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THEORY OF DEMAND

THEORY OF DEMAND. P. Bharathi. What is Demand?. The willingness to buy a good or service at all prices What is the law of Demand? If nothing else changes, the quantity demanded of a good or service is greater at lower prices than higher. Determinants of Demand.

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THEORY OF DEMAND

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  1. THEORY OF DEMAND P. Bharathi

  2. What is Demand? • The willingness to buy a good or service at all prices • What is the law of Demand? • If nothing else changes, the quantity demanded of a • good or service is greater at lower prices than higher.

  3. Determinants of Demand • Prices of other goods ( substitute or complementary) • Outlook (consumer expectation of future income and prices) • Income (normal goods versus inferior goods) • Number of potential customers (pop. of market) • Tastes (or fashions)

  4. Law of Demand • Reasons for inverse relation between • price & demand • Income Effect –current buyers buy more. • 2. Substitution Effect– new buyers now purchase. • 3. Diminishing Marginal Utility - because buyers • of successive units receive less marginal utility, • they will buy more only when the price is lowered.

  5. P QD DEMAND SCHEDULE Consumers “willingness to buy” Price decreases;QD increases D Rs.5 Rs.4 Rs.3 Rs.2 Rs.1 10 20 35 55 80 Rs.5 4 3 2 1 0 10 20 35 55 80 Quantity Demanded …a specified time period …other things remaining constant

  6. P QD GRAPHING DEMAND Price of Corn P Rs5 4 3 2 1 CORN 10 20 35 55 80 $5 4 3 2 1 o Q 10 20 30 40 50 60 70 80 Quantity of Corn

  7. P QD GRAPHING DEMAND Price of Corn P Rs.5 4 3 2 1 CORN 10 20 35 55 80 Rs.5 4 3 2 1 o 55 Q 10 20 30 40 50 60 70 80 Quantity of Corn

  8. P QD GRAPHING DEMAND Price of Corn P Rs.5 4 3 2 1 CORN 10 20 35 55 80 Rs.5 4 3 2 1 o Q 10 20 30 40 50 60 70 80 35 Quantity of Corn

  9. P QD GRAPHING DEMAND Price of Corn P Rs.5 4 3 2 1 CORN 10 20 35 55 80 Rs.5 4 3 2 1 o Q 10 20 30 40 50 60 70 80 Quantity of Corn

  10. P QD GRAPHING DEMAND P Price of Corn Rs.5 4 3 2 1 CORN 10 20 35 55 80 Rs.5 4 3 2 1 o Q 10 20 30 40 50 60 70 80 Quantity of Corn

  11. P QD GRAPHING DEMAND Price of Corn P Rs.5 4 3 2 1 CORN 10 20 35 55 80 Rs.5 4 3 2 1 D o Q 10 20 30 40 50 60 70 80 Quantity of Corn

  12. DEMAND CURVE Price decreases;QD increases D Rs.5 Rs.4 Rs.3 Rs.2 Rs.1 0 10 20 35 55 80 Quantity Demanded …a specifiedtime period …other things remaining constant

  13. Individual Demand and Market Demand “C” “Market Demand” “A” “B” D D D D [Total] Rs.3 Rs.3 = + + Rs.3 Rs.3 Rs.2 Rs.2 Rs.2 Rs.2 40 35 30 45 39 115 100 26 From“individual”demand to“market”demand And, what if the price of this product drops from Rs.3 to Rs.2?

  14. Law of Demand D Change in QD 1. Price change 2. Movement [up/down the demand curve] 3. Point to point [along the curve] Rs.10 Price Inverserelationship Rs.8 QD1 QD2 QD

  15. “Demand Shifters” • Taste • Income • Market Size • Expectations of consumers about future price, Income, availability of good • Prices of related goods

  16. “Demand Shifters” D D1 D1 D2 P1 D2 P P P2 QD1QD2 Complement [inverse] Substitute [Direct] Bread Butter Coffee

  17. “Demand Shifters” D3 D1 D3 P QD2 QD3 QD1

  18. ELASTICITY OF DEMAND

  19. “ The degree of responsiveness of change in demand to a change in price ” Importance of Elasticity of demand: Determination of price under monopoly, Determination of price under discriminating monopoly Determination of price of product mix, Determination of price of public utilities, Determination of international trade policy ELASTICITY OF DEMAND

  20. Type of elasticity of demand: Income elasticity of Demand: The degree of responsiveness of change in demand to a change in income Type of Income Elasticity of Demand: Zero Negative Positive Price Elasticity of Demand: The degree of responsiveness of change in demand to a change in price Methods of Measuring Price Elasticity: Total outlay or expenditure method Point Method Arc Method

  21. Cross Elasticity of Demand: The degree of responsiveness of change in demand for good ‘B’ to a change inprice of good ‘A’ Type of Cross elasticity of demand: Zero, Negative, Positive: a) >1 (b) <1, (c) =1 Infinitive

  22. Factors governing the elasticity of demand: Number and closeness of substitutes Significance of commodity in budgets Degree of necessity of goods Habits and temperaments of consumer Number of the use of commodity Period of time for demand

  23. Factors influencing demand: Number of consumers Price level Availability of substitutes Distribution of wealth Taste Fashion Possibility of change in price Climate Advertisement

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