Simran Project

LOTUS GROUP OF INSTITUTION

Principle Of Economics

Unit -2 :- DEMAND ANALYSIS

Made By - Simran Mehndiradatta

IntroductionDemand analysis :- Demand analysis means the study of factors, which influence the demand of a commodity of services. It is only on the basis of these factors determinants of demand one can forecast demand.

Ques 1. Explain law of demand. Why does demand curve slope downwards to the right ?

Meaning and law of demand Law of demand explains the relationships between change

in quantity demanded and change in price. It states that higher the price , the lower would be the quantity demanded in the market; and the lower the price, the higher would be the quantity demanded in the market.

According to Marshall – “the amount demanded increases with the fall in price and diminishes with the rise in price”. Thus, it expresses it an inverse relation between price and demand the law refers to the directions in which quantity demanded changes with the change in price.

The law of diminishing marginal utility with the successive consumption of a commodity its utility keeps on decreasing and a certain point it becomes zero.

Income effectSubstitution effectNew consumerTo satisfy unsatisfied wants

g

Ques 2. Explain the meaning and methods of measuring elasticity of demand ?

Meaning of elasticity of demandThe term of elasticity of demand is use to denote a measure of the rate at which demand changes in response to the change in prices. It is the percentage change in quantity demanded divided by the percentage in one of the variables on which demand depends.

Types of elasticity of demandPrice elasticity of demandIncome elasticity of demandCross elasticity of demandAdvertising and promotional elasticity of demand

Measurement of price elasticity of demand Percentage method :- The price elasticity of demand is measured by it coefficient (Ep). This coefficient (Ep) measures the percentage change in the quantity of a commodity demanded resulting from a given percentage change in price its price.

where q = quantity demanded p = price = change If Ep 1 demand is elastic. If Ep1, demand is inelastic, and if Ep = 1, demand is unitary elastic.

Point method or geometric method :- This method measures the elasticity of demand on different points of a demand curve. It is a variant of proportionate method

we know that, The term is the reciprocal of the slope of demand curve. The slope of AB demand curve is in the figure price is price is PQ and quantity demanded at PQ price is OQ and fore, Y

and because OQ = RP B X

R P

Q

A

Quantity

price

Now and are similar right angle triangles. Therefore, part PB is the lower section and part PA is the upper section of the AB demand curve. Thus, elasticity of demand at point P is equal to . i.e., Point Elasticity of Demand =

Arc method :- Segment of a demand curve between two points is called an Arc . Arc elasticity is calculated fro the following formula :

Where, change in quantity demanded change in price of the commode = New price Original price = New quantity = Original quantity

𝑷 𝟏

𝑷 𝟐

O 𝑸𝟏

A

𝑸𝟐 X

Y

QuantityPr

ice

Total Outlay method :- In this case of total outlay method, price elasticity of demand is measured on the basis of change in total outlay or total expenditure in response to change in the price of the commodity.

Revenue method :- Revenue refers to the sale proceeds of a firm. Elasticity of demand can be estimated if the average revenue and marginal revenue are known. Average revenue is the price per unit of the commodity.

where = Elasticity of demand A = Average revenue M = Marginal revenue

Ques 3 :- What is the indifference curve ? How does consumer equilibrium attained? What are the assumption on which indifference curve analysis of demand based?

An indifference curve is a curve which represent different combination of two goods which give a consumer equal level of satisfaction.

Assumptions of indifference curve Rationality :- consumer is rational as he wants

to maximize satisfaction.

Ordinal utility :- Consumers ranks his preferences according to the satisfaction of each combination.

Nonsatiety :- Other things remaining same, a consumer always prefers a larger amount of a goods to a smaller amount.

Consumer EquilibriumA consumer is said to be in equilibrium

position when he has no tendency to make any change in his purchases of goods. According to indifference curves technique a consumer is in equilibrium when he purchases that basket of goods which give him maximum satisfaction at given income and prices. It means consumer will be in equilibrium when he purchases that combination of goods which is on the highest indifference curve to his budgetary constraints.

Ques 4 :- How do you perceive the term consumer equilibrium and consumer surplus? Explain your opinion with relevant example?

Consumer ‘s Surplus (CS) The concept of consumer’s surplus was evolved

by Alfred Marshall. Marshall defined the concept of consumer’s surplus as, “Excess of the price which a consumer would be willing to pay rather than go without a thing over that which he actually does pay, is the economic measure of this surplus satisfaction . It may be called consumer’s surplus”.

Consumer’s surplus = what a consumer is ready to pay – what he actually pays

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