MANAGERIAL ECONOMICS ART-i %. F.V.MBA / MMS Ot Sudfiakar M.A.,M.Com.,B.Ed.,LL.B., NET.,DCL.,Ph.DDEMAND FUNCTION & DETERMINANTS OF DEMAND KEY POINTS :- CONCEPT OF DEMAND LAW OF DEMAND. DETERMINANTS OF DEMAND DEMAND FUNCTION AND SCHEDULE VARIATION AND CHANGE IN DEMAND. OBJECTIVES AND CASE STUDY Seoeoesd Q. 1: Explain the meaning of the concept of Demand / Law of Demand. OR State and Explain the Law of Demand. Ans. A) CONCEPT / MEANING OF DEMAND :- “Demand is a desire for a thing backed by willingness and ability to pay for it’. Ability means the income or purchasing power of the person who demands the commodity. Willingness refers to the readiness of the person to spend money. The desire for a commodity or service supported by the income and willingness to spend the income, becomes demand. A poor man's desire for a car does not become demand as the poor man has no ability or income to purchase a car. Similarly a rich man’s desire fora car is also not demand if the rich man is not willing to spend due to his miserliness. A mere desire, therefore, does not become demand. It remains only a wish. Thus in economics demand means "effective demand’, that is, the amount consumers are willing to buy at a given price and over a given period of time. Therefore [Demand = Desire + Willingness to pay + Ability to pay. Demand for a good describes the relationship between price and demanded of the goods given that other factors remains d is a function of price. aps ‘Symbolically DD =(C) EXPLANATION OF THE LAW OF DEMAND :~ The law can be better understood with the help of the following ‘schedule: ET Ci LI Price per kg. of oranges |] Quantity Purchased (in) (in kgs.) The above schedule shows that if the price is € 25, quantity purchased will be 200 kgs. But as the price falls, the quantity demanded goes on rising. ‘The schedule can be used to get a demand curve as follows = DD Schedule is table showing _ different quantities of a commodity demanded at different alternative Prices, OD Curve is a graphical representation of the law of demand sO © 200 400 600 800 1000’ ‘Quantity Demanded From the above diagram, we can see that the demand curve slopes is from left to right, ie. it shows an inverse relationship between ‘Price and demand. ASSUMPTIONS TO THE LAW OF DEMAND. je in Income :- The consumer's income must remain unchanged rising prices, his incomes also rises, then his demand would sles Fashions :- The consumer's ould not change otherwise the law will ds :- The price of the related titutes etc. should not change isi ition of the people: 3) There should be no change in size or cont te products. 4) There should be no change in the price of substi 5) There should be no change in fashion. ? ) No new products should be introduced in the be me rther rise or fall in the 7) There should be no future expectations regarding , price of a product in near future. Fi law of deman There are some other assumptions also on which the is based, “ion in demand. 3) Variation in demand refers to extension and conmaghes BEd to ba ‘Ans. When there is change in demand due to change in BlICe, ATC ontraction variation in demand. Itis of two types: Extension in Demandan ote that in Demand. When the price of a commodity falls, uh snsion in demand. commodity rises or expands, which is known as extensieh 17 Tore, Similarly, when the price of a commodity rises, the deman falls or contracts, itis known as contraction of deman Hence, variation in demand refers to changes in dt change in the price of a commodity and other factors suc! habit etc. remaining constant. (B) FILL IN THE BLANKS :- 1) A tabular statement of Price - demand relationship is described as demand schedule : 2) Asstraight line demand curve implies Lin (C) MATCH THE FOLLOWING COLUMNS jemand, only due to sh as income, taste, demand function. COLUMN 'A" COLUMN ‘BY 1) Price demand relationship a) Exception to law of demand 2) Demand schedule b) Substitutes 3) Giffen Goods c) Demand Function 4) Car & Petrol d) Complementary goods 5) Sony, Samsung TV e) Tabular statement f) Joint demand Ans. (1-c), (2-e), (3-a), (4-d), (5-b). (0) STATE WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE. 1) Anormal demand curve has a positive. 2) Demand is an independent variable while price is dependent. 3) The validity of Law of Demand depends on the exi conditions xistence of (False) (False) certain 4) There are times when demand may vary ditectly with price, pe) 5) D=f(P) is a much simplified statement. (True) 6) Ademand curve is based on demand 7) Demand is inversely related to price ee) 8) Extension and Contraction can be shown en same demand curve mat (E) MULTIPLE CHOICE QUESTIONS :- 1) Alinear demand function is depicted through (2) A straight line demand curve (b) a downward sto (c) a vertical demand curve (a) none of the ab 2) If McDonald reduces the pi demand for King Burger ? (a) No change Jo (c) Decrease in demand PPIng demand curve ove rice of burger, what will be its Possible impact on (b) Increase in demar nd (@) Contraction in demandMBA py. sudhakay Tye¥ ELASTICITY OF DEMAND KEYPOINTS ELASTICITY OF DEMAND AND ITS DETERMINANTS PRICE ELASTICITY OF DEMAND AND ITS TYPES, INCOME ELASTICITY OF DEMAND CROSS ELASTICITY OF DEMAND PROMOTIONAL ELASTICITY & ARC ELASTICITY IMPORTANCE OF ELASTICITY OF DEMAND OBJECTIVES AND CASE STUDY a aaa) Q.1: Explain the Concept of elasticity of demand. Discuss the factors influencing / Determinants of elasticity of demand. Ans. A) MEANING & DEFINITION OF ELASTICITY OF DEMAND :- ‘A change in the price of a commodity leads to change in the demand forit. Generally, when the price of a commodity falls, the demand for itinereases and when its price rises, the demand thereof contracts. This particular behaviour of demand which results due to a change in the price of a commodity is known as elasticity of demand or it may be said that the responsiveness of demand due to changes in price is known as elasticity of demand. According to A. L. Meyers -"the elasticity of demand is a measure of the relative change in amount purchased in response to a relative change in price on a given demand curve". Mrs. Joan Robinson defines it as - "the elasticity of demand at any price or at any output, is proportional change of amount purchased in response fo a small change in price, divided by the proportional change of price” Percentage change in quantity demanded Elasticity of Demand = pecnaee Percentage change in the determinant of demand B) DETERMINANTS | FACTORS INFLUENCING ELASTICITY OF DEMAND (PRICE ELASTICITY OF DEMAND :: Whether the demand for a commodity is elastic or inelastic will depend ona variety of factors. The major factors affecting elasticity of demand are =~ 4) Nature of the Commodity :- Nevessaries like rice and wheat have inelastic ‘demand and luxuries like TV., Car ete. have elastic demand. 2) Availability of Substitutes :- Goods which have no substitutes have inelastic demand e.g. salt, onion etc. Goods which have a wide range of substitutes have more elastic demand e.g. tea or coffee. 3) Number of Uses of a Commodity :- Multi-purpose goods have relatively elastic demand eg, coal, electricity ete. Demand for a commodity having only a specific use is relatively inelastic. 4) Income :- Aconsumer having a high income has relatively inelastic demand for many goods while a poor consumer has more elastic demand for goods in general.ns. i) Price elasticity = Ag p p=% 150 q= 2000 metres Ap = 150-1425 =7.5 e, =07 ‘A eae Putting the values in formula, we have OF te Ao x 150) 75 2000 q = 07X75X 2000 = 70 150 As the price has fallen quantity demanded will increase by 70 metres Thus,the new quantity demanded will be :- 2000 + 70 = 2070. ji) Before reduction in price Total revenue = 2000X 150 = € 3,00,000. After reduction in price Total revenue will be = 2070 X 142.5 = % 2,94,975 Hence, with reduction in price, total revenue has also decreased, The concept of elasticity of demand is useful to the government in formulating a variety of policies. One such policy is related to the provision of public transport system at a subsidised rate. All major cities worldwide suffer from traffic congestion, pollution, inadequate parking space, etc. Hence many alternatives are being tried by various countries which range from encouraging the people to use public transport, sharing an automobile for reaching people to use public transport, sharing an automobile for reaching the same destination rather than using their individual automobiles, using eco-friendly fuel, etc. To give an example, in India, metro railway is promoted in cities like calcutta and Delhi to reduce traffic congestion on the road. Other cities a also trying to follow the same. The trickly issue for the government i formulation of pricing policy for the public transport system. The government has to consider both price elasticity and cross elasticity while fixing the price. QUESTIONS :- Let us suppose the price elasticity of demand for public transport is high. If the public transport is subsidised, what will be the change in demand for public transport and what will be the impact on other modes of transport? What will be the impact on automobiles if cross elasticity of demand between public transport and automobile is (a) high and (b) low ?