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Understanding Demand: Types and Elasticity

Demand is the desire and ability of consumers to purchase a product at a given price. There are different types of demand including negative, nonexistent, latent, declining, irregular, full, and overfull demand. The determinants of demand include price, income, tastes, expectations, population, and the prices of related goods. The law of demand states that demand is inversely related to price - as price increases, quantity demanded decreases. Exceptions to this law include Giffen goods, Veblen goods, ignorance, and speculative goods. Elasticity measures the responsiveness of demand to various factors.

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PRIYA KUMARI
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37 views19 pages

Understanding Demand: Types and Elasticity

Demand is the desire and ability of consumers to purchase a product at a given price. There are different types of demand including negative, nonexistent, latent, declining, irregular, full, and overfull demand. The determinants of demand include price, income, tastes, expectations, population, and the prices of related goods. The law of demand states that demand is inversely related to price - as price increases, quantity demanded decreases. Exceptions to this law include Giffen goods, Veblen goods, ignorance, and speculative goods. Elasticity measures the responsiveness of demand to various factors.

Uploaded by

PRIYA KUMARI
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

What is demand?

-demand is desire backed by the ability


to pay & the willingness to pay at a
certain time and a certain price
States of demand

Negative demand - consumers dislike the product and may even pay to avoid it.

Nonexistent demand - consumers may be unaware of or uninterested in the product.

Latent demand - consumers may share a strong need that cannot be satisfied by an existing
product.

Declining demand - consumers begin to buy the product less frequently or not at all.

Irregular demand - consumer purchases vary on a seasonal, monthly, weekly, daily or even hourly
basis.

Full demand - consumers are adequately buying all products put into the marketplace.

Overfull demand - more consumers would like to buy the product than can be satisfied.

Unwholesome demand - consumers may be attracted to products that have undesirable social
consequences.
Determinants of demand
1. Price of the commodity
2. Price of related goods
3. Income of the consumer
4. Tastes & preferences of the consumer
5. Expectation of price changes in future
6. Size of population
7. Distribution of income
Demand function
Dx={ Px,Pr,Y,T,E,P,Yd}
Dx= demand for the commodity
Px= price of the commodity
Pr=price of related goods
Y= income of the consumer
T = tastes & preferences
E= expectations of future price changes
P= composition of population
Yd= distribution of income
Law of demand
-other things being equal , the demand for a
commodity goes up when the price goes
down and goes down when the price goes
up.

i.e. Demand is inversely proportional to price


Assumptions to the law of
demand
1. No change in price of related goods
2. No change in income
3. No change in taste & preferences
4. No expectations of future change in
prices
Demand schedule &
demand curves
■ Individual demand schedule
■ Market demand schedule
Individual demand schedule

Price per unit Quantity demanded


1 35
2 30
3 25
4 20
5 15
Market demand schedule
Price per Qty. dem. Qty. dem. Qty. dem. Market
unit A B C demand

10 50 25 100 175
12 45 22 83 150
14 40 20 70 130
17 35 18 57 110
20 30 15 45 90
Why does demand curve
slope downwards?
1. Law of diminishing marginal utility
2. Income effect
3. Substitution effect
4. Diverse uses of commodity
5. Size of consumer groups
Exceptions to the law of
demand
■ Giffen goods
■ Distinct or conspicuous goods ( veblen
effect)
■ Ignorance
■ Goods of low value
■ Speculative goods
Change in quantity
demanded
■Movement along the demand curve
(extension & contraction of demand)

■Shiftof the demand curve


(increase & decrease in demand)
Elasticity of demand

The elasticity of demand measures the


responsiveness of the quantity
demanded of a good , to change in its
price, price of other goods and
changes in consumers income
Types of elasticity of demand

■ Price elasticity
■ Income elasticity
■ Cross elasticity of demand
■ Advertising elasticity of demand
Price elasticity of demand

Degrees of Price Ed
■ Unit elasticity of demand {Ed=1}
■ Perfectly elastic demand {Ed=∞}
■ Perfectly inelastic demand {Ed=0}
■ More than unit elastic {Ed>1}
■ Less than elastic {Ed<1}
Measurement of price
elasticity of demand
■ Proportionate method

■ Point method
Factors determining price Ed
■ Nature of commodity
■ Availability of substitutes
■ Goods with multiple uses
■ Postponement of use
■ Income
■ Habits, tastes
■ Proportion of income spent
■ Price level
■ Joint demand
Income elasticity of demand

Degrees
■ Positive income elasticity

■ Negative income elasticity

■ Zero income elasticity


Cross elasticity of demand
Degrees
■ Positive

■ Negative

■ Zero

Advertising elasticity of
demand

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