113 Unit II 1
113 Unit II 1
113 Unit II 1
ECONOMICS
Introduction to demand
• Public goods: goods that are used and are of benefit to everyone. E.g.
public clinics, schools and others.
• Economic goods are also thing of value that can be seen and touched
eg. Books, clothes, houses and so on.
5 2
4 4
3 6
2 80
1 10
Demand curve
• Demand curve is diagrammatic representation of demand
schedule which shows the inverse relationship between the
price and quantity demanded of the product.
Demand curve
Types of demand
• Direct and derived demand
• Complementary and competing goods
• Consumer and capital goods
• Perishable and non-perishable goods
• Individual demand curve
• Market demand curve
• Cross demand: **Positive Cross Price Elasticity (Substitutes) Positive Cross
Price Elasticity occurs when the formula produces a result greater than 0.**
• Negative Cross Price Elasticity (Complementary)
• Unrelated Cross Price Elasticity.
Types of demand
• Efficiency
• Technology can contribute to the efficiency of a business's output rate, allowing for
larger quantities of products to be moved or of services to be rendered
• Specialization
• Technology has lead to an increase in the division of labor and specialization of jobs
within a business, further contributing to the efficiency with which a business is able to
run
• Optimum use of Natural Resources
• Technology has a huge effect on the ability of businesses and governments to access
natural resources and use them in the most effective ways possible to benefit both the
business and the economy.
• Industrial Expansion
• Thanks to the increased efficiency of labor with the ever-improving state of
technology, businesses are able to increase total output, which in turn leads
to higher profits and greater economic development.
• Research
• Better
technology has lead to further research into nearly every sector of
business and science, meaning businesses can benefit from all sorts of
technological advancements.
• International Trade
• Information technology is the single most important element in the success
and growth of international trade and job market growth, allowing
businesses to share information and conduct trade in very less time.
Changes in quantity demanded vs. changes in demand
• Income decrease
It is important to note that all Giffen goods are inferior, but not all are Giffen
goods.
Status symbol goods- Veblen good
SNOB EFFECT
• Snob Effect
• In case network externalities are negative, the snob effect arises. The snob effect refers to
the desire to possess a unique commodity having a prestige value.
• Snob effect works quite contrary to the bandwagon effect. The quantity demanded of a
commodity having a snob value is greater, the smaller the number of people owning its.
Rare works of art, specially designed sport cars, specially designed clothing made to order,
very expensive luxury cars.
• For example, the utility one gets from a very expensive luxury car is mainly due to the
presitge and status value of it which results from the fact that only few others own it.
Interrelated demand
• Cross demand: the demand for good is effected by price of its substitute or
complementary goods. The relationship between the price of substitute or
complementary goods and quantity demanded of a good is what we call
cross demand.
• Derived demand
• Composite demand: is the demand for a good that has multiple uses e.g.
sheep can be used for mutton and wool, milk for curd and cheese. If there is
increase in demand for curd then the supply of milk will be less for cheese.
PRICE ELASTICITY OF DEMAND
• Price elasticity of demand indicates the degree of
responsiveness of quantity demanded of a good to the
change in its price, other factors such as consumers’
income, prices of related commodities that determine
demand are held constant.
• Price elasticity of demand is defined as the ratio of the
percentage change in quantity demanded of a
commodity to a given percentage change in price.
Types of elasticity:
Perfectly Inelastic Demand Perfectly Elastic Demand
Elastic and Inelastic demand
Conti…..
Mid point method
• It
should be carefully noted that for large changes in
price, we must use the midpoint method of calculating
price elasticity of demand. If the change in price is very
small, then we can use initial price and the initial
quantity demanded.
Consider the demand for a good. At price Rs
4, the demand for the good is 25 units.
Suppose price of the good increases to Rs 5,
and as a result, the demand for the good falls
to 20 units. Calculate the price elasticity?
• Cost of production
• Technological advancement
• Number of sellers
• Government policies
• Improvement in infrastructure
Change in quantity supplied and
change in supply
• Change in quantity supplies: movement along the supply
curve
5 2 10 10-2=8
4 4 8 8-4=4
3 6 6 6-6=0
2 8 4 4-8= -4
1 10 2 2-10= -8
Disequilibrium and excess supply
• Shortage
• Surplus
Consumer and Producer surplus