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A presentation on demand analysis for economics basics
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Consumer Behaviour
Demand and Utility
Analysis
Indifference CurveAnalysis
Reveal Preference
Theory
Game Theory
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Be Nice to the Ones who SMOKE..
Every Cigarette might be their last..
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Demand = Desire or Want
+ Willingness to Buy
+ Ability to Pay
At a specific price andper unit of time
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Case: 1.
Which of the following statements depicting
demand are correct. Give reasonsa. In Boregaon village, the total population is
one lakh
b.50 buffaloes give 150 litres of milk every day
which is consumed by an entire village in oneday
c. In a bustling part of a city, 100 packets of idlisare sold within an hour
d.A fruit vendor sell 50 fruits (of differentvarieties) in a day
e.A toy shop selling different types of toys, eachpriced at Rs. 20 at a hill station makes abusiness of Rs. 3500 each day.
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Demand Functions
Long Run functionQDx = f{ Px, Y, Pr, A, T, N, Fe, Tx, O..}
Independent VariableDependant Variable
ShortRun Function
QDx = f (Px)
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Demand Determinants
Price of the product demanded.Income of the consumer.
Prices of related goods.Advertising expenditure.
Future Expectations of the
Consumer about the Price of
the product.
Habits.
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Demand Determinants
Growth of Population, Age
structure, Sex ratio etc
Direct TaxesFashion, Tastes, Trends etc
Climatic ConditionsCredit Facilities
Brand Name
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Income of the ConsumerLuxury
goods
EssentialConsumer
goods (ECG)
Inferior
Goods
Normal Goods
Quantity Demanded
ConsumersIncome
0X
Y
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Advertisement Expenditure
Sales Curve
Advertisement Expenditure (Rs.)0
VolumeofSa
les
X
Y
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Case: 2
Following are some instances explain how
demand will be affected for that product inspecific or in general? Why?
a. A firm announces a double bonus for all itsemployees this Diwali.
b. Right next to a busy snack centre, a new onecomes up.
c. VAT is announced on all saleable commodities
d. A vegetable hawker announces that allcustomers after 9.30pm to his shop will enjoy a25% off on any good
e. An epidemic in a country kills thousands ofpeople, mostly affecting the older generation
f. Prices of washing machines go down drastically
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Case: 3
Point out the factors
determining the demand
for avirus- proof laptop.
OrPen-cum-pendrive
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Individual Demand Schedule
of Pizza
Price (Rs) Quantity Demanded
by Gautam
(In units)
100 6
200 5
300 4400 3
500 2
600 1
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Individual Demand Curve of
Pizza
Quantity Demanded
X
Y
DD
P
P
P
Q Q QO
PRICE
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Demand Curve
Why does a demand curve
slope downwards?
PriceQuantity relationship
Law of Diminishing Marginal
Utility
Income Effect
Substitution Effect
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Price
(Rs.)
QD by
Gautam
(Smokin
Joes)
QD by
Gayatri
(Pizza
Hut)
QD by
Jay
(Dominos)
Marketdemand
Or Total
Demand400 1 3 3
300 2 4 5
200 3 5 7
100 5 9 10
Market Demand Schedule of
Pizza
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Price
(Rs.)
QD by
Gautam
(Smokin
Joes)
QD by
Gayatri
(Pizza
Hut)
QD by
Jay
(Dominos)
Market
Demand
Or Total
Demand400 1 3 3 7
300 2 4 5 11
200 3 5 7 15
100 5 9 10 24
Market Demand Schedule of
Pizza
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Market Demand
is a horizontal
summation of individual
demand.
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Law of Demand states that
Otherthings remaining the same
(Ceterius Paribus) the higher theprice the lower will be the demand
and vice versa.
QDx = f {Px}
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Other things remaining the
same
No change in consumers income
No change in prices of relatedgoods
No change in advertisingexpenditure
No change in fashion, tastes,preferences
No expectations about future
change in price
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Other things remaining the
same
No change in age-composition and
sex ratio of the population
No change in government policy
No change in climatic conditions
No change in credit facilities, brandname, habits etc
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Exceptions to the Law of
Demand
1. Giffen Paradox2. Prestigious goods or conspicuous
consumption or status symbol
goods3. Speculation
4. Consumers ignorance
5. Emergency
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Case: 4
1. With news floating about a possible
outbreak of war in the Gulf, what
would be the reaction of the people
in terms of demand (if for anyparticular product) and why?
2. Some people only buy branded
products. Comment3. Some people are addicted to few
products. Discuss.
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Changes In Quantity Demanded
Expansion in quantity
demandedContraction in quantity
demanded.
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Changes In Quantity Demanded
QUANTITY DEMANDED
X
Y
DD
P
R
I
C
E
P
P
P
Q Q Q
b
c
o
a
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Changesin Demand
Increase in demandDecrease in demand
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QUANTITY DEMANDED
X
Y
DD
P
R
I
C
E
P
Q
Increase in Demand
DD
Qo
C
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Increase in Income of Consumer
Taste, Fashion in favor of The Products
Increase in Price of SubstituteDecrease in price of Complementary
ConsumersIgnorance
EmergencyFuture Expectations About Rise in Price
Increase in population
Increase in Demand Can be
Due to ------
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QUANTITY DEMANDED
X
Y
DD
P
R
I
C
E
P
Q
Decrease in Demand
DD
Qo
D i D d C b
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Decrease in Demand Can be
Due to ------
Decrease in Income of Consumer
Taste, Fashion Against The Products
Decrease in Price of SubstituteIncrease in price of Complementary
Future Expectations About Fall in Price
Decrease in Populationetc etc..
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Case: 5
1. A farmer gets a bumper crop this
season and makes a lot of money.
He goes to the market and buys a
lot of things for his family. This isexpansion of demandJustify.
2. Making door-to-door calls for the
product Tide washing power hasbrought in lot of orders for the
product. How is the demand
behaving? Explain.
C 6
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Case: 6
Given the following features,
describe the effect of each of thefollowing in terms of whether itwould increase or decrease the
quantity demanded or the demandfor housing.
a) An increase in housing prices.
b) A fall in interest rates on Home loan
c) A rise in interest rates on Homeloan
d) A severe economic recession
e) A robust economic expansion
MISTAKES ARE NEW LESSONS FOR
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MISTAKES ARE NEW LESSONS FOR
SUCCESS
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The degree of responsiveness of
quantity demanded due to change in any
factor affecting demand.
Percentage change in quantity
demanded
Ep= -------------------------------------------------
Percentage change in any factor
affecting demand
Elasticity of Demand
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Price elasticity
Percentage change in quantity
demanded
Ep= -------------------------------------------------
Percentage change in price
QDx = f (Px)
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Income Elasticity
Percentage change in
quantity demandedei=------------------------------------------------------
Percentage change in the
Income of consumer
QD = f (Y)
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Cross Elasticity
Percentage change in Quantity demanded
of good X
QDX
Exy =
Percentage change in price of good Y
=f (PY)
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Price elasticity
The degree of responsiveness of
quantity demanded due to change in
price.
Percentage change in quantity
demanded
Ep= -------------------------------------------------
Percentage change in price
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Method of Price Elasticity
eP =Q
P
P
Q
.. .
Q2- Q1
P2- P1
P1
Q1
Ratio or Percentage Method
X
XeP =
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Ratio or Percentage Method
Where, P1= Initial Price
P2= New Price
Q1= Initial Quantity
Q2= New Quantity
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Types of Price Elasticity
1. Perfectly elastic (ep = )
2. Perfectly inelastic (ep = 0 )
3. Relatively elastic demand (ep > 1)4. Relatively inelastic demand
(ep< 1)
5. Unitary elastic demand (ep = 1)
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1. Perfectly elastic(ep=)
X
Y
QUANTITY DEMANDED
PR
I
C
E
P DD
Q
Q
=
Q Q Q0
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2. Perfectly inelastic(ep=0)
X
Y
QUANTITY DEMANDED
P
R
I
C
E
DD
Q
P
P
P
Q
Q
= 0
0
3 Relatively elastic demand
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3. Relatively elastic demand
(ep > 1) Luxury goods
X
Y
QUANTITY DEMANDED
PR
I
C
E
DD
P
P
Q
Q
>P
P
Q
P
o
4 Relatively inelastic demand
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4. Relatively inelastic demand
(Ep < 1)Necessary Goods
X
Y
QUANTITY DEMANDED
PR
I
C
E
DD
P
P
Q
Q1
ep=1
ep
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Method of Price Elasticity
ep =
Q2Q1
P
P2+ P1
Q2+ Q1
ARC Method
X
Q
Q2+ Q1 2
2
P2P1
P2+ P1
ep =
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Method of Price Elasticity
X
Y
DD
a
b
Arc
Quantity Demanded
Price
0
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Method of Calculating Price Elasticity:
Total Revenue or Total Expenditure or
Total Outlay Method
Total Revenue = Price x Quantity
Total Revenue/Total Expenditure/
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Total Revenue/Total Expenditure/
Total Outlay Method-More elastic
o
DD
P
P
Q Q
a
b
P TR
Price
Quantity Demanded
P
Q
C
P TR
Total Revenue/Total Expenditure/
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Total Revenue/Total Expenditure/
Total Outlay Method-less elastic
o
P
P
a
b
P TRPrice
Quantity Demanded
DD
P
Q
P TR
Total Revenue/Total Expenditure/ Total
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Total Revenue/Total Expenditure/ Total
Outlay Method-Unitaryelastic
P
P
Q Q
DD
a
b
Quantity Demanded
Price
0
T t l R M th d
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Total Revenue Method
Type of
Elasticity
(Ep)
Price
(Rs)
QDD
(in units)
TR
(in Rs.)
Ep = 1
2
4
1
10
5
20
20
20
20
Ep > 1
2
41
10
424
20
1624
EP < 1
2
4
1
10
6
16
20
24
16
T t l R M th d
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Total Revenue Method
Price Total Revenue(TR) Type ofElasticity
(Ep)
IncreaseDecrease
ConstantConstant
E = 1(Unitary)
Increase
Decrease
Decrease
Increase
E > 1
(More elastic)
Increase
Decrease
Increase
Decrease
E < 1
(Less elastic)
C 11
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Case: 11The Serpell Report (1983) on
Railway finances in England, forinstances, measured price elasticity ofdemand for rail services on someroutes to be fairly inelastic (-0.15);
hence suggested fares rise of 40 percent for London commuters. In thiscase, work out the revenue effect iffare is raised from pound 10 to pound
14 and daily 1000 passengers aretraveling on this route. Should theauthorities accept this suggestion?Give your comment.
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Case: 11Answer
% Q Q
Ep = _________ = -0.15 = _________
% P 40%
Therefore, Q = 6%
as TR = P X QInitially, TR = 10 X 1000 = Pound 10,000
Q = 6%
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Case: 11cont.
Therefore, with the
rise in fare new Q =
940
At the new pricePound 14
TR = 14 X 940
= pound 13,160
Price Qty TR
10 1000 10,000
14 940 13,160
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Case: 12
Suppose the demand for insulinconsists of two types of consumers,
those who must have a dose each
day and those who are able to gowithout the drug for several weeks.
Suppose the price elasticity of
demand for the first group is 0.01and that for the second group is 4.0.
Explain how the firms producing
insulin might price the insulin.
Factors influencing elasticity of
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Factors influencing elasticity of
demand-
(1) Nature of the commodity :
Necessaries
Comforts and Luxuries
(2) Availability of substitutes :
No substitutes
Close substitutes
Factors influencing elasticity of
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Factors influencing elasticity of
demand-
(3) Number of Uses :
Single Use
Multi Use
(4) Range of Price Change:
Highly PricedLow Priced
Factors influencing elasticity of
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Factors influencing elasticity of
demand-
(5)Proportion of Expenditure :
Less expenditure
More expenditure
(6)Time Period :
Short Period
Long Period
Factors influencing elasticity of
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Factors influencing elasticity of
demand-
(7) Possibility of Postponement :
Can be Postpone --Cannot be Postpone
(8)Influence by Habits & Customs
Factors influencing elasticity of
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g y
demand-
(1) Nature of the commodity :
NecessariesInelastic
Comforts and LuxuriesElastic
(2) Availability of substitutes :
No substitutesInelastic
Close substitutesElastic
Factors influencing elasticity of
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Factors influencing elasticity of
demand-
(3) Number of Uses :
Single UseInelastic
Multi UseElastic
(4) Range of Price Change:
Highly PricedElasticLow PricedInelastic
Factors influencing elasticity of
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Factors influencing elasticity of
demand-
(5)Proportion of Expenditure :
Less expenditureInelastic
More expenditureElastic
(6)Time Period :
Short PeriodInelastic
Long Periodelastic
Factors influencing elasticity of
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Factors influencing elasticity of
demand-
(7) Possibility of Postponement :
Can be Postpone -- ElasticCannot be PostponeInelastic
(8)Influence by Habits & Customs
Inelastic
Practical Applications of Price
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pp
elasticity
1. To a Businessman By knowing the type of elasticity of
demand it is easy to know whether a price
cut is better or a price rise for increasing
the sales, total revenue and the profits.
If the demand is more elastic, a price cut
would lead to an increase in total
revenue. It the demand is inelastic, by raising a
price, no significant decrease in sales will
be effected so the total revenue and the
profit would rise.
C 9
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Case : 9
Just think of the product Mangoes. It
a.Is a perishable commodity
b.Has no substitute
c.Has a high demand in the domestic
as well as the foreign market
-- what can you say about its demand
elasticity in each of the above
aspects?
Practical Applications of Price
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Practical Applications of Price
elasticity
2. To the Finance Minister
Finance minister has to consider the
elasticity of demand while selecting
commodities for tax. Tax imposition oncommodities for getting substantial
revenue becomes worthwhile only if the
taxed goods have an inelastic demand.
Taxes are levied on commodities whichhas inelastic demand like cigarettes,
wine, sugar etc.
Practical Applications of
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Practical Applications of
Price elasticity
3. In International Trade
Elasticity is important in
formulating export and import
policies of a country. The relativeelasticities of demand for
commodities in the two countries
are very important. Export thosecommodities which are inelastic in
the international market.
Practical Applications of
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Practical Applications of
Price elasticity
4. To Trade UnionistsThe concept of price elasticity is
useful to trade unions in wage
bargaining. The union leaders,when they find that demands fortheir industrys product is fairlyelastic, will ask for a higher wage to
workers and use the producer tocut the price and increase saleswhich will compensate for his lossin total profit.
C 13
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Case: 13
Rainbow Crayons, Inc. as amarketing specialist has just hired
you. The CEO comes to you for
advice on how to raise revenue. Shewants to know if the company
should lower product prices or raise
product prices to increase revenue.What information must you know? If
you have this information, what do
you advise?
Case: 14 Calculate the price elasticity of
d d f diff f h
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demand for different years from the
following data
Year Percentagechange in price
Percentagechange in
quantity
2001 5.0 -3.2
2002 -2.5 5.6
2003 zero 1.2
2004 6.5 -2.5
C 14 A
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Case: 14 Answer
20010.64Relatively inelastic.
20022.24Relatively elastic
2003infinityPerfectly elastic.
2004 -- 0.38Relatively inelastic.
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Income Elasticity
the degree of
responsiveness of the
quantity demanded due tothe change in income of the
consumer.
Measurement of Income
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Elasticity
Percentage change in
quantity demanded
ei=------------------------------------------------------Percentage change in the
Income of consumer
Measurement of Income
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ElasticityRatio Method
ei=Q
Y
Y
Q
ei=
Q2 - Q1
Y2 - Y1
Y1
Q1
X
X
M t f I
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Measurement of Income
Elasticity
Where, Y1 = Initial Income
Y2 = New Income
Q1 = Initial Quantity
Q2 = New Quantity
Mesurement of Income
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Elasticity
ei =
Q2Q1
YY2+ Y1
Q2+ Q1
ARC Method
X
Q
Q2+ Q1 2
2
Y2Y1
Y2+ Y1
ei =
T f I l ti it
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Types of Income elasticity
(1)Positive income elasticity can
be :
Greater than one ei > 1 -Luxuries
Less than one ei < 1 -
Necessaries
P iti I El ti it
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Positive Income Elasticity
X
Y
QUANTITY DEMANDED
DD
ei < 1 (necessary goods)
0 QQ
Y
Y
Y
Q
Positi e Income Elasticit
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Positive Income Elasticity
X
Y
QUANTITY DEMANDED
DD
ei > 1 (Luxury goods)
0
Y
Y
Q Q
Y
Q
Negative Income Elasticity
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Negative Income Elasticity
X
Y
QUANTITY DEMANDED
I
N
CO
M
E
DD
0
ei < 0 (Inferior goods)
Y
Q
Y
Y
C 15
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Case: 15
Paul purchases 10 Kgs per monthon sugar when his income is Rs
1500/- per month, when his income
increases to Rs 1800/- per month hespends 12 Kgs on sugar .Find
Income elasticity.
Answer: ei = 1 (sugar is a normal
good)
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Case: 16
Find income elasticity from thefollowing information and interpretthe result.
Initial Income = Rs. 3000Initial Quantity = 1600 units
New Income = Rs. 3200
New Quantity = 1300 units
Answer: Ey = -2.81( it is an inferiorgood)
Case: 17
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Case: 17
There are three income bracketpeople, very poor, middle class andelite class. In one particular monththe prices of each of these rise. Whatwill be the income elasticity?
Potatoes
Diamonds
Cotton
Paper
Wheat
Practical Applications ofI l ti it
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Income elasticity
K. K. Seo points out the income elasticityof demand is applicable to many planning
and strategy problems, such as
1. Long term Business PlanningIn 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 arevery bright. The firm can plan out its
business accordingly.
Practical Applications ofI l ti it
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Income elasticity
2. Market Strategy
Income elasticity of demand is
helpful in developing market
strategies.
3. Housing Development Strategies
On the basis of income elasticity,
housing development requirementcan be predicted and construction
work can be effectively launched
upon.
Practical Applications ofI l ti it
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Income elasticity
4. To the Businessman
Income elasticity is important to certain
producers in their demand and sales
forecasting and planning businessexpansion. For instance, the demand for
TV sets is highly income elastic, so when
per capital income or income levels of a
class of consumers is found to be rising,TV manufacturers can expect a greater
sale even at slightly higher prices.
Cross Elasticity
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Cross Elasticity
..is the degree of responsiveness ofquantity demanded of good X due to
the change in Price of goodY(where
good X and Y are either substitutes orcomplementary)
Percentage change in Quantity demandedof good X
Percentage change in price of good Y
Exy =
Measurement of Cross
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Elasticity
ey=QX
PY
PY
QX
ey=
QX2 - QX1
PY2 - PY1
PY1
QX1
X
X
Ratio Method
Mesurement of Cross
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Elasticity
ey =
QX2QX1
PY
PY2+ PY1
QX2+ QX1
ARC Method
X
QX
QX2+ QX1 2
2
PY2PY1
PY2+ PY1
ey =
Cross elasticity in case of
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Substitutes
Priceofcoffe
e
Demand for tea
P
P
Q Q
DD Tea
Exy > 0
X
Y
0
Cross elasticity in case of
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Complementary goods
Pr
iceofpetrol
Demand for vehicles
DD Vehicles
P
P
Q Q
Exy < 0
0X
Y
Cross elasticity in case of
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Unrelated goods
PriceofIcecream
Demand for Cloths
DD Cloths
P
P
Q
Exy = 0
0X
Y
P
Practical Applications of
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Cross elasticity
To determine the competitiveprice strategy and policy in the
alternative rivals modes of
services such as rail-road
services. Cross elasticity, here is
taken, as a measure of the effect
of a change in the fares on the
demand for the rail service and
vice versa.
Case: 18 Calculate cross
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elasticity and interpret results
Instances Price ofGood X
Qtydemanded
of Good Y
Results
01 10 100
20 200
02 15 150
10 150
03 8 100
20 0
04 20 100
15 50
Case: 18 Calculate cross
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elasticity and interpret results
Instances Price ofGood X
Qtydemanded
of Good Y
Results
01 10 100 Exy = 1
20 200 Substitutes
02 15 150 Exy = 0
10 150 Unrelated
03 8 100 Exy = -0.66
20 0 Complementary
04 20 100 Exy = 2
15 50 Substitutes
Case: 19
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There was a sale of 10,000 units of
Acer Laptop in the year 2004 when itsprice was Rs. 40,000. During the same
period 10,500 Toshiba Laptop were at
the price of Rs. 45,000. when the price
of Acer was brought down to Rs.
38,000 its sales increased to 12,000
units and the demand for Toshiba
declined to 9,500 units without thechange in its own price. Calculate
cross elasticity and interpret your
result
Case: 19 Answer
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Case: 19Answer
Exy = 1.90 (Subsitutes)
Case: 20
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Case: 20
When the price of bread was Rs. 20,the demand for bread for 80 units.During the same time price of butterwas Rs. 75 and demand for butter
was 30 units. Price of breadremaining same, if the Price for butterreduces to Rs. 60, then its demandincreases to 40 units and demand for
bread also increases to 90 units.
Answer:Exy = - 0.625
(Complementary goods)Case: 21.Weekly demand of the Household isgiven below. Find the price elasticity of
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g p y
demand for rice and cross elasticity of demand
between rice and wheat.
Original
price (Rs)
Original
Quty (Kgs)
New
Price
(Rs)
New Quty
(Kgs)
Wheat 8 50 8 70
Rice 20 50 23 40
Case: 21 Answer
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Case: 21Answer
Ep= 1.33,
Exy = 2.66 (Substitutes)
Case: 22
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Case: 22
The Times of lndia, is one of theleading newspapers in India. In
September 1972, it lowered its
price from 45 paise to 30 paisewhile prices of its rivals
remained unchanged. The
number of newspapers sold byTOI and its rivals was as follows
:
Case: 22 conti..
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Case: 22 conti..
August2005
May2006
Times of India 3,55,000 5,18,000
Statesman 10,24,000 9,93,000
Hindu 3,92,000 4,02,000
Hindustan
Times
3,25,000 2,77,000
Case: 22 conti..
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Case: 22 conti..
1. Based on the figures, find theprice elasticity of demand for
TOI.
2. Was the cross elasticity of
demand between Statesman
and TOI positive or negative ?
Case: 23 Work out the type of
elasticity the following products
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elasticity the following products
will have:-Electricity
Soaps
Exotic VacationsCigarettes
Wine
AC
Tea
Genius does what it must, and Talent doeswhat it can
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Demand Forecasting
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Demand Forecasting
Isthe method of predicting
the future demand of a
firmsproduct.
Demand Forecasting
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Demand Forecasting
Short Run Forecasting
Survey Method
Long Run Forecasting
Statistical Method
Survey Method
Opinion Polling Method
Collective opinion MethodPanel of Experts
Correlation & Regression
Time Series MethodBarometric Method
Methods of Demand
Forecasting
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Forecasting
For a Established product :
(1) Interview and Survey Approach
(2)Opinion Polling Method(3)Collective Opinion Method
(4) Panel of Experts Or Delphi
method.
(5) Projection Approach (for Long
Period)
Projection Approach (Long
P i d)
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Period)
SALES
0 YEAR
Y
X
For a New Product
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Evolutionary Method
Substitution Method
Growth Pattern Method
Opinion Polling Method
Sample Survey Method
Case: 24
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Case: 24
Mention which method offorecasting will be suitable for
the following products:
a. Toys
b. Getz
c. Washing Powderd. Coffee
Case: 25
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A cartel has been entered into by various
firms into the manufacture of kidsschoolshoes. Price has been set, which the firms
have to respect. To increase profits, the
firms have to increase the quantity
supplied. Your firm is one of them. It is themonth of April. Just 2 more months to go
for the schools to re-open, the time when
most parents do shoe-shopping for their
children. Certain factors are in your
hands, while some are not. Which ones do
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