theory of demand. introduction how much to produce and what price to charge? factors determining...
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THEORY OF “DEMAND”
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INTRODUCTION
• How much to produce and what price to charge?
• Factors determining demand for a product.
• Explores the relationship between price and demand for a product.
• Examines likely impact of the potential factors that influence its demand.
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WHAT IS DEMAND?The quantity of a product consumers are willing and able to buy at different prices in a specified time period.
Types of Demand-Direct and derived demands
-Individual and market demand
-Recurring and replacement
-Complementary and competing
-New and replacement demands
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DETERMINANTS OF DEMAND
• Price of Product• Income of Consumer• Price of Related Good• Tastes and Preferences• Advertising• Consumer’s expectation of future Income and Price• Growth of Economy• Seasonal conditions• Population
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DEMAND SCHEDULE• It shows the price and output relationship.• Tabular representation of price and demand.
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DEMAND CURVE
• The geometrical representation of demand schedule is called the demand curve.
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LAW OF DEMAND
• As the price of a good rises, quantity demanded of that good falls.
• As the price of a good falls, quantity demanded of that good rises.
• Ceteris paribus.
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DEMAND FUNCTION• When we express the relationship between demand
and its determinant mathematically, the relationship is known as demand function.
• The demand for product X can be written in functional form as-
Dx= f (Px, Y, Po, T, A, Ef, N )
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EXCEPTIONS TO THE LAW OF DEMAND
• Inferior Goods• Snob Appeal• Demonstration Effect• Future Expectation of Prices• Insignificant proportion of income spent• Goods with no Substitutes
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CHANGE IN DEMAND VS. CHANGE IN QUANTITY DEMANDED
• A shift of the entire demand curve to a new position is called change in demand.
• Changes in non-price determinants of demand.
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QUANTITY DEMANDED• Fluctuations in price, another determinant of demand,
cause movement along the demand curve.
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Why the demand curve slope downwards?
• Law of diminishing marginal utility.• Income effect.• Substitution effect.• New consumers.• Multiple use of commodity.
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ELASTICITY OF DEMAND• Elasticity of demand is defined as the responsiveness of the
quantity of a good to changes in one of the variables on which demand depends-
Price of the commodity Income of the Consumer Various other factor
DEFINATION-’’The elasticity of demand measures the response of the demand for the commodity to change in price”.
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PRICE ELASTICITY OF DEMAND• The price elasticity of demand is the percentage change in
quantity demanded divided by the percentage change in price.
P rice e las tic ity o f d em an d =P ercen tag e ch an g e in q u an tity d em an d ed
P ercen tag e ch an g e in p rice
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PRICE ELASTICITY OF DEMAND
/
/P
Q Q Q PE
P P P Q
Point Definition
Arc Definition 2 1 2 1
2 1 2 1P
Q Q P PE
P P Q Q
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Perfectly Inelastic Demand: Elasticity Equals 0 city of Demand
Copyright©2003 Southwestern/Thomson Learning
$5
4
Quantity
Demand
1000
1. Anincreasein price . . .
2. . . . leaves the quantity demanded unchanged.
Price
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Inelastic Demand: Elasticity Is Less Than 1
Quantity0
$5
90
Demand1. A 22%increasein price . . .
Price
2. . . . leads to an 11% decrease in quantity demanded.
4
100
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Unit Elastic Demand: Elasticity Equals 1
Copyright©2003 Southwestern/Thomson Learning
2. . . . leads to a 22% decrease in quantity demanded.
Quantity
4
1000
Price
$5
80
1. A 22%increasein price . . .
Demand
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Elastic Demand: Elasticity Is Greater Than 1
Demand
Quantity
4
1000
Price
$5
50
1. A 22%increasein price . . .
2. . . . leads to a 67% decrease in quantity demanded.
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Perfectly Elastic Demand: Elasticity Equals Infinity
Quantity0
Price
$4 Demand
2. At exactly $4,consumers willbuy any quantity.
1. At any priceabove $4, quantitydemanded is zero.
3. At a price below $4,quantity demanded is infinite.
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