module 3.pptx demand and supply introduction

Meaning of Demand
Demand is the desire or want for something. In
economics, however, demand means much more
than that. The economic meaning of demand
refers the effective demand, i.e., the amount the
buyers are willing to purchase at given price and
over a given period of time. From marginal
economics, point of view, thus, the concept of
demand may be looked up on as Follows:

• Demand is the desire or want backed up by money:
Demand means effective desire or want for a commodity which is
backed up by the ability(i.e money or purchasing power) and
willingness to pay for it.
Obviously, to a businessmen, a buyers wish for the product
without processing money to buy it or unwillingness to pay given
price for it will not constitute a demand for it. For instance, a
pauper’s wish for a Maruti car will not constitute its potential
market demand, as he has no ability to pay for it. Likewise, a
miser’s desire for the same, however rich he may be, will not
become an effective demand when he is unlikely to spend the
money for the fulfillment of that desire. In short:
Demand= Desire + Ability to pay (Money or Purchasing power to
pay)+Willingness to spend.

• Demand is always related to Price and Time
Demand is not an absolute term. It is a relative concept. Demand
for a commodity should always have a reference to price and Time.
For instance, an economists would say that the demand for a
grapes by a household, at a price of 40Rs/Kg. is 10kg/week.
Economists always mention the amount of demand for a
commodity with reference to a particular price and specific time
period, such as per day, per week, per month or per year. “They are
not concerned over with a single isolated purchase, but with a
continuous flow of purchases”(Chrystal and Lipsey: 1977, P. 47).
Therefore, demand is expressed as so much per time period of time
– 1million Oranges per day, or 7million oranges per week.
Demand is refers to the mount of product which will bought per
unit of time at a particular price.

• Demand may be viewed ex-ante or ex-post:
Demand for a commodity may be viewed as ex-
ante i.e intended or ex post i.e what is already
purchased. The former denotes potential
demand, while the latter refers to the actual
amount purchased.

Individual Demand
It refers to the demand for a commodity from the
individual point of view. The quantity of a
product consumers would buy at a given price
over a given period of time is individual demand
for that particular product. Individual demand is
considered from one person’s point of view or
from that of a family or household’s point of
view. Individual demand is a single consuming
entity’s demand.

Market Demand
It refers to the total demand of all the buyers, taken
together. It is an aggregate of the quantities of a
product demand by all the individual buyers at a given
price over a given period of time.
It is the sum total of individuals demand function. It is
derived by aggregating all individual buyers demand
functions in the market. Market demand is important
from business point of view. Sales, Business policy and
planning, Price determination of product are made on
basis of market demand for the product.

Determinants of Individual Demand
Factors influencing Individual Demand:
1. Price
2. Income
3. Tastes, Habits and Preferences
4. People with different tastes and habits have
different preferences
5. Relative prices of other goods-substitute an
Complementary goods.

Determinants of Individual Demand
Price: A consumer usually decides to buy with consideration of price. More
quantity is demanded at low prices and less is purchased at high prices.
Income: With the increase in income one can buy more goods. Rich
consumers usually demand more and more goods than poor consumers.
Demand for luxuries and expensive goods is related to income.
Tastes, habits and Preferences: Demand for several products like ice-
cream, chocolates, beverages and so on depends on individual’s tastes.
Demand for tea, betel, cigarettes, tobacco is matter of habits.
People with different tastes and habits have different preferences for
different goods: A strict vegetarian will have no demand for meat at any
price, whereas a non vegetarian who has liking for chicken may demand it
even at a high price. Similar is the case with demand for cigarettes by non-
smokers and smokers.
Prices of Substitute and complementary goods: How much the consumer
would like to buy of a given commodity, however, also depends on the
relative prices of other related goods such as substitute or complementary
goods to a commodity.

Determinants of Market Demand
Factors influencing Market Demand:
1. Price
2. Distribution of income and wealth in the community
3. Community’s common habits and scale of preference
4. General standards of living and spending habits of the people
5. Number of buyers in the market and growth of population
6. Age structure and sex ratio of the population
7. Future expectations
8. Level of taxation and tax structure
9. Inventions and innovations
10. Fashions
11. Climate and weather conditions
12. Customs
13. Advertisements and sales propaganda

Price of a product: At a low market price, market demand for the product tends to
be high and vice versa
Distribution of income and wealth in the community: If there is equal
distribution of income and wealth, the market demand for many products of
common consumption tends to be greater than in the case of unequal distribution.
Community’s tastes and scale of Preferences: When a large section of population
shifts its preferences from vegetarian foods to non-vegetarian foods, the demand
for the former will tend to decrease and that for the latter will increase.
General standards of living and spending habits of the people: When people in
general adopt a high standard of living and are ready to spend more, demand for
many comforts and luxury items will tend to be higher than other wise.
Number of buyers in the market and the growth of population: The size of
market demand for a product depends on the number of buyers in the market. A
large number of buyers will usually constitute a large demand and vice-versa. As
such, growth of population over a period of time tends to imply a rising demand for
essential goods and services in general.

Age structure and sex ratio of the population: If the population pyramid of a
country is broad based with a large proportion of juvenile population, then the
market demand for toys, school bags i.e goods and services required by children
will be much higher than the market demand for goods needed by the elderly
people. Similarly sex ratio has its impact in demand for many goods. An adverse
sex ratio i.e females exceeding males in number(or males exceeding females as in
Mumbai) would mean a greater demand for goods required by the female
population than by make population.
Future expectation: If buyers in general expect that prices of a commodity will
rise in future, then present market demand would be more as most of them would
like to hoard the commodity, The reverse happens if a fall in the future prices is
expected.
Level of taxation and tax structure: A progressively high tax rate would
generally mean low demand for goods in general and vice versa. But, a highly
taxed commodity will have a relatively lower demand than an untaxed
commodity-if that happens to be a remote substitute.
Fashions: Market demand for many products is affected by changing fashions.
Ex: demand for commodities like jeans, salwar kameej is based on current fashion

Inventions and innovations: Introduction of new goods or
substitutes as result of inventions and innovations in a dynamic
modern economy tends to adversely affect the demand for the
existing products, which as a result of innovations, definitely become
obsolete, Ex: the advent of electronic calculators has made adding
machine obsolete.
Climate or weather conditions: ex: in summer, there is a greater
demand for cold drinks, fans, coolers. Similarly demand for
umbrellas and rain coats is seasonal.
Customs: Diwali days there is greater demand for sweets and
crackers, during Christmas cakes are more in demand.
Advertisement and sales propagandas: Market demand for many
products in present days is influenced by the sellers’ efforts through
advertisements and sales propaganda. Demand is manipulated
through sales promotion. When these factors change, the general
demand pattern will be affected, causing a change in the market

Law of Demand
It describes the general tendency of consumers’
behaviour in demanding a commodity in relation to
the changes in its price. The law of demand expresses
the functional relationship between two variables of
the demand relation viz the price and the quantity
demanded. It simply states that demand varies
inversely to changes in price. The nature of this
inverse relationship stressed by the law of demand
which forms one of the best known and most
significant laws in economics

Law of Demand
In other words, the demand for a commodity extends(i.e.,
the demand rises) as the price falls and contracts(i.e., the
demand falls) as the price rises. Or briefly stated, the law
of demand stresses that, other things remaining
unchanged, demand varies inversely with price.
The conventional law of demand, however, relates to the
much simplified demand function
D=f(P)
Where D=Demand, P=Price and f connotes a functional
relationship

Law of Demand
Price of Commodity X Quantity demanded(Units per week)
10 50
8 60
6 70
4 80
2 90

Law of Demand
When the data are plotted graphically, a demand
curve is drawn. OX axis denotes Demand for
commodity and OY axis denotes Price of
commodity. DD is a downward sloping demand
curve indicating an inverse relationship between
price and demand. We can read that with a fall in
price at each stage demand tends to rise. There is
an inverse relationship between price and the
quantity demanded.

Assumptions underlying the Law of Demand
The law of demand is conditional. It is based on certain conditions. It is
therefore, always stated with the ‘other things being equal’. It relates to the
change in price variable only, assuming other determinants of demand to be
constant. The following are assumptions:
1. No change in consumer’s income
2. No change in consumer’s preferences
3. No change in fashion
4. No change in the price of related goods
5. No exception of future price changes or shortages
6. No change in size, age composition and sex ratio of the population
7. No change in the range of goods available to the consumers
8. No change in the distribution of income and wealth of the community
9. No change in government policy
10. No change in weather conditions

Assumptions underlying the Law of Demand
No change in consumer’s income: Throughout the operation of the law, the
consumer’s income should remain the same. If the level of a buyer’s income
changes, he may buy more even at a higher price, invalidating the law of
demand.
No change in the price of related goods: Prices of complementary and
substitute goods should remain unchanged. If the prices of related goods
change, the consumer’s preferences would change which may invalidate the
law of demand.
No exception of future price changes or shortages: The law requires that
the given price change for the commodity is a normal one and has no
speculative consideration. That is to say, the buyers do not expect any
shortages in the supply of the commodity in the market and consequent future
changes in the prices. The given price change is assumed to be final at a time.
No change in government policy: The level of taxation and fiscal policy of
the government remains the same throughout the operation of the law.
Otherwise, changes in income tax, for instance, may cause changes in
consumer’s income or commodity taxes and may lead to distortion in
consumer’s preferences.

Extension and Contraction of Demand
In economics, the extension and contraction in
demand are used when the quantity demanded
rises or falls as a result of changes in price and
we move along a given demand curve. When the
quantity demanded of a good rises due to the fall
in price, it is called extension of demand and
when the quantity demanded falls due to the rise
in price, it is called contraction of demand.

For instance, suppose the price of bananas in the market at
any given time is Rs.12 per dozen and a consumer buys one
dozen of them at that price. Now, if other things such as
tastes of the consumer, his income, prices of other goods
remain the same and price of bananas falls to Rs. 8 per
dozen and the consumer now buys 2 dozen bananas, then
extension in demand is said to have occurred. On the
contrary, if the price of bananas rises to Rs. 15 per dozen
and consequently the consumer now buys half a dozen of
the bananas, then contraction in demand is said to have
occurred.

It should be remembered that extension and
contraction in the demand takes place as a result of
changes in the price alone when other determinants
of demand such as tastes, income, propen
sity to
consume and prices of the related goods remain
constant. These other factors remaining constant
means that the demand curve remains the same,
that is, it does not change its position; only the
consumer moves downward or upward on it.

Assuming other things such as income, tastes and fashion,
prices of related goods remaining constant, a demand curve DD
goods remaining constant, a demand curve DD has been drawn. It
will be seen in this figure that when the price of the good is OP, then
the quantity demanded of the good is OM.
Now, if the price of the good falls to OP’ the quantity de
manded of the good rises to ON. Thus, there is extension in demand
by the amount MN. On the other hand, if price of the good rises
from OP to OP” the quantity demanded of the good falls to OL.
Thus, there is contraction in demand by ML. We thus see that as a
result of changes in price of a good the consumers move along the
given demand curve; the demand curve remains the same and does
not change its position.

Exceptions to the law of demand
It is universally phenomenal the law of demand that
when the price falls the demand extends and it contracts
when the price rises. But sometimes, it may be observed,
though of course very rarely, that with a fall in price,
demand also falls and with a rise a price, demand also rises.
This is a paradoxical situation or a situation which
apparently is contrary to the law of demand. Cases in which
this tendency is observed are referred to as exception to the
general law of demand. The demand curve for such cases
will be typically unusual. It will be upward sloping demand
curve.

Exceptions to the law of demand
There are few such exceptional cases, which
may be categorised as follows:
1. Giffen goods
2. Articles of snob appeal/Veblen’s effect
3. Speculation
4. Consumer’s psychological bias or illusion.

Giffen goods
In the case of certain inferior goods called Giffen
goods(named after Sir Robert Giffen), when the price
falls, quite often less quantity will be purchased than
before because of the negative income effect and people’s
increasing preference for a superior commodity with the
rise in their real income. Probably, a few appropriate
examples of inferior goods may be listed such as staple
food stuffs like cheap potatoes, cheap bread, pucca rice,
vegetable ghee, as against superior commodities like good
potatoes, cake, basmati rice and pure ghee.

Articles of snob appeal
Sometimes, certain commodities are demanded
just because they happen to be expensive or prestige
goods, and have a ‘snob appeal’. They satisfy the
aristocratic desire to preserve exclusiveness for unique
goods. These are generally ostentatious articles, and
purchased by the fewer rich people or using them as
‘status symbol’. It is observed that when prices of
such articles like, say diamonds, rise their demand
also rises. Similarly Rolls Royce cars another
outstanding illustrations.

Speculation
When people speculate about changes in the price of
a commodity in the future, they may not according to the
law of demand at the present price say when people are
convinced that the price of a particular commodity will
rise still further, they will not contract their demand with
the given price rise; on the contrary, they may purchase
more for the purpose of hoarding. In the stock exchange
market, some people tend to buy more shares when their
prices are rising in the hope that the rising trend would
continue, so they can make a good fortune in future.

Consumer’s psychological bias or illusion
When the consumer is wrongly biased against
the quality of a commodity with the price
change, he may contract this demand with a fall
in price. Some sophisticated consumers do not
buy when there is stock clearance sale at reduced
prices, thinking that the goods may be of bad
quality.

Types of Demand
1. Demand for Consumer’s goods and Producer’s
goods
2. Demand for Perishable goods and Durable goods.
3. Autonomous demand and Derived demand.
4. Industry demand and Company demand
5. Long run demand and Short run demand
6. Joint demand and Composite demand
7. Price demand, Income demand and Cross demand

Types of Demand
Consumer’s goods Producer’s goods
Goods and services demanded by
consumers for the direct satisfaction of
their wants i.e consumption purpose
Goods which are demanded by the
producers in the process of production
Eg- Food, clothes, house, services of a
lawyer, doctor, teacher, cobbler
Eg-Tools and Machinery, equipments, raw
materials, factory buildings, office spaces.
Direct or autonomous Derived. Based on the demand for output
Depends on marginal utility Depends on its marginal productivity

Types of Demand
Perishable goods Durable goods
Goods have no durability. Cannot be
stored for a long time
Goods last long. Storable for a long period
Eg- Milk, egg, fish, Vegetables Eg-House furniture, car, clothes
Use of non-durable goods or perishable
goods gives one short service
Can be used for several years

Types of Demand
Autonomous Demand Derived Demand
Spontaneous demand for goods which is
based on an urge to satisfy some wants
directly
When the demand for a product depends
on the demand for some other
commodities.
Demand for Consumer goods Demand for capital goods
Direct demand Demand of the dependent product

Types of Demand
Industry Demand Company Demand
Total demand for the commodity
produced by a particular industry
Market demand for the firm’s output
Eg- total demand for cars in India is the
demand for automobile industry’s output
in aggregate
Eg-Demand for a Toyota Cars

Types of Demand
Short run Demand Long run Demand
Existing demand with its immediate
reaction to price changes, income
fluctuation
Demand exist as a result of the changes in
pricing, promotion or product
improvement, after enough time is
allowed to let the market adjust itself to
the new situation

Types of Demand
Joint Demand Composite Demand
When two goods are demanded in
conjunction with one another at the same
time to satisfy a single want.
Commodity is said to be in composite
demand when it is wanted for several
different uses.
Ex-Pens and ink, cars and petrol, bread
and butter
Ex- Steel is needed for manufacturing
cars, building construction of railways.
Houseeholds, factories, railways, chemical
industries demand coal.

Types of Demand
Price demand Income demand Cross demand
Various quantities of a
product purchased by the
consumer at alternative
prices
commodity demanded by
the consumer at
alternative levels of his
changing money income
commodity(say X)
purchased by the
consumer in relation to
changes in the price of a
related commodity(say Y
which may substitute or
complementary)
Demand function is based
on single price
on the income variable
on the price of substitute
or Complementary good
D=f(p) p=price of a
commodity
D=f(M) M=Income Dx=f(Py) Dx=demand for
commodity x and Py=Price
of commodity y

Elasticity of Demand
Demand usually varies with price. But the extent
of variations is not uniform in all cases. In some cases,
the variation is extremely wide; in some others, it may
just be nominal. That means sometimes demand is
greatly responsive to changes in price; at other times,
it may not be so responsive. The economists, to
measure this responsiveness or the extent of variation,
use the term “Elasticity”. In measuring the elasticity
of demand, two variables are considered demand and
the determinants of demand.

Elasticity of Demand
Elasticity of Demand=
% change in quantity demanded
% Change in Determinants of demand
The term elasticity of demand measure the responsiveness of
demand for a commodity to changes in the variables
confined to its demand function. There are, thus, as many
kinds of elasticity of demand as its determinants. They are:
1. Price Elasticity of demand
2. Income Elasticity of demand
3. Cross Elasticity of demand

Importance of Elasticity of Demand
1. In the Determination of Output Level
2. In the Determination of Price
3. In Price Discrimination by Monopolist
4. In Price Determination of Factors of Production
5. In Demand Forecasting
6. In Dumping
7. In the Determination of Prices of Joint Products and Other.
8. In determination of Government policies
9. Helpful in adopting the policy of protection
10. In determination of Gains from Trade from International
Trade

1. In the Determination of Output Level:
For making production profitable, it is essential that the quantity of goods
and services should be produced corresponding to the demand for that product.
Since the changes in demand is due to the change in price, the knowledge of
elasticity of demand is necessary for determining the output level.
2. In the Determination of Price:
The elasticity of demand for a product is the basis of its price determination.
The ratio in which the demand for a product will fall with the rise in its price and
vice versa can be known with the knowledge of elasticity of demand. If the
demand for a product is inelastic, the producer can charge high price for it,
whereas for an elastic demand product he will charge low price. Thus, the
knowledge of elasticity of demand is essential for management in order to earn
maximum profit.

3. In Price Discrimination by Monopolist:
Under monopoly discrimination the problem of pricing the same
commodity in two different markets also depends on the elasticity of
demand in each market. In the market with elastic demand for his
commodity, the discriminating monopolist fixes a low price and in the
market with less elastic demand, he charges a high price.
4. In Price Determination of Factors of Production:
The concept of elasticity for demand is of great importance for
determining prices of various factors of production. Factors of production
are paid according to their elasticity of demand. In other words, if the
demand of a factor is inelastic, its price will be high and if it is elastic, its
price will be low.

5. In Demand Forecasting:
The elasticity of demand is the basis of demand forecasting. The knowledge of
income elasticity is essential for demand forecasting of producible goods in future.
Long- term production planning and management depend more on the income elasticity
because management can know the effect of changing income levels on the demand for
his product.
6. In Dumping:
A firm enters foreign markets for dumping his product on the basis of elasticity of
demand to face foreign competition.
7. In the Determination of Prices of Joint Products:
The concept of the elasticity of demand is of much use in the pricing of joint products,
like wool and mutton, wheat and straw, cotton and cotton seeds, etc. In such cases,
separate cost of production of each product is not known. Therefore, the price of each is
fixed on the basis of its elasticity of demand. That is why products like wool, wheat and
cotton having an inelastic demand are priced very high as compared to their byproducts
like mutton, straw and cotton seeds which have an elastic demand.

8. In the Determination of Government Policies:
The knowledge of elasticity of demand is also helpful for the government in
determining its policies. Before imposing statutory price control on a
product, the government must consider the elasticity of demand for that
product. The government decision to declare public utilities those industries
whose products have inelastic demand and are in danger of being controlled
by monopolist interests depends upon the elasticity of demand for their
products.
9. Helpful in Adopting the Policy of Protection:
The government considers the elasticity of demand of the products of those
industries which apply for the grant of a subsidy or protection. Subsidy or
protection is given to only those industries whose products have an elastic
demand. As a consequence, they are unable to face foreign competition
unless their prices are lowered through sub
sidy or by raising the prices of
imported goods by imposing heavy duties on them.

10. In the Determination of Gains from International
Trade:
The gains from international trade depend, among
others, on the elasticity of demand. A country will gain
from international trade if it exports goods with less
elasticity of demand and import those goods for which
its demand is elastic.
In the first case, it will be in a position to charge a
high price for its products and in the latter case it will be
paying less for the goods obtained from the other
country. Thus, it gains both ways and shall be able to
increase the volume of its exports and imports

Price Elasticity of Demand
The extent of response of demand for a commodity to a given change
in price, other demand determinants remaining constant, is termed as
the price elasticity of demand.
The co-efficient of price elasticity is measured as:
e= The percentage change in quantity demanded
The percentage change in price
Representing it in symbols
dQ/Q
dP/P
dQ= the change in demand. It is measured as the difference between
the new demand(Q2) and the old demand(Q1). Thus dQ=Q2-Q1
dP= the change in price. It is measured as the difference between the
new price(P2) and the old Price(P1). Thus dP=P2-P1

Types of Price Elasticity of Demand
Five kinds of Price elasticity of demand as under:
1. Perfectly Elastic demand
2. Perfectly Inelastic demand
3. Relatively Elastic demand
4.
5. Unitary Elastic demand

Perfectly Elasticity of Demand
When a small change in price of a product causes a major
change in its demand, it is said to be perfectly elastic demand. In
perfectly elastic demand, a small rise in price results in fall in demand
to zero, while a small fall in price causes increase in demand to
infinity. In such a case, the demand is perfectly elastic or ep =
00(infinity).
From an organization’s point of view, in a perfectly elastic
demand situation, the organization can sell as much as much as it
wants as consumers are ready to purchase a large quantity of product.
However, a slight increase in price would stop the demand.

Perfectly Inelasticity of Demand
A perfectly inelastic demand is one when there is no change produced
in the demand of a product with change in its price. The numerical
value for perfectly inelastic demand is zero (ep=0).
Perfectly inelastic demand is a theoretical concept and cannot be
applied in a practical situation. However, in case of essential goods,
such as salt, the demand does not change with change in price.
Therefore, the demand for essential goods is perfectly inelastic.

Relatively Elasticity of Demand
Relatively elastic demand refers to the demand when the
proportionate change produced in demand is greater than the
proportionate change in price of a product. The numerical value of
relatively elastic demand ranges between one to infinity.
Mathematically, relatively elastic demand is known as more
than unit elastic demand (ep>1). For example, if the price of a
product increases by 20% and the demand of the product decreases
by 25%, then the demand would be relatively elastic.
If the price of a product decreases by 10% and the demand of the
product increases by 30%, then the demand would be relatively
elastic
Relatively elastic demand has a practical application as
demand for many of products respond in the same manner with
respect to change in their prices.
For example, the price of a particular brand of cold drink
increases from Rs. 15 to Rs. 20. In such a case, consumers may
switch to another brand of cold drink. However, some of the

Relatively Inelasticity of Demand
Relatively inelastic demand is one when the percentage
change produced in demand is less than the percentage change in the
price of a product. For example, if the price of a product increases by
30% and the demand for the product decreases only by 10%, then the
demand would be called relatively inelastic. The numerical value of
relatively elastic demand ranges between zero to one (ep<1).
Marshall has termed relatively inelastic demand as elasticity being
less than unity.

Unitary Elasticity of Demand
When the proportionate of change in demand is exactly the
same as the change in price the demand is said to be unitary elastic.
The numerical value of unitary elastic demand is exactly 1.

Income Elasticity of Demand
It is defined as a ratio percentage or proportional change in the
quantity demanded to the percentage or proportional change in
income.
e= Percentage change in quantity demanded
Percentage change in Income
Symbolically
Em=dQ/Q
M/dM
M=initial Income and dM= Change in income

Types of Income Elasticity of Demand
1. Unitary Income elasticity of demand (em=1)
2. Income Elasticity of demand Greater than Unity (em>1)
3. Income Elasticity of demand Less than Unity (em<1)
4. Zero Income Elasticity of demand (em=0)
5. Negative Income Elasticity of demand (em<0)

Types of Income elasticity of demand
Unitary Income Elasticity: When the Percentage change in demand
is equal to the percentage change in income the demand is unitary
Income Elasticity.
Income Elasticity Greater than Unity: When the percentage change
in quantity demand is greater than the percentage change in income,
the income elasticity of demand is greater than unity.
Income Elasticity Less than Unity: When the percentage change in
quantity demand is less than the percentage change in income, the
income elasticity of demand is less than unity.
Zero Income Elasticity: When the income change in any direction or
in any proportion but carries no effect on demand, so that the quantity
demanded remains unchanged, it is referred to as Zero income
elasticity of demand.
Negative Income Elasticity: When an increase in income causes a
decrease in the demand for a commodity, the demand is said to be
negative income elastic.

Income elasticity of demand
• When income elasticity is positive, the commodity is of normal
type
• When income elasticity is negative, the commodity is inferior. For
instance, cereals like Jowar, bajra are inferior goods, so their
income elasticity is negative.
• If income elasticity co-efficient is positive and greater than one,
the commodity is a luxury. Ex: Demand for TV sets, cars is highly
elastic.
• If income elasticity co-efficient is positive but less than unity, the
commodity is an essential one. Ex: Demand for foodgrains is
income elastic.
• If income elasticity co-efficient is zero the commodity is neutral.
Ex: Consumption of commodities like salt, match-box has Zero
income elasticity.

Application of Income elasticity of demand
K.K. Sen points out that income elasticity of demand is applicable to
many planning and strategy problems such as:
• Long term business planning: In the long run, demand for
comforts and luxury goods may tend to be highly income elastic.
Hence, prospects for long run growth in sales for these goods are
very bright. The firm can plan out its business accordingly.
• Market strategy: Income elasticity of demand is helpful in
developing market strategies.
• Housing Development strategies: On the basis of income
elasticity, housing development requirement can be predicted and
construction work can be effectively launched upon.

Cross elasticity of demand
In this elasticity, we take into account the change in the price of
commodity Y and its effect on the demand for commodity X. The
concept of cross elasticity is important in the case of commodities
which are substitutes and complementary.
The cross elasticity of demand refers to the degree of responsiveness
of demand for a commodity to a given change in the price of some
related commodity.
Ec=dQx/Qx
dPy/Py
dQx= Change in quantity demanded for commodity X
dPy=Change in price of commodity Y

Cross elasticity of demand
A positive cross elasticity of demand indicates that the two
products in consideration are substitutes, since an increase/decrease
in the price of one causes an increase /decrease in the quantity
demand of the other.
A negative cross elasticity of demand indicates that the two
products in consideration are complementary to each other, since an
increase/decrease in the price of one leads to a contraction/extension
in demand for the other.

Application of Cross elasticity of demand
It can useful in determining competitive price strategy and policy in
the alternative rival modes of services such as rail road services.

module 3.pptx demand and supply introduction

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module 3.pptx demand and supply introduction