Why demand

Due to want satisfying power of a

commodity
 Demand schedule
• Details about quantity and price of goods
purchased by consumers

• Expressed in a tabular form

• Individual/whole market
 Demand curve
• Graphical presentation of demand
schedule
 Expansion/contraction of demand
• Change in quantity due to change in price

• It is a movement along the same curve

• Price falls, demand increases – expansion of the

demand – downward movement along the same
curve

• Price rises, demand decreases – contraction of

the demand – upward movement along the same
curve
 Increase/decrease in demand
(change in demand)
• Due to factors other than change in price

• It is shifting of demand curve

• Shifting can be upward/forward

 Change in demand
• Due to change in price (price demand)

• Due to change in income (income

demand)

• Due to change complimentary/substitute

• (cross demand)
 Price demand
• Price and quantity are inversely related

• Curve slopes downwards

 Income demand
• Superior goods : increase in demand to increase in
income (positive correlation)
• (luxury goods)
• Demand curve moves upwards

Inferior goods: fall in demand due to increase in income

(negative correlation)
Increase in income motivates to go for
purchase of luxury goods
demand curve moves downards
 Cross demand
• It relates to two types
• complimentary goods
• substitute goods
 Complimentary demand
• Goods can not be used independently

• pen and ink

• vehicle and petrol
• bread and butter

• With the increase in price, the demand for other

commodity will decrease

• Due to this reason the demand curve in case of

complementary commodity will move from left to right
downwards
Cross demand – substituted goods
• With increase in price of one of them, the
demand for the substitute commodity will
increase
• tea and coffee
 Different kinds of goods
• Superior goods
• Inferior good
• Complimentary goods
• Substitute goods
• Independent goods (books and clothes)
 Giffen paradox
• It relates to Giffen goods

• They are inferior goods

• The law of demand does not become

applicable
 Giffen paradox
• It says

• demand for goods increases on

increase in their price
• demand for goods decreases on
decrease in their prices
 Where does the law of demand
does not apply
• Giffin paradox
• Commodities which are necessaries for
life
• Commodities which involve prestige
• High price commodities
• Emergencies
 Reasons for downward slope of
demand curve
• Due to application of diminishing marginal
utility
• This law states – with increase in
consumption of a commodity by a
consumer, such additional unit provides
decreased utility
 Law of supply
• Price and supply are directly related

• Supply increases on rise in prices and falls

on decline in prices
 Supply schedule
• It can be for an individual firm
• It can be for an entire market

• It provides information about different

quantities of a commodity, which are
offered in a market for sale, at different
prices
 Supply curve
• Graphical presentation of supply schedule

• It moves from left to right upwards

• There is positive correlation with supply

and price
 Expansion of supply and
contraction of supply (due to price
factors)
• Expansion of supply

• Supply of commodity increases on account of

increase in price

• Contraction of supply
• Supply of commodity decreases on account of
decline in price
• It is also called changes in quantity omf supply
 Increase in supply/decrease in
supply (due to non-price factors)
• When supply position of a commodity
changes due to reason other than the
price, it is called increase in supply or
decrease in supply
 factors
• Technical change
• Change in fashion
• Social and political factors

• This is called change in supply

 Elasticity of demand
• Law of demand does not explain the
extent of change

• Law says demand of a commodity

increases when the price decreases

• Law says demand of a commodity

decreases when the price increases
• Extent of change is explained by the
concept of elasticity of demand

• Elasticity is a measure that explains the

change in quantity demanded due to
change in price
 Change has got three dimensions
• Due to price

• Due to income

• Due to other goods’ prices

 Due to price

• Price elasticity of demand

 Due to income

• Income elasticity of demand

 Due to other goods

• Cross elasticity of demand

 Price elasticity of demand
• Proportionate change in quantity demanded due to proportionate
change in price

• Change in quantity from 4000 to 6000

• Change in price from Rs.40 to Rs.30

• What is elasticity of demand? = 2

• =2000/4000*40/10

• = (change in quantity/original demand)*(original price/change in price)

•
 Income elasticity of demand
• Proportionate change in quantity demanded divided by
proportionate change in income of the consumer

• Quantity demanded = 100 kg at income level of Rs.8000

• Quantity demanded = 120 kg at income level of

Rs.10000
• Elasticity = .8(20/100*8000/2000)

• Change in quantity /original quantity*original

income/change in income
 Cross elasticity of demand
• It is the change in the quantity demanded of a commodity as a
result of change in the price of some other related commodity

• Proportionate change in demand of commodity A divided by

proportionate change in the price of B

• The price of commodity B has gone up from Rs.20 to Rs.24

• The demand of related commodity A has gone up from 800 to 1000

• The elasticity will be 1.25 (200/800)*(20/4)

• (Change in quantity of A/original quantity of A)*(Original price of

B/Change in price of B)
 Kinds of elasticity
• Perfect elasticity
• High elasticity (more than one)
• Elastic (equal to one)
• Less elasticity (less than one )
• Perfect inelasticity
 Perfect elasticity
• Change in demand without any change or
little change in price

• The demand curve is parallel to OX axis

 High elastic
• Proportionate change in demand is greater
than proportionate change in price
• 5% increase in price reduces demand by
20%
• Demand curve is less steep but downward
to the right – applicable in case of
consumer durables
 Unit elastic
• Proportionate change in quantity equals
proportionate change in price
• 20% increase in price leads to 20%
decrease in demand
• Demand curve is medium steep
 Less elastic
• Proportionate change in demand is less
than proportionate change in price
• Necessaries of life
• 10% increase in price with 5% decrease in
demand
• Demand curve is very
steep
downwards
 Perfectly inelastic
• Change in price not followed by change in
demand
• Acute necessities of life
• Demand curve is parallel to Y Axis
 Measurement of elasticity
• Total revenue or total outlay method
• Marshall has developed this

• The elasticity is calculated by measuring

effect on total expenditure, as a result of
change in price
 Proportionate or percentage
method
• This is calculated as proportionate change
in quantity demanded/proportionate
change in the price
 Point method
• It is calculated at a particular point on the
demand curve
 Elasticity of supply
• It is the ratio change in the quantity of
such goods supplied, to a certain change
in the price of these commodities
 types
• Perfect elastic
• Highly elastic
• Elastic
• Less elastic
• Perfectly inelastic
 Perfectly elastic
• Increase in price nominal or nil
• But change in supply substantial
 Highly elastic
• Change in price 5% but change in supply
20%
 Elastic
• Change in price 15%
• Change in supply 15%
 Less elastic

• Change in price 20%

• Change in supply 10%
 Perfectly inelastic
• Change in price 20%
• But no change in supply