Bhargav Resume

Demand and Supply
Dr. Sujay Sathyanarayana

Sujaybs54@gmail.com
PES University - MBA - Managerial Economics (UM14MB501)
Demand
• In general sense of the term ‘demand’ means desire, need, want or
requirement of a commodity.
• In economic sense, “demand is desire for a commodity backed by the

ability and willingness to pay for it.”
For example: willingness by car but does not have enough resources to
buy the same. Increasing demand for a product offers high business
prospects for it in future and decreasing demand for product diminishes
its business prospects.
• Demand can either Individual Demand or Market Demand.
• Market Demand is the Sum of individual demand for a given product.
Market Demand = Qda + Qdb+Qdc+……………….Qdn
Demand Function = Qd = f (P, T, y, Py, A, X, H, S ……)
1. Price of the product (P)
2. Tastes and Preferences of the Consumers(T)
3. Income of the buyer (y)
4. Changes in Prices of the Related Goods (Py)
5. Advertisement Expenditure (A)
6. Taxes (X)
7. Technology (H)
8. Social and peer group influences (S)
9. And Many others……..

Law of Demand
• The Law of Demand States that "The Quantity of product demanded
increases with the reduction on the price of the product and
• the Quantity of the product demanded decreases with the increase in
the price of the product, other things remaining constant.
• That is the Quantity demanded and the price of a product are
inversely related to each other, ceteris paribus."
1
Qα ; Ceteris Paribus
P
Q=Quantity demanded
p=Price of the product.
Demand Curve
Demand curve is a Graphical

representation of the
demand Schedule or a
demand function. It is a
Locus of points which shows
the Quantity of goods
demanded at various prices.
As per Law of demand the
demand curve slopes
downwards.
Demand Schedule
Demand Schedule is a Tabular

Representation of Demand
curve, that is the total
Quantity demanded at various
prices. It shows how much a
customer is willing to
purchase at various prices.
Market Demand
Schedule
Market Demand Schedule is a

Tabular Representation of
Market Demand, that is the
total Quantity demanded by
all the customers in a market
at various prices. It shows how
much the market is willing to
purchase at various prices. It is
a Sum of individual Demand
Schedules.
Shift in Demand : Extension and
Contraction
Change in Quantity Demanded
• The Change in the quantity demanded

can be due to various factors affecting
the demand. However, when the
quantity demand change is due to the
price changes, it is called as “Change in
Quantity Demanded”.
• Reduction in Quantity demanded due to

increase in price leads to “Contraction”
and increase in Quantity demanded due
to decrease in price is called
“Expansion/extension”
• The Changes happen along the demand

curve itself.
Shift in Demand : Increase &
Decrease
Change in Demanded
• The Change in the demanded can be due to any other factors
affecting the demand, while the price is constant is called as “Change
in Demanded”.
• Reduction in demand due to change in variables other than price

leads to “Decrease in Demand” and increase in demanded due to
change in variables other than price is called “Increase in Demand”
• The change n demand results in shift of demand curve upwards

(increase) or downwards (decrease).

Reasons to Law of Demand
1. Law of Diminishing Marginal Utility (refer unit 1)
2. Income Effect
3. Substitution Effect
Income Effect : When the price of a product reduces, a consumer with a
constant income (same income) can now buy more quantity of goods, other
things being constant. The purchasing power of his money increases, thus
increasing his real income, due to which he can buy more goods at lower
price. This is known as income effect.
Example, with Income (Y) = Rs 500, at price = Rs 5, he can buy 100 units of
goods. Now if the price of the goods reduces to Rs 1 per unit, with the same
income of Rs 500, he can now buy 500 units of goods. Thus increasing his
purchasing power of his income. This results in greater demand for the
product from 100 units to 500 units.

Substitution Effect
When the prices of the give product increases, it becomes costlier
relative to the other substitute products. Thus the consumers will
demand more of substitutes and less of this product. This is true when
the prices of the substitutes increases, the given product becomes
relatively cheaper thus increasing the demand for this product. This is
known as substitution effect.
For example, if price of given commodity (say, Pepsi) falls, with no
change in price of its substitute (say, Coke), then Pepsi will become
relatively cheaper and will be substituted for coke, i.e. demand for
Pepsi will rise.

Exceptions to the Law of Demand : cases when price
and Demand inverse relationship does not hold!
1. Giffen goods
2. Conspicuous Consumption
3. Future changes in prices (Speculation)
4. Fear of Shortage
5. Ignorance
6. Necessities of Life

Giffen Goods
• A consumer good for which demand rises when the price increases,
and demand falls when the price decreases. These goods violates the
law of demand, whereby demand should increase as price falls and
decrease as price rises.
• To be a Giffen good, the item must lack easy substitutes
• it must be an inferior good, or a good for which demand declines as
the level of income in the economy increases

Giffen Paradox
• Giffen Paradox is an Exception to

the Law of Demand. in the 19th
Century Robert Giffen found that
certain goods which were of
inferior Quality did not obey the
law of demand, that is these
goods demand did not decrease
with the increase in price. The
Expenditure of these goods
normally formed a major portion
of the income of the consumer.
This phenomenon is known as
Giffen Paradox.
• Cheaper varieties of goods like
bajra, potatoes, salt etc.
Veblen Goods : Veblen Effect
• Certain goods are purchased by the customers because it gives them
the satisfaction of certain status symbol and are preferred because
they are not purchased commonly by common people. The Demand
for these goods increases with the increase in their price, because
higher prices confer greater status. These goods do not obey the law
of demand. These are normally Luxury good.
• Thorstein Bunde Veblen observed that certain goods which are Luxury
goods are purchased because they signify status symbol. These goods
do not obey the law of demand and their demand increases with the
increase in price even when similar products are available at lower
price. This is known as Veblen Effect.

Examples of Veblen goods
• Vintage wine. In a posh restaurant, diners may avoid purchasing the
cheapest wine – because it indicates poor taste. If the wine is
increased in price, then it may sell more.
• Modern art. If art is sold at £1, people may not value it, but if the
same pieces are sold for £100, unsuspecting buyers may feel it is
better. Art may be subject to the bandwagon effect – if an artist
becomes in vogue, people want to be part of it.
• Designer clothes. Some clothing retailers have found increasing the
price of luxury ‘branded’ items can sometimes increase sales, e.g.
branded jeans.

Elasticity of Demand
• Elasticity of demand is defined as the proportionate change in the
Quantity demanded of a product for the proportionate change in the
Factor determining the demand for the product.
• It is the Sensitivity of the change on the quantity demanded to the
change in the factors determining demand. These factors can be Price,
income, price of other commodity, advertising expenses etc.
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑

• 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 = % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 𝐴𝑓𝑓𝑒𝑐𝑡𝑖𝑛𝑔 𝑡ℎ𝑒 𝐷𝑒𝑚𝑎𝑛𝑑

Price Elasticity of Demand - e p
• Price Elasticity of demand is defined as the proportionate change in

the Quantity demanded of a product for the proportionate change in
the Price of the product.
• It is the Sensitivity of the change on the quantity demanded to the
change in the Price of the product.
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑

• Price Elasticity of Demand = % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡

Types of Price Elasticity of Demand
• Perfectly Price Elastic Demand
• Relatively Price Elastic Demand
• Unitary Price Elasticity
• Relatively Price Inelastic Demand
• Perfectly Price Inelastic Demand

Perfectly Price Elastic demand
• Also called as Infinitely Elastic demand.
• In a market that has perfectly elastic demand for a product, even a small change in
price causes an infinite change in the quantity demanded. Therefore, in a perfectly
elastic demand, an infinite number of quantities demanded are associated with a
given level of price.
• Here ep = ∞ and slope of the demand curve is 0

From Figure-2 it can be interpreted that at price OP, demand is infinite; however, a slight rise in price would
result in fall in demand to zero. It can also be interpreted from Figure-2 that at price P consumers are ready to
buy as much quantity of the product as they want. However, a small rise in price would resist consumers to buy
the product.

Example
• To illustrate, assume Farmer Jones is a wheat farmer. He produces 200,000
tons of wheat.
• The market supply and demand curves determine the price is $8.00 per
bushel.
• Farmer Jones must accept $8.00 or less for his wheat.
• However, If he tries to sell it for $8.25, buyers would purchase from his
competitors, so above $8.00 the quantity demanded would be zero.
• The good news is that Farmer Jones can sell his 200,000 tons of wheat at
$8.00, so there would be no incentive for him to reduce his price.

Relatively Price Elastic
Demand
• Relatively elastic means that relatively small changes
in price cause relatively Large changes in quantity
demanded. In other words, quantity is very responsive
to price.
• More specifically, the percentage change in quantity
demanded is grater than the percentage change in
price.
• Relatively elastic demand occurs when buyers can
choose from among a large number of very
close substitutes-in-consumption.
• 1 < ep < ∞ , Demand curve slope is flatter
It can be interpreted from Figure-4 that the
proportionate change in demand from OQ1
to OQ2 is relatively larger than the
proportionate change in price from OP1 to
OP2. Relatively elastic demand has a practical
application as demand for many of products
respond in the same manner with respect to
change in their prices.
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. Therefore, a small change in price
produces a larger change in demand of the
product.
Relatively Price Elastic Demand
Example: - there are commodities for which a small change in price will
drastically reduce the amount of the commodity demanded. For
example, air-travel for vacationers is very sensitive to price. An increase
in the air fare will lead the vacationer to choose another mode of
transportation like car or lead him to postpone the vacation plan for
the time being. Thus for a rise in air fare for the vacationers we will see
a relatively more drastic reduction in quantity demanded and
hence high price elasticity of demand.

Unitary Price Elasticity
of Demand
• Also called as Unit Elasticity of demand.
• When the proportionate change in the
Quantity demanded is exactly equal to
the proportionate change in the price
of the product we have Unitary
elasticity of demand.
• Here ep=1
Unitary Price Elasticity of Demand
Example: Goods and services include furniture, motor vehicles,
instrument engineering products, professional services, and
transportation services.

Perfectly Price
Inelastic Demand
• Also called as Zero Elasticity.
• When the Quantity demanded for a product remains
constant at any price, we have Perfectly inelastic
demand. At Perfect inelasticity, there is no change in
Quantity demanded even when the price changes
infinitely.
• Here ep=0 and slope of the demand curve is ∞.
• Here the Quantity demanded (in the graph) remains
constant at M even when price changes from A-B-C.
• Example: Gasoline
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. Perfectly inelastic demand is a theoretical concept and cannot be applied in a practical situation.
However, in case of essential goods, such as salt, the demand does not change with change in price.
Therefore, the demand for essential goods is perfectly inelastic.

Relatively Price
Inelastic Demand
• Relatively inelastic means that relatively large
changes in price cause relatively small changes in
quantity demanded.
• In other words, quantity is very less responsive to
price.
• More specifically, the percentage change in quantity
demanded is lesser than the percentage change in
price. Relatively inelastic demand occurs when there
are not many close substitutes.
• 0<ep<1 , Demand Curve Slope is very steep
It can be interpreted from Figure-5 that the proportionate change in demand from
OQ1 to OQ2 is relatively smaller than the proportionate change in price from OP1 to
OP2.

The demand schedule for milk is given in Table-3
Calculate the price elasticity of demand and determine the type
of price elasticity.
Solution:
P= 15
Q = 100
P1 = 20
Q1 = 90
Therefore, change in the price of milk is:

∆P = P1 – P
∆P = 20 – 15
∆P = 5
Similarly, change in quantity demanded of milk is:
∆Q = Q1 – Q
∆Q = 90 – 100
∆Q = -10
The change in demand shows a negative sign, which can be ignored.

This is because of the reason that the relationship between price and
demand is inverse that can yield a negative value of price or demand.
Price elasticity of demand for milk is:

ep = ∆Q/∆P * P/Q
ep = 10/5 * 15/100
ep = 0.3
The price elasticity of demand for milk is 0.3, which is less than one.
Therefore, in such a case, the demand for milk is relatively inelastic.
Types of Elasticity
• Based on factors influencing the Quantity Demanded, we can have
various types of Elasticity
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Advertisement/Promotional Elasticity of Demand.
Understanding the effect of each of these factors on demand is very

important for management to take various strategic decisions and
other operational decisions.
Income Elasticity of Demand - eY or Ye
• Income Demand is defined as the change in the Quantity of goods
that a customer is willing to purchase due to change in the income
Level, other factors remaining constant.
• Ceteris Paribus, the Income and Demand for a good is directly related
to each other. The demand curve with income as a variable has a
positive slope. (Normal Goods)
• It is notable that, Inferior goods have a negative income elasticity of
demand - the quantity demanded for inferior goods falls as incomes
rise

Income Elasticity of Demand - eY or Ye
• To estimate income – elasticity, for example, that the government
announces a 10 percent dearness allowance to its employees. As a
result average monthly income of government employees increases
from Rs. 20000 to Rs 22000.
• Following the monthly income, the petrol consumption also increases
from 150 lts to 165 lts
20000 15
𝑒𝑦 = ∗ =1
150 2000

Types of Income Elasticity of Demand
1. High income elasticity of demand: In this case increase in income is accompanied by relatively
larger increase in quantity demanded. Here the value of coefficient Ey is greater than unity
(Ey>1). E.g.: 20% increase in quantity demanded due to 10% increase in income.
2. Unitary income elasticity of demand: In this case increase in income is accompanied by same
proportionate increase in quantity demanded. Here the value of coefficient Ey is equal to unity
(Ey=1). E.g.: 10% increase in quantity demanded due to 10% increase in income.
3. Low income elasticity of demand: In this case proportionate increase in income is accompanied
by less than increase in quantity demanded. Here the value of coefficient Ey is less than unity
(Ey<1). E.g.: 5% increase in quantity demanded due to 10% increase in income.
4. Zero income elasticity of demand: This shows that quantity bought is constant regardless of
changes in income. Here the value of coefficient Ey is equal to zero (Ey=0). E.g.: No change in
quantity demanded even 10% increase in income.
5. Negative income elasticity of demand: In this case increase in income is accompanied by
decrease in quantity demanded. Here the value of coefficient Ey is less than zero/negative
(Ey<0). E.g.: 5% decrease in quantity demanded due to 10% increase in income.

Cross Elasticity of
Demand – ec or Ce
• An economic concept that measures the responsiveness in
the quantity demand of one good when a change in price
takes place in another good. The measure is calculated by
taking the percentage change in the quantity demanded of
one good, divided by the percentage change in price of the
substitute good
• Cross Demand is defined as the Quantity of goods that a
consumer is willing to purchase of a given product due to the
price of another product (competing product, Substitute
product or complementary product), other factors remaining
constant.
• Example, what is the Quantity demanded for Pepsi because
of the price of coca cola, is known as cross demand.
Cross Elasticity of Demand – ec or Ce
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑡𝑒𝑎 (𝑞𝑡 )
𝑒𝑐 =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑓𝑓𝑒𝑒 (𝑃𝑐 )

Classifying products based on Cross Elasticity
• A negative cross elasticity between two products denotes the two
are complements. Example : products A and B are complements, meaning
that an increase in the demand for A accompanies an increase in the
quantity demanded for B. Therefore, if the price of product B decreases,
the demand curve for product A shifts to the right, increasing A's demand,
resulting in a negative value for the cross elasticity of demand. The exact
opposite reasoning holds for substitutes.
• A positive cross elasticity between two products denotes two are
Substitute products
• Two goods are Independent products if they have a zero cross elasticity of
demand between them.
Advertisement Elasticity of Demand - AED
• A measure of a market's sensitivity to increases or decreases in
advertising saturation.
• Advertising elasticity is a measure of an advertising campaign's
effectiveness in generating new sales. It is calculated by dividing the
percentage change in the quantity demanded by the percentage
change in advertising expenditures.
• A positive advertising elasticity indicates that an increase in
advertising leads to an increase in demand for the advertised good or
service.

Importance of AED in Business Decisions
• Its helps the management in deciding whether the outlay on advertisement
should be increased, decreased or maintained at the present level.
• Its helps the management in studying the effect of advertisements on sales
revenue, and helps in withdrawing ineffective promotional campaigns.
• Advertising elasticity also helps in evaluating the effectiveness of various
media of advertisement, thus helps in choosing more effective media for
promotion.
• AED can be used to make sure advertising expenses are in line, though an
increase in demand may not be the only desired outcome of advertising.
• Helps in building brands.

Uses of elasticity of demand for Managerial
decision making
• Price distribution: A monopolist adopts a price discrimination policy only when the
elasticity of demand of different consumers or sub-markets is different. Consumers
whose demand is inelastic can be charged a higher price than those with more elastic
demand.
• Public utility pricing: In case of public utilities which are run as monopoly undertakings
e.g. elasticity of water supply railways postal services, price discrimination is generally
practiced, charging higher prices from consumers or users with inelastic demand and
lower prices in case of elastic demand.
• Joint supply: Certain goods, being products of the same process are jointly supplied, e.g.
wool and mutton. Here if the demand for wool is inelastic compared to the demand for
mutton, a higher price for wool can be charged with advantage.
• Super Markets: Super-markets are a combined set of shops run by a single organization
selling a wide range of goods. They are supposed to sell commodities at lower prices
than charged by shopkeepers in the bazaar. Hence, price policy adopted is to charge
slightly lower price for goods with elastic demand.

• Use of machine: Workers often oppose use of machines out of fear of unemployment.
Machines need not always reduce demand for labor as this depends on price elasticity of
demand for the commodity produced. When machines reduce costs and hence price of
products, if the products demand is elastic, the demand will go up, production will have
to be increased and more workers may be employed for the product is inelastic,
machines will lead to unemployment as lower prices will not increase the demand.
• Factor pricing: The factors having price inelastic demand can obtain a higher price than
those with elastic demand. Workers producing products having inelastic demand can
easily get their wages raised.
• International trade: (a) A country benefits from exports of products as have
price inelastic demand for a rise in price and elastic demand for a fall in price. (b) The
demand for imports should be inelastic for a fall in price and elastic for a rise in price. (c)
While deciding whether to devalue a country’s currency or not, price elasticity of
demand for a country’s exports would be an important factor to be taken into
consideration. If the demand is price elastic, it would lead to an increase in the
country’s exports and devaluation would fail to achieve its objective.

• Shifting of tax burden: It is possible for a business to shift a
commodity tax in case of inelastic demand to his customers. But if the
demand is elastic, he will have to bear the tax burden himself,
otherwise demand for his goods will go down sharply.
• Taxation policy: Government can easily raise tax revenue by taxing
commodities which are price inelastic.

Methods of calculating Elasticity
All types of Demand elasticity can be measured by using the following
methods. However, we will focus our discussion of measuring the price
elasticity of demand by these methods
Major methods of measuring the elasticity are
• 1. Percentage Methods
• 2. Point Elasticity Method
• 3. Arc Method (Mid-point method)
• 4. Total Outlay Method.
All above methods may arrive at different values of elasticity, due to
the underlying idea of each method is different.
Percentage Method (Alfred Marshall)
• This method used the percentage change in the quantity to the percentage
change in the price of the product for calculating the elasticity.
• The limitation is we arrive at different values of elasticity when there is
increase or decrease in price with same percentage! As the elasticity keeps
changing along the demand curve.
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑 % 𝛥𝑄 𝛥𝑄 𝑃1 𝑄2−𝑄1
• 𝑒𝑝 = % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
= % 𝛥𝑃
= 𝛥𝑃
× 𝑄1
= 𝑃2−𝑃1
×
𝑃1
𝑄1
𝑄2−𝑄1 𝑃1
• 𝑒𝑝 = ×
𝑃2−𝑃1 𝑄1
Where P1 = initial price, P2= New Price Q1= Initial Qty and Q2 is new
Quantity
Point Method of
Demand Elasticity
• Point elasticity is defined as the Elasticity at a given
point on the demand Curve. When the change in
price is very small, we calculate point elasticity.
• In the example we can find the elasticity exactly at
point A using the formula as given below.
Lower Segment Length of Demand Curve

Point Elasticity = Upper Segment Length of Demand Curve
AC
= AB
Arc Method (Mid-
point Method)
• Arc Elasticity is the elasticity over an Arc or between any two
points on a Demand Curve.
• This is calculated by taking the mid-point of the arc. Thus it
gives the average elasticity along the arc or between the two
points on the demand curve.
ΔQ (P1+P2)/2 Q2−Q1
• Arc Elasticity between AB = × = ×
ΔP (Q1+Q2)/2 P2−P1
P1+P2
Q1+Q2
Total outlay Method (Total Expenditure
Method)
• According to his technique, in order to determine the demand elasticity, you have to
examine the change in total outlay of the consumer or total revenue of the firm.
• Total Revenue of company (TR) = (Price (P) × Quantity Sold (Q)) OR

• Total Outlay of Customer (TO) = (Price (P) × Quantity Purchased (Q))
• TO = (P × Q)

Problem Set 1
1. As a result of 15% change in the price the Quantity demanded decreases from 120 units to 100 units what
is the ed?
2. A Demand function is given by Q=250 - 2.5(P)
a. What is the Maximum Quantity Demanded?
b. What is the Price at which there is Zero Demand?
c. What is the elasticity of Demand if Price changes from Rs 10 to Rs 40?
d. What is the Arc Elasticity between the points on the curve at Price 10 & 40?
3. The Quantity demanded was 12000 units when the price of a product was Rs 25, due to the inflation the
demand reduced to 8500 units, what is the new price of the product is the price elasticity is 1.35 ?
4. When the income of Raj was Rs 10000 he bought 50 units of product x at Rs 200 each, if the Income
elasticity of the product is 2.3 what quantity will he purchase when his income increases by 30%,
assuming other things remain constant?

Problem Set 2
5. Given the Demand function Q=50-2P, where Q=Quantity Demanded and
P=Price, find the Price elasticity of demand on the point on the demand
curve at which price is Rs 6.
6. Government observes that the import of certain Chinese product has
hampered local sellers. So it is planning to levy an import duty on these
products. It is observed that the ep=2 for these products. If the price of
the product is Rs 50, at which the Quantity demanded is 5000 units, what
must be the tax if the government wants to reduce the import by 50%?
7. What is the slope of the demand function Q=764-1.78(P)
8. The price of coffee increases from Rs 50 to Rs 60 per kg, as a result the
Quantity demanded for tea increases from 5 kg to 10 kg. What is the
Cross Elasticity of tea for coffee?
Problem Set 3
9. Find out the different degrees of Price Elasticity
using the total Outlay Method and Represent it
graphically

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Demand and Supply

Dr. Sujay Sathyanarayana

• In economic sense, “demand is desire for a commodity backed by the

PES University - MBA - Managerial Economics (UM14MB501)

Demand curve is a Graphical

Demand Schedule is a Tabular

Market Demand Schedule is a

• The Change in the quantity demanded

• Reduction in Quantity demanded due to

• The Changes happen along the demand

• Reduction in demand due to change in variables other than price

• The change n demand results in shift of demand curve upwards

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

• Giffen Paradox is an Exception to

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑

PES University - MBA - Managerial Economics (UM14MB501)

• Price Elasticity of demand is defined as the proportionate change in

% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

For example, the price of a particular brand

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

Therefore, change in the price of milk is:

The change in demand shows a negative sign, which can be ignored.

Price elasticity of demand for milk is:

Understanding the effect of each of these factors on demand is very

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

Lower Segment Length of Demand Curve

• Total Revenue of company (TR) = (Price (P) × Quantity Sold (Q)) OR

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

PES University - MBA - Managerial Economics (UM14MB501)

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