Demand And Elasticity Of Demand

"Dear friends,Hope you are doing well!!This is my third post  related to micro-economics ,I hope it will benefit you a lot in studying Follow my blog if you find my notes useful".

CHAPTER 3: Demand And Elasticity Of Demand

DEMAND:

Demand can be defined as the quantity of commodity which a consumer is able & willing to purchase at any given price during some specific period of time.

 so there are 3 elements

• Desire of commodity 
• Means of purchase commodity
• Readiness to spend the resources

Determinants Of Demand

There are several factors on which the demand of commodity depends the factors may be economic social as well as political the influence of those factors on demand is called demand function these factor can be divided into 2 parts

• Factor affecting individual demand
• factor affecting market demand

Factors affecting individual demand are:

•  price of the commodity
• price of the related goods
• complementary
• income of the consumer
•  taste and preference

Factors affecting market demand

•  population
• season& weather
• govt policy
• state of business

Demand Function:

it is the functional relationship between the demand of a commodity &its various determinants symbolically.

Dx=f(Px,R,Y,T,N,G,W)

        Px:price of a X commodity

        R: price of a related goods

        Y: income of a consumer

        T:taste and preference

        N:population

        G:govt policy

        W:weather &climate

Law of Demand

It is the  most imp law of economics & it is explains the negative or inverse relation between price and demand .According to this law other things held equal.when price of commodity falls there is expansion in demand & vice versa.

Assumption :

1.There should be no change in the price of related goods

2.There should be no change in the income of the consumer

3.There should be no change in the-taste and preference

4.There should be no change in the population

5.There should be no change in the weather and climate conditions

6.Goods should be normal

Demand curve:It is the graphically representation of relationship  between price and quantity demand of a consumer.

Individual demand curve:It is the graphically representation of relationship  between price and quantity demand of a single consumer.

Market demand curve:It is the graphically representation of relationship  between price and quantity demand of all consumer.

Important: why law of demand operate?

1) Law of DMU

Other things held constant,it is the rate where marginal utility's derived by consuming every additional  unit of a consumption of commodity goes in diminishing..

2) Income effect: 

a)price(Inc)                                          b) price (Dec)

       ↓                                                               ↓   

purchasing power(Dec)                    purchasing power(Inc)

      ↓                                                              ↓    

Quantity demand(Dec)                      Quantity demand(Inc))

                                      

3) Substitution effect: price (Dec)   sub goods (expensive)    QD(Inc)         

                                      price(Inc)     sub goods (cheaper)       QD(Dec)

 

                              

4) Entry and exist of consumer

• if the price inc consumer entry do not exist      QD(Dec)
• if price decrease consumer entry exist               QD(Inc)

5) Various uses    eg(electricity,milk)

•          price(Inc)          QD(Dec)
•          price (Dec)       QD(Inc)

Difference between change in Quantity demand  and change in demand.

 Change in quantity demand:Other things held constant there is change in quantity demand due change in its price .Its tools are Extension in demand,Contraction in demand.There is upward and downward movement along the same demand curve.

Change in Demand:when there is change in  quantity demand due to factors other then price.Its tools are  Increase in demand,Decreased in demand.Demand curve will shift either rightward or leftward direction .   

Normal Goods:normal goods are those goods whose price effect is negative and income effect is positive.

Inferior goods:Are those  goods whose price effect is positive and income effect is negative  

Price Elasticity Of Demand

It is the ratio of percentage change in quantity demand to percentage change in its price  

                     Ed= -%change in Quantity Demand

                            ➖➖➖➖➖➖➖➖➖

                             %change in Price        

• perfectly elastic demand (Ep=∝)
• perfectly inelastic demand (Ep=0)
• Unitary  Elastic demand (Ep=1)
• more than unitary elastic demand (Ep>1)

Methods

•   Geometry method/point method
•   Expenditure Method /Total Outlay method

Dear friends

Follow my blog if you find my notes useful".