Professional Documents
Culture Documents
Eco
Eco
this law tells us that the more of consumer consumes a commodity smaller its marginal utility will be to
him. when price declines theconsumer will find it benifical to buy these units as their marginal utility will
now exceed the new price.
the consumer make sacrifice of money many times till the utility derieved from the commmodity is
greater than the money sacrificed.
-Income effect
when there is fall in price of income it implies the rise in the real income of the consumer. with larger
income a person normally buys more of a commodity.
-Substitution effect
if the price of a particular product increases the consumer shift over to other brand.
when the price of a commodity falls some new users get interested in buying them.
in certain cases, an increaese in the prices of some goods leads to an increase in their demand.
alternatively when this price fals heir demand also falls. this unsual of demand is considered as its
exception to the law of demand.
1. Giffin goods
Sir Robert Giffin obsserved that the rise in price of bread cost low paid british wage earners to buy
more quantities if bread and not less.
This is coz they consiider bread as their main food item. whenever there was rise in price their real
income used to shrink and they were forced to cut down the consumtion of meat and other expensive
food items. To maintain their intake of food they therefore bought more bread even at a higher price.
This phenomenon is reffered as Giffins Paradox.
In India the example of giffin good is bajra which is compared with wheat. it was observed that when the
price of bajra wen doen its consumption also increased and the consumption of wheat fell. This is coz
wheat is more expensive than bajra. hence to compensate the increased price of bjara the consumer
reduced the consumption of wheat.
3. Incase of emergency
in this time the price of good or commodity increases but the demand also increases. eg: in case of
natural disaster.
4. Demand for goods configuring social prestige/snob effect. these goods are bought for the purpose of
showing off in the society. eg: vintage cans, diamonds ,designer wear etc.
5.change in fashion
In certain cases a change in fashion forces a behaviour pattern that is just opposite to the law of
demand. it refers to kind of demonstration effect or hard mentality where a section of the society tends
to initiare a popular celebrity/character. this is generally seen in cases of fashion tends , children toys and
accessories. it is also known as brand wagon effect.
6.ueblen
these goods have low practical value but high prestige value. Generallly thse gooods have
historical/cultural value importance. ex: antique pieces.
the demand curve shifts towards right/left and there is change in factors other than price. In
this curve, at price P, Q1 is QD. If the price does not change, but the income of consumer
increases, the demand curve DD will shift outwards and demand increases from Q1to Q2.
Similarly if there is change in prefernce of consumers and demand falls to Q3 the demand curve
will shift inwards.
ELASTICITY OF DEMAND
1. price elasticity of demand refers to the magnitude of change in demand due to change in its
price. it measures the respnsiveness of the demand of a good to a change in its price.
Q2-Q1/Q1*100/ P2-P1/P*100
deltaQ/deltaP*P/Q
The coeffecient of demand elasticity is negetive coz quantity and price share an inverse relation.
1.when the demand for a product doesnt change as a result of change in its price, demand is said to be
perfectly in elastic.
2. inelastic demand- when a change in price leads to a less propotioante change in demand, demand is
said to be less elastic. The coeffecient of price elasticity in this case is(0<Ed<1). It exists in case of
necessity items like good and fuel.
3. when the percentage change in quantity demanded is equal to percentage change in price the
demand is said to be unitary elastic. it exists in case of normal goods.
4.Elastic- when change in price leads to more than propotionate change in demand, the demand is said
to be highly elastic. The elasticity increses as the absolute value of elasticity coeffecient increaes. It exists
in case of luxurious goods.
5. Perfectly elastic- in this case when the demand of commodity increases or decreses any change in
price demand is said to be perfectly elastic. In this case we are assuming the price is constant and all the
sellers are selling homogenous product. The coeffecient of demand is infinity. eg: vegetables in organised
vegetable market.
FACTORS AFFECTING PRICE ELASTICITY OF DEMAND
· nature of goods
· percentage of income(total)
· habitual goods
· time period
According to this method Ed is studied in relation to change in total expenditure as a result of change in
price (and the consequent change in demand). In case I elasticty is 1 when the price decreases from rs5
to rs4 and quantity increases from 100 to 125.
2. Geometric method/Arch price/Point elasticity of demand
this method enables us to calculate elasticity of demand at different points of linear demand curve. In
fig 1 elasticity of demand is 0 at point B because the lower segment is 0. As we move up the demand
curve, elasticity of demand increases. However it remains less than unity in the range PB as in this entire
range the lower segment is less in length as compared to the upper segment. At point P(mid point) the
two segments are equal. therefore elasticity is unitary. As we move further up, the length of lower
segment becomes more than the length of upper segment. Accordingly as we move up from P to A,
elasticity of demand increaes and remains greater than unitary throghout the range PA. When we reach
A, the upper segment becomes zero therefore elasticity becomes infinite.
· income elasticity is +ve in case of normal goods as income and QD share a direct relationship.
· Ey is -ve in case of inferior goods as the QD of inferior goods falls with increase in income. This is
coz as income increaes the consumer consumes less of inferior goods as he now can afford
more of normal good.
TYPES OF Ey
it is the measure of the quantity demanded of good X due to the change in price of good Y. in other
words it meaures the responsiveness of demand of one product to change in price of related product.
TYPES
2. Ec>0
it occurs when two products are are substitutes of each other. Higher the value of Ec greater is the
substiture ability. eg: two different brands of cola will have greater Ec as compared to packed juice.
3. Ec=0
this occurs when the goods are unrelated to each other. eg: fans and pens.
4. Ec<0
this occurs when two goods are complimentary to one another, higher the numerical value of Ec (in
the -ve side) greater is the degree of complimenatrity. Eg: cross elasticity between shoe and laces will be
higher than that of shoe and socks.
5. Ec= -infinity
such products are perfectly complimentay to one another ie they cannot be used without each other..
eg: fountain pen and ink.
· producers of close substitutes or close complimenatry goods try to find the cross elasticity of
their products with respect to other products in the market.
Advertising consist of activities which aim to create and expand the demand for good and service. these
activities consist of events like conference, fashion shows, sponsorships etc. Advertising elasticity
measures the resposne of quantity demanded to a change in advertising expenditure. It is called
promotion elasticity of demand.
FACTORS AFFECTING
· time lag
DEMAND FORECASTING
It is the activity of estimating the type of quality and quantity of a product or service that the consumer
will purchase in future.
It is the estimation of fure demand under given condition.
Objectives
short term
· to effectively manage inventory
long term
steps
· identifying the objectives
· collection of data
· choice of method
METHODS OF FORECASTING
3. maeket experiments
Utility
it is the benifit that the consumer avails from the goods/ services that they consume. expected
satisfaction to a consumer is where he is willing to spend money on a commodity which he thinks as the
capacity to sastisfy his wants.
Sastisfaction only takes place when as the coomodity has been consumed.
Utility is said to be subjective. it means that it differs from person to person consuming same
commodities and it also differs for same person at different point of time.
Utility function- it shows an individual perception of the level of utility that would be derieved from
consuming combination of goods and services.
A simple form of utility function for a person who consumes three goods X Y Z will be f ( X Y Z). Thus
utility depends on the quantities consumed of X Y Z.
MARGINAL UTILTY
It measures the addded sastisfaction derieved from one unit increase in the consumption of the product
keeping the consumption of other commodies constant.
It is the utility of the last unit on the addition to local utility by the consumption of an additional unit.
MU= TU-TUn-1
ASSUMPTIONS
ASSUMPTIONS
· ratioanal consumer who has all the knowledge of market has ability to think and take decisions.
he tries to maximize utility by minimizing cost
· constant marginal utility of money. It means that importance of money remains unchanged.
· if follows diminishing marginal utility.
LIMITATIONS
· in practise it is difficult for the consumer to know the marginal utility of different goods. A
consumer is not always able to identify the change in utility derieved from additional unit.
· it is next to impossible to calculate numerically the sastisfaction derieved from each unit.
· when consumers acquire certain habits and customs they know the MU derieved from other
goods.