It tells about Theory of Demand , Elasticity of Demand-Kinds and degrees , Engel’s Law of Family Expenditure

1. THEORY OF DEMAND , ELASTICITY OF DEMAND-KINDS AND DEGREES ,
ENGEL’S LAW OF FAMILY EXPENDITURE

2. DEMAND:
 Demand describes a consumer's desire and
willingness to pay a price for a specific good or
service.
 It is a listing or graphing of quantity demanded at
each possible price.
 Holding all other factors constant, the price of a
good or service increases as its demand increases
and vice versa.

3. DEMAND SCHEDULE:
 The demand schedule is a table of the quantity
demanded of a good at different price levels. Thus, given
the price level, it is easy to determine the expected
quantity demanded.

4. DETERMINANTS OF DEMAND:
 The demand is influenced by the following factors:
Tastes and preferences of the consumer.
Income of the people.
Price of the commodity.
Changes in the price of related goods.
Population
Income distribution.
Expectation about future prices.

5. LAW OF DEMAND:
 The law of demand states that, all else being equal,
 as the price of a product increases (↑), quantity
demanded falls (↓);
 likewise, as the price of a product decreases (↓),
quantity demanded increases (↑).
 There is a negative relationship between the quantity
demanded of a good and its price.
 The factors held constant in this relationship are the prices of
other goods and the consumer's income.

6. DEMAND CURVE:
 A demand curve shows the relationship between the
price of an item and the quantity demanded over a period
of time.

7. There are two reasons why more is demanded as
price falls:
 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.
 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.

8. EXTENSION AND CONTRACTION OF DEMAND:
 When the quantity demanded of a good rises due to the fall in
price, it is called extension of demand.
 When the quantity demanded falls due to the rise in price, it is
called contraction of demand.
 Eg : If the price of banana is Rs.12per dozen the consumer
would purchase one dozen and if price falls to Rs.8 per dozen
he would purchase two dozen. Thus Extension of demand
occurs.If price rises to Rs:15 per dozen he would purchase
half dozen. Thus contraction of demand occurs.

9. TYPES OF DEMAND:
DEMAND
PRICE DEMAND
INCOME DEMAND
CROSS DEMAND

10. ELASTICITY OF DEMAND:
 Elasticity of Demand means “Degree of
responsiveness of demand”.
 The responsiveness of one variable to change
in another.
 When price rises, what happens
to demand?
 Elasticity measures the extent to which demand
will change.

11. TYPES OF ELASTICITY OF DEMAND:
Elasticity of
demand
Price elasticity
of demand
Perfectly elastic
Perfectly inelastic
Relatively elastic
Relatively inelastic
Unitary elastic
Income elasticity
of demand
Zero income elasticity
Negative income
elasticity
Unitary income
elasticity
For greater than unity
Demand less than
unity
Cross elasticity
of demand

12. PRICE ELASTICITY OF DEMAND:
The degree of responsiveness of demand to the
change in price of that commodity. The measurement of
this sensitivity in terms of percentage is called price
Elasticity of Demand.
 Types of Price Elasticity of Demand:
a) Perfectly Elastic
b) Perfectly Inelastic
c) Relatively Elastic
d) Relatively Inelastic
e) Unit Elasticity

13.  Perfectly elastic demand :
The demand is perfectly elastic when even a small change
in price cause an infinite large change in amount demanded.

14.  Perfectly inelastic demand:
When there is no change in demand as a result of increase
or decrease in price then the demand is perfectly inelastic.

15.  Unit Elasticity:
Demand is unit elastic when percentage change in quantity
demand and percentage in price are equal.
 Relatively elastic demand (Ed > 1):
The demand is relative elastic when relative change in quantity
demanded is more than the relative change in price

16.  Relatively inelastic demand (Ed < 1):
Demand is said to be relatively inelastic or less than unity
when proportionate change in demand is less than proportionate
change in price.

17. DEGREES OF ELASTICITY :

18. FACTORS INFLUENCING PRICE ELASTICITY OF
DEMAND:
a) Nature of Commodity
b) Availability of Substitutes
c) Number of Uses
d) Durability of commodity
e) Consumer’s income

19. INCOME ELASTICITYY OF DEMAND:
 The income elasticity of demand measures the responsiveness
of the quantity demanded of a good to the change in the income
of the people demanding the good.
 It is calculated as the ratio of the percent change in quantity
demanded to the percent change in income.
 Eg:In response to a 10% increase in income, the quantity of a
good demanded increased by 20%, the income elasticity of
demand would be 20%/10% = 2.

20. CROSS ELASTICITY OF DEMAND:
 The cross elasticity of demand measures the
responsiveness of the quantity demand of a good to a
change in the price of another good.
 It is measured as the percentage change in quantity
demanded for the first good that occurs in response to a
percentage change in price of the second good.

21. ENGEL’S LAW OF FAMILY EXPENDITURE:
Over a century ago , Ernst Engel , a German
Statistician , published to what became known as Engel’s
law.
 A smaller percentage of expenditures goes for
food.
 The percentage spent on housing,household
operations and clothing remain constant.
 The percentage spent on their items (such as
recreation and education ) incrases.