Contraction And Extension Of Demand: According to the law of demand, as
the price changes demand also changes. If the price rises demand decreases and
if the price falls demand increases. These change in demand due to changes in
price are technical called extension and contraction of demand. By extension of
demand we mean an increase in demand due to fall in price. Similarly by contraction
of demand we mean a decrease in demand due to rise in price level. In the case
of extension and contraction of demand, the demand curve remains the same but
demand points shifts from one place to another place as shown in the diagram
and schedule.
|
Price |
Extension in demand |
Contraction in demand |
PRs. 4 |
2 Kg |
2 Kg |
PRs 3 |
4 Kg |
4 Kg |
PRs 2 |
6 Kg |
6 Kg |
PRs 1 |
8 Kg |
8 Kg |
In the above demand schedule, when price is
falling the demand is increasing and when price is rising the demand is
decreasing.
Rise And Fall In Demand: Rise in demand will occur when price
remaining the same, demand increases or at higher price demand remain same.
Price Remain Same But Q d Changes:
|
Price |
Demand |
PRs 10 |
100 Kg |
PRs 10 |
200 Kg |
PRs 10 |
300 Kg |
Price Changes But Q d Demanded In Same:
|
Price |
Demand |
PRs 1 |
100 Kg |
PRs 2 |
100 Kg |
PRs 3 |
100 Kg |
Fall In Demand: Fall in demand also may occurs in
two ways. It will occur when either price remaining the same demand decreases
or at lower price same quantity is demanded.
Price Remain Same But Q d Decreases:
|
Price |
Demand |
PRs 10 |
300 Kg |
PRs 10 |
200 Kg |
PRs 10 |
100 Kg |
Price Decreases But Q d Remain Same:
|
Price |
Demand |
PRs 3 |
100 Kg |
PRs 2 |
100 Kg |
PRs 1 |
100 Kg |
In the case
of rise and fall in demand, demand curve shifts from one place to another
place. When demand rises, demand curve shift’s form left to right upward. In
the case of fall in demand, demand curve shift from right to left downward.
Kinds Of Demand: They are three types of demand. They
are as following;
1) Price Demand: Price
demand refers to the various quantities of a commodity or service that consumer
would purchase at a given time in a market at various prices. It is assumed
that other things such as consumers income, population, taste and prices of
inter- related goods unchanged. The demand of individual consumer is called
individual demand and the total of all the consumers combined for the commodity
or services is called industry demand. The total demand for the product of
individual firm at various prices is known as firms demand or individual seller
demand.
2) Income Demand:
The income demand refers to the various quantities of goods and services which
would be purchased by the consumer at various levels of income. Here we assume
that the price of the commodity as well as the prices of inter-related goods
and tastes of consumer do not change. Just as the income demand express
relationship between income and quantity demanded. D=F (M) where M is the
income of consumer. For example when the income of people increases they begin
to spend money on those goods which were previously regarded by them as
luxuries or semi luxuries and reduce the expenditure on inferior goods. In this
case demand curve moves from left to right upward because the relation between
income and demand is direct. In this case we see that the demand changes due to
change in income level of the consumers but it is not the actual demand because
demand has relationship only with price. Demand only increases or decreases due
to rise or fall in price level. When demand changes due to change in the income
level it is called income demand.
3) Cross Demand:
Cross demand means when demand of the x commodity changes not due to change in
the price of that commodity but due to change in prices of its inter-related
goods that is price of y commodity.
a) Substitution Demand: When demand of x commodity changes due to change in the price of y
commodity and there is direct relationship between demand of x commodity and
price of y commodity. For example; there are two kinds of soap in the market.
1. Lux, 2. Dove. These both have same quality and same price when the price of
Dove increases the people will buy Lux and will decrease the demand of Dove.
The price of Lux is the same but its demand increases due to increase in price
of the substitute goods (Dove). So we can say that Lux is a substitute of Dove.
b) Complementary Demand: Complementary demand means when demand of x commodity changes due to
change in the prices of y commodity and there is a negative relationship
between demand of x and prices of y. for example; when the prices of oil
(petrol, diesel) increase the demand of cars decreases because the consumer of
cars will decrease their demand due to increase in the prices of petrol they
deeply related with each other.
Elasticity Of Demand: According to the law of demand there
is close relationship between price and demand. When price changes demand also
changes. The relation between change in price and demand is indicated by the
concept of elasticity of demand. The sensitivity or responsiveness of the
demand for a commodity to a change in the price is known as the elasticity of
demand. In other words elasticity of demand is the rate at which the quantity
demanded changes with a change in price. Elasticity depends primarily on
proportionate or percentage changes and not on absolute changes in quantity
demanded and price. Elasticity of demand can be expressed mathematically as
under;
FORMULA;
Ed = proportionate
change in quantity demand
Proportionate change in price
Ed = %
del Q or del Q\Q
%del P del P\P
Ed = Q2-Q1\Q
P2-P1\P
Here Ed =
Elasticity of demanded
Del Q=Q2-Q1=
change in quantity demanded
Del P=P2-P1=
change in price demanded
Q= Original
demand
P= Original
price
For Example; if there is a 10% rise in the price
of tea and it leads to reduction in its demand by 20% the price elasticity of
demanded will be;
Ed= %
change in Q d
% change in price
Ed= -20%
= 2.0 = 2.0
+10%
As the
relation between price and Q d is negative, so we ignore the negative sign.
Degree Of Elasticity Of Demand: The term elastic and inelastic
demand do not indicate the degree of responsiveness and unresponsiveness of the
quantity demanded to a change in price. So, there are five degrees of
elasticity of demand which are;
Perfectly Elastic Demand: When there is change in price but
quantity demanded changes to reasonable extent. A demand is perfectly elastic
when with a small increase in the price of goods its quantity demanded drops
down immediately to zero. People would prefer to buy from another producer who
would prefer to buy from another producer who sell the goods at lower price or
market price.
|
Price |
Q t y Demand |
|
Rs.4 |
10 Kg |
|
Rs.4 |
15Kg |
|
Rs.4 |
20Kg |
In above
schedule we see that price remains same while demand in the market increases.
Perfectly Inelastic Demand: When due to any change in price the
demand remains same, then it is known as perfectly inelastic demand.
|
Price |
Demand |
|
Rs.10 |
5Kg |
|
Rs.20 |
5Kg |
|
Rs.30 |
5Kg |
In above
schedule, we see that price is changing while demand remains same.
Unitary Elasticity Of Demand: When quantity demand is change by
exactly the same percentage as price, it is called unitary elasticity of
demand.
Ed= %del
Q = 1
%del P
|
Price |
Q T Y Demand |
|
Rs.30 |
4Kg |
|
Rs.20 |
8Kg |
|
Rs.10 |
12Kg |
In above
schedule, we see that price is decreasing by step by step and demand is
increasing by same steps of percentage.
Elastic Demand: If a little change in price brings
greater change in quantity demanded of a product, in this case we shall say
that demand is more elastic or highly elastic.
Ed= del Q greater than
Del P
|
Price |
Demand |
|
Rs.10 |
5Kg |
|
Rs.8 |
15Kg |
|
Rs.6 |
30Kg |
In above schedule,
we see that when price changes 1 percent, quantity demanded changes more than 1
percent.
Inelastic Demand: When a big change in price brings
little change in quantity demanded, in this case we shall say that demand is
less elastic.
Ed= del Q
less than 1
Del P
Ed= 10%
=1 less than 1
30% 3
|
Price |
Demand |
|
Rs.8 |
2Kg |
|
Rs.2 |
4Kg |
In above
schedule, we see that price change more than 1 percent, while demand change 1
percent.
1)
Price Elasticity Of Demand
2)
Income Elasticity Of Demand
3)
Cross Elasticity Of Demand
Price Elasticity Of Demand: It is the rate at which quantity
demanded of the product change in response to change in its price. Price
elasticity of demand can be calculated with the help of formula;
Price
elasticity of demand= %change in quantity of demand
%change
in price
Where Ed=
price elasticity of demand
Del q=
change in quantity demanded
Q= original
demand
Del p=
change in price
P= original
price