Law of Demand Reasons for the Law of Demand Exceptions to the Law of Demand Types of Demand Change in Demand Elasticity of demand

1. DemandAnalysis
Presented By-
Ninad Jadhav (14014)
Bhaskar Kaule (14022)
Harshal Jadhav (14001)
Shubham Chaudhari (14005)

2. Demand
A relation between the price of a good and the
quantity that consumers are willing and able
to buy during a given period, other things
constant.
• Demand = Desire + Ability to pay +
Willingness to spend.

3. 3 aspects of Demand
1. It is the Quantity desired at a given
price.
2. It is the demand at a Price during a
given time.
3. It is the quantity demanded per unit of
Time.

4. Demand Schedule and Curve
• Demand curve:
• A curve showing the
relation between the price
of a good and quantity
demanded during a given
period, other things
constant.
• Suppose we are making
pizza.

5. Determinants of Demand
• Price of the goods.
• Income of the buyer.
• Prices of related goods.
• Tastes of the buyer.
• Seasons prevailing at the time of purchase.
• Fashion.
• Advertisement and sales promotion.
• Demonstration effect.

6. Law of Demand
• A quantity of a good demanded during a given
period relates inversely to its price, other
things constant.
• Price increases  Quantity Demanded
decreases.
• Price decreases  Quantity demanded
increases.
• Creates a downward sloping demand curve.

7. Reasons for the Law of
Demand
• Substitution Effect
• Unlimited wants/scarce resources
• When the price of a good falls,
consumers substitute that good for
other goods, which become relatively
more expensive.
• Reverse also holds true.

8. Reasons for the Law of
Demand
• Income Effect
• Money income: Is simply the number
of dollars received per period.
• Real income: Your income measured in
terms of what it can buy.
• A fall in the price of a good increases
consumers’ real income making
consumers more able to purchase
goods; for a normal good, the quantity
demanded increases.

9. Exceptions to the Law of
Demand
• Giffen Goods – Inferior Goods.
• Conspicuous Goods- Esteem Goods.
• Future expectations about prices.
• Irrational Consumers.
• Ignorance or Unawareness of Price.

10. Types of Demand
Price Demand
Income Demand
Cross Demand
 Substitute Goods
 Complementary Goods

11. Price Demand
• It refers to the various quantities of the goods
which consumers will purchase at a given time
and at certain hypothetical prices assuming
that other conditions remains the same.
• We are generally concerned with price
demand only.

12. Income Demand
• Income demand refers to the various
quantities of a commodity that a consumer
would buy at a given time at a various levels of
income. Generally, when income increases,
demand increases and vice-a-versa.

13. Cross Demand
• When the demand of one commodity is related
with the price of the other commodity is called
cross demand.
• The commodity may be substitute or
complementary.

14. Substitute Goods
• Substitute goods are those goods which can be
used in case of each other.
• In such case demand and price are positively
related.
• E.g. :- Tea or Coffee; McDonalds or Burger
king; Nirma or Tide.

15. Complementary Goods
• Complementary goods are those goods which
are jointly used to satisfy a want.
• Complementary goods are those which are
incomplete without each other.
• These are things that go together, often used
simultaneously.
• E.g. :- Car & Petrol; Chassis & Tyre ; Samosa &
Chutney.

16. Change in Demand
Expansion Contraction
Increase Decrease

17. Elasticity of demand
• Elasticity of demand is the degree of responsiveness of
demand to the changes in its determinants.
A. Price Elasticity of Demand
The extent of response of demand for a commodity
to the changes in its prices, other determinants of the
demand remaining constant is called price elasticity of
demand.
%change in quality
%change in product

18. Types of Price Elasticity
of Demand
• Perfectly elastic demand
• Perfectly inelastic demand
• Relatively elastic demand
• Relatively inelastic demand
• Unitary elastic demand

19. Perfectly Elastic Demand
 Perfectly elastic demand is said to happen
when a little change in price leads to an
infinite change in quantity demanded.

20. Perfectly Inelastic Demand
 Perfectly inelastic demand is opposite to
perfectly elastic demand.
 Under the perfectly inelastic demand,
irrespective of any rise or fall in price of a
commodity, the quantity demanded remains
the same.

21. Unitary Elastic Demand
 The demand is said to be unitary elastic when
a given proportionate change in the price level
brings about an equal proportionate change
in quantity demanded. The numerical value of
Unitary elastic demand is exactly one i.e. Ed=1
 Marshall calls it unit elasticity.

22. Relative Elastic Demand
 Relative elastic demand refers to a situation in
which a small change in price leads to a big
change in quantity demanded.
 In such a case elasticity of demand is said to be
more than one
 Ed>1

23. Relative Inelastic Demand
 Under the relatively inelastic demand a given
percentage change in price produces.
 A relatively less percentage change in quantity
demanded.
 Ed<1

24. B . Income Elasticity of demand
The degree of responsiveness of demand for a
commodity to the changes in the consumers income is
known as income elasticity of demand.
% change in quality
% change in income
Types of Income elasticity:
o Negative income elasticity
o Positive income elasticity
o Zero income elasticity

25. C . Cross Elasticity of Demand
The degree of responsiveness of demand for a
commodity to a given change in the price of some other
related commodity is known as cross elasticity of
demand.
% change in quality x
% change in price y

26. Basis of Individual Demand
Utility
• From the commodity point of view
• From Consumer point of view
Approaches to Consumer Demand Analysis
Cardinal Utility approach
• Total Utility
• Marginal Utility
• Law of Diminishing Marginal Utility

27. Assumptions underlying Cardinality Approach
• Limited money income
• Maximisation of satisfaction
• Utility is Cardinal measurable
• Diminishing Marginal Utility
• Constant marginal utility of money
Consumer's equilibrium
• One commodity model
• Multiple commodity model-THE LAW OF
EQUIMARGINAL UTILITY.

28. Ordinal Utility Approach
Assumptions underlying Ordinal approach
• Ordinal utility
• Transitivity & consistency in choice
• Diminishing marginal rate of substitution
 Marginal rate of substitution-MRS is the rate at which
one commodity can be substituted for another , the level of
satisfaction remaining the same.
 Diminishing MRS-The quantity of a commodity that a
consumer is willing to sacrifice for an additional unit of
another goes on decreasing when he goes on substituting
one commodity for another.

29.  Indifferent Curve – Indifferent curve is a locus of points,
each representing a different combination of two substitute
goods ,which yields the same level of utility or satisfaction
to the consumer.
 Properties of Indifferent curve
• IC have a negative curve
• IC are convex to origin
• IC does not intersect with each other
• IC are not tangent to one another
• Upper IC always indicate a higher level of satisfaction
• IC will not touch X-Y axis.

30. Thank You…