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Demand
Desire to buy Willingness to buy Ability to buy
Sunil Kumar
Types of Demand
Individual Demand
The individual demand for a product and services in a given period of time.
Market Demand
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Determinants of Demand
Income of the consumer Price of the substitute product Price of complementary product Change in policy Tastes and preferences of the consumer Existing wealth of the consumer Expectation regarding future price changes
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Price
P1
D Q Q1 Quantity demanded
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For normal product, the demand curve slopes downwards to the right It shows inverse relationship between price and quantity demanded
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Law of Demand
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Law of Demand
Y D P
P1 D O Q Q1 Quantity demanded X
When the price of a product is high, the quantity demanded is low When the price of a product is low, the quantity demanded is high
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Price
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Contraction in demand
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Price
D1
D X
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70 60 50 40 30
70 60 50 40 30
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10
20
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Giffen Goods Products which are used as status symbols Expectation of change in the price of the product
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Elasticity of Demand
It is defined as the percentage change in quantity demanded due to change in the determinant of demand under consideration, keeping other factors constant. E= Percentage change in X Percentage change in Y
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Price elasticity of demand Cross elasticity of demand Income elasticity of demand Advertising or promotional elasticity of demand
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Price elasticity of demand is defined as percentage change in quantity demanded of a product due to the percentage change in its price, other things remaining constant.
Ep =
Percentage change in quantity demanded Percentage change in Price
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Availability of closeness of substitutions Proportions of income spend on the product Time period Uses of the product Habit formation
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Pricing decisions of business organizations Pricing regulation by governments Use in international trade Fiscal policy
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It is the ratio of percentage change in the quantity demanded for one product to a percentage change in the price of another related product, other factors remaining constant.
Ec =
% change in quantity demanded of Product X % change in Price of product Y
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The knowledge of cross elasticity of demand is very important in decision making for developing an appropriate price strategy Firms selling multiple products use cross elasticity of demand to analyze the effect of change in the price of one product to the demand of others
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An increase in real income increases the demand for products, other factors remaining the same. Income elasticity of demand for a product is the percentage change in the demand for that product divided by the percentage change in the consumers income.
EY =
% change in the quantity demanded of product X % change in the income of consumer
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In developing countries like India, having scarce resources, income elasticity of demand helps firms to decide what to produce. In the time of business cycles, managers of the firms can decide what to produce with the help of income elasticity of demand.
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Advertising elasticity of demand measures the extent of change in the quantity demanded of a product to change in expenditure on advertisements and other promotional activities
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Case
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SUPPLY
Determinants of Supply
Cost of production Availability of other products Climate changes Changes in government policies
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Law of Supply
Price
P1 P
S O Q Quantity supplied
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Other factors remaining constant, higher the price of, greater the quantity supplied and lower the price, lower the quantity supplied
Q1
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In examining the forces determining the supply curve, we need to analyze the factors upon which the supply of a particular product depends. These can be stated in the form of a supply function: SX = f(PX, PY, PZ,PF, T)
Price of the product Prices of related product Prices of factors of production State of technology
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Shits in Supply
A shift in supply means an increase or decrease in quantity supplied at the same price. Here, supply changes due to other factors than price of the product. The supply curve revels the quantity of a product supplied at various price levels.
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Elasticity of Supply
Es = % change in the quantity supplied of a product
% change in its price
Es = Q P
P Q Q = change in quantity supplied, P = change in the price, Q = original quantity supplied, P = original price
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Equal to infinity More than one but less than infinity Equal to one Less than one but more than zero Equal to zero
S2
S5 S4
Price
S3 P0 S1
O Quantity supplied
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X
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If supply remains constant, increase in demand results in increase in price and vice versa If demand remains constant, increase in supply results in decrease in price and vice versa If increase in demand is grater than increase in supply then price will increase If increase in supply is greater than increase in demand then price will fall If the increase in demand is equal to increase in supply then price will remain same
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Government control on price Price Ceiling- price which is set less than equilibrium price. Price Floor minimum price which legally charged
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If the demand curve is perfectly inelastic, then the customers bore the entire tax. If the supply is perfectly inelastic then the entire tax is borne by the suppliers. If the demand curve is perfectly elastic then tax is borne by the suppliers. If the supply curve is perfectly elastic then price increase by full amount of tax.
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