Law of demand and elasticity of demand

Unit 1: Law of Demand &
Elasticity of Demand
CA Foundation 2
The quantity of a good or service that consumers are
willing and able to purchase at various prices during a
given period of time.

CA Foundation 3
Demand
Desire
Ability to
Buy
Willingness
to Buy

CA Foundation 4
Determinants
Price of
Commodity
Price of
Related
Commodities
Income Of
Consumer
Taste &
Preferences of
Consumers
Consumers
Expectations
Other Factors

CA Foundation 5

CA Foundation 6

CA Foundation 7

CA Foundation 8

CA Foundation 9

CA Foundation 10

CA Foundation 11

CA Foundation 12

CA Foundation 13
Other Factors
Size of
Population
Composition of
Population
Level of
National Income
& its Distribution
Consumer
Credit Facilities
& Interest rates

CA Foundation 14
Negative Slope

CA Foundation 15
Sum of Individual Demands for a Product

CA Foundation 16
Why do demand curves slope downwards?
RationaleofthelawofDemand
Law of Diminishing
marginal utility
Price Effect
Substitution Effect
Income Effect
Arrival of New
Consumers
Different Uses

CA Foundation 17
It states that the amount of satisfaction provided by the consumption
of every additional unit of a good decrease as we increase the
consumption of that good.

CA Foundation 18

CA Foundation 19
Substitution Effect
How a change in price of a
good affects demand
compared to others.
If price of apples rises,
consumers will substitute
apples for other goods like
bananas.
Income Effect
How a change in demand for a
good is affected by a change
in real disposable income.
If price of school fees rises,
this reduces disposable
income and therefore, demand
will fall.

CA Foundation 20
Price of
commodity falls,
more consumers
start buying it
Because some of
those who could
not afford to buy
it earlier may
now be able to
buy it.

CA Foundation 21
As price of a multipurpose product increases its demand decreases
limiting its use
Milk = Rs. 30/ltr Milk = Rs. 45/ltr

CA Foundation 22
Rationaleofthelawof
Demand
Conspicuous Goods
Giffen Goods
Conspicuous
Necessities
Future Expectations
about prices
Irrational Consumers
Demand for necessaries
Speculative Goods

CA Foundation 23
Conspicuous
Goods

Goods which exhibit direct price-demand relationship are called ‘Giffen
goods’. Generally those goods which are inferior, with no close
substitutes easily available and which occupy a substantial place in
consumer’s budget are called ‘Giffen goods’.
CA Foundation 24

CA Foundation 25

CA Foundation 26
Gold Price in
Jan’20
Rs. 43,000
Gold Price in
Feb’20
Rs. 42,000
Gold Price
Future
Expectation
Rs. 39,000
As there is expectation for future price fall demand will not rise
even though the price fell from Jan to Feb.

CA Foundation 27
Consumers tend to be irrational and make impulsive purchases without
any rational calculations about the price and usefulness of the product
and in such contexts the law of demand fails.

CA Foundation 28
Irrespective of price changes, people have to consume the minimum
quantities of necessary commodities.

CA Foundation 29
In the speculative market, particularly in the market for stocks and
shares, more will be demanded when the prices are rising and less will
be demanded when prices decline.

CA Foundation 30
Other Factors
remain Constant

CA Foundation 31
Other Factors
Change

CA Foundation 32
Other Factors
remain Constant
Other Factors
Change

CA Foundation 33
Responsiveness of the quantity demanded of a good to changes in
one of the variables on which demand depends.
Degree of Change in demand
in relation to Change in
determinants

CA Foundation 34
Response of quantity demanded of a good to a change in its price,
other things remaining equal.

CA Foundation 35
Used for measuring price elasticity where the change in price is
infinitely small.

CA Foundation 36
Used for measuring price elasticity where the change in price is
somewhat larger or when price elasticity is to be found between 2
prices (i.e. 2 points on demand curve).

CA Foundation 37

CA Foundation 38

CA Foundation 39
Determinants
Availability
of
substitutes
Position of
a
commodity
in a
consumer’s
budget
Nature of
the need
that a
commodity
satisfies
Number of
uses to
which a
commodity
can be put
Time period
Consumer
habits
Tied
Demand
Price
Range

CA Foundation 40
1. If the proportion of income spent on a good remains the same as
income increases, then income elasticity for the good is equal to one.
2. If the proportion of income spent on a good increase as income
increases, then the income elasticity for the good is greater than one.
3. If the proportion of income spent on a good decrease as income
rises, then income elasticity for the good is less than one.

CA Foundation 41

CA Foundation 42

CA Foundation 43
Refers to estimating demand scientifically and objectively on the basis
of certain facts and events relevant to forecasting.
Types of Forecasts:
(1) Macro-level forecasting : deals with the general economic environment
prevailing in the economy
• Industry- level forecasting : concerned with the demand for the industry’s
products as a whole.
• Firm- level forecasting : refers to forecasting the demand for a particular firm’s
product
(2) Based on time period : demand forecasts may be short-term demand forecasting
and long-term demand forecasting.
• Short-term demand forecasting : covers a short span of time, depending of the
nature of industry. It is done usually for six months or less than one year and is
generally useful in tactical decisions.
• Long-term forecasts : for longer periods of time, say two to five years and more.
It provides information for major strategic decisions of the firm such as expansion
of plant capacity.

CA Foundation 44
Sr
No.
Particulars 1 Particulars 2
1 Producers Goods: Used for
production of other goods
Consumers Goods: Used for final
Consumption
2 Durable Goods: Consumed more
than once (do not quickly wearout)
Non-durable Goods: Cannot be
consumed more than once
3 Derived Demand: arises because
of the demand for some other
commodity (Dependent Demand)
Autonomous Demand: demand
for a product is independent of the
demand for other goods
4 Demand for Firm’s product:
demand for the products of a particular
firm eg. Demand for steel produced by
Tata Steel Co.
Industry Demand: total demand for
the products of a particular industry,
e.g. the total demand for steel in the
country
5 Short-run Demand: Demand with
its immediate reaction to changes in
other factors (price, income, etc)
Long Run Demand: Demand which
exists over a long period

CA Foundation 45
1. Survey of Buyers’ Intentions: To ask customers what they are planning to buy
during the forthcoming time period.
2. Collective opinion method: Firms having a wide network of sales personnel can
use the knowledge, experience and skills of the sales force to forecast future
demand.
3. Expert Opinion method: Instead of depending upon the opinions of buyers and
salesmen, firms solicit the opinion of specialists or experts through a series of
carefully designed questionnaires.
4. Statistical methods: Forecasts using statistical methods are considered as
superior methods because they are more scientific, reliable and free from
subjectivity.
5. Controlled Experiments: Future demand is estimated by conducting market
studies and experiments on consumer behaviour under actual, though controlled,
market conditions.
6. Barometric method of forecasting: These methods are based on past
experience and try to project the past into the future.

Law of demand and elasticity of demand

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