2.1 Theory of demand Pome aaa PU Ee eee ue ars > Here, the meaning is different from what we use it in our day to day activities Soran tuta ae hat Pert eeeaatcicekuriaar) Pk paige Cenacle rican cack cite Demand > Re Penna eg Pe ee RC ee Tet ee ee ee ee ere Reece] purchase at a given time in a market at various prices, given other things unchanged (ceteris paribus)Law of demand: This is the principle of demand, which states that , price of a eS RRR sm uu i BU ease Re eee a ele) Te Mug lage sme ure Rm ur gee liag decreases (increases), ceteris paribus.2.1.1 Demand schedule (table), demand curve and demand barat) Price per KG Qd/week b=-2 and a=15, Se rr] Uta sl) BSE Lat) Q=a+bPConsumer 3 ° ° 1 2 4 Market Demandre Can price affect Demand? Other Determinants of demand > The demand for a product is influenced by many factors. Taste or preference of consumers Tare -Mel meee Cie) Consumers expectation of future price Price of related goods Number of buyers in the market. Taste or preference When the taste of a consumer changes in favour of a good, her/his demand will increase and the opposite is true Ue mung Normal Goods are goods whose demand increases as income increase, Inferior goods are those whose demand is inversely related with income Oe et ac lee esa) aim eee dela lea mn Mines h tee uae ROU eM elim ive olala expectation will decrease the demand for the good.Cetera > Two goods are said to be related if a change in the price of one good affects Pe er) Tete ur Ros Substitute goods are goods which satisfy the same desire of the consumer. > If two goods are substitute, then price of one and the demand for the other are directly relat Complimentary goods: are those goods which are jointly consumed. ee eeu Ue uC Re eae ey Eo) SR ar Boe UCU Ure Mc ur Re Un oe RR lad buyers will increase demand while a decrease in the number of buyers will decrease demand.Made with KINE MASTER Are the following statements ‘True’ or ‘False’? >If price of Banana increases, then the demand for banana will decrease. False >If price of Banana increases, then the quantity demanded for banana will decrease. TrueCoreteSUk uti k Came) CU CURVE): because of pears 9). 4 a of demand other than price Increase in demand: ———__—> \ A> D (Outward Shift)enue Cutie h lamer DLS CURVE): because of changes in other fa: of demand other than price Decrease in F demand: A> E H (Inward Shift) ads Ce a 7 ee oe* Change In quantity demanded A>B and A>C 6 +------; C (4,6) * Movements along the curve i | te * Caused by only price change Made with KINE ay2.2.2. Elasticity of Demand "=""KINEMASTER > Elasticity is a measure of responsiveness of a dependent variable to area MAMMAL (slel-uae (na lee) > Elasticity of demand refers to the degree of responsiveness of quantity demanded of a good to a change in its price, or change in income, or change in prices of related goods. > Commonly, there are three kinds of demand elasticity: 1. Price elasticity 2. Income elasticity 3. Cross elasticity.1.Price Elasticity of Demand aT avi tes > Price elasticity of demand means degree of responsiveness of demand to change in price. > Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. > Price elasticity demand can be measured in two ways. 1. Point elasticity 2. Arc elasticityoases aoe Li eae oA WIS) LU eee Clo RR RIC iein ela BN un ol ae eRe a of demand can be determined Ly) Seal following formula. mee UNL yo NO ne MR Creer Cee 2a elt K Po i = pe eT a te > For Q=a-bP and b= Ain I > Hence, E,g= b(P,/Q,)Cont... Ps “a Pemeny 41 asus > Nis Po and M is Qo fe} M, T Q > It should be remembered that the point elasticity of demand on a straight line is different at every point.Cont... i ~~ > Nis Po and M is Qo kF Pe, Peery @ VPS b. Arc price as I of demand > In arc price elasticity of demand, the midpoints of the old and the new values of both price and quantity demanded are used. > It measures a portion or a segment of the demand curve between alma ied ence P.4 = Q1-Qo X Po-P1 Q1+Qo P1+PoInterpretations of Ed maa meme eMC M tT VAM 1 Mal ile ole-l eh mele Ul law of demand. So we take absolute values for interpretations. “ |Edp| <1: Inelastic ® C2) * |Edp| >1: Elastic “> |Edp| =1: Unitary Elastic * |Edp| = 0°: Perfectly Elastic > * |Edp| =0: Perfectly Inelastic eoMade with KINE aN Numerical Example > Suppose that the price of a commodity is Br. 5 (Po) and the quantity demanded at that price is 100 units (Qo) of a commodity. MSR oe eee Reels NACH Rk Tae SGA RLU quantity demanded rises to 110 units (Q,). eR eel Ue etl elle lee Arend of demand and interpret Pee ieemais a9 eee ese PS 4 Fd aCe eho a) Pei ETD Epd = -0.5 id es Te SOM CNT Me uta MM 114 (-k1 814Made with KINE aN rae eia a P.g = Q1-Qo X Po-P1 Q1+Qo P1+Po = (110-100) X (4-5) (110+100) (4+5) ~=-0.43 |E,4] = 0.43, .. the demand is Inelastic iDeterminants of price Elasticity of D&éinia MU CEL is mem ss elec cn > Time: In the long- run, price elasticity of demand tends to be elastic. Because: > More substitute goods could be produced. > People tend to adjust their consumption pattern. > The proportion of income consumers spend for a product:-the smalle the proportion of income spent for a good, the less price elastic will be MUM elec Mem Reel is Me CMe an Lee ele -<-1 ae Luxury goods tend to be more elastic; example: gold. B Necessity goods tend th Tee cll (aerayPe lie w areal a mel mri > It is a measure of responsiveness of demand to change in income. \ dS hier alia eae i) E> 1, tas Pt ir Pee ee DRS Aes 7S eee Rua siis ele Tae at good is inferior good.: a Pree 4 Sa EMO ce ee Maes aoe Tuell | Q Measures how much the demand for a product is affected by a change in price lle = Qx1-Qxo X Pyo Py1-Pyo Qxo 4 = lm etal ce oleae erste > Ey ome cine eee ens clio > i for unrelated goods is zero.F Pome dh Sas Numerical Example al > Calculate the cross —price elasticity of demand between the two goods. What can you say about the two goods? diene Quantity demanded of X 10 1500 45 1000 [era ds sia E,, = Qx1-Qxo X Pyo a eee meld aes S eee em 15-10 1500 Therefore, the two goods are complementpPend VES 2.2 THEORY OF SUPPLY ¢ Supply: quantities of a product that sellers (producers) are willing and able to provide at different prices in a given period of time, other things remaining unchanged. ° The law of supply: Select teed ee octet ee Cone) a product increase, quantity supplied of the product increases, and vice versa.FUNCTION _ wade with KINE MASTER Pe CCRC Cone Cari ype roo e Oe tice rs 20 Pty ot 90 80 70 60 4 ETF ji a Qs= £(P) re K Qs= atbPmade with KINE M BBE Ta amd) AEM Ceo ehioe Mon reler Acne l bar CeCe trem tile quantity supplied of the product by all sellers at each price.CHANGE IN QS AND SS 5... KINEMASTER SSN a tr gitar cee teres a Cee Cec vernon gay yg 1 BT oe BN ay = BB Kos CB Bl yey) bed iN Bere x Right Q2>Ql oI Qs501s FNC) DB 1 ROLF DR eae aa aia BRS a Cet yeaa Ces eu Ce es ted Cece Cent bg Ss2 Le S BT ay wn Ls Se Se TTS Cre Ley hi nN Shifting to wi Left Q1>Qo Co Co) QsPa rats ls 2.2.2 DETERMINANTS OF SUPPLY Bcc any teeny a) ee 1 G5 aaa Py Set CT BO octets eC CCE rt) OCs TCC ns cca uch sooty cee trsc ier SMe oe CEN ey Ce tts oi SRT for2.2.3 ELASTICITY OF SUPPLY * It is the degree of responsiveness of the supply to change in price. PAR ncn eno Ih AU Ty hme Onn CERO talag PCa nee See Ee ent cin ts ones tcrs etter mes at Pmt VS 7) 7 te TDa INTERPRETATIONS OF E, “* Es <1: Inelastic “ Es>1: Elastic e ss “* Es = 1 : Unitary Elastic ( ** Es = 00 : Perfectly Elastic “naINTERPRETATIONS OF E, ** Es <1: Inelastic * Es> 1: Elastic @ ** Es=1: Unitary Elastic if Ss ** Es = 00 : Perfectly ElasticMade with INTERPRETATIONS OF E, ** Es <1: Inelastic ** Es > 1: Elastic @ > ** Es = 1: Unitary Elastic *» Es = 00 : Perfectly Elastic ** Es =0: Perfectly Inelastic t Note that: Elasticity is unit free because it is a ratio of percentage Cairne2.3 MARKET EQUILIBRIUM * Market equilibrium occurs when market demand | equals market supply. ( 1. Ddand Ss Intercept each other 2. Qa=Q; | 3. Market clearsPp I) a .SURPLUS Yo Om ern 4 Market surplus b> Vr i OP me err) Market Shortage N Qs2 Qe Qa oFTARO Re eee re ae EQUILIBRIUM = SS} WA Increase in Demand en — isEFFECT OF CHANGE IN DEMAND OW). -1¢2 EQUILIBRIUM > SS Decrease in Demand es oor is eye \ Dd Qa Qs Pay eU iTSEFFECT OF SIMULTANEOUS CHAN DEMAND AND SUPPLY ON EQUILiB + At point ‘E’ Q,=Q, aOR Ca ot oe ASTEI 1 Vas a) fey) Qa Qs Pauw ev leEFFECT OF CHANGE IN SUPPLY Q OL Um teat veer i EMASTE P St Ss ly a in Supply a eer Omer Qe Qen Q2a9;s — ErmiAbel —a EFFECT OF CHANGE IN SUPPLY ON,-y.<; EQUILIBRIUM “™ ; Ss Decrease in Supply Dee oRTE oy Qen Qe [oonen atesEFFECT OF CHANGE IN SUPPLY ON. EQUILIBRIUM freer MASTEF * At point ‘E’ Q,=Q, + Market Clears yaEFFECT OF SIMULTANEOUS ON —— DEMAND AND SUPPLY ON EQUILIBR iP Proportional Increase in Supply and Demanc Pe ae = (OeIPP AR RS Le NEL) SEU tad = DEMAND AND SUPPLY ON EQUILIBR ‘ P “ SI Increase in demand if greater than increase eT in supply >P. Pen Pe 4 aie ied o gle ee fo a aaTe bt vi Deere y dl Qa QsPee aL arated YOUR EXERCISE Ray eMC osteo e UC roe Rg CSO lacie mn Cnet Oe CoC ECE hey tear aa tea tes INCA Mee CoC sac kano settee cans demand. PR OC CEE ECan Cen 5A Pe Sectone it Comnc et hns a tent corre shen setts cca etn Erno eC CoC En ARON oct Sens sec sce gent demand.NUMERICAL EXAMPLE + Given market demand: Qd= 100-2P, and + Market supply :P =10+ %Qs > Qs = -20+2P a) Calculate the market equilibrium price and quantity ene nea cers st toe eon Soir Bok OME eth a Nel Perse ea Bets) Loe CR UTR Ce tit settingSOLUTION ie * Given market demand: Qd= 100-2P, and + Market supply :P =10+ %4Qs > Qs = -20+2P a) Calculate the market equilibrium price and quantity. At equilibrium:- Qd = Qs 100-2p = -20+2p Os 4p= 120 P,= 30 Q fotar- 16) Then Q,= 100-2p or = -20+2p = 100-(2*30) or = -20+(2*30) = 40 or = 40SOLUTION CONT... 4.5. KINEMASTER * Given market demand: Evel PB Vereen) yas ene ewe b) Determine, whether there is surplus or shortage at P= 25 and P= 35. eos es) * For P= 38a SOLUTION CONT... Kinema + Given market demand: Qd= 100-2P, and + Market supply :P =10+ '%Qs > Qs = -20+2P + Pe= 30 and Qe= 40 c) If demand increases to Od! = 220-2P, what will happen to the equilibrium? At equilibrium:- Rdl = Qs “So 1) 9 I 124 and 220-2p = -20+2p (0). os (oy 4p= 240 P,,= 60 Then Q,,,= 220-2p or = -20+2p = 220-(2*60) or =-20+(2*60) oy Eales} fod Eee} Fortin«