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Law of demand
Demand for a commodity is defined as the quantity of that commodity
which a consumer is willing and able to pay at a particular price during a
particular period of time. For example, a consumer demands 2 KG of Rice
in a month at the price of Rs. 20 per Kg. This is the complete example of
demand.
That is when the price rise, the quantity purchased decrees, and when the
price falls, the quantity of purchase increase. On the other hand, when a
consumer’s income rises, he or she usually purchases more of most goods.
(Shoes, movies travel, education, automobile, and so on). These are
known as normal goods.
There are two types of demand
1. Individual demand
2. Market demand
Individual Demand Schedule
Let us study it the help of an example.
Price per unit of commodity x (Px) Quantity demanded of commodity x
(Dy)
100 50
200 40
300 30
400 20
500 10
We can see that when the price of the commodity is ₹100, its demand is 50
units. Similarly, when its price is ₹500, its demand decreases to 10 units.
Thus, we can conclude that as the price falls the demand increases and as
the price raises the demand decreases. Hence, there exists an
inverse relationship between the price and quantity demanded.
Individual Demand Curve
When the price of gasoline is $3.5 per liter, its demand is 50 liters and when
the price is $0.5 per liter, its demand is250 liters.
Market Demand Schedule
100 50 70 120
200 40 60 100
300 30 50 80
400 20 40 60
500 10 30 40
It is a summation of the individual demand schedules. Market demand is
more important from the business point of you sales depends on the
market demand business policies and planning.
The above schedule shows the market demand for commodity X. When the
price of the commodity is ₹100, customer A demands 50 units while the
customer B demands 70 units. Thus, the market demand is 120 units.
Similarly, when its price is ₹500, Customer A demands 20 units while
customer B demands 30 units. Thus, its market demand decreases to 40
units. Thus, we can conclude that whether it is the individual demand or the
market demand, the law of demand governs both of them.
It can be interpreted from Figure-3 that the movement in price from OP1
to OP2 and OP2 to OP3 does not show any change in the demand of a
product (OQ). The demand remains constant for any value of price. In case
of essential goods, such as salt, the demand does not change with change
in price.
3. Relatively Elastic Demand:
For example, the price of a particular brand of cold drink increases from
Rs. 15 to Rs. 20. In such a case, consumers may switch to another brand of
cold drink. However, some of the consumers still consume the same
brand.
Example:
The price of digital cameras increases by 10%, the quantity of digital
cameras demanded decreases by 10%.
Luxury goods
Required of life
When income is Rs. 10, then the demand for goods is 4 units. On the other
hand, when the income increases to Rs. 20, then the demand is 2 units.
Classification of commodities
Normal goods
Inferior goods
Luxury goods
When income elasticity is positive and greater than one the commodity is
luxury. The demand for cars, jewelry, and television is highly income
elastic.
Necessity goods
When income elasticity is positive and less than one the commodity is
necessity of life. The demand for food articles is income elastic
Formula:-
Cross elasticity of demand can be calculated using the following formula:
Substitute goods
Since A, say Coke, and B, say Sprite, are substitutes, an increase in price of
product B means that more people will consume A instead of B, and this
will increase the quantity demanded of product A. Increase in quantity
demanded of product A relative to increase in price of product B gives us a
positive cross elasticity of demand.
Complimentary Goods
As A, say car, and B, say gas, are complimentary goods, and an increase in
price of B will reduce the quantity demanded of A. This is because people
consume both A and B as a bundle and an increase in price reduces their
purchasing power and decreases quantity demanded.
Example:-
The initial price and quantity of widgets demanded is (P1 = 12, Q1 = 8). The
subsequent price and quantity is (P2 = 9, Q2 = 10). This is all the
information needed to compute the price elasticity of demand.
If the price of a good rises, consumers will buy less of that good and more
of others because it is now relatively more expensive than other goods. If
the price of good falls, consumers will buy more of that good and less of
others. These changes in quantity demanded due to the relative change in
prices are known as substitution effect of a price change
Normal Goods:
Normal good, also called necessary good, Normal goods are a type of
goods whose demand shows a direct relationship with a
consumer’s income. It means that the demand for normal goods increases
with the increase in the consumer’s income. A normal good is a product or
service whose quantity demanded increases as consumer income
increases.
Normal Goods
Inferior Good
It is a curve that represents all the combinations of goods that give the same
satisfaction to the consumer. Since all the combinations give the same
amount of satisfaction,
Consider again the situation of Sameer, who can buy Mangoes or Orange.
If Sameer likes Mangoes but hates Orange, he will spend all of his money
on Mangoes and nothing on orange. In other words, he will select bundle
P.
If Sameer likes oranges but hates Mangoes, he will spend all of his money
on orange and none on Mangoes.
Usually, consumers prefer a mix of both goods. Where they consume
depends on the strength of their preferences, measured by a concept
known as utility.
A 1 14
B 2 9
C 3 6
D 4 4
E 5 2.5
Table: Indifference schedule
Combination Cigarette Coffee
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2
1. There is a need to take correct decision and make planning for future
events related to business like a sale, production, etc.
2. Demand is the most important aspect for business for achieving its
objectives.
3. Demand forecasting reduces risk related to business activities and helps
it to take efficient decisions.
Techniques of Demand Forecasting
Survey and Statistical Methods
Survey Method:
Procedures
On the basis of the objective set, the demand forecast can either be for a
short-period, say for the next 2-3 year or a long period. While forecasting
demand for a short period (2-3 years),
Once the objective is set and the time perspective has been specified the
method for performing the forecast is selected. There are several methods
of demand forecasting falling under two categories; survey
methods and statistical methods.
Collection of Data
Once the method is decided upon, the next step is to collect the required
data either primary or secondary or both
Once the required data are collected and the demand forecasting method
is finalized, the final step is to estimate the demand for the predefined
years of the period.