demand , law of demand and elasticity of demand with explanation

1. Department of Commerce
DEMAND,DEMAND ANALYSIS, LAW
OF DEMAND,
& ELASTICITY OF DEMAND
TOPIC :
Mohammed Arif
By…
M.Com

2. Demand :
Demand in economics means “ demand backed
up by enough money to pay for goods demanded .”
In other words demand means – “ The desire backed by the
willingness to buy a commodity and purchasing power to pay. Hence
desire alone is not enough”.
Thus the demand has three essentials –
1. Desire
2. Purchasing power
3. Willingness to purchase

3. Demand Analysis :
Demand analysis means an
attempt to determine the factors affecting the demand of a
commodity or service and to measure such factors and
their influences.
A. To determine the factors affecting the demand
B. To measure the elasticity of demand
C. To forecast the demand
D. To increase the demand
E. To allocate the resource efficiently

4. Law of Demand :
The law of demand is know
as the ‘first law in demand ”. Law of demand shows
the relation between price and quality demanded of a
commodity in the market. In other words “ law of
demand states that people will buy more at lower
price and buy less at higher price ”. While other things
remaining the same an increase in the price of a
commodity will decreases the quantity demanded of
that commodity and decrease in the price will
increase the demand of that commodity. So the
relationship described by law of demand is an
inverse or negative relationship .

5. Individual demand schedule
Example given below...
Quantity demand of Apples in individual schedule
Price of Apple (in Rs.) Quantity demanded
14 1
12 2
10 3
8 4
6
4
2
5
6
7

6. P
R
I
C
E
Quantity
X- axis
Y
-
a
x
I
s
0
14
12
10
8
6
4
2
1 2 3 4 5 6 7
Demand curve

7. Assumptions of law of demand
 There is no change in consumer s’ taste preferences.
 Income should remain constant.
 Price of the other goods should not change.
 There should be substitute for the commodity.
 The commodity should not the confer any distinction.
 The demand for the commodity should be continuous.
 People not expect any changes in the price of the
commodity.

8. Elasticity of demand
This concept explains the relationship
between a change in price and consequent change in quality
demanded. Nutshell, it shows the rate at which changes in
demand tack place.
Elasticity of demand can be defined as “The degree of
responsiveness in quantity demanded to a change in
price”. Thus in it represents the rate of change in quality
demanded due to a change in price. There are mainly three
types of elasticity of demand :
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand

9. Price Elasticity of Demand:
Price elasticity in demand
measure the change in quantity demanded to a change
in the price. It is the ratio of percentage change in
quantity demanded to a percentage change in price.
This can be measured by the following formula.
Proportionate change in Quantity demand
proportionate change in price
(Q2-Q1) or Q1
(P2-P1) or P1
EP =
EP =

10. Relatively
elastic
demand

11. Perfectly elastic demand:
When the a small change in price
leads to infinite change in quantity demanded. Its is called
perfectly elastic demand. In this curve is a horizontal line
as given below.
P
r
i
c
e
Quality0
Demand curve

12. Perfectly inelasticity demand:
In this case , even a large change in
price falls to bring about a change in quantity
demanded. I.e. the change in price will not affect the
quantity demanded and quantity remains the same
whatever the change in price. Here demand curve will
be vertical line as follows.
P
r
i
c
e
Quality
Demand curve

13. Relatively elastic demand:
Here a small change in price leads to very
big change in quantity demanded. In this case demand
curve will be fatter one.
P1
P
Q1
D
D
Q
0
P
r
i
c
e
Quality

14. Relatively inelastic demand
Here quantity demanded changes less than
proportionate to change in the price. A large change in
price leads to small change in demanded. In this case
demand curve will be steeper.
Q Q1
P1
P
D
D
P
r
i
c
e
Quality
0

15. Unity elasticity of demand
Here the change in the demand is
exactly equal to the change in the price. When both
are equal. The elasticity is said to be unitary.
D
D
Q1Q
P1
P
Quality
P
r
i
c
e
0

16. Mohammed Arif
M.com