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Meaning
Desire for a commodity backed by the ability and willingness to pay for it. A want with three attribute 1. Desire to buy 2. Willingness to pay 3. Ability to pay Becomes effective demand A meaning full statement regarding the demand for a commodity should contain The quantity demanded Price Time Place
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Demand function
Dx = f ( Px , Y , T , P, F , P 1, P 2 ....) Dx = Demand for commodity x Px = price of commodity x T = tastes P = preference F = fashion P 1, P 2 .... = price of other commodities
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Law of demand
Other things remaining the same, demand will be more when price is less and it will be less when price is more.
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Quantity Demand
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Quantity demand
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Quantity demand
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Quantity demand
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Quantity demand
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Quantity demand
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Quantity demand
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Demand of B 20 18 14 10 6
A
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Types of demand
Derived demand Joint demand Composite demand (many use of a commodity) Direct demand (autonomous demand)
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Snob effect
In microeconomics, the snob effect is a phenomenon referring to the situation where the demand for a certain good by individuals of a higher income level is inversely related to the demand for the good by individuals of a lower income level. The "snob effect" contrasts most other microeconomic models, in that the demand curve can have a positive slope, rather than the typical negatively sloped demand curve of normal goods.
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Elasticity of demand
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Elasticity of demand
The degree of responsiveness of the demand for a good to a change in its price is called elasticity of demand.
percentage change in quantity demanded price elasticity = percentage change in price q p q p ep = = q p p q
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Categories of Elasticity
Relative elasticity of demand: EP > 1 Relative inelasticity of demand: 0 < EP < 1 Unitary elasticity of demand: EP = 1 Perfect elasticity: EP = Perfect inelasticity: EP = 0
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Various uses (elastic) Postponement (some time elastic) Habit (inelastic) Joint demand (both are same)
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Point method
elasticity of demand at a point on a straight line is lower sgement of the demand curve AT = ed = upper sgement of the demand curve AS
PRIC E S Upper segment
Lower segment
T
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QUANTITY
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E<1 Total
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Income Elasticity
The percentage change in quantity demanded caused by a percent change in income. %Q Y = Income EY =
%Y
Effect on sales with change in income Less than proportionate change in sale Almost proportionate change in sale More than proportionate increase in sale 26
%QA EX = %PB
For a +ve cross-elasticity the products are substitutes product For8/14/2013 a ve cross-elasticity the products are complimentary27
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Example
Demand for computer depends on its price, income, price of substitutes, advertisement. qc = f ( pc , y, ps , A) qc = 50 1.5 pc + 0.5 y + 2.0 ps + 0.8 A if price = 40, income = 60, price of substitutes = 30 and A = 25 then if we replace these then demand = 100,000 Given these demand the business policy follow these changes increase the computer price by 10% increase its ad - expenditure by 20% in anticipation of an increase in income by 8%, and no change in the cometitors price. the company would like to know whether it would be advisable to make the planned changes? 8/14/2013 30
Q P Q P 40 = = 1.5 = 0.6 P Q P Q 100 60 = 0.3 EY = 0.5 100 30 = 0.6 ES = 2 100 25 = 0.2 E A = 0.8 100 The impact become Qc = 100 0.6(10) + 0.3(8) + 0.6(0) + 0.2(20) = 100.4 EP = so the demand estimate shows 100,400 - 100,000 = 400 units This is not a significant increase in demand because decline in demand for computer by 600 units due to 10% increase in price. The company would better be advised not to increase in price but 8/14/2013 rely on increase in PC user' s income and advertisement.
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Sol.
Assignment - 3
1.The price of a commodity falls from Rs. 10 to Rs. 5 and its coefficient of price elasticity of demand is 2. how much quantity will be demanded to the changed price where original quantity demanded is 40. 2.A decline of Rs.2 in the price leads to an increase o f 10 units in the demand as a result of which demand goes up to 100 units and price declines to Rs.8. calculate price elasticity of demand.
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Assignment - 3
3. If the demand function is q=100-5p find the elasticity of the demand at p=10. 4. the demand law is given by x=10-p near the point x=4, and p=6. if the price increases by 5%; determine the percent decrease in demand and hence an approximation to the elasticity of demand. 5. If the demand law is x=20/(p+1), find elasticity of demand with respect to price at the point where p=3.
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Assignment - 3
6. What is meant by elasticity of demand? Explain what are different methods of measuring elasticity of demand. Suppose price elasticity co-efficient for a commodity is estimated at -2. what does it mean? 7. What do you mean by demand . Explain the difference between change in demand and change in quantity demand for a commodity.
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Thank you
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