m. jamshed khan, dept of economics, edwardes college peshawar 1

M. Jamshed Khan, Dept of Economics, Edwardes College Peshawar 1


MARKET DEMANDMARKET DEMAND

Business can not sell anything unless Business can not sell anything unless there is a demand for it. People must there is a demand for it. People must both want a product and have to both want a product and have to money to buy it. money to buy it.

The quantity demanded by people of a The quantity demanded by people of a specific product, how ever, does not specific product, how ever, does not only depend upon price but also some only depend upon price but also some other factors.other factors.


DETERMINANTS OF DEMANDDETERMINANTS OF DEMAND

The important determinants of The important determinants of demand are as follows:demand are as follows:

(a)(a) PricePrice

(b)(b) Price of substitutesPrice of substitutes

(c)(c) Price of complementary goodsPrice of complementary goods

(d)(d) Taste of the consumerTaste of the consumer



(e) Advertising and social factors(e) Advertising and social factors

(f) Demography(f) Demography

(g) External factors(g) External factors

(h) The level of income(h) The level of income



PricePrice

Price has a negative relationship with Price has a negative relationship with demand and as price increases less demand and as price increases less of the commodity is demanded. of the commodity is demanded.

However it does not follow that as However it does not follow that as price falls, more and more will be price falls, more and more will be demanded with no upper limits. This demanded with no upper limits. This is for two reasons:is for two reasons:



(1)(1) People only want a certain amount of a People only want a certain amount of a good and cannot buy an infinite good and cannot buy an infinite amount.amount.

(2)(2) Many people assume that price Many people assume that price indicates quality.indicates quality.

Example:Example: If cheese is offered at Rs. 100 a If cheese is offered at Rs. 100 a Kg, people may assume that it is of Kg, people may assume that it is of poor quality and not buy it.poor quality and not buy it.



SubstitutesSubstitutes

People may change from one product People may change from one product to another, as the relative prices to another, as the relative prices change, but they may not.change, but they may not.

Some people simply like a good and Some people simply like a good and will not change to another just will not change to another just because it becomes relatively cheapbecause it becomes relatively cheap



Complementary productsComplementary products

Complementary good influence the Complementary good influence the demand of each other. demand of each other.

If there is a change in the price of one If there is a change in the price of one good the demand for the other can be good the demand for the other can be affected.affected.

Example: Tea and sugarExample: Tea and sugar

Bat and BallBat and Ball

Car and petrolCar and petrol



Income Income The demand is expected to rise with an The demand is expected to rise with an

increase in the income of the consumer.increase in the income of the consumer. The demand of some goods decrease The demand of some goods decrease

with the increase in income or with the with the increase in income or with the increase in income after a certain level; increase in income after a certain level; such a good is called inferior good.such a good is called inferior good.

As income rise, people usually buy As income rise, people usually buy expensive products and as income fall expensive products and as income fall people buy cheaper goods.people buy cheaper goods.


DETERMINANTS OF DEMANDDETERMINANTS OF DEMAND Advertising and social factorsAdvertising and social factors Advertising and other sales promotional Advertising and other sales promotional

measures can greatly affect the measures can greatly affect the demand.demand.

However, if a producer runs a successful However, if a producer runs a successful advertising campaign for a soap, we advertising campaign for a soap, we should not automatically assume that should not automatically assume that overall consumption of soap has overall consumption of soap has increased as people could have increased as people could have switched from some other band of soap.switched from some other band of soap.

Fashion can also effect the demand for Fashion can also effect the demand for products.products.



DemographyDemography

Population and its composition affects Population and its composition affects demand for a productdemand for a product

►Demand increases with an increase in Demand increases with an increase in population and vice versapopulation and vice versa

► If there is a greater proportion of kids If there is a greater proportion of kids in population then demand for play in population then demand for play stations may increase; composition of stations may increase; composition of population is also importantpopulation is also important



External FactorsExternal Factors

Demand for Pepsi Cola is likely to Demand for Pepsi Cola is likely to increase during a spell of hot weather. increase during a spell of hot weather.


DERIVED DEMANDDERIVED DEMAND

Derived demandDerived demand is a term where demand for is a term where demand for one good or service occurs as a result of one good or service occurs as a result of demand for another. demand for another.

For example,For example, the demand for labour in the the demand for labour in the automobile industry is derived from the automobile industry is derived from the demand of the automobilies. If the demand for demand of the automobilies. If the demand for automobiles increases so does the demand for automobiles increases so does the demand for labour working in automobile factories.labour working in automobile factories.

Another exampleAnother example would be production and would be production and demand for fertilizer. If the demand for the demand for fertilizer. If the demand for the particular crop increases so does the demand particular crop increases so does the demand for fertilizer.for fertilizer.


DEMAND SCHEDULE & DEMAND SCHEDULE & CURVE CURVE

The The Demand scheduleDemand schedule is a tabular is a tabular representation of the quantities representation of the quantities demanded of a particular good at demanded of a particular good at different prices in the market per different prices in the market per period of time.period of time.

Demand curveDemand curve is the graphical is the graphical representation of the demand schedule.representation of the demand schedule.


MARKET DEMANDMARKET DEMAND

The The market demandmarket demand for a commodity is for a commodity is obtained by adding up the total obtained by adding up the total quantity demanded at various prices by quantity demanded at various prices by all the individuals over a specified all the individuals over a specified period of time.period of time.

The market demand is the The market demand is the horizontal horizontal summationsummation of individual demand for a of individual demand for a commodity at various possible prices in commodity at various possible prices in market.market.


CHANGES IN DEMANDCHANGES IN DEMAND

There can be two types of changes in There can be two types of changes in demand.demand.

(1)(1) Movement in demandMovement in demand

(2)(2) Shift in demandShift in demand



(1)(1) Movement in DemandMovement in Demand

► Change in quantity demand because Change in quantity demand because of a change in price of that of a change in price of that commoditycommodity

► Here demand curve remains the Here demand curve remains the same, but we either move up or same, but we either move up or down on the same demand curvedown on the same demand curve



►When we move up the demand curve When we move up the demand curve with a rise in price, it is called with a rise in price, it is called contraction in demandcontraction in demand

►When we move down the demand When we move down the demand curve with a fall in price, it is called curve with a fall in price, it is called extention in demand.extention in demand.



(2) Shift in demand(2) Shift in demand

►A change in demand because of a A change in demand because of a change in any factor, other than the change in any factor, other than the price of the commodityprice of the commodity

►Here the whole demand curve shifts Here the whole demand curve shifts either to the right or to the lefteither to the right or to the left



►When the demand curve shifts to the When the demand curve shifts to the right, it shows an increase in demand right, it shows an increase in demand and is called rise in demandand is called rise in demand

►When the demand curve shifts to the When the demand curve shifts to the left, it shows a fall in demand and is left, it shows a fall in demand and is called fall in demandcalled fall in demand

(WHY DEMAND CURVE SHIFTS)????(WHY DEMAND CURVE SHIFTS)????


ELASTICITY OF DEMANDELASTICITY OF DEMAND

Elasticity of demand is the Elasticity of demand is the responsiveness of demand to changes responsiveness of demand to changes in the prices of the commodityin the prices of the commodity

Elasticity of demand is the ratio of the Elasticity of demand is the ratio of the percentage change in the demand of a percentage change in the demand of a commodity to the percentage change commodity to the percentage change in the price of the commodityin the price of the commodity



Elasticity of demandElasticity of demand= = Percentage change in Percentage change in quantity ddquantity dd Percentage change in price

= QP

X PQ

Ed



Here are some examples:Here are some examples:

(a)(a) Price rises from $10 to $11, a 10% rise, Price rises from $10 to $11, a 10% rise, and demand falls from 4000 units to and demand falls from 4000 units to 3200 units, a 20% fall: the elasticity is 3200 units, a 20% fall: the elasticity is 20/10=2.20/10=2.

(b)(b) Price rises from $15 to $18, a 20% rise, Price rises from $15 to $18, a 20% rise, and demand falls from 1000 units to 800 and demand falls from 1000 units to 800 units: the elasticity is 20/20=1.units: the elasticity is 20/20=1.


ELASTICITY OF DEMANDELASTICITY OF DEMANDSome points to remember:Some points to remember:

(a)(a) A product is said to have an elastic A product is said to have an elastic demand if the elasticity is greater than demand if the elasticity is greater than 1. a small change in price (up or down) 1. a small change in price (up or down) leads to a larger change in quantity leads to a larger change in quantity demanded. The demand of demanded. The demand of luxuriesluxuries is is usually elastic.usually elastic.

(b)(b) If the elasticity equals 1, then a given If the elasticity equals 1, then a given percentage change in price leads to an percentage change in price leads to an equal percentage change in demand: equal percentage change in demand: this is called unit elasticitythis is called unit elasticity



( c ) A product is said to have an inelastic ( c ) A product is said to have an inelastic demand if the elasticity is less than 1. a demand if the elasticity is less than 1. a large change in price (up or down) leads large change in price (up or down) leads to a small change in quantity to a small change in quantity demanded. demanded.

The demand for The demand for necessitiesnecessities is usually is usually inelastic.inelastic.



Importance of price elasticity of demandImportance of price elasticity of demand

Price elasticity of demand is important Price elasticity of demand is important when working out how much to charge when working out how much to charge for a product and it can help to make for a product and it can help to make sensible decisions on price.sensible decisions on price.



In case of a product having an In case of a product having an inelastic inelastic demand demand, the company can seriously , the company can seriously consider increasing the priceconsider increasing the price because because in spite of the loss in demand the total in spite of the loss in demand the total revenue of the firm will increase and it revenue of the firm will increase and it will incur less cost because of less will incur less cost because of less quantity of output being quantity of output being manufactured.manufactured.



In case of a product having an elastic In case of a product having an elastic demand, a price rise will not be a good demand, a price rise will not be a good idea.idea.

Sales will fall fast and total revenue will fall.Sales will fall fast and total revenue will fall.

A price cut will be a good idea, because it A price cut will be a good idea, because it will lead to a lot of extra sales, but of will lead to a lot of extra sales, but of course costs will rise as well.course costs will rise as well.



To find out the elasticity of demand, a To find out the elasticity of demand, a company may conduct a market company may conduct a market research to find out how much of a research to find out how much of a product people would buy at different product people would buy at different prices.prices.


The elasticity of demand generally changes as the price changes. Here is the demand schedule with elasticity worked out for the first price change. Work out the elasticity of demand for the other prices and complete the table.

Price (Per Kg)

Quantity demanded (Per month in Kg)

Price elasticity of demand

1 $ 9.75 --

2 $ 8 0.158

3 $ 6.25??

4 $ 4.5??

5 $ 2.75??

6 $ 1??


INCOME ELASTICITY OF DEMANDINCOME ELASTICITY OF DEMAND

Income elasticity of demand is the Income elasticity of demand is the responsiveness of quantity demanded responsiveness of quantity demanded of a product to the changes in the of a product to the changes in the income of the consumerincome of the consumer

Income elasticity of demand is the ratio Income elasticity of demand is the ratio of percentage change in the quantity of percentage change in the quantity demanded of a product to the demanded of a product to the percentage change in the income of the percentage change in the income of the consumerconsumer


INCOME ELALSTICY OF INCOME ELALSTICY OF DEMANDDEMAND

Elasticity of demandElasticity of demand= = Percentage change in Percentage change in quantity ddquantity dd Percentage change in income

= QY

X YQ

EY



If with a rise in income, the consumer If with a rise in income, the consumer increases the demand of a commodity increases the demand of a commodity then such a good is called normal good.then such a good is called normal good.

If with a rise in income, the consumer If with a rise in income, the consumer decreases the quantity demanded of a decreases the quantity demanded of a good, then such a good is called inferior good, then such a good is called inferior good.good.



Demand for a good is income elastic if Demand for a good is income elastic if income elasticity is greater than 1 so that income elasticity is greater than 1 so that quantity demanded rises by a larger quantity demanded rises by a larger proportion than the rise in income.proportion than the rise in income.

Demand for a good is income inelastic if Demand for a good is income inelastic if income elasticity is less than 1 and the income elasticity is less than 1 and the quantity demanded changes by less than quantity demanded changes by less than the proportionate change in income.the proportionate change in income.


CROSS PRICE ELASTICITY OF CROSS PRICE ELASTICITY OF DEMANDDEMAND

Cross price elasticity of demandCross price elasticity of demand is the is the responsiveness of the quantity demanded responsiveness of the quantity demanded of a good Y to changes in the price of an of a good Y to changes in the price of an other good X.other good X.

Cross price elasticity of demandCross price elasticity of demand is the is the ratio of the percentage change in quantity ratio of the percentage change in quantity demanded of good X to the percentage demanded of good X to the percentage change in the price of good Y.change in the price of good Y.



= = % age change in quantity dd of % age change in quantity dd of good Xgood X % age change in price of good Y

= QP

X PQ

EXY

X

Y

Y

X

Cross price elasticity of demand



If the value of the cross price elasticity of If the value of the cross price elasticity of two goods X and Y is positive, then goods X two goods X and Y is positive, then goods X and Y are substitutes.and Y are substitutes.

If the value of cross price elasticity of If the value of cross price elasticity of demand of two goods X and y is zero, then demand of two goods X and y is zero, then goods X and y are unrelated goods.goods X and y are unrelated goods.

Example: price of newspaper and demand forExample: price of newspaper and demand for

holidaysholidays



If the value of cross price elasticity of If the value of cross price elasticity of two goods X and Y is negative, then two goods X and Y is negative, then goods X and Y are complementary goodsgoods X and Y are complementary goods

m. jamshed khan, dept of economics, edwardes college peshawar 1

Documents

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edwardes college peshawar

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