Demand Inwards Economic Science - Constabulary Of Require - Elasticity Of Demand

Understanding Demand - definition of Demand

In economical terminology the term need conveys a wider as well as definite pregnant than inwards the ordinary usage. Ordinarily need agency a desire, whereas inwards economical sense it is something to a greater extent than than a mere desire. It is interpreted every bit a want backed upward past times the - purchasing power. Further need is per unit of measurement of fourth dimension such every bit per day, per calendar week etc. moreover it is meaningless to refer need without reference to price. Considering all these aspects the term need tin live defined inwards the next words,

“Demand for anything agency 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 police explains the functional human relationship betwixt cost of a commodity as well as the quantity demanded of the same. It is observed that the cost as well as the need are inversely related which agency that the 2 displace inwards the contrary direction. An increment inwards the cost leads to a autumn inwards the need as well as vice versa. This human relationship tin live stated as

“Other things beingness equal, the need for a commodity varies inversely every bit 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 as well as less than what it would live at a lower price”

Demand Schedule or Demand Table

These are the 2 devices to acquaint the law. The need schedule is a schedule or a tabular array which contains diverse possible prices of a commodity as well as unlike quantities demanded at them. It tin live an private need schedule representing the need of an private consumer or tin live the marketplace need schedule showing the total need of all the consumers taken together, this is indicated inwards the next table.

It tin live observed that with a autumn inwards cost every private consumer buys a larger quantity than earlier every bit a resultant of which the total marketplace 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 police of demand. H5N1 need bend tin live obtained past times plotting a need schedule on a graph as well as joining the points so obtained, similar the need schedule nosotros tin derive an private need bend every bit good every bit a marketplace need curve. The one-time shows the need bend of an private buyer spell the latter shows the amount total of all the private curves i.e. a marketplace or a total need curve. The next diagram shows the 2 types of need curves.

 

In the to a higher house diagram, figure (A) shows an private need bend of whatsoever private consumer spell figure (B) indicates the total marketplace 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 as well as the quantity demanded on X axis. It may live noted that at a higher cost OP the quantity demanded is OM spell at a lower cost say OP1, the quantity demanded rises to OM1 thus a need bend diagrammatically explains the police of demand.

Assumptions of the 'Law of Demand'

The police of need inwards gild to found the price-demand human relationship makes a number of assumptions every bit follows:

1. Income of the consumer is given as well as constant.
2. No alter inwards tastes, preference, habits etc.
3. Constancy of the cost of other goods.
4. No alter inwards the size as well as 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 police is experienced. However at that spot are certainly situations as well as commodities which do non follow the law. These are termed every bit the exceptions to the law; these tin live expressed every bit follows:

1. 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 as well as awaits a farther inwards price.
2. 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 as well as switches on to a superior commodity. Hence the exception.
3. Conspicuous Consumption refers to the consumption of those commodities which are bought every bit a affair of prestige. Naturally with a autumn inwards the cost of such goods, at that spot is no distinction inwards buying the same. As a resultant the need declines with a autumn inwards the cost of such prestige goods.
4. 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 every bit 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 as well as less at a depression price.

Determinants (Factors Affecting) of Demand

The police of demand, spell explaining the price-demand human relationship assumes other factors to live constant. In reality however, these factors such every bit income, population, tastes, habits, preferences etc., do non stay constant as well as buy the farm on on affecting the demand. As a resultant the need changes i.e. rises or falls, without whatsoever alter inwards price.

1. Income: The human relationship betwixt income as well as the need is a direct one. It agency the need changes inwards the same management every bit the income. An increment inwards income leads to rising inwards need as well as vice versa.
2. 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 as well as vice versa.
3. Tastes as well as Habits: The tastes, habits, likes, dislikes, prejudices as well as preference etc. of the consumer receive got a profound number 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 really high cost also may non halt him from buying a skillful if he likes it really much.
4. Other Prices: This is roughly 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 gratis commodity rises, the need for the commodity inwards reference falls. E.g. the need for petrol volition turn down due to rising inwards the cost of cars as well as the consequent turn down inwards their demand. Opposite number volition live experienced incase of substitutes.
5. 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 as well as many times fifty-fifty if they don’t remove it.
6. Fashions: Hardly anyone has the courage as well as the want to buy the farm against the prevailing fashions every bit good every bit social customs as well as the traditions. This factor has a bully impact on the demand.
7. Imitation: This style is commonly experienced everywhere. This is known every bit 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 wretched countries seek to re-create the consumption patterns of rich countries.

Variation & Changes In Demand

The police of need explains the number 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. crusade the rising or autumn inwards need without whatsoever alter inwards the price. These effects are unlike from the police of demand. They are termed every bit changes inwards need inwards contrast to variations inwards need which hap due to changes inwards the cost of a commodity. In economical theory a distinction is made betwixt (a) Variations i.e. extension as well as contraction inwards need due to cost as well as (b) Changes i.e. increment as well as decrease inwards need due to other factors.

(a) Variations inwards need refer to those which hap due to changes inwards the cost of a commodity.

These are 2 types.

1. Extension of Demand: This refers to rising inwards need due to a autumn inwards cost of the commodity. It is shown past times a downwards movement on a given need curve.
2. Contraction of Demand: This agency autumn inwards need due to increment inwards cost as well as tin live shown past times an upwards movement on a given need curve.

(b) Changes inwards need imply the rising as well as autumn due to factors other than price.

It agency they hap without whatsoever alter inwards price. They are of 2 types.

1. Increase inwards Demand: This refers to higher need at the same cost as well as results from rising inwards income, population etc., this is shown on a novel need bend lying to a higher house the master copy one.
2. Decrease inwards demand: It agency less quantity demanded at the same price. This is the resultant of factors similar autumn inwards income, population etc. this is shown on a novel need lying below the master copy one.

 

 

Fig (A) Extension/Contraction of Demand

Fig (B) Increase/Decrease inwards Demand

In figure A, the master copy cost is OP as well as the Quantity demanded is OQ. With a rising inwards cost from OP to OP1 the need contracts from OQ to OQ1 as well as every bit a resultant of autumn inwards cost from OP to OP2, the need extends from OQ to OQ2.

In figure, B an increment inwards need is shown past times a novel need curve, D1 spell the decrease inwards need is expressed past times the novel need bend D2, lying to a higher house as well as below the master copy need bend D respectively. On D1 to a greater extent than is need (OQ1) at the same cost spell on D2 less is demanded (OQ2) at the same cost OP.

Elasticity of Demand

The police of need explains the functional human relationship betwixt cost as well as demand. In fact, the need for a commodity depends non solely on the cost of a commodity but also on other factors such every bit income, population, tastes as well as preferences of the consumer. The police of need assumes these factors to live constant as well as states the inverse price-demand relationship. Barring certainly exceptions, the inverse price- need human relationship holds skillful inwards instance of the goods that are bought as well as sold inwards the market.

The police of need explains the management of a alter every bit it states that with a rising inwards cost the need contracts as well as 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 police of need only shows the management inwards which the need changes every bit a resultant of a alter inwards price, but does non throw whatsoever lite on the amount past times which the need volition alter inwards response to a given alter inwards price. Thus, the police of need explains the qualitative but non the quantitative appear 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 spell roughly others are less. The concept of the elasticity of need has bully significance every bit 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 agency the sensitiveness or responsiveness of need to a alter inwards price.

According to Marshall, “the elasticity (or responsiveness) of need inwards a marketplace is bully or minor accordingly every bit the need changes (rises or falls) much or piddling for a given alter (rise or fall) inwards price.”

From the to a higher house discussion, it volition live clear that idea unlike commodities react to a alter inwards cost inwards the same direction; the grade of their response differs. Demand for roughly commodities is to a greater extent than sensitive or responsive to a alter inwards price, spell it is less responsive for roughly others. Elasticity of need is a mensurate of relative changes inwards the amount demanded inwards response to a minor alter inwards price. Certain goods are said to receive got an elastic need spell others receive got an inelastic demand. The need is said to live elastic when a minor alter inwards cost brings virtually considerable alter inwards demand. On the other hand, the need for a skillful is said to live inelastic when a alter inwards cost fails to convey virtually 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 roughly commodities is to a greater extent than elastic spell that for certainly others is less elastic. Using the formula of elasticity, it possible to refer next unlike types of cost elasticity:

1. Perfectly inelastic need (ep = 0)
2. Inelastic (less elastic) need (e < 1)
3. Unitary elasticity (e = 1)
4. Elastic (more elastic) need (e > 1)
5. Perfectly elastic need (e = ∞)

1. 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 past times agency of the amongst diagram.

   The vertical straight line need bend every bit 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

2. 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 agency the need is relatively c less responsive to the alter inwards price. This is referred to every bit an inelastic demand. Fig e

3. 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 every bit 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

4. 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 agency a minor alter inwards cost induces a important alter in, demand. This tin live understood past times agency of the amongst figure.

   It tin live noticed that inwards the to a higher house representative the per centum alter inwards need is greater than that inwards price. Hence, the elastic need (e>1) Fig d

5. 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. H5N1 minor alter inwards cost produces interplanetary space alter inwards demand. H5N1 perfectly competitive employment solid faces this type of demand.

From the to a higher house analysis it tin live concluded that theoretically 5 unlike types of cost elasticity tin live mentioned. In practice, all the same 2 extreme cases i.e. perfectly elastic as well as 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

1. Nature of the Commodity: Humans wants, i.e. the commodities satisfying them tin live classified broadly into necessaries on the ane paw as well as comforts as well as luxuries on the other hand. The nature of need for a commodity depends upon this classification. The need for necessities is inelastic as well as for comforts as well as luxuries it is elastic.
2. Number of Substitutes Available: The availability of substitutes is a major determinant of the elasticity of demand. The large the number of substitutes, the higher is the elastic. It agency 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.
3. Number Of Uses: If a commodity tin live pose to a diversity 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 as well as when the cost falls the consumption may live extended to less urgent uses, e.g. coal electricity, H2O etc.
4. 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.
5. Range of prices: The need for really low-priced every bit good every bit really high-price commodity is mostly inelastic. When the cost is really high, the commodity is consumed solely past times the rich people. H5N1 rising or autumn inwards the cost volition non receive got important number inwards the demand. Similarly, when the cost is so depression that the commodity tin live brought past times all those who wishing to buy, a change, i.e., a rising or autumn inwards the price, volition hardly receive got whatsoever number on the demand.
6. Proportion of Income Spent: Income of the consumer significantly influences the nature of demand. If solely a minor fraction of income is beingness spent on a detail commodity, say newspaper, the need volition tend to live inelastic.
7. According to Taussig, unequal distribution of income as well as wealth makes the need inwards general, elastic.
8. In addition, it is observed that need for durable goods, is normally elastic.
9. The nature of need for a commodity is also influenced past times the complementarities of goods.

From the to a higher house analysis of the determinants of elasticity of demand, it is clear that no precise conclusion virtually the nature of need for whatsoever specific commodity tin live drawn. It depends upon the hit of price, as well as the psychology of the consumers. The conclusion regarding the nature of need should, thence live restricted to minor 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 mensuration the elasticity nosotros tin know the extent to which the need is elastic or inelastic. Different methods are used for mensuration the elasticity of demand.

1. Percentage Method: In this method, the per centum alter inwards need as well as per centum alter inwards cost are compared.

   ep = [Percentage alter inwards need / Percentage alter inwards price]

   In this method, iii 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 agency the need is elastic.
   • If per centum alter inwards need is less than that inwards price, e > 1, pregnant thereby the need is inelastic.

2. Total Outlay Method: The elasticity of need tin live measured past times considering the changes inwards cost as well as 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 virtually whatsoever alter inwards the total outlay, it is the instance of unit of measurement elasticity. It agency 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 as well as total revenue are inversely related, i.e., if total revenue falls with rising inwards cost or rises with autumn inwards price, need is said to live elastic or e > 1.
   • When cost as well as total revenue are straight related, i.e. if total revenue rises with a rising inwards cost as well as falls with a autumn inwards price, the need is said to live inelastic pr e < 1.

3. Another suggested past times 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 every bit a resultant of alter inwards price. However, every bit 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 number is a factor of the cost effect. The income number suggests the number of alter inwards income on demand. The income elasticity of need explains the extent of alter inwards need every bit a resultant of alter inwards income. In other words, income elasticity of need agency 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:

1. 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.
2. 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.
3. 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.
4. Zero Income Elasticity of Demand (EY=o): This is the instance when alter inwards income of the consumer does non convey virtually whatsoever alter inwards the need for a commodity.
5. Negative Income Elasticity of Demand (EY< o): It is good known that income number for most of the commodities is positive. But inwards instance of inferior goods, the income number beyond a certainly bird of income becomes negative. This implies that every bit the income increases the consumer, instead of buying to a greater extent than of a commodity, buys less as well as 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 resultant 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 whatsoever 2 goods is of 2 types. The goods X as well as Y tin live complementary goods (such every bit pen as well as ink) or substitutes (such every bit pen as well as ball pen). In instance of complementary commodities, the cross elasticity volition live negative. This agency that autumn inwards cost of X (pen) leads to rising inwards its need so also rising inwards t) need for Y (ink) On the other hand, the cross elasticity for substitutes is positive which agency a autumn inwards cost of X (pen) results inwards rising inwards need for X as well as autumn inwards need for Y (ball pen). If 2 commodities, say X as well as Y, are unrelated at that spot volition live no alter i. Demand for X every bit a resultant of alter inwards cost of Y. Cross elasticity inwards cad of such unrelated goods volition so live zero.

In short, cross elasticity volition live of iii types:

1. Negative cross elasticity – Complementary commodities.
2. Positive cross elasticity – Substitutes.
3. Zero cross elasticity – Unrelated goods.

Importance of Elasticity

The concept of elasticity is of bully importance both inwards economical theory as well as inwards practice.

1. Theoretically, its importance lies inwards the fact that it deeply analyses the price-demand relationship. The police of need only explains the qualitative human relationship spell the concept of elasticity of need analyses the quantitative price-demand relationship.
2. The Pricing policy of the producer is greatly influenced past times the nature of need for his product. If the need is inelastic, he volition live benefited past times 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 spell practicing the cost discrimination.
3. The cost of articulation products tin live fixed on the the world of elasticity of demand. In instance of such articulation products, such every bit wool as well as mutton, cotton fiber as well as cotton fiber seeds, dissever costs of production are non known. High cost is charged for a production having inelastic need (say cotton) as well as depression cost for its articulation production having elastic need (say cotton fiber seeds).
4. The concept of elasticity of need is helpful to the Government inwards fixing the prices of world utilities.
5. The Elasticity of need is of import non solely inwards pricing the commodities but also inwards fixing the cost of labour viz., wages.
6. The concept of elasticity of need is useful to Government inwards formulation of economical policy inwards diverse fields such every bit taxation, international merchandise etc. (a) The concept of elasticity of need guides the finance government minister inwards imposing the commodity taxes. He should revenue enhancement 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 as well as subsidy is granted to the industries which human face upward an elastic demand.
7. The concept of elasticity of need is really of import inwards the patch international trade. It helps inwards solving roughly of the problems of international merchandise such every bit gains from trade, residuum 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 bully significance inwards economical analysis. Its usefulness inwards branches of economical such every bit production, distribution, world finance, international merchandise etc., has been widely accepted.

Question Bank - Concept of Demand In Economics

1. Write a curt banknote on 'Law of demand'
2. Explain briefly how the need for a commodity is affected past times changes inwards price. In come, cost of substitute, promotion advertisement population.
3. Define cost elasticity of need promotion distinguish betwixt its diverse types. Discuss the role of cost elasticity of need inwards employment organization decision
4. Define elasticity of demand. Explain with diagrams the cases where the absolutely value of elasticity is (i) goose egg (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.