Law of Demand
Introduction of Law of Demand
Demand depends on price. Demand is always at a price. At different prices different quantities will be purchased. The law of demand states:
"Demand varies inversely with price not necessarily proportionally, it means that when price falls demand rises and vice versa.
It can also be stated in these words:
"A rise in the price of a commodity or service is followed by a reduction in demand and a fall in price is followed by increase in demand if conditions of demand remain constant."
It can also be written in the words of S.T. Thomas as:
"At any given time the demand for the commodity or service at the prevailing price is greater than it would be at a higher price and less than it would be at higher price and less than it would be at lower price."
There are several factors that cause change in demand e.g. changes in weather, fashion, taste, change in population etc.
Demand Schedule
Demand Schedule
Demand schedule is simply a statement in the form of a table given against each price the quantity of the commodity that will be demanded for a given period of time.
The individual demand schedule is not of very great importance. It shows only the demands of an individual. Putting down against price the total quantity of commodity, which will be disposed off in the market, can prepare the market demand schedule.
Demand Curve
Demand Curve
Demand curve is a geometrical presentation of the demand schedule. Demand schedule is a table and demand curve is based on this table. Thus one represents the other. The above schedule can be stated in terms of demand curve as:
Changes in Demand
According to the law of demand the demand for a product increases due to change in its price. But there are certain other reasons that influence the demand. Some of them are as follows:
1. Changes in the Taste and Fashion
The changes in the taste and fashion influence the demand to a great extant. Actually a human being psychologically want continuous change in his life style so that he get maximum satisfaction .To achieve his state of satisfaction he do not consider whatever the price of commodity he has to pay. Even if the price is high and the commodity is in high fashion or matches exactly his taste he will ultimately go for purchasing it.
2. Change in climatic conditions
The climatic conditions tend to increase or decrease the demand for a product. In winter there a great demand for warm clothing and in summer there a demand for electric fans and cold rinks and the marketers do not usually charge, less prices in these seasons in order to sell their products.
3. Change in Population
A change in the composition of the population will also affect demand. Influx of new people will create a demand for the good; they are in the habit of consuming. If the population of a country is rising, the over all demands of the people increase even at the same high price.
4. Change in the Amount of Money
Inflation also has a significant bearing on the demands of the people. When there is inflation it causes a great deal in demand, which leads to an increase in prices. Similarly if the amount of money is decreased the demand goes down even if there is no change in its price.
5. Change in Methods of Production
Changes in techniques and in the use of factors will affect the demand pattern of those factors as in the case of capital equipment and labour or chemicals.
6. Changes in the Price of the Substitutes
If the prices of the substitutes are varied their demand will directly be affected. If the price of any commodity whose substitute is also available in the market is decreased its demand will be increased whereas the demand for its substitute despite of unaltered price will fall down.
7. Changes in the Wealth Distribution
The distribution of wealth also affects the demand for a product. If the wealth is distributed evenly the goods demanded by people the have acquired more wealth will increase and demand of the people who have lost wealth will decrease.
8. Anticipated Political or Price Change
Some time norms and general speculation about tax changes war etc or of future shortages or abundance causes the present pattern of demand to change.
9. Changes in Conditions of Trade
The conditions of trade are closely related with the demand of the product. Demand for every thing is greater in a boom though the prices are rising. Opposite is the case when there is depression.
Elasticity of Demand
Elasticity of Demand
Meaning
There is a close connection between the quantity of a commodity purchased and its price. Changes in price are bound to affect the purchasers. The law of demand only indicates the direction of change in the quantity demanded as a result of change in prices. It does not tell the amount or the extant by which the demand will change in response to changes in prices. The concept which measures the responsiveness of quantities demanded to price changes is the elasticity of demand.
The term elasticity expresses the degree of correlation between demand and price. It is a result at which the quantity demanded varies with change in price. It may be defined as
“The degree of responses (in the form of variations in the quantity demanded) to changes in price.
To be more exact we can say that “the elasticity of demand is a measure of the relative change in amount purchased n response to a relative change in price n a given demand curve.”
Kinds
There are various kinds of elasticity of demand vise:
1. Price elasticity
2. Income elasticity
3. Cross elasticity
4. Substitution elasticity
Measurement of Elasticity
The practical purposes, it is not enough to know whether the demand is elastic or inelastic. It is more useful to find out to what extent it is so. For that purpose it is essential to measure elasticity.
Three methods are generally used for measurement of elasticity, which are explained below:
1. Total Outlay Method
In this method, we compare the total outlay of the purchases (or total revenue from the point of view of the seller) before and after the variations in the price. It may be expressed as:
Unity: It is unity, when even though the price has changed, the total amount spent or total revenue remains the same.
Greater than Unity
When with the fall in the price the total amount spent or total revenue increases on the total amount spent (total revenue) decreases when the price rise it is said to be greater than unity .
Less than Unity
Elasticity between two prices is considered to be less than unity when the total amount spent (total revenue) decreases with the rise n the price and decreases with a fall in the price.
Though this method is dimple it suffers from a serious drawback. It simply classifies the price elasticity in three categories and does not assist in measuring it in numerical terms.
2. Proportional Method
In this method we compare the percentage change in price with the percentage change in demand. The elasticity is the ratio of the percentage change in the quantity demanded to the percentage change in the price charged. Its formula is:
Elasticity of Demand = Proportionate Change in amount demanded / Proportionate Change in Price
3. Geometrical Method
We can better understand with the help of the figure:
In the figure DD’ is the demanded curve which is a straight line. Here the demand is represented by the fraction distance from D’ to a point on the curve divided by the distance from the other to that point. Thus elasticity of demand on the points P1, P2 and P3 is.
If the curve is not a straight line the above formula can be used by drawing a tangent at a point where the elasticity is to be measured.
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