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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 Pourush




Demand… definition                                            The Circular Flow Model
The demand for a particular good is the amount that          Markets and Prices
will be purchased at a given price and at a given time.
                                                                     Inputs
                                                                                        >                                        Inputs
                                                                                               Input Markets
                                            - Veera Anstey
                                                                                                                           Exp
                                                                               Income
The demand for anything, at a given price, is the
amount of it which will be bought per unit of time at             Households
                                                                                                                                          Firms
that price.
                                                                               Exp                                         Rev
                                                 - Benhaur
                                                                    Products                  Product Markets                     Products
Demand is defined as the amount of commodity or
service bought per unit of time at a given price.                                                                   <
                             Sachin Pourush       - Edward                                                Sachin Pourush




Characteristics 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
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                                                                                            1.50
Mathematically,                                                                             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
3/21/2012




  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                                                                               OR
Mathematically,             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 Schedule
Analyzing       given     demand          Demand Schedule for Coffee Beans
                                                                                                      Individual Demand Schedule
schedule for Alice, who often eats
                                          Price of coffee           Quantity of coffee
Coffee beans in her breakfast,           beans (per Pound)          beans demanded
                                                                                                      A schedule or a list of various quantities of a
living her own, we can say:                                           (per gallon)                    commodity which an individual consumer purchases
She often keeps an eye on the                $ 2.00                            7.1                    at different prices in market
price i.o.t to trade-off its                    1.75                           7.5
consumption within her income.                                                                        Market Demand Schedule
                                                1.50                           8.1
She increases her consumption                                                                         A schedule which represents quantities of a
when the price get lower and                    1.25                           8.9
vice-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
3/21/2012




Market Demand Schedule                                                                            Market Demand Curve
A schedule which represents quantities of a commodity                                           The market demand curve is the horizontal sum of the individual
which 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
3/21/2012




          Exceptions To The Law of Demand                                                   Why The Curve is Downward Sloped
 Sachin
Pourush




      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 product's 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
 Sachin
Pourush




                                                                                                                                                 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
3/21/2012




          Demand Elasticity… Labels                                  Demand Elasticity… Labels
 Sachin
Pourush




           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
3/21/2012




Practical 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 Pourush




Ways of Creating Utility                                                              Importance of Production
Usage Utility                                                                         Improves standard of living of people
Transforming 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 government
Time utility
 Providing things on time when you need it
(e-Selling – Selling product over internet / TV; e-reservation)
                                                        Service utility
                                       Adding service to same product
Sachin Pourush                                (Insurance, Mobile operator Services)                               Sachin Pourush




                                                                                                                                                  7
3/21/2012




Factors 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 Pourush




Land                                                           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 Pourush




Labor                                                          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
3/21/2012




Capital                                                    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 Pourush




Enterprise / 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 Pourush




Factors 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

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Engg.eco sec b_ch01-2

  • 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 Pourush Demand… definition The Circular Flow Model The demand for a particular good is the amount that Markets and Prices will be purchased at a given price and at a given time. Inputs > Inputs Input Markets - Veera Anstey Exp Income The demand for anything, at a given price, is the amount of it which will be bought per unit of time at Households Firms that price. Exp Rev - Benhaur Products Product Markets Products Demand is defined as the amount of commodity or service bought per unit of time at a given price. < Sachin Pourush - Edward Sachin Pourush Characteristics 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. 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 1.50 Mathematically, 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. 3/21/2012 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 OR Mathematically, 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 Schedule Analyzing given demand Demand Schedule for Coffee Beans Individual Demand Schedule schedule for Alice, who often eats Price of coffee Quantity of coffee Coffee beans in her breakfast, beans (per Pound) beans demanded A schedule or a list of various quantities of a living her own, we can say: (per gallon) commodity which an individual consumer purchases She often keeps an eye on the $ 2.00 7.1 at different prices in market price i.o.t to trade-off its 1.75 7.5 consumption within her income. Market Demand Schedule 1.50 8.1 She increases her consumption A schedule which represents quantities of a when the price get lower and 1.25 8.9 vice-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. 3/21/2012 Market Demand Schedule Market Demand Curve A schedule which represents quantities of a commodity The market demand curve is the horizontal sum of the individual which 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. 3/21/2012 Exceptions To The Law of Demand Why The Curve is Downward Sloped Sachin Pourush 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 product's 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 Sachin Pourush 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. 3/21/2012 Demand Elasticity… Labels Demand Elasticity… Labels Sachin Pourush 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. 3/21/2012 Practical 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 Pourush Ways of Creating Utility Importance of Production Usage Utility Improves standard of living of people Transforming 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 government Time utility Providing things on time when you need it (e-Selling – Selling product over internet / TV; e-reservation) Service utility Adding service to same product Sachin Pourush (Insurance, Mobile operator Services) Sachin Pourush 7
  • 8. 3/21/2012 Factors 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 Pourush Land 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 Pourush Labor 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. 3/21/2012 Capital 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 Pourush Enterprise / 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 Pourush Factors 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