DEMAND- Concepts

FOREST ECONOMICS
 Demand

Demand normally means the desire/ willingness for

a good.
In Economics- Demand is defined as the amount of a
product / service the consumers are willing and able
to purchase at each price during some specified time
in a specified market.
Demand conceptualizes the buyer’s response to price
changes.
Schedule of quantities & corresponding prices of
fireplace wood that could be sold in Woodstock

Price per cord Quantity sold

( dollars)

18 10,000

16 12,000

14 14,000

12 16,000

10 18,000

8 20,000

6 22,000
Curve of the demand for fireplace wood
Unit Price

Quantity Sold
 Law of Demand

Explains the functional relationship between the

quantity demanded of a commodity and its unit
price., ceteris paribus.
When there is a rise in the price of the commodity,
quantity demanded is reduced and when there is a
fall in the price , quantity demanded is extended.
 Kinds of Demand

1. Price demand: refers to the various quantities of

good/ service that a consumer would be willing to
purchase at all possible prices, ceteris paribus
2. Income Demand: refers to various quantities of
good/ service that a consumer would be willing to
purchase at different levels of income, ceteris paribus.
3. Cross Demand: refers to the various quantities of
good/ service that a consumer would be willing to
purchase not due to the changes in the prices of the
commodity but due to change in the prices of related
commodities
Movement Refers to the change in the
along the quantity demanded due to
curve change in price.
1. Extension in demand- buying
more quantity at a lower price.
o Price- P P1
P A
o Quantity- Q Q1
B
P1 2. Contraction in demand- buying
less quantity at a higher price.
Q Q1 o Price- P1 P
o Quantity- Q1 Q
 Shift in Demand Curve

Refers to change in price not due to change in price but

due to changes in values of other variables .

D1 Increase in demand
DD D1 D1
D2 D
P1

P D1
Decrease in Demand
P2 D DD
D2 D2D2

Q2 Q Q1
Increase in Demand( DD – D1D1) :- more demand at

the same price / same demand at higher price.

Decrease in demand ( DD- D2D2):- Less demand at

same price / same demand at lower price.

 Factors affecting Demand

1. Tastes and Preferences

2. Income
3. Price of other related goods
4. Habits
5. Region
6. Season
 Elasticity of Demand

Elasticity of Demand measures the responsiveness of

quantity demanded to a change price/ income/ price

of related goods by keeping other factors constant.
 Types of Elasticity of demand

(1) Price Elasticity of Demand:

Price elasticity of demand is the degree of
responsiveness of quantity demanded of a good to a
change in its price.
Precisely, it is defined as the ratio of proportionate
change in the quantity demanded of a good caused by
a given proportionate change in price.
Δq / q ÷ ∆ P / P
 (2) Income Elasticity of Demand:

The degree of change or responsiveness of quantity

demanded of a good to a change in the income of a
consumer is called income elasticity of demand.
= Proportionate change in quantity demanded
Proportionate change in income
= Change in quantity
Initial quantity X 100
Change in Price
Initial Price
∆q/q÷ ∆I/I
 (3) Cross Elasticity of Demand

The concept of cross elasticity of demand is used for

measuring the responsiveness of quantity demanded
of a good to changes in the price of related goods.
Exy = % change quantity demanded of good X
% change in price of good Y
= change in quantity X
Initial quantity X x 100
Change in quantity Y
Initial quantity Y
= ∆ X/X÷ ∆ Y/Y
Degrees of Price Elasticity of Demand:

(1) Perfectly inelastic demand

The quantity demanded of a good does not change
with change in price.
Ed= 0
 (2) Perfectly elastic demand

The quantity demanded is extremely (infinitely)

responsive to price.
Ed= ∞
 (3) Unitary elastic demand:

When the quantity demanded of a good changes by

exactly the same percentage as price, the demand is
said to be unitary elastic.
Ed=1
 (4) Relatively elastic demand

Small change in price results in relatively greater

change in quantity demanded.
Ed= >1
 (5) Relatively Inelastic demand

A given proportionate change in price causes a

relatively less proportionate change in quantity
demand.
Ed= <1
 Methods for calculating PED

Total Outlay Method

Point Method
Arc Method
 1. Total Outlay Method

Or Total Expenditure Method

Proposed by Alfred Marshal
PED can be measured on the basis of change in TE to
the change in price
Change in Price Elastic Demand Unitary Elastic Inelastic
(ed >1) Demand (ed=1) Demand (ed<1)

Fall in price Total Exp. Total Exp. Total Exp. falls

increases unchanged

Rise in Prices Total Exp. Total Exp. Total Exp. rises

decreases unchanged
 2. Point Method

Geometrical / Graphical Method

Ed is measured at a point on the demand curve
Ed= Lower segment of the demand curve
Upper segment of the demand curve
The price elasticity is different at different points of
the demand curve.
A
Ed= ∞ B • A= ∞
Ed >1 • B= >1
• C= 1
C D • D=<1
Ed= 1 Ed < 1 • E= 0

E
Ed= 0
 Ed= QR
D
PQ
P

Q
D

R
 3. Arc method

Price elasticity is measured over a finite range

Is an average reaction or the average responses

Ed= Δq ÷ Δp
q1+q2 p1+p2
2 2
 Determinants of Price Elasticity

1. Substitutability- > substitutes , > elastic

2. Proportion of Income - Other things equal, the higher
the price of a good relative to consumers’ incomes, the
greater the price elasticity of demand
3. Luxuries versus Necessities
4. Time- Generally, product demand is more elastic
the longer the time period under consideration.
Consumers often need time to adjust to changes in
prices.
5. The no. of uses of a commodity
 Substitutes vs. Complements

Substitutes Complements

Rise in price of good Rise in price of good

results in increase in results in decrease in
quantity demanded. quantity demanded.
Ec = +ve Ec = - ve
E.g. – tea and coffee E.g. – tea and milk
Also known as
competing goods.
 Normal goods vs. Inferior goods

Ei = 0

a l Inferior
orm s goods
N od
go
Positive Income Zero Income Negative Income
elasticity elasticity elasticity

↑ in income leads to ↑ ↑ in income leads to ↑in income leads to ↓

in quantity demanded ‘0’ change in quantity in quantity demanded
demanded

Normal goods Inferior goods

Necessities Luxuries