. LAW OF DEMAND 2.COMMODITY MARKET GOODS PRODUCED FOR SALE IN THE MARKET ALL AREAS IN WHICH BUYERS AND SELLERS ARE IN CONTACT WITH EACH OTHER FOR THE PURCHASE AND SALE OF THE COMMODITY 3.FACTORS AFFECTING DEMAND PRICE OF THE COMMODITY THE MONEY INCOME OF THE INDIVIDUAL HOUSEHOLD THE TASTES AND PREFERENCES OF THE INDIVIDUAL HOUSEHOLD THE PRICES OF OTHER COMMODITIESD n = f(P n , P ..... P n - YT) D n is the demand for commodity n . P n is the price of commodity n P .....P n - is the prices of all other commodities ( other than P n) Y is the income of the household T stands for tastes and preferences of the household 4.GENERAL DEMAND FUNCTION QD = f(P) SPECIFIC DEMAND FUNCTION Dn = f(Pn) Y = Y T = T PPn- means there is no change in these variables ; their value is being held constant DEMAND FUNCTION 5.TYPES OF DEMAND PRICE DEMAND INCOME DEMAND CROSS DEMAND DEMAND CHANGES WITH THE CHANGE IN PRICES PROVIDED INCOME, TASTES & PREFERENCES AND PRICES OF OTHER GOODS REMAIN CONSTANT WHEN THE CONSUMERS INCOME GOES UP, THE DEMAND FOR SUPERIOR QUALITY GOODS GOES UP. WHEN IT FALLS THE DEMAND FOR INFERIOR GOODS TEND TO RISE CHANGE IN THE QUANTITY DEMANDED FOR ONE PRODUCT AS A RESULT OF CHANGE IN THE PRICE OF ANOTHER COMMODITY 6.MANAGERIAL USES DEMAND ANALYSIS FORECASTING DEMAND MANIPULATING DEMAND Serves Two Major Purposes Ancillary Functions 1. Appraisal of performance of a salesman 2. Fixing sales quota 3. Companys competitive position DEMAND ELASTICITY 7.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 8.ELASTICITY OF DEMAND Price Per Unit Of X Quantity Demanded Of X A B P P M M N N O Market A : Expansion in the demand is low Market B : Expansion in the demand is high 9.MORE ELASTIC When the demand is proportional or more to the change in price LESS ELASTIC When there is a negligible response for the quantity demanded despite a considerable change in price MORE ELASTIC LESS ELASTIC When the elasticity is less than one or less than unity When the elasticity is more than one or more than unity 10.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 Price Initial Quantity Demanded = P Q Q P E = Q Q P P = Q Q P P Q = Original Quantity Demanded P = Original Price Q =Change In Quantity P = Change In Price 11.ORIGINAL PRICE (P) = RS. 3 ORIGINAL DEMAND (Q) = 1 CHANGE IN PRICE ( P) = RS. 2 CHANGE IN DEMAND ( Q) = 3 ELASTICITY = ? 12.TYPES OF DEMAND PRICE DEMAND INCOME DEMAND CROSS DEMAND DEMAND CHANGES WITH THE CHANGE IN PRICES PROVIDED INCOME, TASTES & PREFERENCES AND PRICES OF OTHER GOODS REMAIN CONSTANT WHEN THE CONSUMERS INCOME GOES UP, THE DEMAND FOR SUPERIOR QUALITY GOODS GOES UP. WHEN IT FALLS THE DEMAND FOR INFERIOR GOODS TEND TO RISE CHANGE IN THE QUANTITY DEMANDED FOR ONE PRODUCT AS A RESULT OF CHANGE IN THE PRICE OF ANOTHER COMMODITY 13.TYPES OF ELASTICITY THE EFFECT OF CHANGE IN PRICE ON QUANTITY DEMANDED IS CALLED THE PRICE ELASTICITY ODF DEMAND PRICE ELASTICITY % Change () In The Quantity Demanded % Change () In The Price E = % Change Q = 4 % Change P = 2 PRICE ELASTICITY (E p) = ? 14.DETERMINANTS OF PRICE ELASTICITY OF DEMAND Availability of substitutes Nature of commodity Weightage in total consumption Adaptability of consumption pattern Range of commodity use Proportion of market supplied 15.INCOME ELASTICITY OF DEMAND MEANS THE RATIO OF THE PERCENTAGE CHANGE IN QUANTITY DEMANDED TO THE PERCENTAGE CHANGE IN INCOME E y = Percentage Change In Quantity Demanded Percentage Change In Income E y = Y Q Q Y 16.USE OF INCOME ELASTICITY OF DEMAND Production Planning & Management Estimating Future Demand Helps In Avoiding Over-Production And Under-Production GROSS NATIONAL PRODUCT Income Of The Relevant class Income Of The Relevant Region Normal Goods/Inferior Goods 17.CROSS ELASTICITY IS THE MEASURE OF RESPONSIVENESS OF DEMAND FOR A COMMODITY TO THE CHANGES IN THE PRICES OF SUBSTITUTES AND COMPLEMENTARY GOODS E = Proportionate Change in the Quantity Of X Proportionate Change in the Q Price Of Y E = Q x Q x PQ x 18.USES OF CROSS ELASTICITY OF DEMAND CROSS ELASTICITY OF TWO GOODS ARE POSITIVE OR GREATER THAN ONE CROSS ELASTICITY OF TWO GOODS ARE NEGATIVE IS LESS THAN ONE Perfect Substitutes Complementary Inadvisable to increase the price rather a reduction in price will be proper Reducing the price may help in maintaining demand 19.ADVERTISING ELASTICITY OR PROMOTIONAL ELASTICITY OF DEMAND = S A A S S = Sales S = Increase In Sales A = Original Advertisement Cost A = Additional Expenditure On Advertisement S S A A E A = 20.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 21.MEASUREMENT OF ELASTICITY TOTAL OUTLAY METHOD PROPORTIONAL METHOD GEOMETRIC METHOD 22.TOTAL OUTLAY METHOD 23.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 Elasticity Proportionate change in the quantity demanded Proportionate change in price = Alternatively = Change in demand Quantity demanded Change in price Price P Q = Q P 24.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 25.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 = ? 26.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 27.. . . E 1 E 2 E 3 D D ' Y 0 x 28.D E 2 DE 2 = 1 Hence the elasticity at E 2 is Unity The elasticity between D E 2 and DE 2 is equal Therefore D E 2 = DE 2 or Similarly the elasticity at point E 1 is written as : D E 1 DE 1 And the distance between D and E 1 is less than the distance between D and E 1 In other words D E 1 < DE 1 D E 1 DE 1 = is < 1 ( Elasticity at E 1 less than unity ) 29.At Point E 3 the elasticity is D E 3 DE 3 In this case the distance between D and E3 is greater than the distance between D and E 3 . That is D E 3 is > DE 3 Hence D E 3 DE 3 = = > 1 Elasticity is greater than Unity 30.. . . E 1 E 2 E 3 D D ' Y O X The elasticity between D E 2 and DE 2 is equal Therefore D E 2 = DE 2 D E 2 DE 2 or = 1 Hence the elasticity at E 2 is Unity UNITY 31.. . . E 1 E 2 E 3 D D ' Y O X Similarly the elasticity at point E 1 is written as : D E 1 DE 1 And the distance between D and E 1 is less than the distance between D and E 1 In other words D E 1 < DE 1 D E 1 DE 1 = is < 1 ( Elasticity at E 1 less than unity ) LESS than UNITY 32.. . . E 1 E 2 E 3 D D ' Y O X In this case the distance between D and E3 is greater than the distance between D and E 3 . That is D E 3 is > DE 3 Hence D E 3 = DE 3 = > 1 Elasticity is greater than Unity MORE than UNITY