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DEMAND - Concepts

1. Demand is defined as the quantity of a product consumers are willing and able to purchase at different prices over time. 2. The law of demand states that as price increases, quantity demanded decreases, and vice versa. 3. Elasticity of demand measures the responsiveness of quantity demanded to changes in price, income, or the price of related goods. Price elasticity specifically refers to responsiveness to price changes.
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0% found this document useful (0 votes)
67 views30 pages

DEMAND - Concepts

1. Demand is defined as the quantity of a product consumers are willing and able to purchase at different prices over time. 2. The law of demand states that as price increases, quantity demanded decreases, and vice versa. 3. Elasticity of demand measures the responsiveness of quantity demanded to changes in price, income, or the price of related goods. Price elasticity specifically refers to responsiveness to price changes.
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DEMAND- Concepts

FOREST ECONOMICS
Demand

Demand normally means the desire/ willingness for


a good.
In Economics- Demand is defined as the amount of a
product / service the consumers are willing and able
to purchase at each price during some specified time
in a specified market.
Demand conceptualizes the buyer’s response to price
changes.
Schedule of quantities & corresponding prices of
fireplace wood that could be sold in Woodstock

Price per cord Quantity sold


( dollars)

18 10,000

16 12,000

14 14,000

12 16,000

10 18,000

8 20,000

6 22,000
Curve of the demand for fireplace wood
Unit Price

Quantity Sold
Law of Demand

Explains the functional relationship between the


quantity demanded of a commodity and its unit
price., ceteris paribus.
When there is a rise in the price of the commodity,
quantity demanded is reduced and when there is a
fall in the price , quantity demanded is extended.
Kinds of Demand

1. Price demand: refers to the various quantities of


good/ service that a consumer would be willing to
purchase at all possible prices, ceteris paribus
2. Income Demand: refers to various quantities of
good/ service that a consumer would be willing to
purchase at different levels of income, ceteris paribus.
3. Cross Demand: refers to the various quantities of
good/ service that a consumer would be willing to
purchase not due to the changes in the prices of the
commodity but due to change in the prices of related
commodities
Movement Refers to the change in the
along the quantity demanded due to
curve change in price.
1. Extension in demand- buying
more quantity at a lower price.
o Price- P P1
P A
o Quantity- Q Q1
B
P1 2. Contraction in demand- buying
less quantity at a higher price.
Q Q1 o Price- P1 P
o Quantity- Q1 Q
Shift in Demand Curve

Refers to change in price not due to change in price but


due to changes in values of other variables .

D1 Increase in demand
DD D1 D1
D2 D
P1

P D1
Decrease in Demand
P2 D DD
D2 D2D2

Q2 Q Q1
Increase in Demand( DD – D1D1) :- more demand at

the same price / same demand at higher price.


Decrease in demand ( DD- D2D2):- Less demand at

same price / same demand at lower price.


Factors affecting Demand

1. Tastes and Preferences


2. Income
3. Price of other related goods
4. Habits
5. Region
6. Season
Elasticity of Demand

Elasticity of Demand measures the responsiveness of

quantity demanded to a change price/ income/ price


of related goods by keeping other factors constant.
Types of Elasticity of demand

(1) Price Elasticity of Demand:


Price elasticity of demand is the degree of
responsiveness of quantity demanded of a good to a
change in its price.
Precisely, it is defined as the ratio of proportionate
change in the quantity demanded of a good caused by
a given proportionate change in price.
Δq / q ÷ ∆ P / P
(2) Income Elasticity of Demand:

The degree of change or responsiveness of quantity


demanded of a good to a change in the income of a
consumer is called income elasticity of demand.
= Proportionate change in quantity demanded
Proportionate change in income
= Change in quantity
Initial quantity X 100
Change in Price
Initial Price
∆q/q÷ ∆I/I
(3) Cross Elasticity of Demand

The concept of cross elasticity of demand is used for


measuring the responsiveness of quantity demanded
of a good to changes in the price of related goods.
Exy = % change quantity demanded of good X
% change in price of good Y
= change in quantity X
Initial quantity X x 100
Change in quantity Y
Initial quantity Y
= ∆ X/X÷ ∆ Y/Y
Degrees of Price Elasticity of Demand:

(1) Perfectly inelastic demand


The quantity demanded of a good does not change
with change in price.
Ed= 0
(2) Perfectly elastic demand

The quantity demanded is extremely (infinitely)


responsive to price.
Ed= ∞
(3) Unitary elastic demand:

When the quantity demanded of a good changes by


exactly the same percentage as price, the demand is
said to be unitary elastic.
Ed=1
(4) Relatively elastic demand

Small change in price results in relatively greater


change in quantity demanded.
Ed= >1
(5) Relatively Inelastic demand

A given proportionate change in price causes a


relatively less proportionate change in quantity
demand.
Ed= <1
Methods for calculating PED

Total Outlay Method


Point Method
Arc Method
1. Total Outlay Method

Or Total Expenditure Method


Proposed by Alfred Marshal
PED can be measured on the basis of change in TE to
the change in price
Change in Price Elastic Demand Unitary Elastic Inelastic
(ed >1) Demand (ed=1) Demand (ed<1)

Fall in price Total Exp. Total Exp. Total Exp. falls


increases unchanged

Rise in Prices Total Exp. Total Exp. Total Exp. rises


decreases unchanged
2. Point Method

Geometrical / Graphical Method


Ed is measured at a point on the demand curve
Ed= Lower segment of the demand curve
Upper segment of the demand curve
The price elasticity is different at different points of
the demand curve.
A
Ed= ∞ B • A= ∞
Ed >1 • B= >1
• C= 1
C D • D=<1
Ed= 1 Ed < 1 • E= 0

E
Ed= 0
Ed= QR
D
PQ
P

Q
D

R
3. Arc method

Price elasticity is measured over a finite range


Is an average reaction or the average responses

Ed= Δq ÷ Δp
q1+q2 p1+p2
2 2
Determinants of Price Elasticity

1. Substitutability- > substitutes , > elastic


2. Proportion of Income - Other things equal, the higher
the price of a good relative to consumers’ incomes, the
greater the price elasticity of demand
3. Luxuries versus Necessities
4. Time- Generally, product demand is more elastic
the longer the time period under consideration.
Consumers often need time to adjust to changes in
prices.
5. The no. of uses of a commodity
Substitutes vs. Complements

Substitutes Complements

Rise in price of good Rise in price of good


results in increase in results in decrease in
quantity demanded. quantity demanded.
Ec = +ve Ec = - ve
E.g. – tea and coffee E.g. – tea and milk
Also known as
competing goods.
Normal goods vs. Inferior goods

Ei = 0

a l Inferior
orm s goods
N od
go
Positive Income Zero Income Negative Income
elasticity elasticity elasticity

↑ in income leads to ↑ ↑ in income leads to ↑in income leads to ↓


in quantity demanded ‘0’ change in quantity in quantity demanded
demanded

Normal goods Inferior goods


Necessities Luxuries

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