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and should have ability to pay for it. Thus a desire becomes demand
whom to produce are taken on the basis of price signals coming from
demanded. The law states that the price of a commodity falls, the
only the direction of change in demand and not the extent of change.
decisions regarding fixing of price with a view to make larger profit. For
instance, cost of production is increasing the firm would want to pass the rising
cost on to the consumer by raising the price. Firms may decide to change the
price even without any change in the cost of production. But whether raising
price following the rise in cost or otherwise proves beneficial depends on:
a) The price elasticity of demand for the product, i.e. how high or low is the
price.
b) Price elasticity of demand for its substitutes, because when the price of a
product increases the demand for its substitutes increases automatically even if their
1. Price elasticity
2. Income elasticity
a. Zero income elasticity
b. Negative income elasticity
c. Positive income elasticity
3. Cross elasticity
1. Price Elasticity
its price i.e. it measures how much a change in price of a good affects demand
for that good, all other factors remaining constant. It is calculated by dividing the
price.
demand for that commodity if the price and other factors remains constant.
3. Cross elasticity
increase in the price of X will result in an increase in sales of Y. If the goods are
complementary and increase in the price of one commodity will depress the
demand for the other. So cross elasticity will be negative. If the goods are
unrelated cross elasticity will be zero. Because however much the price of one
commodity increased demand for the other will not be affected by that increase.
There exist another two types elasticity viz.
Advertisement elasticity
ex = pf / pf pf x pc
==
pc/pc pc pf
Where Pc and Pf are current and future price. The coefficient ex gives
the measure of expected percentage change in future price as a result of 1
percent change in present price. If ex > 1 it indicates the future change in price
will be greater than the present change in price. If ex=1, it indicates that the
future change in price will be equal to the change in current price. In ex > 1, the
sellers will sell more in the future at higher prices.
FACTORS INFLUENCING
1. Nature of commodity
2. Availability of substitutes
For some goods, consumers spend only a small part of their income. The
demand will be inelastic. For eg: - salt and matches
5. Price of goods
6. Income of consumers
Very rich people have inelastic demand for goods and poor people have
elastic demand. Because rich people will buy the commodity at all levels of
7. Time period
Elasticity would be more in the long run than in the short run. Because in
the long run consumers can adjust their demand by switching over to cheaper
parallel to x-axis.
Y
Price
D ep = 2
X
0 Qty demanded
P1 ep = 0
Price
P2
Quantity demanded M
∴ ep= 10/10 = 1
P ep =1
Price
P1
0 N N1 X
Quantity demanded
4. Relatively elastic demand
demanded.
P ep >1
Price
P1
0 N N1 X
Quantity demanded
5. Relatively Inelastic demand
curve will be a very steep curve. Elasticity is less than 1. For example, If price
Y D
P1 ep =1
Price
0 N N1 X
Quantity demanded
inelastic are extreme cases i.e. rarely found in actual life. Unitary elasticity,
relatively elastic and relatively inelastic demand are the most widely used price
elasticties.
MEASUREMENT OF
ELASTICITY OF DEMAND
method.
∆q= ∆p
q p
= p X ∆q
q ∆p
ep is the price elasticity
∆ q is the change in quantity demanded
∆p is the change in price
q is the initial quantity
p is the initial price
For example:
Price of A Quantity demanded of A
5 10
4 15
When price of A is Rs.5 quantity demanded is 10. When price falls to Rs.4
quantity demanded rises to 15.
Here ∆ p = 1, ∆ q= 5
Initial price = 5, Initial quantity = 10
ep = p X ∆q
q ∆p
= 5 X 5
10 1
= 2.5
means total revenue. So this method is also known as total revenue method.
Y
A
e>1
B
e=1
C
e<1
L
0 X
Total Expenditure
In this figure price is on the vertical axis and total expenditure on horizontal
line. As the price falls and total outlay increases, elasticity is greater than 1. We
find elasticity greater than 1 in the CB portion of the total outlay curve. In BA,
total expenditure remains the same while price is falling. Therefore elasticity is
equal to 1. In AL the price is falling and total expenditure is also falling. From A
to L the curve is bending towards the origin. So elasticity is less than one
elasticity at any point on the straight line can be calculated using the point
method.
curve, we have to extend the demand curve to touch the x axis and y axis.
Then the point at which elasticity is to be known has to be marked on
ep = lower segment
upper segment
a ep=2
ep>1
ep=1
PRICE
ep<1
ep=0
0 X
Qty demanded e
4. Arc method
Arc method is not so important that it is applicable only when there are very
20
PRICE
0 X
80
Qty
20
PRICE
0 70 Qty 80 X
At this time we have to reduce the price by Rs. 18/- instead of Rs. 20/- to
D1
20
PRICE D
D1
0 70 75 80 X
Qty
There are certain reasons for the sudden decline of demand for our
commodity.
The main reason is the availability of cheap substitutes in the market i.e.
more substitutes is available in the market at low price. So that people buy
more of that commodity and because the demand for our commodity falls.
for another.
When price of a commodity falls the cheaper commodities will be substituted
in the place of dearer commodities. Thus price of the commodity falls more of it
will be demanded and the consumer uses it as a substitute for high priced
commodities.
2. Lack of Advertisement
Lack of Advertisement is also a reason for the declining demand for goods.
3. Technological progress
discoveries bring new things in the market. So people will not demand older
things. So we must use more technological devices to improve the demand for
our product.----9703252205
4. Lack of demonstration
Lack of demonstration also brings out our commodity to a fall in demand i.e.
people get motivated or they were attracted by the demos given by us and they
will buy that product not because of their increase in income or it becomes a
cheaper product but their neighbour or relatives bought it. Tendency of the
consumer to imitate others will help us to increase the demand for our
commodity.
5. Free goods
More Free goods are given by other producer to attract consumers and that
will affect the demand of our product. So we also gave more free goods than
commodity to increase our commodities demand. For this we must know the
different market conditions and the factors affecting demand for a commodity.
DETERMINANTS OF DEMAND
1. Price of a commodity
Price of the commodity is the most important factor that determine demand.
Substitutes are those goods which can be used one another or the goods
When price of tea falls demand for coffee also falls. Because when price of
Complementary goods are those goods which can be used only jointly. e.g.:
- car, petrol or pen, ink. When price of a commodity raises demand for its
x without y. When price of x raises demand for x falls and y cannot be used
Income of the consumer and demand for a commodity are positively related.
For normal goods when income increases demand also increases and vice
versa. But for inferior goods there is a negative relationship between income
Taste and Preferences of consumers also brings out changes in demand for
demand for a commodity. It change from person to person, place to place and
time to time.
4. Rate of Interest
5. Money supply
increases people will have more purchasing power and hence the demand will
6. Business condition
Trade cycles or business cycles also demand for a commodity. Demand will
there is equal distribution of income demand for necessary goods and comforts
8. Government policy
heavy taxes are imposed on certain goods, the demand will decrease. On the
9. Consumers’ expectations
Consumers’ expectation about a further rise or fall in future price will affect
commodity in the near future, they may purchase large quantity even though
there is some rise in the price. When the price of a commodity decreases,
people expect a further fall in price and postpone their purchase. Similarly, if
consumers believe that their incomes will rise in the near future they are more
inclined to buy more expensive items today. So these expectations changes the
we have to increase our demand of our commodity. But this increase in demand
must take some strategic decisions to improve our quality of our commodity and
thereby increase profit, increase in demand and also we have to reduce the
cost of production.
demand of the goods they make, the use of precise estimates of elasticity of
demand will add precision to their business decision i.e. the theory of elasticity
of demand is very useful at the time of taking tactical decisions by the top
influences the working of business and even in our day to day life.
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