PSG INSTITUTE OF MANAGEMENT MBA 2011-13 BATCH - I Trimester Session IV- For Batch C and D

22nd Aug 2011

EFM Faculty P.Uday Shankar

Shifts in Demand Curve

The demand curve you drew on the 22nd Aug the curve indicates

the level of demand of the product at various prices ceteris paribus. Draw the same curve for the same parameters and contemplate what will happen to the Demand Curve if say INCOME INCREASES. Name the old Demand curve as D1 and the new one as D2. There will be a SHIFT in the demand curve and this could happen due to any of the following reasons: Rise in household income Rise in price of substitutes Fall in price of complements Change in taste /preferences Expected rise in the price of the product.
22nd Aug 2011 EFM Faculty P.Uday Shankar 2

The Demand Curve shifts to the right when income increases and shifts to the left when there is a decrease in income ceteris paribus

22nd Aug 2011

EFM Faculty P.Uday Shankar

Elasticity of Demand- Price Elasticity of Demand

The price elasticity of demand measures how far

the quantity demanded changes as the price changes. (BE-E) The formula is: Percentage change in quantity demanded Percentage change in price. Exercise: Work out the elasticity of demand at the first and second levels of price in the graph you drew yesterday.

22nd Aug 2011

EFM Faculty P.Uday Shankar

Price Elasticity of Demand- Interpretation

Elastic Demand: for eg the elasticity is 20/10=2 . A

product is said to have an elastic demand if the elasticity is greater than one. In other words, it means that a small change in the price (up or down) leads to a large change in quantity demanded.

Unit Elasticity: for eg the elasticity is 20/20= 1. A product is said to have an unit elastic demand when a given percentage change in price leads to an equal percentage change in demand. Inelastic Demand: for eg the elasticity is 10/20= 2 (-) < 1 A large change in the price (up or down) leads to only a small change in quantity demanded.
22nd Aug 2011 EFM Faculty P.Uday Shankar 5

Managers Decision based on Elasticity of Demand

Price Elasticity helps managers take crucial

decisions on price of a product. Decision making in an inelastic demand situation: If demand is inelastic then the Manager should seriously consider increasing the price. As he will not loose any sales. In fact, his total revenue will go up even though he is selling less than before and therefore is incurring lower costs.

22nd Aug 2011

EFM Faculty P.Uday Shankar

Managers Decision based on Elasticity of Demand

Decision making in an elastic demand situation:

If demand is elastic, then a hike in price would not be a good idea since sales will fall fast and total revenue will fall too. A price cut would be a fair idea as it will lead to a lot of extra sales. In such a situation costs would rise too. In similar methods one can work out Income Elasticity and Cross-price Elasticity for related products.

22nd Aug 2011

EFM Faculty P.Uday Shankar

Law of Demand

Quantity demanded increases when price falls, and quantity demanded decreases when price rises, ceteris paribus. ( Thomas & Maurice)

22nd Aug 2011

EFM Faculty P.Uday Shankar

Topics for Group Presentations

Economics of petroleum as a natural resource,

economics of water for irrigation, drinking water, economics of foodgrains, education, reservation in education, Gandhian Economics, economics of climate change, economics of cloud computing, economics of health care, economics of video piracy, economics of anti-virus business, economics of war, economics of transportation and traffic congestion, economics of religion, economics of corruption, economics of aging, economics of death, economics of open source, .
22nd Aug 2011 EFM Faculty P.Uday Shankar 9

Thanks

22nd Aug 2011

EFM Faculty P.Uday Shankar

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