DEMAND

It is the DESIRE backed by:

The ABILITY

AND

The WILLINGNESS
To PAY THE PRICE

To PAY THE CURRENT MARKET PRICE

 Demand (contd.)
Hence, D = f(A, W)
Venn Diagrams used to depict Ability and Willingness:
Intersecting sets Intersection
Means ??
Ability Willingness Ability

Willingness
Disjoint sets

Must they be How does one

Congruent make ‘A’ or ‘W’
sets? favourable for a
firm?

UNEQUAL sets ??
 Demand (contd.)
• Elasticity of Demand

Stimulants Technical Term Symbol

Price of the Price Ed Edp

concerned Good

Income Income Ed EdY

Price of a Cross Ed Exy

related good

Promotions Promotional Ed EdA

 Demand and Elasticity (= Responsiveness)

∆𝑫  
%
 
∆ 𝑫
𝒆 𝒅𝒑= ( )
∆𝑷
𝒆 𝒅𝒑 =
%∆𝑷 ( )
∆𝑫 ∆𝑷  
𝒆 𝒅𝒑=
𝑫𝟎 [
×𝟏𝟎𝟎 ÷
𝑷𝟎
×𝟏𝟎𝟎
][ ]
∆𝑫 𝑷𝟎 𝟏
 
𝒆 𝒅𝒑=
[
𝑫𝟎
×𝟏𝟎𝟎 × ×
∆ 𝑷 𝟏𝟎𝟎 ][ ]
∆𝑫   𝑷𝟎
(
𝒆 𝒅𝒑 =
𝑫𝟎 )( ∆𝑷 )
 
∆𝑫 𝑷𝟎 𝑷
(
𝒆 𝒅𝒑 =
∆𝑷 )( )𝑫𝟎
=𝜷𝟐
𝑫 ( )
 Demand and Elasticity (= Responsiveness)

 
=0
 
Perfectly Inelastic Edp = 0

Relatively I   Edp < 1

 Demand and Elasticity (= Responsiveness)

% ∆ 𝑷=%∆ 𝑫
 

𝐔𝐧𝐢𝐭𝐚𝐫𝐲 𝐄𝐥𝐚𝐬𝐭𝐢𝐜 𝐃𝐞𝐦𝐚𝐧𝐝

 
Edp = 1
% ∆ 𝑷<% ∆ 𝑫  

𝐑𝐞𝐥𝐚𝐭𝐢𝐯𝐞𝐥𝐲 𝐄𝐥𝐚𝐬𝐭𝐢𝐜 𝐃𝐞𝐦𝐚𝐧𝐝

 
Edp > 1

 
=
 
Perfectly Elastic Demand Edp =
 Demand and Elasticity (= Responsiveness)

Demand

∆ 𝑫  𝟏 ∆ 𝑫  𝟐
∆ 𝑫  𝟐 ∆ 𝑷 ∆ 𝑷

∆ 𝑷
∆ 𝑫  𝟏

∆ 𝑷 RIE
RE
A
B
∆ 𝑷
Price
 Demand and Elasticity (= Responsiveness)

• Price Elasticity of Demand

 
%  ∆ 𝑫 𝒙 ∆𝑫𝒙 𝑷 𝒙𝟎 𝑷𝒙
𝒆 𝒅𝒑 =
%  ∆ 𝑷 𝒙
=
∆𝑷𝒙 ( )( ) ( )
𝑫 𝒙𝟎
= 𝜷𝟐
𝑫𝒙

Px Dx
Dx = 70 - 0.3Px
10 400
20 330 At Px = 20, Edp = ?
 Demand and Elasticity (= Responsiveness)

• Income Elasticity of Demand

 
%  ∆ 𝑫 𝒙 ∆𝑫𝒙 𝒀𝟎 𝒀
𝒆𝒅𝒀 =
%  ∆ 𝒀
=
∆𝒀 ( )( ) ( )
𝑫 𝒙𝟎
=𝜷𝟐
𝑫𝒙

Income Demand Dx = 7000 + 0.3Y

10000 400
At Y = 20k, EdY = ?
25000 600
 Demand and Elasticity (= Responsiveness)

• Promotional Elasticity of Demand

 
%  ∆ 𝑫 𝒙 ∆𝑫𝒙 𝑨𝟎 𝑨
𝒆𝒅 𝑨=
%  ∆ 𝑨
=
∆𝑨 ( )( ) ( )
𝑫𝒙𝟎
=𝜷𝟐
𝑫𝒙

Promo Exp. Demand

Dx = 10 + 0.7A
50 400
80 900 At A = 50, EdA = ?
 Demand and Elasticity (= Responsiveness)

• Cross Elasticity of Demand

 
%  ∆ 𝑫 𝒙 ∆𝑫𝒙 𝑷𝒚 𝟎 𝑷𝒚
𝒆 𝒅 𝒙𝒚 =
%  ∆ 𝑷 𝒚
=
∆𝑷 𝒚 ( )( ) ( )
𝑫𝒙𝟎
=𝜷 𝟐
𝑫𝒙

Competitive Goods Supportive Goods

Py Dy Dx Py Dy Dx

Py Dx Py Dx
50 400 50 900
80 900 80 400

Dx = 25 + 0.7Py Dx = 25 - 0.7Py
 Demand and Elasticity (= Responsiveness)

• Cross Elasticity of Demand

Substitute Goods Complementary Goods

Py Dy Dx Py Dy Dx

Py Py

Dx Dx