1. MBA(Marketing) Msc(Economics) INSRUCTOR:BILAL KHAN

2. Chapter no 2 Utility analysis of Demand

3. 3 Terms to know: The law of demand 1 Demand function 2 Demand schedule 3 Diagramatical representation 4 Elasticity of demand 7 Changes in Demand 6

4. 4 Meaning of demand.  Demand is an effective desire which is supported by willingness and ability to pay for it.  The term demand has three components 1. desire 2.Willingness and 3.Ability to pay for or purchasing power..

5. 5  Quantity demanded is the amount of a good that buyers are willing and able to purchase.  Law of Demand The law of demand states that, for most goods, other things equal, the quantity demanded of a good falls when the price of the good rises;.  “The demand schedule is a table that shows the relationship between the price of a good and the quantity demanded.” DEMAND

6. 6 The Demand Curve  The demand curve is the graphic representation of the law of demand.  The demand curve slopes downward and to the right.  As the price goes up, the quantity demanded goes down.

7. 7 Definition:  Law of demand states that, other things remaining the same, amount demanded increases with a fall in price and diminishes with rise in price.

8. 8 Definition (continued) Other things remaining the same Weather conditionPrice of substitute goods Taxes of the govt. Taste, habits of the consumer Income of the consumer Political stability

9. 9 Demand function: Qd = f(P) Here, Qd= Dependent variable P= Independent variable Demand has a negative relationship with price; i.e.

10. 10 Demand schedule: priceDemand 1O0100O 9O1050 8O1100 7O115O 6O120O 50125O priceDemand 1O0100O 110950 120900 130850 140800 150750 Decrease in price increase in demand Increase in price decrease in demand

11. 11 Diagrammatical representation: PRICES Quantity demand O 1000 1050 11001150 70 80 90 100 Demand curve D D

12. 12 Graphical presentation of the LOD schedule.  The above given demand schedule is now shown with the help of graph in which there are two axis vertical and horizontal, with the vertical axis the price of product is given while horizontal axis measures the quantity of that product. a b c d

13. 13 Changes in demand: Changes in the demand for a commodity can be shown through the demand curve in two ways: Movements along the demand curve: Shifts in the demand curve:

14. 14 Changes in demand:  CHANGE IN DEMAND: Change in demand Movement along a demand curve Extension in demand Contraction in demand It is caused by change in the price alone. Shift in the demand curve Increase in demand It is caused by changes in factors other than the price. Decrease in demand

15. 15 Changes in demand (cont’d):  Movements along the demand curve: if the change in demand is due to a rise or fall in the price of a commodity alone, it is known as contraction or extantion in demand. Quantity Price 2 4 6 8 100200 300 400 a b

16. 16 Changes in demand (cont’d):  Shift in the Demand curve:  If the changes in demand is due to factor other than price, it is known as increase or decrease in demand.  In such case the demand curve shift to right or left from the original demand curve. 2 4 6 8 100200300400  The demand curve shift to right due to change in other factors.

17. 17 Shift in demand curve A shift of demand curve can also be caused by a change other than price, such as a change in taste, population, fashion, price of complementary goods, price of substitute goods. For example price of complementary goods, car and oil. If price of car increase it will effect demand of petrol due to which the demand curve of petrol shift downward.

18. 18 Shift in Demand Curve 40 60 70 price Quantity Demand Demand Curve D1 D2D2

19. 19 Conti This diagram shows shift of demand curve. When price of complementary product increase or decrease it shift the demand curve upward or downward. Here when the price of car increase it effect the demand of petrol due to which the demand curve shift downward. The diagram shows that when price of petrol was 40 Afs, the demand was 70. but when the price of car increase it effect the demand of petrol due to which the demand decrease to 60 Afs, which shift the curve downward.

20. 20 Market Demand vs. Individual Demand  Market demand refers to the sum of all individual demands for a particular good or service.  Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

21. 21

22. 22  Terms to know: statement Degree/Cases of Ed Schedule of Ed Diagrammatical representation Formula form for Ed Elasticity Of demand Elasticity

23. 23 Elasticity Elasticity of Demand  Meaning and concept.  Degrees of elasticity of demand 1.Perfectly elastic demand. 2.Perfectly inelastic demand. 3.High/more elastic demand. 4.Less elastic demand and 5.Unitary elastic demand.  Measurement of demand elasticity.  Types of demand elasticity.

24. 24 Meaning and concept  Elasticity. The term elasticity refers to extension and contraction quality of a good. For example, rubber, Spring, plastic, metals etc. And a good which has no quality of extension and contraction is known as inelasticity or inelastic good. For instance, stone, paper etc.  Demand elasticity. The LOD expresses only inverse relationship b/w price and quantity demanded but it does not show that how much quantity is influenced by change in price. Only elasticity of demand makes us able to know about that how much quantity is effected by change in price. Thus demand elasticity is the degree of responsiveness of quantity demanded to change in price. In other words, a percentage change in quantity divided by a percentage change in price is called demand elasticity. Mathematically it is written as

25. 25 Elasticity of demand:  Statement: To what extent or to what degree quantity demanded changes as a result of change in price is called elasticity of demand (Ed).

26. 26 Cont….  % change in Qd  Ed =  % change in price

27. 27 DEGREES OF ELASTICITY OF DEMAND.  There are five degrees of demand elasticity which show different level of responsiveness of quantity demanded to change in price these are given as 1.Perfectly elastic demand. 2.Perfectly inelastic demand. 3.High/more elastic demand. 4.Less elastic demand. 5.Unitary elastic demand.

28. 28 Explanation to the degrees of demand elasticity.  Perfectly elastic demand. A demand is said to be perfectly elastic when the quantity is increasing or decreasing with no change in price, here in this degree price is constant whereas quantity is variable.  Quantity is influenced by other factors rather than price such as, change in income, taste, price of substitutes etc

29. 29 Schedule and graph for PED. pricequantity 1020 1030 Y X 0 5 10 20 30.. DL P Q Here the quantity is effected not by price but by other factors such as change in income, taste, price of substitute etc. a b

30. 30 Perfectly inelastic demand  Perfectly inelastic demand refers to no change in quantity with any change in price, whatever the price is the quantity remain unchanged or fixed. The demand for necessary items is perfectly inelastic such as food, medicine etc.

31. 31 Cases/Degrees of elasticity of demand: Elasticity of demand Lesselastic Equal elastic More elastic

32. 32 Cases of Ed (cont’d): Equal elastic More elastic Less elastic If there is a great change in price cause a less change in quantity demand, is called less elastic situation. If there is an equal change in price cause an equal change in quantity demanded, is called equal elasticity of demand. If there is a less change in price caused a great change in quantity demand, is called more elastic situation.

33. 33 Schedule form of Ed: 50 2O 40 22 Less elastic Price Demand 15 100 10 200 More elastic Price Demand 12 60 10 70 Price Demand Equal elastic

34. 34 Diagrammatical representation of less elastic demand: Less elastic curve 2022 40 50 PRICE QUANTITY DEMANDED

35. 35 Diagrammatical illustration for equal elasticity: Equal elastic curve PRICE QUANTITY DEMANDED 50 60 10 12

36. 36 Diagrammatical illustration for more elasticity: PRICE QUANTITY DEMANDED 100 200 10 15 More elastic curve

37. 37 Measurement of elasticity (Formula for Ed): The formula form for elasticity of demand is; Elasticity of demand = change in quantity demanded ÷ change in price Quantity Price Ed = ΔQd ÷ ΔP Q P Ed = ΔQd × P Q ΔP Ed = ΔQd × P ΔP Q

38. 38 Measurement of demand elasticity.  To measure the elasticity of demand economists use 1 or unit for hundred percent change in quantity to change in price. If the elasticity of demand for a good is lees than 1 the demand is said to be less elastic and if the elasticity of demand is greater than 1 then the demand is said to be more elastic. When the elasticity is exactly equal to 1 then the demand is said to be unitary elastic.  Now to find these degrees of demand elasticity, a mathematical formula is given as under.

39. 39 Formula for demand elasticity.  The elasticity of demand is to be measured with the help of given formula.   Ed = ∆q   the above given formula is used for price elasticity of demand only such as, more, less and unitary elastic demand. ∆p∆p × p q

40. 40 Measurement. 1 PriceQuantity p 2010 12 q 12 E d = ∆q × p ∆p q E d = 2 × 20 = 10 =. 4 8 12 24 Here elasticity of demand is less than 1 which shows that demand is less elastic.

41. 41 Measurement. 2 PriceQuantity p10010 90q18 E d = ∆q × p ∆p q E d = 8 × 100 = 800 = 4. 4 10 18 180 Here the elasticity of demand is greater than 1 which shows that demand is more or high elastic.

42. 42 Measurement. 3 PriceQuantity 10010 5020 E d = ∆q × p ∆p q E d = 10 × 100 = 1000 = 1 50 20 1000 Here elasticity of demand is exactly equal to 1 which shows that demand is unitary elastic.

43. 43 Types of Elasticity of Demand:  There are many types of elasticity of demand: i.e.  Price elasticity of demand  Income elasticity of demand and  Cross elasticity of demand.

44. 44 1) Price Elasticity of Demand: Price elasticity of demand is percentage change in quantity demanded divided by the percentage change in the price. P.E = %age change in amount demanded / % change in price. Suppose the price of a commodity increase from 20 to 25. quantity demand decrease from 50 to 40. which is equal to 5÷10 = 0.5 there for price elasticity of demand is 5%.

45. 45  Income elasticity of demand:  “Income elasticity of demand is the responsiveness of demand to changes in the income of the consumer.”  Income elasticity is calculated by using the following formula: E y = % change in quantity / % change in income E y = ΔQ/Q ÷ ΔY/Y E y = ΔQ/Q × Y/ΔY Types of Elasticity of Demand (cont’d):

46. 46 Types of Elasticity of Demand (cont’d):  Income elasticity of demand is: a)Equal to unity i.e. when the proportion of income spent on goods remains the same even after increase in income. Ey = 1 b)It is less than unity if the proportion decreases. Ey < 1 a)More than unity if the proportion increases. Ey > 1

47. 47 Types of Elasticity of Demand (cont’d):  For example: monthly income of the consumer (Afs) Monthly demand for meat (Kg) 5000 40 8000 50 E y = ΔQ/ΔY × Y/Q Ey = 10/3000 × 5000/40 Ey = 0.14 Ey = 0.14 < 1

48. 48 Types of Elasticity of Demand (cont’d):  Cross elasticity of demand:  “The rate of responsiveness of quantity demanded of commodity A to changes in price of commodity B.” i.e.  E AB = % change in Qd of A ÷ % change in price of B E AB = ΔQ A /Q A ÷ ΔP B /P B E AB = ΔQ A /Q A × P B /ΔP B

49. 49 Types of Elasticity of Demand (cont’d):  For example: Price of wheat (P B ) Quantity demand for rice (Q A ) 200 1000 300 1200 E AB = ΔQ A /ΔP B × P B /Q A E AB = 200/100 × 200/1000 E AB =2/5 = 0.4<1

50. 50 Extension or Contraction of Demand Extension of Demand: An extension of demand caused by a fall in price. When price decrease demand increase which extend the demand and curve moved upward.

51. 51 Extension of Demand Price Quantity Demand P1 P2 D1D2

52. 52 Contraction of demand caused by a rise in price. When price increase demand decrease which is called contraction of demand. Contraction of demand:

53. 53 Contraction of Demand Price Quantity Demand P2 P1 D2D2 D1D1

54. 54 Demand Curve The demand curve has a negative slope, consistent with the law of demand.

55. 55 Supply Curve The supply curve has a positive slope, consistent with the law of supply.

56. 56 Equilibrium  In economics, an equilibrium is a situation in which:  there is no tendency to change,  quantity demanded equals quantity supplied, and  the market just clears.

57. 57 Equilibrium Equilibrium occurs at a price of $3 and a quantity of 30 units.

58. 58 Shortages and Surpluses  A shortage occurs when quantity demanded exceeds quantity supplied.  A shortage leads to increase the price.  A surplus occurs when quantity supplied exceeds quantity demanded.  A surplus leads to decrease the price..

59. 59 Shortage. A price is set at $2 resulting in a shortage of 20 units.

60. 60 Surplus. A price is set at $4 resulting in a surplus of 20 units.

61. 61 Price Equilibrium: The equilibrium price the amount that buyers wish to purchase is exactly equal to the amount that supplier are willingly to offer to the market. Simply we can say that the amount at which both buyer and seller are agree. The buyer want to purchase on that price, while supplier is ready to supply that product to the market on that amount.

62. 62 Schedule price Qd Qs 1080 30 1270 45 1660 60 1850 70 20 40 80

63. 63 Diagram 20 18 16 14 12 10 20 40 60 80 100 E Price Qd/Q s E is Equilibriu m point

64. 64 Explanation the above schedule and diagram shows various prices of a product and its quantity demand and quantity supply. When the price was 10, the quantity demand of this product was 80 and the supplier supply 30 products to the market. As price increase quantity demand decrease and quantity supply increase. When price increase to 16, at this point the quantity demand and quantity supply both are same, which is call equilibrium price.