) Perfectly inelastic demand (Ed=0): a change in price will not lead to
any change in the quantity demanded. A good with a perfectly price
inelastic demand has a vertical demand curve
18. Income Elasticity of demand
2. Income elasticity of demand (Ey) – It measures the percentage
change in a consumer's purchase of a good as a result of a percentage
change in her/his income, others things like price of the good or related
goods, taste of the consumers etc., remaining the same.
Ey =
Percentage change in quantity demanded
Percentage change in income of consumer
=
∆q
∆y
.
y
q
where ∆ denotes a change and y , q are initial income and
quantity respectively
19. Cross Elasticity of demand
3. Cross elasticity of demand (Ec) – when a price change of a good
leads to a change in demand for another good, other things remaining the
same. It is measured as:
Ec =
Percentage change in quantity demanded of good A
Percentage change in price of good B
=
∆Q𝑎
∆𝑃𝑏
x
𝑃𝑏
Qa
where ∆ denotes a change
Qa = initial quantity demanded of good A
Pb = initial price of good B
If Ec>0 then goods are substitutes
If Ec<0 then goods are complements
If Ec=0 then goods are independent
20. Measurement of elasticity of demand
Four methods to measure elasticity of demand are:
1. Total outlay method
2. Flux’s percentage method
3. Point method
4. Arc elasticity of demand
21. Measurement of elasticity of demand
1. Total Expenditure method: In this method, Ed is
measured on the basis of change in total expenditure
(T.E) in response to a change in price.
• If T.E before and after the price change remains same
then Ed = 1(Unitary elastic demand)
• If T.E increases with fall in price and decreases with
rise in price then Ed>1(Elastic demand)
• If T.E decreases with fall in price and increases with
rise in price then Ed>1(inelastic demand)
23. Measurement of elasticity of
demand
2. Percentage method:
Ep= -
percentage change in quantity demanded of a good
percentage change in its price
=
∆q
∆p
x
p
q
where
∆q = change in quantity demanded
∆p = change in price
p = initial price
q = initial quantity
24. Measurement of elasticity of demand
3. Point method: Also called as geometric method, it
measures elasticity at any point on a demand curve as the
ratio of its lower segment to the upper segment.
Ed =
lower segment of demand curve
upper segment of demand curve
Measurement of elasticity depends upon the nature of
demand curve.
26. Measurement of elasticity of demand
Non-linear demand curve : a tangent is drawn at the point
at which Ed is to be measured and lower segment is
divided by upper segment.
At point R:
Ed =
𝑅𝑇′
𝑅𝑇
27. Measurement of elasticity of demand
4. Arc elasticity of demand: Under this method, Ed is
measured by using average of initial of price and new
price and the initial quantity and new quantity demanded
i.e.
Ed =
𝑄−𝑄1
(𝑄+𝑄1)
2
𝑃−𝑃1
(𝑃+𝑃1)
2
where
Q = initial quantity, Q1 = new quantity
P = initial price, P1 = new price
