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Chapter 8

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12 views12 pages

Chapter 8

Uploaded by

Ahmad Muiz Muhammad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ANALYSIS OF

MARKET DEM A N D
A N D DEM A N D
ELASTICITY
Learning
Objectives
Concept of market demand
Different kinds of demand
concepts
Determinants of market
demand
The demand function
Elasticities of demand
Price elasticity and its
determinants
Other elasticities of demand
Market
Demand
It is defined as the sum of the individual demands for a
product at a price per unit of time.

The Method

Adding up the individual


demand at different prices.

Summing up the
individual demand
functions
.
Kinds of
Demand
Demand
Individua Marke for firms
l t product
demand deman
d
Demand
for Autonomou Derive
industries s d
product demand deman
d
Demand Demand
for for non-
durable durable
goods goods

Short- Long-
term term
demand demand
Determinants of Market
Demand Price of the product
Price of the related goods – substitutes, complements and

supplements Level of consumers income

Consumers’ taste and

preferences Advertisement of

the product

Consumers’ expectations about future price and supply

position Demonstration effect and bandwagon effect

Consumer-credit facility

Population of the country (for the goods of mass


consumption)
Demand
Function
Demand
Function
 Linear demand
function:
A function is said to
be linear if ΔD/ΔP
(reciprocal of the
slope of demand
curve) is constant
and the resulting
Dxis=aaP
function -
linear
x

demand b curve.
Non-linear
demand function:
A function is said to be
non- linear or
curvilinear if the slope It states the relationship between
of the demand curve, the demand for a product (the
ΔP/ΔD changes all dependent variable) and its
along the curve. determinants (the independent
Dx = a-bPx (where b= variables).
ΔD/ΔP)
Elasticities of
Demand
It is the degree of responsiveness of demand
to the change in its determinants.
TYPES OF DEMAND
ELASTICITIES

 Price elasticity: It is the responsiveness or sensitiveness of


demand for
a commodity to the changes in its price.
Percentage Its in
of change formula
quantity is:
Pr ice elasticity p
(e ) Percentage of change in price
Arc elasticity: It is the measure of elasticity of demand
between any two finite points on a demand curve.

Point elasticity: Measure of elasticity of demand at any


point on a demand curve.
Other Demand
Elasticities
Cross elasticity: Measure of the responsiveness of demand for a
commodity to the changes in the price of its substitutes and
complementary goods.
Percentage of change in demand for tea Q
e t,c 1

Percentage of change in price of coffee Pc


Where t refers to tea and c refers to coffee
 Income elasticity: Responsiveness of demand to the changes in
the income.
% change in income (M ) Q
em Where M=Money
M
Income
% change in demand (Q) M Q
Advertisement or promotional elasticity: It is the responsiveness
of sales(demand) to change in advertisement expenditure.
Advertisement elasticity is useful in determining the optimum level of
advertisement expenditure.
S/S Where S = sales, ΔS = increase in sales, A = Initial
eA A/A advertisement cost & ΔA = Additional expenditure on
advertisement.

Pf /Pf
ex
Pc /Pc
Elasticity of price
expectation

 : Useful in formulating future pricing


policy.
Pf
ex
/P
Pc f
Where, Pc & Pf /Pc the current
are
and future prices respectively.
Determinants of Price
Elasticity

Weight age
in the total
consumptio
n

Price Elasticity
Determinants of Advertisement
Elasticity
Summar
y
Market demand is defined as the sum of the
individual demands for a product at a price per
unit of time.
Demand is analyzed as Long term and short
term
Demand function can be linear or non- linear
Elasticity of demand is the degree of
responsiveness of demand to the change in its
determinants
 Elasticity of demand is measured with
reference to
1. Price of product
2. Price of substitutes and complimentary goods

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