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Market Demand

Definition: The total quantity that all the individuals are willing to and are able to buy at a given price,
other things remaining the same is called as Market Demand. In other words, Market Demand refers to
the sum of individual demands for a product at a given price per unit of time.

What is Individual Demand? Individual demand refers to the quantity of a commodity demanded by
an individual per unit of time, at a given price. The aggregate of individual demands for a product per
unit of time constitutes the market demand. The market demand schedule and the curve can be obtained
if the individual demand schedules or individual demand functions are known. Thus, the demand curve
can be derived by adding up:

Price of A Quantity Demanded Quantity Demanded Quantity Demanded Market


(Rs.) by P by Q by R Demand

30 0 0 0 0

25 5 0 0 5

20 10 5 0 15

15 15 10 5 30

10 20 15 10 45

5 25 20 15 60

1. Individual Demand Schedules


2. Individual Demand Functions
Demand Curve Obtained from Individual Demand
Schedules: Suppose, there are three consumers (P, Q, R)
of commodity A, and their monthly demand schedules are
given in the table below:

The table shows individual demands of the three


consumers at different prices of commodity A. The last
column shows the market demand (sum of individual
demands). On the basis of an individual and the market
demand schedule, the demand curve can be obtained by
plotting the market demand of commodity X against
respective prices.

Demand Curve obtained from Individual Demand


Functions: The demand curve can also be obtained by
using the individual demand function. Suppose, the
individual demand function of three consumers (P, Q, R)
for commodity A are given as:
P’s Demand Function: DP = 75 – 10 PA
Q’s Demand Function: DQ = 50 – 7 PA
R’s Demand Function: DR = 25 – 5 PA
Given, the individual demand functions, the market demand function can be obtained by adding up all
these individual functions. Thus,
DM= (75 – 10 PA) + (50 – 7 PA) + (25 – 5 PA) = 150 -22PA
This demand function can be converted into a market demand schedule by assigning the numerical value
to PA. Once the schedule is obtained, the demand curve can be drawn by plotting the demand schedule.
Ref: https://businessjargons.com/market-demand.html
Related Terms:
1. Law of Demand
2. Law of Supply
3. Reasons for Law of Demand
4. Determinants of Market Demand
5. Types of Demand
Demand Analysis

Definition: The Demand Analysis is a process whereby the management makes decisions with respect
to the production, cost allocation, advertising, inventory holding, pricing, etc. Although, how much a firm
produces depends on its production capacity but how much it must endeavor to produce depends on the
potential demand for its product.

Thus, the marketer is required to analyze properly the demand for its product in the market and must
hold inventory accordingly. Such as if there is a potential demand in the future, then the firm should hold
more inventories and in case there is no demand, then the production remains unwarranted, and hence,
lesser inventories are held. There is a possibility that production might exceed the demand, then the
marketer must use alternative ways such as better advertisements to create a new demand.
The demand shows the relationship between two economic variables, the price of the product and the
quantity of product that a consumer is willing to buy for a given period of time, other things being equal.

Features/Characteristics of Demand
The following are the main features or characteristics of demand that the marketer must keep in mind
while analyzing the demand for its product:
• The demand is the specific quantity that a consumer is willing to purchase. Thus, it is
expressed in numbers.
• The demand must mean the demand per unit of time, per month, per week, per day.
• The demand is always at a price, e. any change in the price of a commodity will bring about a
certain change in its quantity demanded.
• The demand is always in a market, a place where a set of buyers and sellers meet. The market
needs not to be a geographical area.
Thus, demand plays a crucial role in the success of any business enterprise. And it must be remembered
that demand is always at a price and a particular time period in which it is created. Such as demand for
woolen clothes will be more in winters than in any other season. Hence, demand analysis is always done
in terms of the price and the relevant time period.

Ref: https://businessjargons.com/demand-analysis.html
Law of Demand
Definition: The Law of Demand asserts that there is an inverse relationship between the price, and the
quantity demanded, such as when the price increases the demand for the commodity decreases and
when the price decreases the demand for the commodity increases, other things remaining unchanged.

In the definition, the “other things” are the factors that influence the demand such as consumer’s
income, price of related goods, consumer’s tastes and preferences, advertisement, etc. The law of
demand can be further illustrated by the Demand Schedule and the Demand Curve.
Demand Schedule: The demand schedule is a tabular presentation of series of prices arranged in some
chronological order, i.e. either in ascending or descending order along with their corresponding quantities
which the consumers are willing to purchase per unit of time. A hypothetical daily demand schedule for
the commodity (Wheat) is given below:

Wheat Demanded by Family/Day


Price of Wheat/Kg Price Quantity Combinations
(In Kg)

15 2 A

14 3 B

13 4 C

12 5 D

11 6 E

10 7 F

9 8 G

The table clearly illustrates the law of demand, i.e. the demand for wheat increases as its price
decreases. For example, at price Rs 14/kg only 3 kg of wheat is demanded, but as the price decreases to
Rs 13/kg the quantity demanded increased to 4 kg.
Demand Curve: Demand curve is formed when the demand and price data in the demand schedule is
plotted on a graph. Thus, the demand curve is the
graphical representation of the demand schedule.
The above demand schedule is represented
graphically in the figure below:

The DD’ is the demand curve that depicts the law of


demand. The demand curve is downward sloping
towards the right, which shows that as the price of
the wheat decreases the quantity demanded
increases.
While plotting the demand curve the following
assumptions are to be taken into the consideration:
• The consumer’s tastes and preferences remain
unchanged.
• The discontinuous change is ignored, and
therefore the price-demand relationship is
considered continuous.
• The consumer’s income remains same.
• No individual can influence the price.
• The price of the related goods remains the same.
Thus, it is clear from the above explanation that the
law of demand strictly follows an inverse
relationship between the price of the product and its
quantity demanded, i.e. the quantity decreases with the increase in the price and vice-versa.
Ref: https://businessjargons.com/law-of-demand.html
Reasons for Law of Demand

Definition: The Law of Demand explains the downward slope of the demand curve, which posits that
as the price falls the quantity demanded increases and as the price rise, the quantity demanded
decreases, other things remaining unchanged.There are several factors that explain why the demand
curve slopes downward or why the law of demand showing an inverse relation between the price and
quantity is valid?

Reasons for Law of Demand

1. Substitution Effect: The Substitution effect is seen


when the quantity demanded for one commodity
changes due to the change in the price of other
closely related commodity. Such as, if the price of the
commodity decreases while the price of the other is
assumed to remain the same, then the latter
becomes dearer and the demand for the cheaper
commodity increases. For example, suppose the
price of tea decreases while the price of coffee
remains unchanged, then the tea will be substituted
for coffee and thus the demand for tea increases.
This effect of increase in the demand for tea is called
as the substitution effect.
2. Income Effect: The income effect explains the
change in demand due to the change in the real
income of the consumer as a result of the change in the price of the given commodity. Such as,
with the fall in the price of a commodity, the real income (purchasing power) of the consumer
increases since the consumer can now purchase more units of the commodity with the same
amount of money income. Thus, the increase in demand due to the increase in the real income is
called as the income effect. For example, Suppose a boy purchases 5 ice-creams for Rs 50, and if
the price of ice-cream falls to Rs 8, now he can purchase 6 ice-creams with the same amount of
money income or may decide to buy the same quantity and save the rest of the money, as he is
required to spend less.
3. Utility-Maximizing Behavior: The consumer theory posits that the consumer buys goods and
services to maximize his total utility (satisfaction). We know, that the marginal utility decreases
with each additional unit of the commodity and thus, this is one of the reasons for the downward
slope of the demand curve, which shows that the demand for the normal goods increases with the
fall in the prices. A person exchanges his money income for the purchase of the commodity so as to
maximize his satisfaction. He continues to buy the commodity as long as the marginal utility of
money (MUm) is less than the marginal utility of the commodity (MUx).
4. Large Number of Consumers: The effect on demand due to the change in the number of
consumers as a result of a change in the price also causes the demand curve to slope downwards.
Such as, if the price of the commodity falls, then many new consumers who were earlier not able to
afford the commodity due to its high price, starts purchasing it. And as a result, the demand for the
commodity increases.On the other hand, if the price rises, then few rich people can buy it, and
many consumers will withdraw themselves from the market. And as a result, the demand for the
commodity decreases.
5. Varied Uses of the Product: This is one of the important reasons for the law of demand, which
explains that the product has several uses and can be utilized for different purposes. When the
price of the commodity rises, then the consumer restricts its usage for the most important purpose.
On the other hand, if the commodity becomes cheap then it can be utilized for all kinds of purposes,
whether important or not. For example, if the price of coal increases, then it will be more used in
the industries where it is an essential raw material, whereas its demand for less important use such
as in household (bonfire) gets reduced.
Thus, these are the important factors that explain the slope of the demand curve and advocates that the
law of demand is valid.
Ref: https://businessjargons.com/reasons-for-law-of-demand.html
Law of Supply

Definition: The Law of Supply posits that there is a positive relationship between the supply of a
commodity and its price, such that the supply of the commodity increases with the increase in its price
and decreases with the fall in its price, other things remaining constant.

Here, “other things” are the factors that influence the supply of the commodity such as technology,
input prices, price of related products, nature and size of the industry, government policy, etc. The law of
supply is based on the notion, that as the price of a product increases the suppliers with an objective to
maximize their profits increases the production of a commodity for sale.
The concept of the law of supply can further be illustrated by Supply Schedule and Supply Curve.
Supply Schedule: The supply schedule is the tabular representation of the different prices of the
commodity and the corresponding quantities that the suppliers are willing to offer for sale. A hypothetical
daily supply schedule of rice is given below:

Supply of Rice/day
Price of Rice/Kg Price quantity combinations
(In Kg)

10 5 A

11 6 B

12 7 C

13 8 D

14 9 E

15 10 F

16 11 G

The law of supply is well substantiated through the


table above, which shows that the supply of rice
increases with the increase in the price. Such as
when the price of rice is Rs 14/ kg the supply of
rice is 9/Kg and as the price rise to Rs 15/kg the
supply also increases to 10/kg.

Supply Curve: The supply curve is the graphical


representation of the supply schedule which shows
different combinations between the price and the
quantity supplied.

SS’ is the upward sloping supply curve, which


depicts the law of supply, i.e. the supply of rice
.
increases with the increase in its price

Ref: https://businessjargons.com/law-of-supply.html
Determinants of Market Demand
Definition: The Market Demand is defined as the sum of individual demands for a product per unit of
time, at a given price. Simply, the total quantity of a commodity demanded by all the buyers/individuals
at a given price, other things remaining same is called the market demand.

There are several factors that determine the demand for a product. These are:

1. Price of the Product: The price of a product is the most important determinant of market demand
in the long-run and the only determinant in the short-run. As per the law of demand, the price of
a product and its quantity demanded are inversely related, i.e. the quantity demanded increases
when the price falls and decreases when the price rises, other things remaining the same. Here,
other things imply that the income of the consumer, the price of the substitute and complementary
goods, tastes and preferences and the number of consumers, all remains constant. The price-
demand relationship has more significance in the oligopolistic market structure in which the result
of a price war among the firm and its rival decides the level of success of the firm.
2. Price of the Related Goods: The market demand for a commodity is also affected by the changes
in the price of the related goods.
The related goods may be the
substitute or complementary
goods. Two commodities are
said to be a substitute for one
another if they satisfy the
same want of an individual and
the change in the price of one
commodity affects the
demand for another in the
same direction. Such as, tea
and coffee, Maggi and Yippie,
Pepsi and Coca-Cola are close
substitutes for each other. The
increase in the price of either
commodity the demand for the
other also increases and vice-
versa. A commodity is said to
be a complement for another if
the use of two goods goes
together such that their
demand changes (increases
or decreases) simultaneously. For example, bread and butter, car and petrol, mattress and cot,
etc. are complementary goods. The increase in the price of either commodity the demand for
another decreases and vice-versa.
3. Consumer’s Income: The income is the basic determinant of the quantity demanded of a product
as it decides the purchasing power of the consumers. Thus, people with higher disposable
income spend a larger amount of income on consumer goods and services as compared to
those with lower disposable income. Consumer goods and services can be grouped under four
categories: essential goods, inferior goods, normal goods, and prestige or luxury goods. The
relationship between the consumer’s income and these goods is explained below:
• Essential Consumer Goods: The essential goods are the basic necessities of the life and are
consumed by all the persons of the society. Such as food grains, salt, cooking oil, clothing, housing,
etc., the demand for such commodities increases with the increase in consumer’s income but only
up to a certain limit, although the total expenditure may increase with respect to the quality of
goods consumed, other things remaining the same.
• Inferior Goods: A commodity is deemed to be inferior if its demand decreases with the
increases in the consumer’s income beyond a certain level of income and vice-versa. For
example, Bajra, millet, bidi are the inferior goods.
• Normal Goods: The normal goods are those goods whose demand increases with the
increase in the consumer’s income, such as clothing, household furniture, automobiles, etc. It is
to be noted that, demand for the normal goods increases rapidly with the increase in the
consumer’s income but slows down with a further increase in the income.
• Luxury Goods: The luxury goods are those goods which add to the prestige and pleasure of
the consumer without enhancing the earnings. For example, jewelry, stone, gem, luxury cars, etc.
The demand for such goods increases with the increase in the consumer’s income.
4. Consumers’ tastes and preferences: Consumer’s Tastes and preferences play a vital role in
determining a demand for a product. Tastes and preferences often depend on the lifestyle, culture,
social customs, hobbies, age and sex of the consumers and the religious sentiments attached to a
commodity. The change in any of these factors results in the change in the consumer’s tastes and
preferences, thereby resulting in either increase or decrease in the demand for a product.
5. Advertisement Expenditure: Advertisement is done to promote sales of a product. It helps in
stimulating demand for a product in four ways; by informing the prospective consumers about
the availability of a product, by showing its superiority over the competitor’s brand, by influencing
the consumer’s choice against the rival product and by setting new fashion and changing tastes of
the consumers. The effect of advertisement is said to be fruitful if it leads to the upward shift in the
demand curve, i.e. the demand increases with the increase in the advertisement expenditure, other
things remaining constant.
6. Consumers’ Expectations: In the short run, the consumer’s expectation with respect to the
income, future prices of the product and its supply position plays a vital role in determining
the demand for a commodity. If the consumer expects a high rise in the price of the commodity,
shall purchase it today at a high current price so as to avoid the pinch of the high price in the
future. On the contrary, if the prices are expected to fall in the future the consumer will postpone
their purchase with a view to avail benefits of lower prices in the future, especially in case of
nonessential goods. Likewise, an expected increase in the income increases the demand for a
product and vice-versa. Also, in the case of scarce goods, if its production is expected to fall short
in the future, the consumer will buy it at current higher prices.
7. Demonstration Effect: Often, the new commodities or new models of an existing product are
bought by the rich people. Some people buy goods due to their genuine need for them or have
excess purchasing power. While some others do so because they want to exhibit their affluence.
Once the commodity is in very much fashion, many households buy them not because they have a
genuine need for them but their neighbors have purchased it. Thus, the purchase made by such
people arises out of feelings as jealousy, equality in society, competition, social inferiority,
status consciousness. The purchases made on the account of these factors results in the
demonstration effect, also called as Bandwagon Effect.
8. Consumer-Credit Facility: The availability of credit to the consumer also determines the demand
for a product. The credit extended by sellers, banks, friends, relatives or from other sources induces
a consumer to buy more than what would have not been possible in the absence of the credit. Thus,
the consumers with more borrowing capacity consumes more than the ones who borrow
less.
9. Population of the Country: The population of the country also determines the total domestic
demand for a product of mass consumption. For a given level of per capita income, tastes and
preferences, price, income, etc., the larger the size of the population the larger the demand
for a product and vice-versa.
10.Distribution of National Income: The national income is one of the basic determinants of the
market demand for a product, such as the higher the national income, the higher the demand
for all the normal goods. Apart from its level, the distribution pattern of the national income
also determines the overall demand for a product. Such as, if the national income is unevenly
distributed, i.e., the majority of the population falls under the low-income groups, then the market
demand for the inferior goods will be more than the other category goods.
Thus, the demand for a commodity can be estimated or analyzed by studying the determinants of market
demand and the nature of the relationship between the demand and its determinants.
Ref: https://businessjargons.com/determinants-of-market-demand.html
Types of Demand
Definition: The Demand for a product refers to the quantity of goods and services that the consumers
are willing to buy at a particular price for a given point of time.

Types of Demand
The demand can be classified on the following basis:

1. Individual Demand and Market Demand: The individual demand refers to the demand for goods
and services by the single consumer, whereas the market demand is the demand for a product by
all the consumers who buy that product. Thus, the market demand is the aggregate of the
individual demand.
2. Total Market Demand and Market Segment
Demand: The total market demand refers to
the aggregate demand for a product by all the
consumers in the market who purchase a
specific kind of a product. Further, this
aggregate demand can be sub-divided into the
segments on the basis of geographical areas,
price sensitivity, customer size, age, sex, etc.
are called as the market segment demand.
3. Derived Demand and Direct Demand: When
the demand for a product/outcome is associated
with the demand for another product/outcome
is called as the derived demand or induced
demand. Such as the demand for cotton yarn is
derived from the demand for cotton cloth.
Whereas, when the demand for the products/
outcomes is independent of the demand for
another product/outcome is called as the direct
demand or autonomous demand. Such as, in
the above example the demand for a cotton
cloth is autonomous.
4. Industry Demand and Company Demand:
The industry demand refers to the total aggregate demand for the products of a particular industry,
such as demand for cement in the construction industry. While the company demand is a demand
for the product which is particular to the company and is a part of that industry. Such as demand
for tyres manufactured by the Goodyear. Thus, the company demand can be expressed as the
percentage of the industry demand.
5. Short-Run Demand and Long-Run Demand: The short term demand is more elastic which
means that the changes in price or income are reflected immediately on the quantity demanded.
Whereas, the long run demand is inelastic, which shows that demand for commodity exists as a
result of adjustments following changes in pricing, promotional strategies, consumption patterns,
etc.
6. Price Demand: The demand is often studied in parlance to price, and is therefore called as a price
demand. The price demand means the amount of commodity a person is willing to purchase at a
given price. While studying the demand, we often assume that the other factors such as income of
the consumer, their tastes, and preferences, the prices of other related goods remain unchanged.
There is a negative relationship between the price and demand Viz. As the price increases the
demand decreases and as the price decreases the demand increases.
7. Income Demand: The income demand refers to the willingness of an individual to buy a certain
quantity at a given income level. Here the price of the product, customer’s tastes and preferences
and the price of the related goods are expected to remain unchanged. There is a positive
relationship between the income and demand. As the income increases the demand for the
commodity also increases and vice-versa.
8. Cross Demand: It is one of the important types of demand wherein the demand for a commodity
depends not on its own price, but on the price of other related products is called as the cross
demand. Such as with the increase in the price of coffee the consumption of tea increases, since tea
and coffee are substitutes to each other. Also, when the price of cars increases the demand for
petrol decreases, as the car and petrol are complimentary to each other.
These are some of the important types of demand that the firms must cater to before deciding on the
price and other factors related to their products.
Ref: https://businessjargons.com/types-of-demand.html
Elasticity of Demand

Definition: The Elasticity of Demand is a measure of change in the quantity demanded in response to
the change in the price of the commodity. Simply, the effect of a change of price on the quantity
demanded is called as the elasticity of demand.

Marshall, a renowned economist, has suggested a mathematical method to measure the elasticity of
demand:

According to this formula, the elasticity


of demand can be defined as a
percentage change in demand as a
result of the percentage change in
price. Numerically, it can be written as:

Where,
ΔQ = Q1 –Q0
ΔP = P1 – P0

Q1= New quantity
Q2= Original quantity
P1 = New price
P0 = Original price
Importance of Elasticity of Demand
• The concept of demand elasticity helps in understanding the price determination by the
monopolist. A monopoly is the market structure wherein there is only one seller whose main
objective is to maximize the profits. The price he chooses for his product depends on the elasticity
of demand. Such as, if the demand for a commodity is high he can choose the higher price as the
consumers will buy the product even when the price rise. But however, if the demand is elastic, he
will choose the lower prices.
• The determination of the price depends on demand for and supply of the commodity. But
however, the demand is governed by the demand elasticity and the supply too is governed by the
elasticity of supply. Therefore, the price of a commodity depends on both the demand and supply
elasticity.
• The concept of demand elasticity also helps in understanding other types of prices, such as
exchange rates, i.e. a rate at which currency unit of one country is exchanged for the currency unit
of another country. Also, the terms of trade, i.e. the rate at which the exports are changed for
imports can be easily understood through this concept.
• The concept of elasticity of demand also helps the government in its taxation policies. This helps
the government to have a fair idea about the demand elasticity of goods which are being taxed.
• This concept also helps in the determination of wages, such as if the demand for labor is inelastic
the union can demand higher wages and conversely if the labor demand is elastic the demand for
higher wages could not be raised.
Thus, the concept of elasticity of demand is very important to understand the economic problems and
policies. This is very well elucidated through the points explained above.
Ref: https://businessjargons.com/elasticity-of-demand.html
Types of Elasticity of Demand

Definition: The Elasticity of Demand
measures the percentage change in quantity
demanded for a percentage change in the
price. Simply, the relative change in demand
for a commodity as a result of a relative
change in its price is called as the elasticity of
demand.

Types of Elasticity of Demand

1. Price Elasticity of Demand: The price elasticity of demand, commonly known as the
elasticity of demand refers to the
responsiveness and sensitiveness of
demand for a product to the changes
in its price. In other words, the price
elasticity of demand is equal to

Numerically,

Where,

ΔQ = Q1 –Q0, ΔP = P1 – P0, Q1= New quantity, Q2=


Original quantity, P1 = New price, P0

= Original priceThe following are the main Types of Price


Elasticity of Demand:

erfectly Elastic Demand

P
Perfectly Inelastic Demand

Relatively Elastic Demand

Relatively Inelastic Demand

Unitary Elastic Demand

2. Income Elasticity of Demand: The income is the other factor


that influences the demand for a product. Hence, the degree of
responsiveness of a change in demand for a product due to the
change
in the
income
is known
a s
income
elasticity
of demand. The formula to compute the income elasticity of demand is:

For most of the goods, the income elasticity of demand is greater than one indicating that
with the change in income the demand will also change and that too in the same direction, i.e.
more income means more demand and vice-versa.

3. Cross Elasticity of Demand: The cross elasticity of demand refers to the change in quantity
demanded for one commodity as a result of
the change in the price of another
commodity. This type of elasticity usually
arises in the case of the interrelated goods
such as substitutes and complementary goods. The cross elasticity of demand for goods X and Y
can be expressed as:

The two commodities are said to be complementary, if the price of one commodity falls,
then the demand for other increases, on the contrary, if the price of one commodity rises the
demand for another commodity decreases. For example, petrol and car are complementary
goods. While the two commodities are said to be substitutes for each other if the price of one
commodity falls, the demand for another commodity also decreases, on the other hand, if the
price of one commodity rises the demand for the other commodity also increases. For example,
tea and coffee are substitute goods.

4. Advertising Elasticity of Demand:   The responsiveness of the change in demand to the


change in advertising or rather
promotional expenses, is known as
advertising elasticity of demand. In other
words, the change in the demand as a
result of the change in advertisement and
other promotional expenses is called as
the advertising elasticity of demand. It can
be expressed as:

Numerically,

Where,

Q1 = Original Demand

Q2= New Demand

A1= Original Advertisement Outlay

A2 = New Advertisement Outlay

These are some of the important types of elasticity of demand that helps in understanding the
criteria of demand for the goods and services and the factors that influence the demand.

Ref: https://businessjargons.com/types-of-elasticity-of-demand.html

Types of Price Elasticity of Demand


Definition: The Price Elasticity of Demand is commonly known as
the elasticity of demand, which refers to the degree of
responsiveness of demand to the change in the price of the
commodity.

Types of price Elasticity of Demand

The following are the main types of price elasticity of demand:

1. Perfectly Elastic Demand (Ep = ∞): The demand is said to be


perfectly elastic when a slight change in the price of a commodity causes a major change in its
quantity demanded. Such as, even a small rise in the price of a commodity can result into fall in
demand even to zero. Whereas a little fall in the price can result in the increase in demand to
infinity.

In perfectly elastic demand the demand curve is a straight horizontal line which shows, the
flatter the demand curve the higher is the elasticity of demand.

2. Perfectly Inelastic Demand (Ep =0): When there is no change in


the demand for a product due to the change in the price, then the
demand is said to be perfectly inelastic. Here, the demand curve is a
straight vertical line which shows that the demand remains
unchanged irrespective of change in the price., i.e. quantity OQ
remains unchanged at different prices, P1, P2, and P3.

3. Relatively Elastic Demand (1 to ∞): The demand is relatively


elastic when the proportionate change in the demand for a
commodity is greater than the proportionate change in its price.
Here, the demand curve is gradually sloping which shows that a
proportionate change in quantity from OQ0 to OQ1 is greater than
the proportionate change in the price from OP1 to Op2.

4. Relatively Inelastic Demand (0-1): When the proportionate change in the demand for a product
is less than the proportionate change in the price, the demand is said to be relatively inelastic
demand. It is also called as the elasticity less than unity, i.e. 1. Here the demand curve is rapidly
sloping, which shows that the change in the quantity from OQ0 to OQ1 is relatively smaller than
the change in the price from OP1 to Op2.

5. Unitary Elastic Demand (Ep =1): The demand is unitary elastic when the proportionate change
in the price of a product results in the same change in the quantity demanded. Here the shape of
the demand curve is a rectangular hyperbola, which shows that area under the curve is equal to
one.

Thus, these are some of the types of the price elasticity of demand that helps the firms to price their
product in accordance with the demand patterns of an individual which changes with the change in the
price of the commodity.

Ref: https://businessjargons.com/types-of-price-elasticity-of-demand.html
Determinants of Elasticity of Demand
Definition: The Elasticity of Demand is a measure of sensitiveness of demand to the change in the
price of the commodity.

Determinants of Elasticity of Demand


Apart from the price, there are several other factors that
influence the elasticity of demand. These are:

1. Consumer Income: The income of the consumer


also affects the elasticity of demand. For high-
income groups, the demand is said to be less
elastic as the rise or fall in the price will not have
much effect on the demand for a product.
Whereas, in case of the low-income groups, the
demand is said to be elastic and rise and fall in the
price have a significant effect on the quantity
demanded. Such as when the price falls the
demand increases and vice-versa.
2. Amount of Money Spent: The elasticity of
demand for a product is determined by the proportion of income spent by the individual on that
product. In case of certain goods, such as matchbox, salt a consumer spends a very small amount
of his income, let’s say Rs 2, then even if their prices rise the demand for these products will not be
affected to a great extent. Thus, the demand for such products is said to be inelastic. Whereas
foods and clothing are the items where an individual spends a major proportion of his income and
therefore, if there is any change in the price of these items, the demand will get affected.
3. Nature of Commodity: The elasticity of demand also depends on the nature of the commodity.
The product can be categorized as luxury, convenience, necessary goods. The demand for the
necessities of life, such as food and clothing is inelastic as their demand cannot be postponed. The
demand for the Comfort Goods is neither elastic nor inelastic. As with the rise and fall in their
prices, the demand decreases or increases moderately. Whereas the demand for the luxury goods
is said to be highly elastic because even with a slight change in its price the demand changes
significantly. But, however, the demand for the prestige goods is said to be inelastic, because
people are ready to buy these commodities at any price, such as antiques, gems, stones, etc.
4. Several Uses of Commodity: The elasticity of demand also depends on the number of uses of the
commodity. Such as, if the commodity is used for a single purpose, then the change in the price will
affect the demand for commodity only in that use, and thus the demand for that commodity is said
to be inelastic. Whereas, if the product has several uses, such as raw material coal, iron, steel, etc.,
then the change in their price will affect the demand for these commodities in its many uses. Thus,
the demand for such products is said to be elastic.
5. Whether the Demand can be Postponed or not: If the demand for a particular product cannot
be postponed then, the demand is said to be inelastic. Such as, Wheat is required in daily life and
hence its demand cannot be postponed. On the other hand, the items whose demand can be
postponed is said to have elastic demand. Such as the demand for the furniture can be postponed
until the time its prices fall.
6. Existence of Substitutes: The substitutes are the goods which can be used in place of one
another. The goods which have close substitutes are said to have elastic demand. Such as, tea and
coffee are close substitutes and if the price of tea increases, then people will switch to the coffee
and demand for the tea will decrease significantly. Whereas, if there are no close substitutes for a
product, then its demand is said to be inelastic. Such as salt and sugar do not have their close
substitutes and hence lower is their price elasticity.
7. Joint Demand: The elasticity of demand also depends on the complementary goods, the goods
which are used jointly. Such as car and petrol, pen and ink, etc. Here the elasticity of demand of
secondary (supporting) commodity depends on the elasticity of demand of the major commodity.
Such as, if the demand for pen is inelastic, then the demand for the ink will also be less elastic.
8. Range of Prices: The price range in which the commodities lie also affects the elasticity of
demand. Such as the higher range products are usually bought by the rich people, and they do not
care much about the change in the price and hence the demand for such higher range commodities
is said to be inelastic. Also, the lower range commodities have inelastic demand because these are
already low priced and can be bought by any sections of the society. But the commodities in middle
range prices are said to have an elastic demand because with the fall in the prices the middle class
and the lower middle class are induced to buy that commodity and therefore the demand increases.
But however, if the prices are increased the consumption reduces and as a result demand falls.
Thus, these are some of the important determinants of elasticity of demand that every firm should
understand properly before deciding on the price of their offerings.
Ref: https://businessjargons.com/determinants-of-elasticity-of-demand.html
Money Laundering

Definition: Money laundering can be understood as an act of concealing the identity or source of money
obtained illegally, to make them appear to have obtained out of legal sources.

Simply put, money laundering is the process of disguising


the origin, i.e. the source from which money is received
due to criminal activity, changing its form and transferring
them into a location where they are less likely to
be noticed.

In this process, the black or illegal money arising from


criminal activity is turned into white or legal money
through transfers involving deposits into foreign banks or
investing into legitimate businesses.
Criminal activity includes illegal arms selling, smuggling, human trafficking, drug trafficking, terrorist
activity, prostitution rings, bribery, embezzlement, financial crimes, etc.
Stages of Money Laundering

1.Placement: In the first stage, the money launderer


injects the proceeds of criminal activity to the financial
system. And this is done by dividing the large sum of
money into smaller amounts and deposited into bank
accounts or by buying financial instruments which are
collected later on and deposited into bank accounts.
2.Layering: At this stage, the money introduced in the
economy is then covered by means of a number of
conversions of the funds, to change its form and to
make it difficult to find out the original source of the
money. This can be done by spreading it over various
complex transactions in a number of bank accounts
internationally.
3.Integration: When the criminal gains arising from
the previous stages are successfully processed, then
the funds are reintroduced in the financial system
legally, i.e. in a way that the original connection with
the crime is wiped out and the offender invests the
funds into real estate, business ventures, film industry
etc.
Basically, money laundering is a sole process, but it is classified into three stages.
Methods of Money Laundering
• Bribery and Corruption
• Drug trafficking
• Shell companies and trusts
• Cash Smuggling
• Structuring
• Investment in real estate
• Investment in stock market
• Kidnapping and extortion
• Black salaries
Apart from these methods, there are other methods too such as round tripping, bank capture, trade-
based laundering, etc.
Impact of Money Laundering on Economic Development
Money Laundering is a burning issue in many countries of the world. Primarily, those countries are prone
to money laundering whose financial centre is developing and do not have effective control over it.
On the other hand, if we talk about those economies which have well developed financial centres and an
anti-laundering system, are less likely vulnerable to money laundering. However, this does not mean
that money laundering does not exist there, because the launderers take advantage of the loopholes in
the system and look for the illegal ways to park their money.
Money laundering needs a permanent solution, as it can hamper the growth of the economy which can be
seen in the change in cash demand, high inflation and fluctuating interest and exchange rates.
Prevention from Money Laundering
Over the years, the government has made a number of regulations and laws are enacted to fight money
laundering. In the year 1989, an international committee is created, namely Financial Action Task
Force, shortly known as FATF, by Group of Seven (G-7), to combat this issue globally.
Ref: https://businessjargons.com/money-laundering.html

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