LAW OF DEMAND

GOODS PRODUCED FOR

COMMODITY
SALE IN THE MARKET

ALL AREAS IN WHICH

BUYERS AND SELLERS ARE
IN CONTACT WITH EACH
MARKET OTHER FOR THE
PURCHASE AND SALE OF
THE COMMODITY
 FACTORS AFFECTING DEMAND
1. PRICE OF THE COMMODITY
2. THE MONEY INCOME OF THE INDIVIDUAL HOUSEHOLD
3. THE TASTES AND PREFERENCES OF THE INDIVIDUAL
HOUSEHOLD
4. THE PRICES OF OTHER COMMODITIES

Dn = f(Pn , Pı .....‚ Pn-ı‚Y‚T)

Dn is the demand for commodity n.

Pn is the price of commodity n
Pı.....Pn-ı is the prices of all other commodities (other than Pn)
Y is the income of the household
T stands for tastes and preferences of the household
 DEMAND FUNCTION

GENERAL DEMAND FUNCTION QD = f(P)

SPECIFIC DEMAND FUNCTION Dn = f(Pn)

Y = Yº
T = Tº
Pºı……Pn- ıº
º means there is no change in these variables ;
their value is being held constant
 TYPES OF DEMAND

DEMAND CHANGES WITH THE CHANGE

PRICE IN PRICES PROVIDED INCOME, TASTES
DEMAND & PREFERENCES AND PRICES OF OTHER
GOODS REMAIN CONSTANT

WHEN THE CONSUMER’S INCOME GOES

UP, THE DEMAND FOR SUPERIOR
INCOME QUALITY GOODS GOES UP. WHEN IT
DEMAND FALLS THE DEMAND FOR INFERIOR
GOODS TEND TO RISE

CHANGE IN THE QUANTITY DEMANDED

CROSS FOR ONE PRODUCT AS A RESULT OF
DEMAND CHANGE IN THE PRICE OF ANOTHER
COMMODITY
 MANAGERIAL USES
DEMAND ANALYSIS

Serves Two Major Purposes

FORECASTING MANIPULATING
DEMAND DEMAND

DEMAND ELASTICITY

Ancillary Functions

1. Appraisal of performance of a salesman

2. Fixing sales quota
3. Company’s competitive position
 DEFINITION
ELASTICITY OF DEMNAND IS A CONCEPT
WHICH MEASURES RELATIVE CHANGE IN
DEMAND BECAUSE OF A CHANGE IN PRICE

PERCENTAGE CHANGE IN QUANTITY

DEMANDED DIVIDED BY THE PERCENTAGE
CHANGE IN PRICE
 ELASTICITY OF DEMAND

Market A : Expansion in the demand is low

Market B : Expansion in the demand is high

Pı

A
B

O M Mı N Nı

Quantity Demanded Of X
 When the demand is proportional
MORE ELASTIC or more to the change in price

When there is a negligible

response for the quantity
LESS ELASTIC
demanded despite a considerable
change in price

MORE ELASTIC When the elasticity is more than

one or more than unity

When the elasticity is less than

LESS ELASTIC
one or less than unity
 FORMULA FOR MEASURING ELASTICITY OF
DEMAND
Price Elasticity Of Demand (E)

= Proportionate Change In Quantity Demanded

Proportionate Change In Price
Change In Quantity Demanded Change In Price
= Initial Quantity Demanded ÷ Initial Price
ΔQ ΔP Q = Original Quantity
E =
Q
÷ P Demanded P = Original Price
ΔQ P ΔQ =Change In Quantity
= × ΔP ΔP = Change In Price
Q
= P × ΔQ
Q ΔP
ORIGINAL PRICE (P) = RS. 3

ORIGINAL DEMAND (Q) = 1

CHANGE IN PRICE (ΔP) = RS. 2

CHANGE IN DEMAND (ΔQ) = 3

ELASTICITY = ?
 TYPES OF DEMAND

DEMAND CHANGES WITH THE CHANGE

PRICE IN PRICES PROVIDED INCOME, TASTES
DEMAND & PREFERENCES AND PRICES OF OTHER
GOODS REMAIN CONSTANT

WHEN THE CONSUMER’S INCOME GOES

UP, THE DEMAND FOR SUPERIOR
INCOME QUALITY GOODS GOES UP. WHEN IT
DEMAND FALLS THE DEMAND FOR INFERIOR
GOODS TEND TO RISE

CHANGE IN THE QUANTITY DEMANDED

CROSS FOR ONE PRODUCT AS A RESULT OF
DEMAND CHANGE IN THE PRICE OF ANOTHER
COMMODITY
 TYPES OF ELASTICITY
PRICE ELASTICITY

THE EFFECT OF CHANGE IN PRICE ON QUANTITY

DEMANDED IS CALLED THE PRICE ELASTICITY
ODF DEMAND

E=
% Change (Δ) In The Quantity Demanded
% Change (Δ) In The Price
% Change ΔQ = 4

% Change ΔP = 2

PRICE ELASTICITY (Ep) = ?

DETERMINANTS OF PRICE ELASTICITY OF
DEMAND

Availability of Adaptability of
substitutes consumption
pattern

Nature of Range of
commodity commodity use

Weightage in total Proportion of

consumption market supplied
 INCOME ELASTICITY OF DEMAND

MEANS THE RATIO OF THE PERCENTAGE

CHANGE IN QUANTITY DEMANDED TO
THE PERCENTAGE CHANGE IN INCOME

Percentage Change In Quantity Demanded

Ey =
Percentage Change In Income

Ey = Y × ΔQ
Q ΔY
 USE OF INCOME ELASTICITY OF DEMAND

Production Planning & GROSS NATIONAL

Management PRODUCT

Income Of The
Estimating Future Relevant class
Demand
Income Of The
Relevant
Helps In Avoiding Over- Region
Production And Under-
Production Normal
Goods/Inferior
Goods
 CROSS ELASTICITY

IS THE MEASURE OF RESPONSIVENESS OF

DEMAND FOR A COMMODITY TO THE
CHANGES IN THE PRICES OF SUBSTITUTES
AND COMPLEMENTARY GOODS

Proportionate Change in the Quantity Of X

Eе = Proportionate Change in the Q Price Of Y

Eе = ΔQx ÷
Qx
ΔPQx
 USES OF CROSS ELASTICITY OF DEMAND

Perfect Substitutes Complementary

CROSS ELASTICITY CROSS ELASTICITY

OF TWO GOODS ARE OF TWO GOODS
POSITIVE OR ARE NEGATIVE IS
GREATER THAN ONE LESS THAN ONE

Inadvisable to increase Reducing the price may

the price rather a help in maintaining
reduction in price will demand
be proper
 ADVERTISING ELASTICITY OR PROMOTIONAL
ELASTICITY OF DEMAND

ΔS ΔA
EA = S ÷ A
= ΔS × A
ΔA S

S = Sales
ΔS = Increase In Sales
A = Original Advertisement Cost
ΔA = Additional Expenditure On Advertisement
 PRICE OF X = RS. 1.25

NUMBER OF UNITS BOUGHT = 4

OUTLAY = RS. 1.25 X 4

= RS. 5.00

NOW PRICE OF X = RS. 1.00

NUMBER OF UNITS BOUGHT = 5

TOTAL OUT LAY = RS. 1.00 X 5

= RS. 5.00
 MEASUREMENT OF ELASTICITY

1. TOTAL OUTLAY METHOD

2. PROPORTIONAL METHOD
3. GEOMETRIC METHOD
TOTAL OUTLAY METHOD
 PROPORTIONAL METHOD

Under this method, the percentage change in price is

compared to the percentage change in the quantity
demanded; in other words, the ratio is the change in
quantity demanded to the change in price. The formula is
written as follows:
Price Proportionate change in the quantity demanded
Elasticity =
Proportionate change in price
Alternatively
Change in demand Change in price
= ÷ Price
Quantity demanded

 = ΔQ ÷ ΔP
Q P
PROBLEM

A Company which generally sells a product for Rs. 200,

decides to cut price to Rs. 160. As a result, the demand
goes up from 40,000 units to 60,000 units. Calculate the
elasticity
SOLUTION

Original Price = Rs. 200

New Price = Rs. 160

Change in Price = Rs. 40

Original Sales (Demand) = 40,000 Units

New Sales (Demand) = 60,000 Units

=?
 GEOMETRIC METHOD

The elasticity of demand can also be worked out

geometrically The elasticity of demand has been
considered as UNITY, as LESS than UNITY and as MORE
than UNITY
Y

.E
3

.E
2

.
E1

0
D' x
 The elasticity between D E2 and DE2 is equal
Therefore D E2 = DE2
or D E2 = 1
DE2
Hence the elasticity at E2 is Unity

Similarly the elasticity at point E1 is written as :

D E1
DE1
And the distance between D and E1 is less than the distance
between D and E1 In other words D E1< DE1
D E1
DE1 =  is < 1 ( Elasticity at E1 less
than unity )
At Point E3 the elasticity is

D E3
DE3

In this case the distance between D and E3 is greater than

the distance between D and E3 . That is

D E3 is > DE3
Hence
=  =
D E3 >1
DE3
Elasticity is greater than Unity
 Y UNITY
D
.E3

.E 2

.E 1

D'
O X

The elasticity between D E2 and DE2 is equal

Therefore D E2 = DE2
or D E2
= 1
DE2
Hence the elasticity at E2 is Unity
 Y LESS than UNITY
D
.E3

.E 2

.E 1

D'
O X
Similarly the elasticity at point E1 is written as :
D E1
DE1
And the distance between D and E1 is less than the distance
between D and E1 In other words D E1< DE1
D E1 =  is < 1 ( Elasticity at E1 less than unity )
DE1
 Y MORE than UNITY
D
.E 3

.E 2

.E 1

D'
O X
In this case the distance between D and E3 is greater than
the distance between D and E3 . That is
D E3 is > DE3
Hence
D E3 =  = > 1
DE3
Elasticity is greater than Unity