ECONOMICS

(4th week)

Assist. Prof. Dr. Tuğba Deniz

Istanbul University-Cerrahpaşa, Forest Faculty
Department of Forest Economics
denizt@iuc.edu.tr
 Titles
• Demand concept
• The factors affecting demand
• Individual Demand Curve
• The Law of Demand and Demand shift
• Demand Elasticity
• Price elasticity of demand
• Income elasticity of demand
• Cross elasticity of demand
• Relationship of price elasticity to goods
• Factors affecting the price elasticity of demand
• King’s Law
 Demand concept and the factors affecting demand

Demand is the willingness and ability of individuals or groups to buy a particular good
or service in different quantities at different prices, assuming all other conditions are
constant (ceteris paribus).
Demand is not only affected by the price of the good, but also by the price of
complementary goods, the price of substitute goods, the income of consumers, their
tastes and preferences, and other factors. Demand occurs as a function of these
factors.
In that case, it is possible to write the factors that determine the amount of demand
for good X and thus affect demand as a demand function as follows:

Qx = ƒ(Px, Pc, Ps, R, CP, OF)

 Qx = ƒ(Px, Pc, Ps, R, CP, OF)
Here;
Qx : demand amount of good X,
Px : The price of good X,
Pc: The price of complementary goods,
Ps : The price of substitute (competitor) goods,
R : Income of consumers,
CP : Consumers' tastes and preferences,
OF : Other factors (expectations, living standard, consumption tendency,
income distribution, population, etc.).
 Individual Demand Curve
• All other things being constant (ceteris paribus), there is an inverse (negative)
relationship between the price of the good and the quantity demanded. In other
words, as the price of the good decreases, the amount of demand increases or as
the price increases, the amount of demand decreases.
• The curve obtained by combining the points showing the quantity of goods
demanded by the consumer (Q) against the different prices (P) of any good in the
coordinate system is called the individual demand curve.
• Due to the inverse relationship between the price of the good and the quantity
demanded, the individual demand curve is a negatively sloping curve from top left
to bottom right, that is, it is a decreasing function of price.
• The individual demand curve shows the amount of goods that the consumer will
demand at various prices or how much of a product he wants to buy at which price.
 The Law of Demand
• Demand curves for normal goods are always negatively sloping curves, descending from the
top left to the right. This feature of demand curves is due to the inverse (negative)
relationship between the price of the good and the quantity demanded.

• All other conditions being constant, this feature, which is expressed as a decrease in demand
as the price of a normal good increases or an increase in demand as the price of a normal good
decreases, is called the Law of Demand.

• However, there are some exceptions to the Law of Demand for inferior goods. As it is known,
as the prices of inferior goods decrease, the quantity of goods demanded may also decrease or
vice versa. This situation, which contradicts the law of demand, is called the Giffen Paradox.
 Demand Shift
Demand curves can shift over time for a number of reasons. While the price of the good is fixed, if
there is a change in the factors affecting the demand for any reason, the quantity of the good
demanded at the same price level changes and in this case the demand curve shifts to the right and to
the left. This is called Demand Shift.

For example, the initial demand curve (T) shifts to the right (T1) due to reasons such as changes in the
tastes and preferences of consumers towards increasing the demand for the good, increase in incomes,
increase in the price of substitute goods, decrease in the price of complementary goods, increase in the
number of buyers, and expectations of income and price increase.

The curve shifts to the left (T2) if there are changes in the opposite direction.
 Demand Elasticity
The concept of elasticity in demand refers to the degree of sensitivity or sensitivity of
the quantity of a good demanded to the price of the good, the income of the
consumer, and the price of other goods. Accordingly, three types of elasticity can be
mentioned:
• Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity

However, when the demand elasticity is mentioned in the economy, price elasticity
of demand is generally understood.
 Price Elasticity of Demand

Price Elasticity of Demand refers to the changes in the quantity

demanded by the changes in the price of the good. Accordingly,
Price Elasticity of Demand is defined as the ratio of the relative
change in the quantity demanded (ΔQ/Q) of any good to the relative
change in the price of that good (ΔP/P) and is formulated as follows:

Ep = x = x
 Ep = x = x

E : price elasticity of demand,

ΔQ : The amount of change in demand calculated as Q2-Q1,
Q : Initial demand quantity,
ΔP: The amount of change in the price calculated as P2-P1,
P: Initial price.
Since the change in quantity demanded and the price change occur in the opposite
direction, elasticity is calculated as a value with a negative sign. However, its absolute value
is often used when interpreting. price elasticity of demand; It is calculated in two ways as
Point Elasticity and Arc Elasticity.
 Point Elasticity

Point elasticity values are found if any of the points A or B on the

demand curve is taken as the starting point and the elasticity is
calculated with the help of the elasticity formula accordingly.
If the price has decreased from point A to point B, the initial price and quantity
values are P1 and Q1. Conversely, if the price increases from B to A, the initial
price and quantity values become P2 and Q2.
Accordingly, the elasticity value of point A is accounted by the formula:

E= x

EA = x = x = -5

The elasticity value of point B is accounted as -2.

EB = x = x = - 2
Question:
In the graphic below, the price and quantity values are given on the demand curve of good X. The initial
price of good X is P1= 6 TL, and the initial quantity is Q1 = 10 units. Since the price and quantity values
formed by the decrease in the price of the good X are P2= 3 TL, Q2 = 20 units. Find the point elasticity
values at A and B points by writing the relevant formulas and interpret the elasticity conditions at these
points.
P
EA= (Q2-Q1/P2-P1) x P1/Q1 EA= (20-10/3-6) x 6/10
EA= - 60/30= - 2 EA<1 inelastic

P1= 6 A
EB= (Q1-Q2/P1-P2) x P2/Q1 EB= (10-20/6-3) x 3/20
B
EB= -30/60 EB= -0,5 EB<1 inelastic
P2= 3
T

Q
Q1= 10 Q2 = 20
 Interpretation of Price Elasticity***
• E=0, it is fully inelastic (not elastic at all),
• E=∞, fully elasticity,
• E = 1, with unit elasticity,
• E<1, inelastic,
• E> 1, elastic demand structure.
 Relation of Price Elasticity with Goods
• Elasticity value is high (E>1) for goods that are price sensitive, can be substituted, are intended for
luxury consumption and are relatively expensive.
• Goods that are compulsory, not possible to substitute, have a low share in the budget and are
relatively cheap have a low elasticity value (E<1). Salt is an extreme example. Salt is a necessary
good that has no substitute and is relatively inexpensive. Therefore, the demand amounts of
consumers do not change much in the face of price decreases or increases.
• The elasticity value of salt is generally accepted as E=0.
• Bread, cheese, health care, fuel, logs, etc. of goods E<1
• television, computer, mobile phone, automobile, etc. E>1 of goods
 Factors affecting the price elasticity of
demand
1. The severity of the need for the goods and the property of the goods:
Necessary goods whose consumption is difficult to delay have low elasticity
(E<1). Elasticity is high for goods intended for non-essential luxury
consumption (E>1).
2. Substitution possibilities: The demand for substitutes is elastic (E>1),The
demand for non-replaceable goods is inelastic (E<1).
3. The amount spent on the goods or the share in the consumer budget:
If the amount spent on the good does not have a significant share in the
consumer's budget, the demand for the good is inelastic (E<1),If it has a
significant share in the consumer's budget, the demand for the good is
elastic (E>1).
 Income Elasticity of Demand

The income elasticity of demand expresses the relationship between changes in the income of the
consumer and changes in the quantity demanded of goods, all other things being equal.
Therefore, income elasticity of Demand is defined as the ratio of the relative change in the quantity
demanded of any good (ΔQ/Q) to the relative change in the consumer's income (ΔR/R) and is
formulated as follows:

Er = x
 Er = x

Er: income elasticity of demand,

ΔQ : The amount of change in demand (Q2-Q1),
Q : Initial demand quantity,
ΔR : The amount of change in income (R2-R1),
R : Initial consumer income.
 Interpretation of income elasticity of demand
• If Er > 0, the demand for the related good increases as the income of the consumer increases. In
other words, there is a positive relationship between the income of the consumer and the amount
of demand for the good. In this case, the goods subject to demand are normal goods.
• If Er<0 is found, there is a negative relationship between the income of the consumer and the
quantity demanded of the good. In other words, as the income of the consumer increases, the
demand for the related good decreases. In this case, the demanded good is an inferior good. Such
goods are also called poor goods, inferior goods or Giffen goods.
• Er=1, unit elasticity,
• Er>1, excess (soft) flexibility and
• Er<1, little (hard) flexibility.
 Cross elasticity

Cross-elasticity is defined as the ratio of the relative change in the

quantity demanded (ΔQx/Qx) of any good X to the relative change in the
price of another good Y (ΔPy/Py) causing it, all other things being equal,
and is formulated as follows:

Exy = x
The calculated Exy value will be either positive or negative. In fact, this value shows whether

the said goods X and Y are substitutes (competitors) or complementary goods, and if there

is such a relationship, the degree of it. Accordingly, as a result of the calculations;

Exy > 0, goods X and Y are substitute goods.

Exy<0, goods X and Y are complementary goods.

Exy=0, goods X and Y are unrelated goods.

On the other hand, if Exy=1 as an absolute value, it can be interpreted as unit elasticity.

If Exy>1 there is more elasticity and if Exy<1 there is less elasticity.

 King’s Law
• For goods with both low price elasticity and low income elasticity (inferior goods), price decreases
for any reason cause a decrease in firm income.
• Agricultural products and especially cereals are among the inferior goods.
• Since both price elasticity and income elasticity of agricultural products are low (E<1), a decrease
in the price of these products or an increase in consumer income do not cause a significant
increase in demand. In this case, sometimes there is a drastic reduction in the incomes of the
producers (farmers) due to the price drops caused by the increase in supply during the years of
abundant agricultural produce.
• In the scarce product years, however, the incomes of the producers increase due to the price
increases due to the decrease in supply. This shows that the farmer makes a loss in the years of
abundant production and increases his income in the years of scarce production.
• This inverse relationship between the supply of agricultural products and the income of
producers is called King's Law or Paradox of Abundance. In fact, this law is sometimes expressed
as "abundant product in agriculture means bad revenue, scarce product means good revenue".
 Reference
Daşdemir, İ., 2014. Ekonomi Ders Kitabı,1. Baskı, Nobel Yayıncılık, ISBN:
978-605-133-863-7, Ankara.