The document discusses the law of demand and elasticity of demand. The law of demand states that the quantity demanded of a product rises when the price falls and falls when the price rises, assuming other factors remain constant. Elasticity of demand measures the responsiveness of demand to changes in price. There are different degrees of elasticity including perfectly elastic, perfectly inelastic, relatively elastic and relatively inelastic demand. The elasticity depends on factors such as the nature and importance of the product, availability of substitutes, percentage of income spent on the product, and tastes and preferences of consumers.
2. Definitions
"Law of Demand states that people will buy more at lower prices
and buy less at higher prices, if other things remaining the
same."- Prof. Samuelson.
“The Law of Demand states that amount demanded increases
with a fall in price and diminishes when price increases.” - Prof.
Marshall
"According to the law of demand, the quantity demanded varies
inversely with price." –Ferguson
"The greater the amount to be sold the smaller must be the
price”- Marshall:
“Usually a larger quantity of commodity will demanded at lower
price that a higher price”- Benham
Law of Demand is the amount of quantity demanded rises with
every decrease in the price and vice versa. Other things
remaining the same. If increase demand of the commodity when
its price is falls and demand is decrease when its increases price.
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 2
3. A Law of Demand relationship between quantities demanded and price of
product or service. But there are some exceptional situations under which there
may be a direct relationship between price and quantity demanded.
Figure : Law of Demand
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 3
4. Assumptions made for law of demand
Consumer income level should remain constant.
Price of related goods should not change.
There is no change in customer preference of the customer.
Expectation about the price or income in the future.
The size and composition of population.
Advertising effects and any other factor.
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 4
5. "The elasticity of demand for a commodity is the rate at
which quantity bought changes as the price changes."-
A.K. Cairncross
"The elasticity of demand is a measure of the relative
change in quantity to a relative change in price."- J.M.
Keynes
"Elasticity of demand measures the responsiveness of
demand to changes in price."- Kenneth Boulding
"Elasticity of demand may be defined as the percentage
change in quantity demanded to the percentage change in
price."- Alfred Marshall
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 5
6. The different degrees of Elasticity of Demand are as
followed
Perfectly elastic demand
Perfectly in-elastic demand
Relatively elastic demand
Relatively inelastic demand
Unit elasticity demand
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 6
7. 1. Unit elasticity of demand (Unit elastic, ep=1)
When elasticity of demand is equal to one than it is set to be unitary. If
increase the price of the good from P1 to P and in the end demand will be
decrease the Q1to Q. The relative change in price is equal to relative
change in demand.
Figure 2.3 Unit elasticity of demand (source- sites.google)
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 7
8. 2. Relatively elastic demand (ep>1)
Some times small change in the price would lead to a greater
demand for the product. In such cases the elasticity of demand
would be greater than one.
Figure 2.4 Relatively elastic demands(source- sites.google)
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 8
9. 3. Relatively inelastic demand
When elasticity of demand is less than to one than for a
large change in price there will be small difference in the
demand quantity.
Example: Even though the large changes in the price of Petrol,
diesel and gas there is the small difference in demand quantity.
Figure 2.5Relatively inelastic demands (Fuel and Gas ) (source- sites.google)
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 9
10. 4.Perfectly inelastic demand
When there is a large difference in price that lead to no difference in demand
quantities. Demand curve would be is a vertical straight line as per below
diagram. (ep= 0)
Figure 2.7 Perfectly inelastic demands (Drugs, Tablet) (source-
sites.google)
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 10
11. 1. Nature of the product
Nature of product are generally classified in three categories, they are
1. Basics needs-necessity
2. Contentment level-comfort
3. Exorbitant-luxuries.
2. Percentage of income
When there is increase in the income of the person than the demand also
increases. This because the person capable to buy more products is possible.
When elasticity of demand is greater than one income generation will more.
3. Ease of getting alternate products/ Substitutes products
When alternate or substitute product is easily available then this creates a lot of
change in the demand of the product.
4. Time frame
Some products will gain more demand over a periods of time while few of than
need to be sold within specified time range.
5. Taste and preference of the consumer
The customer is particular about his taste and preference is an inelastic.
Generally customers’ willing to buy a branded product even their product rate
does not matter.
Mr.K.Vinothkumar, Ass Prof,
Mechanical, SRMIST, Ramapuram 11