BASIC LAWS OF CONSUPTION AND DEMAND ANALYSIS.ppt
- 1. BASIC LAWS OF CONSUPTION AND DEMAND ANALYSIS
- 2. Introduction The scope of Managerial Economics broadly Further grouped as Consumption Production Exchange Distribution
- 3. Basic Laws of Consumption • The law of Diminishing Marginal Utility • The Law of Equi – Marginal Utility • Consumer Surplus • The Concept of Indifference Curves • Consumer Equilibrium
- 4. The Law of Diminishing Marginal Utility The marginal utility derived on the consumption of every additional unit goes on diminishing, other things remaining the same. Marginal utility refers to the additional utility derived from consumption of an additional unit. Total utility refers to the sum of total of the utilities of all units of a commodity consumed a t a particular time. The amount of total utility goes on increasing but at a diminishing rate. Example
- 5. The Law of Equi – Marginal Utility Explains the prerequisite for the consumer to be in equilibrium. It states that the consumer is in equilibrium when the marginal utilities obtained from the products bought are equal. Marginal utility of product X = Marginal utility of product Y Price of X Price of Y Where X and Y refers to the products brought
- 6. Consumer Surplus It is defined as the difference between the price that the consumer is prepared to pay and the price that he is exactly paying. It is the value consumers get from a good without paying for it. In many cases, the consumer is prepared to pay a higher price for the product many reasons i.e. - -He wants the product badly -He likes particular design
- 7. The Indifference Curves An indifference curve is a curve which reveals certain combinations of goods or services which yields the same utility. The consumer is indifferent to a particular combination as every combination is yielding him the same utility. Assumptions underlying indifference curves: (a) The consumer behaves rationally (to maximise his satisfaction) (b) The prices and incomes do not change during the analysis. (c) Tastes and preferences of the consumer do not change during analysis.
- 8. Properties of Indifference Curve It slopes down from left to right It is convex to the origin It can not intersect with another indifference curve
- 9. Consumer Equilibrium A consumer is said to be in equilibrium when he maximises his utility, given the budget constraint. When the budget line is tangential to any of the indifference curves, then he is said to be in equilibrium.
- 10. Demand Analysis
- 11. DEMAND Every want supported by the willingness and ability to buy constitutes demand for a particular product or service. The conditions to be satisfied are Desire on the part of the buyer to buy Willingness to pay for it Ability to pay the specified price for it
- 12. Nature and types of demand Consumer goods Vs Producer goods Autonomous demand Vs Derived demand Durable Vs Perishable goods Firm Demand Vs Industry demand Short – run demand Vs long – run demand New demand Vs Replacement demand Total market and Segment market demand
- 13. Factors determining demand Price of the product (P) Income level of the consumer (I) Tastes and preferences of the consumer (T) prices of related goods which may be substitutes / complementary (PR) Expectations about the prices in future(EP) Expectations about the income in the furture (EI) Size of the population (SP) Distribution of consumers over different regions (DC) Advertising efforts (A) any other facotr capable of affecting the demand. (O)
- 14. DEMAND FUNCTION A demand function is a function which describes a relationship between one variable and its determinants. The demand function for a good relates the quantity of a good which consumer demand during a given period to the factors which influence the demand. Mathematically , Qd = f(P,I,T,PR,EP,EI,SP,DC,A,O)
- 15. Impact of the determinants on the demand Price of the product Income of the consumer Prices of substitutes or complementaries Tastes and preferences
- 16. Law of demand The law of demand states: “Other things remaining the same, the amount of quantity demanded rises with every fall in the price and vice versa.”
- 17. Assumptions of the law of demand Except the price and demand of a particular product other things remains same, ex income level of the consumer, tastes, preferences etc.
- 18. Operation of the Law of demand Exceptions to the law of demand Where there is a shortage of necessities feared Where the product is such that it confers distinction Giffen’s paradox In case of ignorance of price changes
- 19. Change in Demand The increase or decrease in demand due to change in the factors other than price is called change in demand.
- 22. Extension and Contraction in demand An extension is the downward movement along a demand curve, which indicates that a higher quantity is demanded for a given fall in the price of the good. A contraction is the upward movement along a demand curve, which indicates that a lower quantity is demanded for a given increase in the price of the good.
- 23. Significance Primary law in the consumption theory of economics Indicates the consumer behaviour for a given change in the variables in the study. Provides the basis for decisions related to costs, output, investment appraisals and so on. Basis for other economic laws
- 24. Elasticity of demand Elasticity : the rate of responsiveness in the demand of a commodity for a given change in price or any other determinants of demand.
- 25. Measurement of Elasticity Perfectly elastic demand Perfectly inelastic demand Relatively elastic demand Relatively inelastic demand Unity elasticity
- 26. Perfectly elastic demand When the quantity can be sold at a given price, and when there is no need to reduce price, the demand is said to be perfectly elastic. Small increase in price will lead to the fall in demand
- 27. Perfectly inelastic demand When a significant degree of change in price leads to little or no change in the quantity demanded, then the elasticity is said to be perfectly inelastic.
- 28. Relatively elastic demand The demand is said to be relativley elastic when the change in demand is more than the change in the price.
- 29. Relatively inelastic demand The demand is said to be relatively inelastic when the change in the demand is less than the change in the price.
- 30. Unity elasticity When the change in the demand is equal to the change in the price then the elasticity in demand is said to be unity.
- 31. Types of elasticity Price elasticity of demand Income elasticity of demand Cross elasticity of demand Advertising elasticity of demand
- 32. Price elasticity of demand Elasticity of demand in general refers to the price elasticity of demand It refers to the quantity demanded of a commodity in response to a given change in price. Price elasticity is always negative, indicates that the customer tends to buy more with every fall in the price. Price elasticity of demand = Proportionate change in the quantity demanded for product X Proportionate change in the price of X
- 33. Income elasticity of demand It refers to the quantity demanded of a commodity in response to a given change in income of the consumer. It is always positive, indicates that the consumer tends to buy more and more with every increase in income. Income elasticity of demand = Proportional change in quantity demanded for product X Proportional change in income
- 34. Cross elasticity of demand I t refers to the quantity demanded of a commodity in response to a change in the price of a related good, which may be substitute or compliment. Cross elasticity of demand = Proportionate change in quantity demanded for product X Proportionate change in price of product Y Cross elasticity is always positive for substitutes and negative for complements
- 35. Advertising elasticity of demand It refers to increase in the sales revenue because of change in the advertising expenditure. Advertising elasticity = Proportionate change in quantity demanded for product X Proportionate change in advertisement costs The advertising elasticity is said to be high when even small percentage change in the advertising expenditure results in a large percentage of change in the level of quantity demanded or sales
- 36. Factors governing elasticity of demand Nature of product Time frame Degree of postponement Number of alternative uses Tastes and preferences of the consumer Availability of close substitutes In case of complementaries or joint goods Level of prices Availability of subsidies Expectation of prices Durability of the product Government policy
- 37. Significance of elasticity of demand Prices of factors of production Price fixation Government policies Forecasting demand Planning the levels of output and price
- 38. Point elasticity and Arc elasticity