Understanding Demand - definition of Demand
In economical terminology the term need conveys a wider together with definite pregnant than inwards the ordinary usage. Ordinarily need way a desire, whereas inwards economical sense it is something to a greater extent than than a mere desire. It is interpreted equally a want backed upwardly yesteryear the - purchasing power. Further need is per unit of measurement of fourth dimension such equally per day, per calendar week etc. moreover it is meaningless to cite need without reference to price. Considering all these aspects the term need tin live defined inwards the next words,
“Demand for anything way the quantity of that commodity, which is bought, at a given price, per unit of measurement of time.”
Law Of Demand - Demand Price Relationship
This constabulary explains the functional human relationship betwixt cost of a commodity together with the quantity demanded of the same. It is observed that the cost together with the need are inversely related which way that the 2 displace inwards the contrary direction. An increment inwards the cost leads to a autumn inwards the need together with vice versa. This human relationship tin live stated as
“Other things beingness equal, the need for a commodity varies inversely equally the price”
or
“The need for a commodity at a given cost is to a greater extent than than what it would live at a higher cost together with less than what it would live at a lower price”
Demand Schedule or Demand Table
These are the 2 devices to introduce the law. The need schedule is a schedule or a tabular array which contains diverse possible prices of a commodity together with dissimilar quantities demanded at them. It tin live an private need schedule representing the need of an private consumer or tin live the marketplace seat need schedule showing the total need of all the consumers taken together, this is indicated inwards the next table.
blogspot.com/_iFIztPmvqg8/SpLoQ8IU4QI/AAAAAAAABXo/ntXloXnZmDg/s400/Demand-Schedule.jpg" />It tin live observed that with a autumn inwards cost every private consumer buys a larger quantity than earlier equally a final result of which the total marketplace seat need also rises. In instance of an increment inwards cost the province of affairs volition live reserved. Thus the need schedule reveals the inverse price-demand relationship, i.e. the Law of Demand.
Demand Curve DD
It is a geometrical device to limited the inverse price-demand relationship, i.e. the constabulary of demand. Influenza A virus subtype H5N1 need bend tin live obtained yesteryear plotting a need schedule on a graph together with joining the points so obtained, similar the need schedule nosotros tin derive an private need bend equally good equally a marketplace seat need curve. The one-time shows the need bend of an private buyer piece the latter shows the total total of all the private curves i.e. a marketplace seat or a total need curve. The next diagram shows the 2 types of need curves.
blogspot.com/_iFIztPmvqg8/SpLoY68OP2I/AAAAAAAABXw/kHUlFUBihx0/s400/Demand-Curve-A-Figure.jpg" />blogspot.com/_iFIztPmvqg8/SpLoeBl91PI/AAAAAAAABX4/TSxkqYLBERc/s400/Demand-Curve-B-Figure.jpg" />In the inwards a higher house diagram, figure (A) shows an private need bend of whatever private consumer piece figure (B) indicates the total marketplace seat demand. It tin live noticed that both the curves are negatively sloping or downwards sloping from left to right. Such a bend shows the inverse human relationship betwixt the 2 variables. In this instance the 2 variable are cost on Y axis together with the quantity demanded on X axis. It may live noted that at a higher cost OP the quantity demanded is OM piece at a lower cost say OP1, the quantity demanded rises to OM1 thus a need bend diagrammatically explains the constabulary of demand.
Assumptions of the 'Law of Demand'
The constabulary of need inwards gild to flora the price-demand human relationship makes a pose out of assumptions equally follows:
- Income of the consumer is given together with constant.
- No alter inwards tastes, preference, habits etc.
- Constancy of the cost of other goods.
- No alter inwards the size together with composition of population.
These Assumptions are expressed inwards the phrase “other things remaining equal”.
Exceptions of the 'Law of Demand'
In instance of major mass of the commodities the validity of the constabulary is experienced. However at that topographic point are certainly situations together with commodities which do non follow the law. These are termed equally the exceptions to the law; these tin live expressed equally follows:
- Continuous changes inwards the cost Pb to the especial behavior. If the cost shows a rising style a buyer is probable to purchase to a greater extent than at a high cost for protecting himself against a farther rise. As against it when the cost starts falling continuously, a consumer buys less at a depression cost together with awaits a farther inwards price.
- Giffens’s Paradox describes a peculiar sense inwards instance of inferior goods. When the cost of an inferior commodity declines, the consumer, instead of purchasing more, buys less of that commodity together with switches on to a superior commodity. Hence the exception.
- Conspicuous Consumption refers to the consumption of those commodities which are bought equally a affair of prestige. Naturally with a autumn inwards the cost of such goods, at that topographic point is no distinction inwards buying the same. As a final result the need declines with a autumn inwards the cost of such prestige goods.
- Ignorance Effect implies a province of affairs inwards which a consumer buys to a greater extent than of a commodity at a higher cost solely due to ignorance.
In the especial situations quoted above, the need bend becomes an upwards rising ane equally shown inwards the amongst diagram. In the amongst figure, the need bend is positively sloping ane due to which to a greater extent than is demanded at a high cost together with less at a depression price.
Determinants (Factors Affecting) of Demand
The constabulary of demand, piece explaining the price-demand human relationship assumes other factors to live constant. In reality however, these factors such equally income, population, tastes, habits, preferences etc., do non rest constant together with proceed on affecting the demand. As a final result the need changes i.e. rises or falls, without whatever alter inwards price.
- Income: The human relationship betwixt income together with the need is a direct one. It way the need changes inwards the same management equally the income. An increment inwards income leads to ascension inwards need together with vice versa.
- Population: The size of population also affects the demand. The human relationship is a direct one. The higher the size of population, the higher is the need together with vice versa.
- Tastes together with Habits: The tastes, habits, likes, dislikes, prejudices together with preference etc. of the consumer receive got a profound final result on the need for a commodity. If a consumers dislikes a commodity, he volition non purchase it despite a autumn inwards price. On the other paw a rattling high cost also may non halt him from buying a skilful if he likes it rattling much.
- Other Prices: This is to a greater extent than or less other of import determinant of need for a commodity. The effects depends upon the human relationship betwixt the commodities inwards question. If the cost of a release commodity rises, the need for the commodity inwards reference falls. E.g. the need for petrol volition reject due to ascension inwards the cost of cars together with the consequent reject inwards their demand. Opposite final result volition live experienced incase of substitutes.
- Advertisement: This factor has gained tremendous importance inwards the modern days. When a production is aggressively advertised through all the possible media, the consumers purchase the advertised commodity fifty-fifty at a high cost together with many times fifty-fifty if they don’t ask it.
- Fashions: Hardly anyone has the courage together with the want to decease against the prevailing fashions equally good equally social customs together with the traditions. This factor has a keen impact on the demand.
- Imitation: This style is commonly experienced everywhere. This is known equally the demonstration effects, due to which the depression income groups copy the consumption patterns of the rich ones. This operates fifty-fifty at international levels when the misfortunate countries endeavor to re-create the consumption patterns of rich countries.
Variation & Changes In Demand
The constabulary of need explains the final result of only-one factor viz., price, on the need for a commodity, nether the supposition of constancy of other determinants. In practice, other factors such as, income, population etc. displace the ascension or autumn inwards need without whatever alter inwards the price. These effects are dissimilar from the constabulary of demand. They are termed equally changes inwards need inwards contrast to variations inwards need which travel on due to changes inwards the cost of a commodity. In economical theory a distinction is made betwixt (a) Variations i.e. extension together with contraction inwards need due to cost together with (b) Changes i.e. increment together with decrease inwards need due to other factors.
(a) Variations inwards need refer to those which travel on due to changes inwards the cost of a commodity.
These are 2 types.
- Extension of Demand: This refers to ascension inwards need due to a autumn inwards cost of the commodity. It is shown yesteryear a downwards displace on a given need curve.
- Contraction of Demand: This way autumn inwards need due to increment inwards cost together with tin live shown yesteryear an upwards displace on a given need curve.
(b) Changes inwards need imply the ascension together with autumn due to factors other than price.
It way they travel on without whatever alter inwards price. They are of 2 types.
- Increase inwards Demand: This refers to higher need at the same cost together with results from ascension inwards income, population etc., this is shown on a novel need bend lying inwards a higher house the master copy one.
- Decrease inwards demand: It way less quantity demanded at the same price. This is the final result of factors similar autumn inwards income, population etc. this is shown on a novel need lying below the master copy one.
blogspot.com/_iFIztPmvqg8/SpQ_r7cybKI/AAAAAAAABYY/-Bn8dKfvOaQ/s400/Extension-Contraction-Of-Demand.jpg" /> blogspot.com/_iFIztPmvqg8/SpQ_vk5td6I/AAAAAAAABYg/Pu5QI-tRjVc/s400/Increase-Decrease-In-Demand.jpg" />Fig (A) Extension/Contraction of Demand
Fig (B) Increase/Decrease inwards Demand
In figure A, the master copy cost is OP together with the Quantity demanded is OQ. With a ascension inwards cost from OP to OP1 the need contracts from OQ to OQ1 together with equally a final result of autumn inwards cost from OP to OP2, the need extends from OQ to OQ2.
In figure, B an increment inwards need is shown yesteryear a novel need curve, D1 piece the decrease inwards need is expressed yesteryear the novel need bend D2, lying inwards a higher house together with below the master copy need bend D respectively. On D1 to a greater extent than is need (OQ1) at the same cost piece on D2 less is demanded (OQ2) at the same cost OP.
Elasticity of Demand
The constabulary of need explains the functional human relationship betwixt cost together with demand. In fact, the need for a commodity depends non solely on the cost of a commodity but also on other factors such equally income, population, tastes together with preferences of the consumer. The constabulary of need assumes these factors to live constant together with states the inverse price-demand relationship. Barring certainly exceptions, the inverse price- need human relationship holds skilful inwards instance of the goods that are bought together with sold inwards the market.
The constabulary of need explains the management of a alter equally it states that with a ascension inwards cost the need contracts together with with a autumn inwards cost it expands. However, it fails to explicate the extent or magnitude of a alter inwards need with a given alter inwards price. In other words, the constabulary of need but shows the management inwards which the need changes equally a final result of a alter inwards price, but does non throw whatever lite on the amount yesteryear which the need volition alter inwards response to a given alter inwards price. Thus, the constabulary of need explains the qualitative but non the quantitative human face of price- need relationship.
Although it is truthful that need responds to alter inwards cost of a commodity, such response varies from commodity to commodity. Some commodities are to a greater extent than responsive or sensitive to alter inwards cost piece to a greater extent than or less others are less. The concept of the elasticity of need has keen significance equally it explains the grade of responsiveness of need to a alter inwards price. It thus elaborates the price-demand relationship. The elasticity of need thus way the sensitiveness or responsiveness of need to a alter inwards price.
According to Marshall, “the elasticity (or responsiveness) of need inwards a marketplace seat is keen or modest accordingly equally the need changes (rises or falls) much or piddling for a given alter (rise or fall) inwards price.”
From the inwards a higher house discussion, it volition live clear that idea dissimilar commodities react to a alter inwards cost inwards the same direction; the grade of their response differs. Demand for to a greater extent than or less commodities is to a greater extent than sensitive or responsive to a alter inwards price, piece it is less responsive for to a greater extent than or less others. Elasticity of need is a mensurate of relative changes inwards the amount demanded inwards response to a modest alter inwards price. Certain goods are said to receive got an elastic need piece others receive got an inelastic demand. The need is said to live elastic when a modest alter inwards cost brings most considerable alter inwards demand. On the other hand, the need for a skilful is said to live inelastic when a alter inwards cost fails to convey most important alter inwards demand.
The concept of elasticity tin live expressed inwards the cast of an equation as:
Ep = [Percentage alter inwards quantity demanded / Percentage alter inwards the price]
Types of Price Elasticity
The concept of cost elasticity reveals that the grade of responsiveness of need to the alter inwards cost differs from commodity to commodity. Demand for to a greater extent than or less commodities is to a greater extent than elastic piece that for certainly others is less elastic. Using the formula of elasticity, it possible to cite next dissimilar types of cost elasticity:
- Perfectly inelastic need (ep = 0)
- Inelastic (less elastic) need (e < 1)
- Unitary elasticity (e = 1)
- Elastic (more elastic) need (e > 1)
- Perfectly elastic need (e = ∞)
blogspot.com/_iFIztPmvqg8/SpLqrgWPhWI/AAAAAAAABYQ/fXn1KiyLCzw/s400/Types-of-Price-Elasticity.jpg" />Perfectly inelastic need (ep = 0)
This describes a province of affairs inwards which need shows no response to a alter inwards price. In other words, whatever live the cost the quantity demanded remains the same. It tin live depicted yesteryear way of the amongst diagram.
The vertical straight line need bend equally shown amongst reveals that with a alter inwards cost (from OP to Op1) the need remains same at OQ. Thus, need does non at all response to a alter inwards price. Thus ep = O. Hence, perfectly inelastic demand. Fig a
Inelastic (less elastic) need (e < 1)
In this instance the proportionate alter inwards need is smaller than inwards price. The amongst figure shows this type.
In the amongst figure per centum alter inwards need is smaller than that inwards price. It way the need is relatively c less responsive to the alter inwards price. This is referred to equally an inelastic demand. Fig e
Unitary elasticity need (e = 1)
When the per centum alter inwards cost produces equivalent per centum alter inwards demand, nosotros receive got a instance of unit of measurement elasticity. The rectangular hyperbola equally shown inwards the figure demonstrates this type of elasticity. In this instance per centum alter inwards need is equal to per centum alter inwards price, hence e = 1. Fig c
Elastic (more elastic) need (e > 1)
In instance of certainly commodities the need is relatively to a greater extent than responsive to the alter inwards price. It way a modest alter inwards cost induces a important alter in, demand. This tin live understood yesteryear way of the amongst figure.
It tin live noticed that inwards the inwards a higher house instance the per centum alter inwards need is greater than that inwards price. Hence, the elastic need (e>1) Fig d
Perfectly elastic need (e = ∞)
This is experienced when the need is extremely sensitive to the changes inwards price. In this instance an insignificant alter inwards cost produces tremendous alter inwards demand. The need bend showing perfectly elastic need is a horizontal straight line. Fig b
It tin live noticed that at a given cost an interplanetary space quantity is demanded. Influenza A virus subtype H5N1 modest alter inwards cost produces interplanetary space alter inwards demand. Influenza A virus subtype H5N1 perfectly competitive theater faces this type of demand.
From the inwards a higher house analysis it tin live concluded that theoretically 5 dissimilar types of cost elasticity tin live mentioned. In practice, soundless 2 extreme cases i.e. perfectly elastic together with perfectly inelastic demand, are rarely experienced. What nosotros actually receive got is to a greater extent than elastic (e > 1) or less elastic (e < 1 ) demand. The unitary elasticity is a dividing line betwixt these 2 cases.
Determinants of Elasticity
- Nature of the Commodity: Humans wants, i.e. the commodities satisfying them tin live classified broadly into necessaries on the ane paw together with comforts together with luxuries on the other hand. The nature of need for a commodity depends upon this classification. The need for necessities is inelastic together with for comforts together with luxuries it is elastic.
- Number of Substitutes Available: The availability of substitutes is a major determinant of the elasticity of demand. The large the pose out of substitutes, the higher is the elastic. It way if a commodity has many substitutes, the need volition live elastic. As against this inwards the absence of substitutes, the need becomes relatively inelastic because the consumers receive got no other option but to purchase the same production irrespective of whether the cost rises or falls.
- Number Of Uses: If a commodity tin live pose to a diverseness of uses, the need volition live to a greater extent than elastic. When the cost of such commodity rises, its consumption volition live restricted solely to to a greater extent than of import uses together with when the cost falls the consumption may live extended to less urgent uses, e.g. coal electricity, H2O etc.
- Possibility of Postponement of Consumption: This factor also greatly influences the nature of need for a commodity. If the consumption of a commodity tin live postponed, the need volition live elastic.
- Range of prices: The need for rattling low-priced equally good equally rattling high-price commodity is to a greater extent than frequently than non inelastic. When the cost is rattling high, the commodity is consumed solely yesteryear the rich people. Influenza A virus subtype H5N1 ascension or autumn inwards the cost volition non receive got important final result inwards the demand. Similarly, when the cost is so depression that the commodity tin live brought yesteryear all those who want to buy, a change, i.e., a ascension or autumn inwards the price, volition hardly receive got whatever final result on the demand.
- Proportion of Income Spent: Income of the consumer significantly influences the nature of demand. If solely a modest fraction of income is beingness spent on a item commodity, say newspaper, the need volition tend to live inelastic.
- According to Taussig, unequal distribution of income together with wealth makes the need inwards general, elastic.
- In addition, it is observed that need for durable goods, is normally elastic.
- The nature of need for a commodity is also influenced yesteryear the complementarities of goods.
From the inwards a higher house analysis of the determinants of elasticity of demand, it is clear that no precise conclusion most the nature of need for whatever specific commodity tin live drawn. It depends upon the attain of price, together with the psychology of the consumers. The conclusion regarding the nature of need should, thence live restricted to modest changes inwards prices during curt period. By doing so, the influence of changes inwards habits, tastes, likes customs etc., tin live ignored.
Measurement of Elasticity
For practical purposes, it is essential to mensurate the exact elasticity of demand. By measurement the elasticity nosotros tin know the extent to which the need is elastic or inelastic. Different methods are used for measurement the elasticity of demand.
Percentage Method: In this method, the per centum alter inwards need together with per centum alter inwards cost are compared.
ep = [Percentage alter inwards need / Percentage alter inwards price]
In this method, 3 values of ‘ep’ tin live obtained. Viz., ep = 1, ep > 1, ep > 1.
- If 5% alter inwards cost leads to precisely 5% alter inwards demand, i.e. per centum alter inwards need is equal to per centum alter inwards cost , e = 1, it is a instance of unit of measurement elasticity.
- If per centum alter inwards need is greater than per centum alter inwards price, e > 1, it way the need is elastic.
- If per centum alter inwards need is less than that inwards price, e > 1, pregnant thereby the need is inelastic.
Total Outlay Method: The elasticity of need tin live measured yesteryear considering the changes inwards cost together with the consequent changes inwards need causing changes inwards the total amount spent on the goods. The alter inwards cost changes the need for a commodity which inwards plough changes the total expenditure of the consumer or total revenue of the seller.
- If a given alter inwards cost fails to convey most whatever alter inwards the total outlay, it is the instance of unit of measurement elasticity. It way if the total revenue (price x Quantity bought) remains the same inwards spite of a alter inwards price, ‘ep’ is said to live equal to 1
- If cost together with total revenue are inversely related, i.e., if total revenue falls with ascension inwards cost or rises with autumn inwards price, need is said to live elastic or e > 1.
- When cost together with total revenue are straight related, i.e. if total revenue rises with a ascension inwards cost together with falls with a autumn inwards price, the need is said to live inelastic pr e < 1.
Another suggested yesteryear Marshall is to mensurate elasticity at a dot on a straight line is called Point Method
Income Elasticity of Demand
The give-and-take of cost elasticity of need reveals that extent of alter inwards need equally a final result of alter inwards price. However, equally already explained, cost is non the solely determinant of demand. Demand for a commodity changes inwards response to a alter inwards income of the consumer. In fact, income final result is a factor of the cost effect. The income final result suggests the final result of alter inwards income on demand. The income elasticity of need explains the extent of alter inwards need equally a final result of alter inwards income. In other words, income elasticity of need way the responsiveness of need to changes inwards income. Thus, income elasticity of need tin live expressed as:
EY = [Percentage alter inwards need / Percentage alter inwards income]
The next types of income elasticity tin live observed:
- Income Elasticity of Demand Greater than One: When the per centum alter inwards need is greater than the per centum alter inwards income, a greater component of income is beingness spent on a commodity with an increment inwards income- income elasticity is said to live greater than one.
- Income Elasticity is unitary: When the proportion of income spent on a commodity remains the same or when the per centum alter inwards income is equal to the per centum alter inwards demand, EY = 1 or the income elasticity is unitary.
- Income Elasticity Less Than One (EY< 1): This occurs when the per centum alter inwards need is less than the per centum alter inwards income.
- Zero Income Elasticity of Demand (EY=o): This is the instance when alter inwards income of the consumer does non convey most whatever alter inwards the need for a commodity.
- Negative Income Elasticity of Demand (EY< o): It is good known that income final result for most of the commodities is positive. But inwards instance of inferior goods, the income final result beyond a certainly bird of income becomes negative. This implies that equally the income increases the consumer, instead of buying to a greater extent than of a commodity, buys less together with switches on to a superior commodity. The income elasticity of need inwards such cases volition live negative.
Cross Elasticity of Demand
While discussing the determinants of need for a commodity, nosotros receive got observed that need for a commodity depends non solely on the cost of that commodity but also on the prices of other related goods. Thus, the need for a commodity X depends non solely on the cost of X but also on the prices of other commodities Y, Z….N etc. The concept of cross elasticity explains the grade of alter inwards need for X as, a final result of alter inwards cost of Y. This tin live expressed as:
EC = [Percentage Change inwards need for X / Percentage alter inwards cost of Y]
The human relationship betwixt whatever 2 goods is of 2 types. The goods X together with Y tin live complementary goods (such equally pen together with ink) or substitutes (such equally pen together with ball pen). In instance of complementary commodities, the cross elasticity volition live negative. This way that autumn inwards cost of X (pen) leads to ascension inwards its need so also ascension inwards t) need for Y (ink) On the other hand, the cross elasticity for substitutes is positive which way a autumn inwards cost of X (pen) results inwards ascension inwards need for X together with autumn inwards need for Y (ball pen). If 2 commodities, say X together with Y, are unrelated at that topographic point volition live no alter i. Demand for X equally a final result of alter inwards cost of Y. Cross elasticity inwards cad of such unrelated goods volition together with so live zero.
In short, cross elasticity volition live of 3 types:
- Negative cross elasticity – Complementary commodities.
- Positive cross elasticity – Substitutes.
- Zero cross elasticity – Unrelated goods.
Importance of Elasticity
The concept of elasticity is of keen importance both inwards economical theory together with inwards practice.
- Theoretically, its importance lies inwards the fact that it deeply analyses the price-demand relationship. The constabulary of need but explains the qualitative human relationship piece the concept of elasticity of need analyses the quantitative price-demand relationship.
- The Pricing policy of the producer is greatly influenced yesteryear the nature of need for his product. If the need is inelastic, he volition live benefited yesteryear charging a high price. If on the other hand, the need is elastic, depression cost volition live advantageous to the producer. The concept of elasticity helps the monopolist piece practicing the cost discrimination.
- The cost of articulation products tin live fixed on the dry reason of elasticity of demand. In instance of such articulation products, such equally wool together with mutton, cotton wool together with cotton wool seeds, split upwardly costs of production are non known. High cost is charged for a production having inelastic need (say cotton) together with depression cost for its articulation production having elastic need (say cotton wool seeds).
- The concept of elasticity of need is helpful to the Government inwards fixing the prices of world utilities.
- The Elasticity of need is of import non solely inwards pricing the commodities but also inwards fixing the cost of labour viz., wages.
- The concept of elasticity of need is useful to Government inwards formulation of economical policy inwards diverse fields such equally taxation, international merchandise etc. (a) The concept of elasticity of need guides the finance government minister inwards imposing the commodity taxes. He should taxation such commodities which receive got inelastic need so that the Government tin heighten handsome revenue.(b) The concept of elasticity of need helps the Government inwards formulating commercial policy. Protection together with subsidy is granted to the industries which confront an elastic demand.
- The concept of elasticity of need is rattling of import inwards the acre international trade. It helps inwards solving to a greater extent than or less of the problems of international merchandise such equally gains from trade, remainder of payments etc. policy of tariff also depends upon the nature of need for a commodity.
In nutshell, it tin live concluded that the concept of elasticity of need has keen significance inwards economical analysis. Its usefulness inwards branches of economical such equally production, distribution, world finance, international merchandise etc., has been widely accepted.
Question Bank - Concept of Demand In Economics
- Write a curt depository fiscal establishment bill on 'Law of demand'
- Explain briefly how the need for a commodity is affected yesteryear changes inwards price. In come, cost of substitute, promotion advertising population.
- Define cost elasticity of need advertising distinguish betwixt its diverse types. Discuss the role of cost elasticity of need inwards occupation organization decision
- Define elasticity of demand. Explain with diagrams the cases where the absolutely value of elasticity is (i) null (ii) infinity (iii) ane (iv) less than ane (v) to a greater extent than than one
Source: Economics Lecture 2, Study Notes For Academic Year 2009-2010.
