Demand Inwards Economic Science - Police Of Necessitate - Elasticity Of Demand

Understanding Demand - definition of Demand

In economical terminology the term need conveys a wider as well as definite pregnant than inward the ordinary usage. Ordinarily need way a desire, whereas inward economical sense it is something to a greater extent than than a mere desire. It is interpreted every bit a want backed upwards yesteryear 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 advert need without reference to price. Considering all these aspects the term need tin live defined inward 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 police clitoris 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 way that the 2 displace inward the reverse direction. An increment inward the cost leads to a autumn inward 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 introduce the law. The need schedule is a schedule or a tabular array which contains diverse possible prices of a commodity as well as 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 inward the next table.

It tin live observed that with a autumn inward cost every private consumer buys a larger quantity than earlier every bit a outcome of which the total marketplace seat need also rises. In instance of an increment inward 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 clitoris of demand. Influenza A virus subtype H5N1 need bend tin live obtained yesteryear 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 seat need curve. The sometime shows the need bend of an private buyer piece the latter shows the amount 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.

 

In the inward a higher house diagram, figure (A) shows an private need bend of whatsoever 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 as well as 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 police clitoris of demand.

Assumptions of the 'Law of Demand'

The police clitoris of need inward lodge to constitute the price-demand human relationship makes a break of assumptions every bit follows:

1. Income of the consumer is given as well as constant.
2. No alter inward tastes, preference, habits etc.
3. Constancy of the cost of other goods.
4. No alter inward the size as well as composition of population.

These Assumptions are expressed inward 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 clitoris is experienced. However in that location are for certain 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 inward 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 inward price.
2. Giffens’s Paradox describes a peculiar sense inward 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 thing of prestige. Naturally with a autumn inward the cost of such goods, in that location is no distinction inward buying the same. As a outcome the need declines with a autumn inward the cost of such prestige goods.
4. Ignorance Effect implies a province of affairs inward 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 1 every bit shown inward the with diagram. In the with figure, the need bend is positively sloping 1 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 clitoris of demand, piece 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 rest constant as well as popular off on on affecting the demand. As a outcome the need changes i.e. rises or falls, without whatsoever alter inward price.

1. Income: The human relationship betwixt income as well as the need is a direct one. It way the need changes inward the same management every bit the income. An increment inward income leads to ascent inward 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 remove maintain a profound outcome on the need for a commodity. If a consumers dislikes a commodity, he volition non purchase it despite a autumn inward price. On the other paw a real high cost also may non halt him from buying a expert if he likes it real much.
4. Other Prices: This is just about other of import determinant of need for a commodity. The effects depends upon the human relationship betwixt the commodities inward question. If the cost of a gratis commodity rises, the need for the commodity inward reference falls. E.g. the need for petrol volition reject due to ascent inward the cost of cars as well as the consequent reject inward their demand. Opposite outcome volition live experienced incase of substitutes.
5. Advertisement: This factor has gained tremendous importance inward 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 popular off 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 simulate the consumption patterns of the rich ones. This operates fifty-fifty at international levels when the miserable countries endeavor to re-create the consumption patterns of rich countries.

Variation & Changes In Demand

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

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

These are 2 types.

1. Extension of Demand: This refers to ascent inward need due to a autumn inward cost of the commodity. It is shown yesteryear a downwards motility on a given need curve.
2. Contraction of Demand: This way autumn inward need due to increment inward cost as well as tin live shown yesteryear an upwards motility on a given need curve.

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

It way they occur without whatsoever alter inward price. They are of 2 types.

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

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

In figure, B an increment inward need is shown yesteryear a novel need curve, D1 piece the decrease inward need is expressed yesteryear the novel need bend D2, lying inward 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 piece on D2 less is demanded (OQ2) at the same cost OP.

Elasticity of Demand

The police clitoris 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 clitoris of need assumes these factors to live constant as well as states the inverse price-demand relationship. Barring for certain exceptions, the inverse price- need human relationship holds expert inward instance of the goods that are bought as well as sold inward the market.

The police clitoris of need explains the management of a alter every bit it states that with a ascent inward cost the need contracts as well as with a autumn inward cost it expands. However, it fails to explicate the extent or magnitude of a alter inward need with a given alter inward price. In other words, the police clitoris of need just shows the management inward which the need changes every bit a outcome of a alter inward price, but does non throw whatsoever low-cal on the amount yesteryear which the need volition alter inward response to a given alter inward price. Thus, the police clitoris of need explains the qualitative but non the quantitative expression of price- need relationship.

Although it is truthful that need responds to alter inward cost of a commodity, such response varies from commodity to commodity. Some commodities are to a greater extent than responsive or sensitive to alter inward cost piece just about 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 inward price. It thus elaborates the price-demand relationship. The elasticity of need thus way the sensitiveness or responsiveness of need to a alter inward price.

According to Marshall, “the elasticity (or responsiveness) of need inward a marketplace seat is bully or pocket-size accordingly every bit the need changes (rises or falls) much or piffling for a given alter (rise or fall) inward price.”

From the inward a higher house discussion, it volition live clear that idea dissimilar commodities react to a alter inward cost inward the same direction; the grade of their response differs. Demand for just about commodities is to a greater extent than sensitive or responsive to a alter inward price, piece it is less responsive for just about others. Elasticity of need is a stair out of relative changes inward the amount demanded inward response to a pocket-size alter inward price. Certain goods are said to remove maintain an elastic need piece others remove maintain an inelastic demand. The need is said to live elastic when a pocket-size alter inward cost brings almost considerable alter inward demand. On the other hand, the need for a expert is said to live inelastic when a alter inward cost fails to convey almost important alter inward demand.

The concept of elasticity tin live expressed inward the shape of an equation as:

Ep = [Percentage alter inward quantity demanded / Percentage alter inward the price]

Types of Price Elasticity

The concept of cost elasticity reveals that the grade of responsiveness of need to the alter inward cost differs from commodity to commodity. Demand for just about commodities is to a greater extent than elastic piece that for for certain others is less elastic. Using the formula of elasticity, it possible to advert next dissimilar 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 inward which need shows no response to a alter inward price. In other words, whatever live the cost the quantity demanded remains the same. It tin live depicted yesteryear way of the with diagram.

   The vertical straight line need bend every bit shown with reveals that with a alter inward cost (from OP to Op1) the need remains same at OQ. Thus, need does non at all reply to a alter inward price. Thus ep = O. Hence, perfectly inelastic demand. Fig a

2. Inelastic (less elastic) need (e < 1)

   In this instance the proportionate alter inward need is smaller than inward price. The with figure shows this type.

   In the with figure per centum alter inward need is smaller than that inward price. It way the need is relatively c less responsive to the alter inward price. This is referred to every bit an inelastic demand. Fig e

3. Unitary elasticity need (e = 1)

   When the per centum alter inward cost produces equivalent per centum alter inward demand, nosotros remove maintain a instance of unit of measurement elasticity. The rectangular hyperbola every bit shown inward the figure demonstrates this type of elasticity. In this instance per centum alter inward need is equal to per centum alter inward price, hence e = 1. Fig c

4. Elastic (more elastic) need (e > 1)

   In instance of for certain commodities the need is relatively to a greater extent than responsive to the alter inward price. It way a pocket-size alter inward cost induces a important alter in, demand. This tin live understood yesteryear way of the with figure.

   It tin live noticed that inward the inward a higher house representative the per centum alter inward need is greater than that inward 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 inward price. In this instance an insignificant alter inward cost produces tremendous alter inward 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 pocket-size alter inward cost produces interplanetary space alter inward demand. Influenza A virus subtype H5N1 perfectly competitive work solid faces this type of demand.

From the inward a higher house analysis it tin live concluded that theoretically v dissimilar types of cost elasticity tin live mentioned. In practice, nonetheless 2 extreme cases i.e. perfectly elastic as well as perfectly inelastic demand, are rarely experienced. What nosotros actually remove maintain 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 1 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 break of substitutes, the higher is the elastic. It way if a commodity has many substitutes, the need volition live elastic. As against this inward the absence of substitutes, the need becomes relatively inelastic because the consumers remove maintain 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 seat 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 real low-priced every bit good every bit real high-price commodity is mostly inelastic. When the cost is real high, the commodity is consumed solely yesteryear the rich people. Influenza A virus subtype H5N1 ascent or autumn inward the cost volition non remove maintain important outcome inward the demand. Similarly, when the cost is so depression that the commodity tin live brought yesteryear all those who wishing to buy, a change, i.e., a ascent or autumn inward the price, volition hardly remove maintain whatsoever outcome on the demand.
6. Proportion of Income Spent: Income of the consumer significantly influences the nature of demand. If solely a pocket-size fraction of income is beingness spent on a item 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 inward general, elastic.
8. In addition, it is observed that need for durable goods, is unremarkably elastic.
9. The nature of need for a commodity is also influenced yesteryear the complementarities of goods.

From the inward a higher house analysis of the determinants of elasticity of demand, it is clear that no precise conclusion almost the nature of need for whatsoever specific commodity tin live drawn. It depends upon the gain of price, as well as the psychology of the consumers. The conclusion regarding the nature of need should, hence live restricted to pocket-size changes inward prices during brusk period. By doing so, the influence of changes inward habits, tastes, likes customs etc., tin live ignored.

Measurement of Elasticity

For practical purposes, it is essential to stair out the exact elasticity of demand. By touchstone the elasticity nosotros tin know the extent to which the need is elastic or inelastic. Different methods are used for touchstone the elasticity of demand.

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

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

   In this method, 3 values of ‘ep’ tin live obtained. Viz., ep = 1, ep > 1, ep > 1.

   • If 5% alter inward cost leads to precisely 5% alter inward demand, i.e. per centum alter inward need is equal to per centum alter inward cost , e = 1, it is a instance of unit of measurement elasticity.
   • If per centum alter inward need is greater than per centum alter inward price, e > 1, it way the need is elastic.
   • If per centum alter inward need is less than that inward price, e > 1, pregnant thereby the need is inelastic.

2. Total Outlay Method: The elasticity of need tin live measured yesteryear considering the changes inward cost as well as the consequent changes inward need causing changes inward the total amount spent on the goods. The alter inward cost changes the need for a commodity which inward plough changes the total expenditure of the consumer or total revenue of the seller.

   • If a given alter inward cost fails to convey almost whatsoever alter inward 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 inward spite of a alter inward 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 ascent inward cost or rises with autumn inward 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 ascent inward cost as well as falls with a autumn inward price, the need is said to live inelastic pr e < 1.

3. Another suggested yesteryear Marshall is to stair out 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 inward need every bit a outcome of alter inward price. However, every bit already explained, cost is non the solely determinant of demand. Demand for a commodity changes inward response to a alter inward income of the consumer. In fact, income outcome is a component of the cost effect. The income outcome suggests the outcome of alter inward income on demand. The income elasticity of need explains the extent of alter inward need every bit a outcome of alter inward income. In other words, income elasticity of need way the responsiveness of need to changes inward income. Thus, income elasticity of need tin live expressed as:

EY = [Percentage alter inward need / Percentage alter inward income]

The next types of income elasticity tin live observed:

1. Income Elasticity of Demand Greater than One: When the per centum alter inward need is greater than the per centum alter inward income, a greater component of income is beingness spent on a commodity with an increment inward 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 inward income is equal to the per centum alter inward demand, EY = 1 or the income elasticity is unitary.
3. Income Elasticity Less Than One (EY< 1): This occurs when the per centum alter inward need is less than the per centum alter inward income.
4. Zero Income Elasticity of Demand (EY=o): This is the instance when alter inward income of the consumer does non convey almost whatsoever alter inward the need for a commodity.
5. Negative Income Elasticity of Demand (EY< o): It is good known that income outcome for most of the commodities is positive. But inward instance of inferior goods, the income outcome beyond a for certain 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 inward such cases volition live negative.

Cross Elasticity of Demand

While discussing the determinants of need for a commodity, nosotros remove maintain 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 inward need for X as, a outcome of alter inward cost of Y. This tin live expressed as:

EC = [Percentage Change inward need for X / Percentage alter inward 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 way that autumn inward cost of X (pen) leads to ascent inward its need so also ascent inward t) need for Y (ink) On the other hand, the cross elasticity for substitutes is positive which way a autumn inward cost of X (pen) results inward ascent inward need for X as well as autumn inward need for Y (ball pen). If 2 commodities, say X as well as Y, are unrelated in that location volition live no alter i. Demand for X every bit a outcome of alter inward cost of Y. Cross elasticity inward cad of such unrelated goods volition as well as so live zero.

In short, cross elasticity volition live of 3 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 inward economical theory as well as inward practice.

1. Theoretically, its importance lies inward the fact that it deeply analyses the price-demand relationship. The police clitoris of need just explains the qualitative human relationship piece the concept of elasticity of need analyses the quantitative price-demand relationship.
2. 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.
3. The cost of articulation products tin live fixed on the dry reason 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, carve upwards 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 inward fixing the prices of world utilities.
5. The Elasticity of need is of import non solely inward pricing the commodities but also inward fixing the cost of labour viz., wages.
6. The concept of elasticity of need is useful to Government inward formulation of economical policy inward diverse fields such every bit taxation, international merchandise etc. (a) The concept of elasticity of need guides the finance government minister inward imposing the commodity taxes. He should taxation such commodities which remove maintain inelastic need so that the Government tin heighten handsome revenue.(b) The concept of elasticity of need helps the Government inward formulating commercial policy. Protection as well as subsidy is granted to the industries which confront an elastic demand.
7. The concept of elasticity of need is real of import inward the acre international trade. It helps inward solving just about of the problems of international merchandise such every bit 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 bully significance inward economical analysis. Its usefulness inward 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 brusk banking concern notation on 'Law of demand'
2. Explain briefly how the need for a commodity is affected yesteryear changes inward price. In come, cost of substitute, promotion advert population.
3. Define cost elasticity of need advert distinguish betwixt its diverse types. Discuss the role of cost elasticity of need inward work concern decision
4. Define elasticity of demand. Explain with diagrams the cases where the absolutely value of elasticity is (i) zilch (ii) infinity (iii) 1 (iv) less than 1 (v) to a greater extent than than one

Source: Economics Lecture 2, Study Notes For Academic Year 2009-2010.