Introduction to Demand and Definition

Factors Effecting Demand

Types of Goods Demand

Law of Demand and Exceptions

Elasticity of Demand and its Measurements

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By: Sri. J. Simhadri Raju, Department of Mechanical Engineering
What is demand ?........
A product is said to have Demand, only if desire for a commodity backed by ability to pay for it
and willingness to pay exist by the consumer.

What factors does effect demand variations ?.....

Demand measures the factors like….
1. Price (P)
2. Relative prices of commodity (RP)
3. Tastes & Preferences of the Consumer (T)
4. Income level of consumer (I)
5. Advertisement effort (A)
6. Expectations of the price increase in future (EP)
7. Expectations of Income in future (EI)
8. Distribution of consumers over different region (Dc)
9. Size of Population/Consumers (Sp)
10. Any other factors (O)

How does demand be determined ?.....

Quantity of products sold in a specified durations, gives the measurement of demand of that product.

Demand function, Q=f(P, RP, T, I, A, EP, EI, Dc, Sp, O)

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Nature & Types of Goods demand
 Demand always implies at a given price. How much is the quantity demanded at a given level of price? This is the
volume of demand.
 The use & characteristics of different products affect their demand.
 A product with more no of uses is naturally more in demand than with a single use.
 Demand measures for all the goods will not be same. It varies with type of product.

1. Consumer Goods Demand (Direct satisfaction) Vs Producer Goods Demand (Indirect satisfaction)
 Food Products etc Vs Machinery and Tractors etc
 Paddy (Rice seeds)- Both consumer good & Producer good
 Microwave oven- Consumer good for household & Producer good for hotel

2. Autonomous Goods Demand (Direct) Vs Derived Goods Demand (Indirect)

 Hospitals, Colleges etc Vs Medical stores, canteens etc
 Demand for houses Vs demand for steel, bricks, cement, sand, etc.

3. Durable Goods Demand Vs Perishable Goods Demand

 T.V, Refrigerator, washing machines, etc Vs Milk, Vegetables, fish etc
 Rice, wheat, sugar, etc
 The life of the perishable goods can be increased for some time by using freezing techniques.

4. Firm Goods Demand (single) Vs Industry Goods Demand (Group of firms)

Eg: 100 tonnes of cement during a given month. (Firm Demand), The construction industry in a particular state may have
used 10 million tonnes of cement. (industry demand) 3
5. Short Run Goods Demand Vs Long Run Goods Demand
 Short run demand defined as the demand with its immediate reaction to price changes, income fluctuations and
so on..
 Long run demand is the demand which will ultimately exist as a result of the changes in pricing, promotion or
product improvement after enough time is allowed to let the market adjust itself to the given situation.
 The existing demand based on the available tastes & technology at the current price is short-run demand.
 The demand that can be created in the long-run by changes in the design as a result of changes in technology is
long run demand.
 In short run demand, additional changes can not be initiated in terms of expansion of plant or hiring additional
capital and so on. One can not expand the output over a night.
 The short run is a period in which the firms can adjust their production by changing variable factors such as
material & labour. They can not change the fixed factors such as technology or capital.
 The long run is a period relatively long so that all factors of production including capital can be adjusted to meet
the market requirements.

6. New Goods Demand Vs Replacement Goods Demand

 New demand refers to the demand for the new products & it is the addition to the existing stock.
 In replacement demand, the items are purchased to maintain the asset in good condition.
Eg: The demand for the cars is new demand & the demand for the spare parts is replacement demand.
 Replacement demand may also refers to the demand resulting out of replacing the existing assets with the new
ones. Eg: Exchange schemes.

7. Total Market Goods Demand Vs Segment Market Goods Demand

 Sugar Industry, Cement Industry etc Vs Sweets shops, Cement selling shops etc
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Law of Demand: Law of demand presents a Demand curve showing relationship between the quantity
demand of a good and its price, while all other factors influencing on consumers’ plan of purchasing remaining the
same. Hence it can be stated as “ Other things remaining the same, for every fall in the price of a good there
will be an increase in quantity demanded”.
 As the price lowers, the quantity increases.
Demand curve sloping downwards from left to right.

Exceptions of Law of Demand:

1. Where there is a shortage feared: If a consumer feels that there is a possibility of price hikes or shortage
in the future, even at high price he/her buy more.
2. Where the product is such that it confers distinction: products giving prestigious look. (Eg:
Jewellery, diamonds, etc.- Veblen goods)
3. Giffens Paradox: Even price falls, some people (low level) feel not to buy more, instead spent it on other
product.
4. In case of ignorance of price changes: The consumer does not keep track of price changes and so tends
to buy at any price.

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Change in Demand:
The increase or decrease in demand due to change in the factors other than price is Called
change in demand.
 Change in demand leads to a shift in the demand curve to the right or the left.
Increase in demand:
 if the customers are willing and able to buy more of a particular commodity at the same price,
the result will be an increase in demand.
Eg: rain coats, seasonal fruits, etc.
Decrease in demand:
 A decrease in demand occurs when buyers are ready to buy less of a product at the same price because of
factors like fall in income, rise in price of complementary goods and so on.
Eg: cloths, car, sugar, etc.

Increase in Demand (D1-D1) and

Decrease in Demand (D2-D2)

Extension and contraction in demand curve:

A movement along the demand curve shows a change in the quantity demanded.

Contraction in Demand and

Extension in Demand
Significance of law of demand:
• It is the primary law in the consumption theory in economics.

• It indicates consumer behaviour for a given change in the variables

in the study.

• Despite assumptions that other things remaining the same, the

results of the law of demand are time tested and have been basis
for further decisions relating to costs, output investment
appraisals and so on.

• Learning outcome: Classify demand for different types of goods. [L2]

• Session quiz:
https://docs.google.com/forms/d/1V_KdbDp4q8657_aE43HwzclIF1_r5o7G0w1
VJJpGqFQ/edit?gxids=7757
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Elasticity of demand ?........
Demand varies with several factors. So each and every factors has its own effect on demand and make
demand to respond accordingly.
Elasticity of Demand is “ Rate of Responsiveness in the demand of a product for a given change in any
of the factors determining demand”.
% change in demand of goods X
Elasticity of Demand ( ED) 
% change in factor effecting demand of goods X
 It is the ratio of proportionate change in quantity demanded to the proportionate change in the
demand determinants.
The total revenue from the sale of a good equals the price of the good multiplied by the quantity sold. An
increase in price increases the revenue on each unit sold. But an increase in price also leads to a decrease
in the quantity sold. Whether the total expenditure increases or decreases after a price hike, depends on the
responsiveness of demand to the price.

Significance of elasticity of demand variations .....

1. To fix prices of “Factors of Production” like Men, Material, Technology, Capital, Land etc.
 E.g.: Land will be elastic in nature in villages, whereas in towns it will be in-elastic.
2. To formulate or revise government policies like price hikes for petrol, public utilities, bank deposit
interests, revaluation of currencies with imports and exports, etc
3. To prices for goods and services rendered, like in case of monopoly or where competition exists
(Oligopoly).
4. To forecast demand.
5. To plan levels of inputs and outputs, like asses change in price Vs revenue.

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Types of Elasticity of demand........
Demand varies with several factors and hence it will depend on the factor that is been considered.

% change in demand of goods X

Elasticity of Demand ( ED) 
% change in factor effecting demand of goods X
1. Price Elasticity: A measure of the responsiveness of the quantity demanded of a good to a change in its
price, other things remaining the same.
 It is the ratio of proportionate change in quantity demanded to the proportionate change in the price.
(Q2  Q1 )

Price
Q1 Demand Curve
PED 
( P2  P1 )
2. Income Elasticity P1 Quantity
 It is the ratio of proportionate change in quantity demanded to the proportionate change in the Income.

(Q2  Q1 ) Demand Curve

Q1

Income
I ED 
( I 2  I1 )
I1
3. Cross Elasticity Quantity
 It is the ratio of proportionate change in quantity demanded to the proportionate change in the price of
relative goods change.
(Q2  Q1 )
Q1
CED 
( PR2  PR1 )
4. Advertising Elasticity PR1
 It is the ratio of proportionate change in quantity demanded to the proportionate change in the
Advertisement cost.
(Q2  Q1 )
Q1
AED 
( A2  A1 )
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A1
 Measurement of Elasticity of demand .....
Demand measures for all the goods will not be same. It varies with type of product like….
1. Perfectly Elastic Demand: If a product can be sold at any given price and no need to reduce the price,
is said to be perfectly elastic.
Or in other words, “If the quantity demanded is indefinitely responsive to a price change, then the magnitude of
the elasticity of demand is infinity, and demand is said to be perfectly elastic”.

(Q2  Q1 ) (Q2  Q1 )
Q1 Q1
PED   
Demand Curve ( P2  P1 ) 0
Price

P1

Quantity
Figure: Perfectly Elastic Demand Curve
2. Perfectly In-Elastic Demand: If a product demand is fixed ir-respective of the price variation, is said to
be perfectly in-elastic.
Demand Curve
(Q2  Q1 )
Q1 0
PED   0

Price
( P2  P1 ) ( P2  P1 )
P1 P1

Quantity
Figure: Perfectly In-Elastic Demand Curve
Or in other words, “If the quantity demanded is indefinitely irresponsive
to a price change, then the magnitude of the elasticity of demand is Zero,
and demand is said to be perfectly In-elastic”. 10
 Measurement of Elasticity of demand .....
3. Relatively Elastic demand – If demand of a product is little higher when compared to the price change,
is said to be relatively elastic. So, the elasticity will be greater than 1.
P  Q

Price
PED  1 Demand Curve

Quantity
Figure: Relatively Elastic Demand Curve E.g: Printers, Electronic Goods etc
4. Relatively Inelastic demand - If the percentage change in the quantity demanded is less than the
percentage change in price, then the magnitude of the elasticity of demand is between zero and 1, and
demand is said to be inelastic.
Demand Curve

P  Q
E.g.: Toxic, Cigarettes etc
Price

PED  1

Quantity

Figure: Relatively In-Elastic Demand Curve

5. Unit elastic demand - If the percentage change in the quantity demanded is equal to the percentage
change in price, then the magnitude of the elasticity of demand is 1 and is said to be Unit elastic.

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 What factors governs elasticity of demand variations ?.....

1. Time Frame
 Products available nearer to the customer has more demand than having same product at
far of places, due to time frame.
2. Degree of Postponement
 When customer does not feel the necessity right know, or if he is not in a position to buy,
then the demand of the product may be postponed.
3. Several alternatives/Substitutes available
 If a product can be replaced by another alternate product with lesser price.
4. Uses of a product in several ways
 If a product can be used in several forms, the demand varies, like electricity, fuels etc.
5. Level of price Hikes
 If the variation in price is in a small range, then the demand exists. If the price hikes is too
low or too high, then customer will tend not buy it due to wrong perception about the product
or due to his in-ability to buy, respectively.
6. Government policies.
7. Expectation of price hikes
8. Durability of the product.
9. Nature of product.

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Learning outcome: Analyze the elasticity of demand for various economic goods. [L4]

Session quiz:

https://docs.google.com/forms/d/1nOOVJMG_IrRX6a7otzzeLwaFUGNVZ0ApyQkmRNfI-F0/edit?ts=5f570738&gxids=7757

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POINT ELASTICITY and ARC ELASTICITY
• A demand curve does not have the same elasticity through-out its entire length.

• In general, elasticity differs at different points on a given demand curve.

• However, this does not hold in the following three cases: a) perfectly elastic b) perfectly inelastic and c) unity elasticity.

• The demand curves in each of these cases possess a single elasticity through-out its entire length.

• The elasticity computed at a single point on the demand

curve for an infinitesimal change in price is called
Point Elasticity.

• The elasticity between two separate points of demand

curve is called Arc Elasticity.

• Point elasticity is more precise than arc elasticity concept.

• The point elasticity is defined as the proportionate change in quantity demanded

resulting from a very small change in price of that commodity. It is expressed as,

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 GRAPHICAL REPRESENTATION OF POINT ELASTICITY
Linear demand curve Non-linear demand curve
• Here point elasticity is the ratio of • At any point to the right of point P1, elasticity is less
than unity (Ep<1).
the segments of the line to the right
• Any point to its left (Ep>1); where the demand curve
and to the left of the particular
touches the vertical axis Ep--> ꝏ
point.
• Where the demand curve touches the horizontal
• At point R1, elasticity= (R1D2/R1D1) axis Ep=0.
• At point R2, elasticity= (R2D2/R2D1) • Thus the range of elasticity are 0<Ep< ꝏ.
• To the right of P1, the demand is said to be inelastic
(i.e., 0<Ep<1) and to the left of P1, The demand is
said to be inelastic (i.e., 1<Ep<ꝏ).

Ep=0, the demand is perfectly inelastic

Ep=1, the demand is perfectly unity elasticity
Ep= ꝏ, the demand is perfectly elastic

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 Arc Elasticity
 Arc elasticity measures the average responsiveness to price change over a finite
stretch on the demand curve.

 To make the arc elasticity more meaningful, compute between the points on the
demand curve that are close enough.
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 END OF MODULE-I

THANK YOU.....
ANY QUERRIES????

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