Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime. sec b_ch01-2


Published on

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this sec b_ch01-2

  1. 1. 3/21/2012 DEMAND… Meaning Unit – II Engineering Economics Demand = Desire to buy Meaning of Demand + Ability to pay Individual and Market Demand Schedule Law of Demand + Willingness to pay Backed up by adequate P u r c h a s i n g Powe r Shape of Demand Curve Always at a P r i c e Elasticity of demand – Always be expressed in terms of specific Q u a n t i t y Measurement, Related to T i m e Affecting Factors, Pourush Sachin Practical importance Sachin PourushDemand… definition The Circular Flow ModelThe demand for a particular good is the amount that Markets and Priceswill be purchased at a given price and at a given time. Inputs > Inputs Input Markets - Veera Anstey Exp IncomeThe demand for anything, at a given price, is theamount of it which will be bought per unit of time at Households Firmsthat price. Exp Rev - Benhaur Products Product Markets ProductsDemand is defined as the amount of commodity orservice bought per unit of time at a given price. < Sachin Pourush - Edward Sachin PourushCharacteristics of Demand Determinants of Demand It is expressed in numbers rather approximation Price of the Commodity (P) Its backed up by ability to pay Price of related commodity (Pr) Demand must mean demand per unit of time means Price expectation in future (Pe) quantity demanded is a flow (e.g. 1Mn Oranges/week) Taste & preference (T) Demand is always in a market Income of consumer (Y) Individual-specific or environmental factors (S) Demand Function Mathematically, Dx = f (P, Pr, Pe, T, Y, S) Sachin Pourush Sachin Pourush 1
  2. 2. 3/21/2012 Few other Determinants of Demand Demand Function Sachin Pourush Income distribution Demand is a function of various factors like: Wealth distribution Price Price of related Population size commodity Population age distribution Taste & Preference The interest rate Functions Price Expected Income Level Sachin Pourush Types of Demand Price Demand Price Demand* The relationship between the price and demand of a Cross Demand* commodity, other things remains constant Individual Demand & Market Demand Income Demand* Mathematically, 2.00 1.75 Long run or Short run Demand Dx = f (Px) As price rises, the quantity demanded falls 1.50 Industry or Company Demand 1.25 1.00 0.75 0.50 Sachin Pourush 0 7 Sachin Pourush 9 11 13 15 17 Demand Income Demand Cross Demand The relationship between income of the consumer and The demand derived from the relation between the the quantity demanded of a commodity, other things price of related commodity (substitute or being equal complementary) and the quantity demanded 2.00 2.00 1.75 As income rises, the Mathematically, 1.75 Fall in price of one commodity quantity demanded rises raises the demand for other 1.50 1.50Mathematically, Dx = f (Ps) 1.25 1.25 Dx = f (Y) 1.00 1.00 0.75 0.75 0.50 0.50 0 7 Sachin Pourush 9 11 13 15 17 0 7 Sachin Pourush 9 11 13 15 17 Demand Demand 2
  3. 3. 3/21/2012 Cross Demand Demand Schedule The demand derived from the relation between the Demand Schedule is one way Demand Schedule for Coffee Beans price of related commodity (substitute or of showing the relationship Price of coffee Quantity of coffee complementary) and the quantity demanded between quantity demanded beans (per Rupee) beans demanded & price. 2.00 7.1 2.00 ORMathematically, 1.75 With fall in price of good, demand for A series of prices placed in 1.75 7.5 complementary good falls Dx = f (Pc) 1.50 ascending / descending order 1.50 8.1 1.25 with corresponding quantities. 1.25 8.9 1.00 0.75 It is a numerical tabulation 1.00 10.0 0.50 that shows the quantity that 0.75 11.5 will be demanded at some 0 7 Sachin Pourush 9 11 13 15 17 selected price. 0.50 14.2 Demand Demand Schedule Types of Demand ScheduleAnalyzing given demand Demand Schedule for Coffee Beans Individual Demand Scheduleschedule for Alice, who often eats Price of coffee Quantity of coffeeCoffee beans in her breakfast, beans (per Pound) beans demanded A schedule or a list of various quantities of aliving her own, we can say: (per gallon) commodity which an individual consumer purchasesShe often keeps an eye on the $ 2.00 7.1 at different prices in marketprice i.o.t to trade-off its 1.75 7.5consumption within her income. Market Demand Schedule 1.50 8.1She increases her consumption A schedule which represents quantities of awhen the price get lower and 1.25 8.9vice-versa commodity which all consumers will buy at all 1.00 10.0 possible prices at a given moment. 0.75 11.5 0.50 14.2 Sachin Pourush Individual Demand Schedule Individual Demand Curve A schedule or a list of various quantities of a It is a graph of the individual commodity which an individual consumer purchases at demand schedule different prices in market 6 5 Price of Milk per Kg. Quantity Demanded by Jena It shows how much of a consumer (in Rupees) (in Kg.) 4 want to buy at any given price 5 1 3 and, 2 4 2 1 3 3 Alternatively, it shows how much 0 1 2 3 4 5 2 4 a consumer is willing to pay for Quantity of coffee beans (billions of pounds) each unit of a good. 1 5 Sachin Pourush Sachin Pourush 3
  4. 4. 3/21/2012Market Demand Schedule Market Demand CurveA schedule which represents quantities of a commodity The market demand curve is the horizontal sum of the individualwhich all consumers will buy at all possible prices at a demand curves of all consumers in that market.given moment. (a) (b) (c)Symbolically, Zena’s Individual Demand Curve Kane’s Individual Demand Curve Market Demand Curve DM = DA + DB + … + Dn Price of coffee Price of coffee Price of coffee beans (per beans (per beans (per pound) pound) pound)Price of Milk ($) Demand of Zena Demand of Kane Market Demand $2 $2 $2 5 1 2 1+2=3 DMarket 4 2 3 2+3=5 1 1 1 DDarla DDino 3 3 4 3+4=7 2 4 5 4+5=9 0 20 30 0 10 20 0 30 40 50 Quantity of coffee beans Quantity of coffee beans Quantity of coffee beans 1 5 6 Sachin Pourush 5 + 6 = 11 (pounds) Sachin Pourush (pounds) (pounds)Definitions of Law of Demand Law of Demand… With an Example Demand Schedule for Coffee Beans The law of demand states that amount demanded Analyzing given demand increases with a fall in price and diminishes with a rise in schedule for Alice, who Price of coffee beans Quantity of coffee price. often eats Coffee beans in (per Rupee) beans demanded Marshall her breakfast, living her 2.00 7.1 Law of demand states that people will buy more at lower own, we can say: prices and buy less at higher prices, ceteris paribus, (or 1.75 7.5 She increases her other things remaining the same). 1.50 8.1 consumption when the price Samuelson get lower and vice-versa 1.25 8.9 Usually a larger quantity of a commodity will be demanded at a lower price that a higher price. She often keeps an eye on 1.00 10.0 Benham the price i.o.t to trade-off 0.75 11.5 its consumption within her Sachin Pourush Sachin Pourush 0.50 14.2 income.Alice’s Demand Curve Features of Law of Demand Price of A demand curve is a graph of the coffee bean (per gallon) demand schedule; it shows how much There is an inverse relationship between price and of a good consumers want to buy at quantity demanded. any given price and, alternatively, it $2.00 shows how much a consumer is Demand is a dependent variable over the willing to pay for each unit of a independent variable Price 1.75 good. 1.50 (The curve below is interpolated It is merely a qualitative statement. As such it does 1.25 from 7 demand points.) not indicate quantitative changes in price and 1.00 demand. 0.75 As price rises, the quantity Demand Generally, the demand curve slopes downwards curve, D 0.50 demanded falls from left to right. 0 7 9 11 13 15 17 Sachin Pourush Quantity of coffee beans Sachin Pourush (billions of pounds) 4
  5. 5. 3/21/2012 Exceptions To The Law of Demand Why The Curve is Downward Sloped SachinPourush With fall in price, demand falls & vice-versa Law of diminishing marginal utility Giffen’s Paradox People tend to switch towards superior goods High level of consumption, when price is low Veblen’s Effect Demand of goods portraying status symbol Fear of Shortage Anticipating future shortage, people purchase more New consumers enter to the market of a product Fear of Future Rise In Price Fall in price of a superior good leads to rise in ‘Real Speculation Expecting rise or fall in prices Conspicuous Consumption Special uses in modern lifestyle Income’ of the consumer Emergencies ‘Substitution Effect’ in case of inferior good Ignorance & Necessaries Sachin Pourush Elasticity of Demand Elasticity of Demand An important aspect of a products demand curve is Elasticity is a measure of responsiveness of one how much the quantity demanded changes when the variable to change in other. price changes. The economic measure of this response Marshall is the price elasticity of demand. The elasticity of demand measures the responsiveness of the quantity demanded of a Simply, It is a calculable change in the quantity good, to change in its price, price of other goods demanded due to a relative change in any and changes in the consumer’s income. determinant of demand. Dooley Sachin Pourush Sachin Pourush Elasticity of Demand… kinds The Mathematical Representation of Elasticity SachinPourush Q Price Elasticity % Q Q Elasticity = = Income Elasticity % P P P Cross Elasticity Because the demand curve is downward sloping and the Substitution Elasticity supply curve is upward sloping the elasticity of demand is NEGATIVE and the elasticity of supply is POSITIVE. Complementary Elasticity Often these signs are implicit and ignored. Ep= Ep= Percentage Change In Quantity Demanded Percentage Change in Price Sachin Pourush 5
  6. 6. 3/21/2012 Demand Elasticity… Labels Demand Elasticity… Labels SachinPourush Perfectly elastic (e=∞) Elastic : the condition of demand when the percentage change in quantity is larger than Relatively elastic (e<1) the percentage change in price Inelastic: the condition of demand when the Price Perfectly inelastic (e=o) percentage change in quantity is smaller than the percentage change in price Relatively inelastic (e>1) Unitary Elastic: the condition of demand when Quantity the percentage change in quantity is equal to the percentage change in price Unitary elastic (e=1) Sachin Pourush Elasticity… Quick wick Demand Elasticity… Example Elasticity: the responsiveness of quantity to a change If a 2% increase in price of Chairs resulted in a 1% in another variable decrease in quantity demanded, Price Elasticity of Demand: the responsiveness of quantity demanded to a change in price the price elasticity of demand would be equal to Price Elasticity of Supply: the responsiveness of approximately 0.5 quantity supplied to a change in price Income Elasticity of Demand: the responsiveness of because, quantity demanded to a change in income Ep= Ep= Percentage Change In Quantity Demanded Percentage Change in Price Cross Price Elasticity of Demand: the responsiveness of quantity demanded of one good to a change in thus, the price of another good Ep= Ep= 1% =0.5 OR – 0.5 2% Sachin Pourush Sachin Pourush Measurement of Elasticity Determinants of Elasticity Point Method Number and Closeness of Substitutes Gra p h i c a l Me th o d s The more alternatives you have the less likely you are to pay Arc Method high prices for a good and the more likely you are to settle for Total Expenditure/ Total Outlay Method something that will do. Time horizon Variants of use Income of consumer Proportion of income spent in the consumption Necessities versus Luxuries Sachin Pourush Sachin Pourush 6
  7. 7. 3/21/2012Practical Importance of Elasticity Applications of Elasticity Elasticity enables a producer to answer: Incidence of Indirect Taxation "If I lower the price of my product, how much more will I Distribution of wealth sell?" Effect of changing price on firm revenue. "If I raise the price, how much less will I sell?" Income elasticity – as an indicator of industry health, "If we learn that a resource is becoming scarce, will future consumption patterns and as a guide to firms people scramble to acquire it?" investment decisions. Effect of international trade & terms of trade effects. Sachin Pourush Sachin Pourush Production Unit – II Engineering Economics Chapter – 2 Production Factors of production Production is the act of creating use, value or Law of Variable Proportion utility that can satisfy a want or need. Law of Returns to Scale Any effort directed toward the realization of a Internal & External Economies/ Diseconomies of Scale desired product or service is a "productive" effort. Diseconomies of Scale The performance of such act is production. Sachin Pourush Sachin PourushWays of Creating Utility Importance of ProductionUsage Utility Improves standard of living of peopleTransforming to a usable form(Transforming Cotton into Mattress) Let consumers satisfy their need / wants Place utility Enables firms to generate income Providing things at place where you need it Creates national wealth (Selling Packaged Drinking Water) Generates revenue to the governmentTime utility Providing things on time when you need it(e-Selling – Selling product over internet / TV; e-reservation) Service utility Adding service to same productSachin Pourush (Insurance, Mobile operator Services) Sachin Pourush 7
  8. 8. 3/21/2012Factors Affecting Production Factors / Means of Production Resource availability All the resources used in production Technology available Physical, non-human inputs used in production (e.g. Banking and Credit policies factories, machines, tools, stationary, phone, lights Government policies etc) Socio-cultural Factors Significant Factors: Land (L) Economic situation Labor (N) Capital (K) Organization (O) Sachin Pourush Sachin PourushLand Land - Features The whole of the materials and forces which nature Available in abundance yet scarce gives freely for man’s aid in land and water, in air, light Indestructible and heat. Immobile - Marshall Differs in variety In economics, any space virtual/ real partially or Passive factor wholly occupied for the establishing business Basis of all other factors It can be air, ocean, earth surface. Sachin Pourush Sachin PourushLabor Labor - Features By labor is meant the economic work of man, whether Mobile with the hand or with the head. Active factor - Marshall Divisible on the basis of functional specialization All the physical or mental efforts made by an Inseparable from worker individual with a view to earn a reward. Productivity can be increased, money is motivation It includes skilled & unskilled, technical & non- technical, ordinary & managerial. Sachin Pourush Sachin Pourush 8
  9. 9. 3/21/2012Capital Capital - Features Capital consists of those kinds of wealth, other than Result of saving to earning ratio free gifts of nature, which yield income. Secondary factor - Marshall Mobility All the man-made inputs given to the business It appears in various forms like plant and machinery, tools, buildings, roads, dams, bridges, means of transportation and communication. Sachin Pourush Sachin PourushEnterprise / Entrepreneur Entrepreneur - Features An entrepreneur is a person who performs dual function Purposeful activity of risk-taking and control. Risk element - F. H. Knight Dynamic process An agent who unites all factors of production – Coordination of resources land, labor and capital Schumpeter considers entrepreneur as an innovator Sachin Pourush Sachin PourushFactors Classification Fixed factor inputs Inputs that remain fixed for a certain period of time irrespective of scale of production e.g. Land, Building, Machineries etc. Variable factor inputs All the factor inputs that varies as the scale of production varies e.g. Raw material, electricity, other bills etc. Sachin Pourush 9