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Principle Of Economics
Unit -2 :- DEMAND ANALYSIS
Made By -

Simran Mehndiradatta

Introduction
Demand

analysis :- Demand
analysis means the study of
factors, which influence the
demand of a commodity of
services. It is only on the basis of
these factors determinants of
demand one can forecast demand.

Ques

1. Explain law
of demand. Why does
demand curve slope
downwards to the
right ?

Meaning and law of demand

Law

of demand explains the relationships between change

in quantity demanded and change in price. It states that
higher the price , the lower would be the quantity
demanded in the market; and the lower the price, the
higher would be the quantity demanded in the market.

According

to Marshall the amount demanded

increases with the fall in price and diminishes with the rise
in price. Thus, it expresses it an inverse relation between
price and demand the law refers to the directions in which
quantity demanded changes with the change in price.

The

law of diminishing marginal utility

with the successive consumption of a
commodity its utility keeps on
decreasing and a certain point it
becomes zero.
Income effect
Substitution effect
New consumer
To satisfy unsatisfied wants

Ques

2. Explain
the meaning and
methods of
measuring
elasticity of

Meaning of elasticity of demand

The

term of elasticity of demand is

use to denote a measure of the rate
at which demand changes in
response to the change in prices. It is
the percentage change in quantity
demanded divided by the
percentage in one of the variables on

Types of elasticity of demand

Price

elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Advertising and promotional
elasticity of demand

Measurement of price elasticity of demand

Percentage

method :- The price elasticity of demand is

measured by it coefficient (Ep). This coefficient (Ep) measures
the percentage change in the quantity of a commodity
demanded resulting from a given percentage change in price its
price.
where

q = quantity demanded
p = price
= change
If Ep 1 demand is elastic. If Ep1, demand is inelastic, and if Ep =

 Point

method or geometric method :- This method measures

the elasticity of demand on different points of a demand curve.
It is a variant of proportionate method
we know that,

The term is the reciprocal of the slope of demand curve. The

slope of AB demand curve is in the figure price is price is PQ and
quantity demanded at PQ price is OQ and fore,
Y

and
X

because OQ = RP

price

Quantity

Now and are similar right angle triangles.

Therefore, part PB is the lower section and part
PA is the upper section of the AB demand curve
Thus, elasticity of demand at point P is equal to
.

i.e., Point Elasticity of Demand =

 Arc

method :- Segment of a demand curve between

two points is called an Arc . Arc elasticity is calculated
fro the following formula :

Where,
change in quantity demanded
Y

change in price of the commode

Original price
= New quantity
= Original quantity

Price

= New price

Quantity

Total

Outlay method :- In this case of total outlay method, price

elasticity of demand is measured on the basis of change in total outlay or
total expenditure in response to change in the price of the commodity.

Revenue method :- Revenue refers to the sale proceeds of a firm.

Elasticity of demand can be estimated if the average revenue and marginal

revenue are known. Average revenue is the price per unit of the
commodity.
where
= Elasticity of demand
A = Average revenue
M = Marginal revenue

Ques

3 :- What is the
indifference curve ? How does
consumer equilibrium
attained? What are the
assumption on which
indifference curve analysis of
demand based?

An

indifference curve is a
curve which represent
different combination of
two goods which give a
consumer equal level of
satisfaction.

Assumptions of indifference curve

Rationality :- consumer is rational as he wants

to maximize satisfaction.

Ordinal

utility :- Consumers ranks his

preferences according to the satisfaction of each
combination.

Nonsatiety :- Other things remaining same, a

consumer always prefers a larger amount of a

Consumer Equilibrium
A

consumer is said to be in equilibrium

position when he has no tendency to make
any change in his purchases of goods.
According to indifference curves technique
a consumer is in equilibrium when he
purchases that basket of goods which give
him maximum satisfaction at given income
and prices. It means consumer will be in
equilibrium when he purchases that

Ques

4 :- How do you
perceive the term
consumer equilibrium and
consumer surplus?
Explain your opinion with
relevant example?

Consumer s Surplus (CS)

The concept of consumers surplus was evolved
by Alfred Marshall. Marshall defined the concept of
consumers surplus as, Excess of the price which
a consumer would be willing to pay rather than go
without a thing over that which he actually does
pay, is the economic measure of this surplus
satisfaction . It may be called consumers surplus.

Consumers surplus = what a consumer is ready to pay what he

actually pays

Choice

of taxes
Importance to finance minister
Difference between value in Use and
value in - exchange
Importance to monopolist
Importance in International Trade
Economic welfare
Pricing of Public Utilities
Thank You.....