Eco Notes

DEMAND FUNCTION

Demand function:-

In the formal economic theory of demand, the decision – making of the

household is explained by the theory of consumer behavior.

The nature of demand reflects the extent of market. For a business firm,

which is basically a production-cum sale unit, demand analysis helps in sale

forecasting, and profit planning. The study of demand behavior also helps

business management in deciding a new product policy, adut. policy.

Meaning of demand:-

Demand is defined as the quantities of a product which a consumer is not

only desiring to purchase and able to purchase but is also ready to purchase

at given prices at a given point of time. It indicates how much quantities of

commodity will be demanded at its different prices.

Definition:-

In the words of Forguson “ demand refers to the quantities of a commodity

that the consumers are able & willing to buy at each possible price during a

given period of time, other things buy equal”.

There are five constituents of demand:-

1. Desire for a things.

2. Money to satisfy the desire.

3. Willingness to spend the money.

4. Relationship of the price & the quantity of the commodity demanded.

5. Relationship of time & the quantity of the commodity demanded.

Law of Demand

Law of Demand

Law of Demand statis, that other things being equal, the demand for a good

extends with a fall in price and contracts with a rise in price. There is an

inverse relationship between price of the commodity and its quantity

demanded.

Definition:-

According to samuelson, “ Law of demand states that people will buy more

at lower prices & buy less at higher prices, ceteris paribus, or other things

remaining the same.

The chief characteristics of the law of demand are as follows:-

1. Inverse Relationship:-

The relationship between price & quantity demanded is inverse. That

is, if the price rises demand falls & if the price falls, the demand goes

up.

2. Price an independent variable & demand a dependent variable

Under the law of demand, it is the effect of price on demand which is

examined, and not the effect of demand on price. When demand rises,

the price would rise and when demand falls, the price would falls.

But the law of demand doesn’t concern with this kind of behavior or

phenomenon. In other words, in the law of demand, price is regarded as

an independent variable & demand a dependent variable.

3. Other things Remaining the same:-

The law of demand assumes that other things remain the same, in

other words there should be no change in other factors influencing

demand except price. If however, any one or more of the other factors,

say income, price of the substitutes consumer’s tastes and preferences,

adversity outlays etc. vary the demand may rise, inspire of a rise in

price or alternatively, the demand may fall inspire of fall in price.

4. Direction of Change:-

The law of demand is a qualitative statement, it tells the direction of

change in demand consequent upon the change in the price. It doesn’t

tell the degree of change.

5. Related with time:-

The law of demand is related with a point of time say a day or a week

or a month or a year or for that matter of a decade.

Assumptions:-

Law of demand holds good when “others things remains the same”. It means

factor influency demand, other than price, are assumed to be constant. These

may be explained with the help of following demand function:-

Dx = f ( Px, Pr, Y T, E)

Here Dx = Demand for commodity

Px = Price of commodity

Pr = Price of other (related goods)

Y = Income of the consumer

T = Tastes

E = Expectations of consumer

Assumptions of the law of demand are that all the determinants of demand

other than the Px remain unchanged. In detail these are that:

1. There should be no change in the price of related goods.

2. There should be no change in the income of the consumer.

3. There should be no change in the tastes & preferences of consumer.

(T)

4. The consumer doesn’t expect any change in the prices of the

commodity in the near future. (E)

5. There is no change in size, age composition & sex- ratio of

population.

6. There is a no change in the range of goods available to consumers..

7. There is no change in the distribution of & wealth of the commodity.

8. there is no change in government policy ‘i.e’ no change in taxes.

9. There is no change in weather conditions.

Explanation of Law Of Demand:-

According to law of Demand there is an Inverse relationship between

price & demand for a commodity law of demand for a commodity law of

demand simply the directions of

Change in demand as a result of change in price. The law is explained with

help of demand Schedule & dem---------and Curve.

Demand Schedule:-

In the words of Mc Connell,” Demand Schedule is a Table that Shows

different Prices of a good & the Quantity of that good demanded at each of

these prices. It has two aspects.

(1) Individual Demand Schedule.

(2) Market Demand Schedule.

1. Individual Demand Schedule:-

Individual Demand Schedule is defined as the table which shows quantities

commodity which an individual consumer will buy at all possible prices at a

given time. Take the ex of Table A.

Individual Demand Schedule

Price (Per unit) Quantity Demanded

(in units) (Units)

1 4

2 3

3 2

4 1

It is from the above schedule that as the price of ice-cream increases, the

demand tends to contract. When price of an ice-cream is Rs.1.00 demand is

for 4 units & when price goes up to Rs.4.00 contract to 1 unit only.

Market Demand Schedule:-

In the words of Leibhafsky, “Market demand schedule is defined as the

quantities of given commodity which all consumers will buy at all possible

prices at a given moment of time.” In every market there are many

consumers of commodity e.g. sugar. The schedule indicating the quantity

demanded by all the consumer of a commodity collectively at different

prices is called Market demand schedule.

Table-2 Market demand schedule.

Price of commodity demand of A B Market Demand

1 4 5 4+5=9

2 3 4 3+4=7

3 2 3 2+3=5

4 1 2 1+2=3

Above schedule indicates that when price of ‘X’ is Rs.1.00 per unit, demand

of ‘A’ is for 4 units & that of ‘B’ is for 5 units. Thus, the market demand is

for 9 units. As the prices rise to Rs.2.00 per unit the market demand comes

down to 7 units & so on.

Demand Curve:-

The demand curve is a graphic presentation of a demand schedule. In the

words of left “The demand curve represents the maximum quantities per unit

of time that consumer will take at various prices like demand schedule,

demand curve can be

(1) Individual Demand Curve.

(2) Market Demand Curve.

(1) Individual Demand Curve:-

Individual demand curve is a curve that shows different quantities of a

commodity demanded by an individual consumer. Fig 1 indicates individual

demand curve. On OX-Axis is shown Quantity Demanded and on 0 %

AXIS, the price. DD is demand curve. Each point on the demand curve

presents relation between price & demand.

At a price of 4 per unit ,demand is for 1 unit & at a piece of Rs 1.00 per unit,

demand is for4 units, the demand curve stops down works from left it light,

meaning there by that when piece is high demand is low & when piece is

low demand is light.

Market Demand Curse:-

Market demand curve is a curve that represents the aggregate demand of all

the consumers in the market at different price of a particular commodity. It

is horizontal summation of individual demand curve. Take the example of

Table2.

Above Indicator that when piece of 10 is Rs. 1per unit, demand of A is for 4

unit and that of B’is for 5 unit. Then the market demand is for 9 unit. As the

piece rise to 2.00 per unit the market demand comes down to 7 units and so

on.

Why does Demand Curve & Lopes down word?

Law of diminishing Marginal utility A consumer demand a commodity

because it has utility consumer is satisfied with 1 unit but if the price is low

then consumer’s demand will Increase law of diminishing marginal utility

refers to the phenomenon where by the

Marginal utility of any good is purchased.

Marginal utility is the addition made to total utility by consuming one more

unit of commodity. A consumer will buy an additional unit of commodity to

previous unit. A consumer will stop his purchase at that point where the

marginal utility of the commodity is equal to the price paid for it.

Price = Marginal Utility

Relationship between the law of demand and law of diminishing marginal

utility expeained with the help of following schead:-

Utility Schedule

Units of Ice –cream Marginal utility

(Measures in tems of rupes )

1 8

2 6

3 4

4 2

If price of ice –cream is Rs-4per unit the consumer will bay 3 units

corresponding to the equal between marginal utility and price. Like wise, if

the price becomes Rs.6 per unit ,2 unit of ice- cream will be purchased so

that marginal utility and price are equal to each other and so on .Low of

diminishing marginal utility then is the basis of the Low of Demand.

Algebraic Explanation:

With a view to maximizing his satisfaction from a given income, consumer

spend his income a given income , the consumer spend his income across

different goods is accordance with following equation :

MU1 = MU2 = -------------- MUn

P1 P2 Pn

MU1 refers to marginal utility of commodity –1 per unit of the money P1

Spent on this commodity likewise MU2 , refers to marginal utility of P2

Commodity –2 per unit of the money spent can this commodity. Equation of consumer’s equilibrium.

If P1 = 4 MU1=20

20 = 5 4 P2 = 5 25 = 5 5

MU2 = 25

It will be equal on that price where P = MU

2. Income Effect:-

Income effect is the effect that a change in person’s real Income caused by

change in the price of a commodity has on the quantity of that commodity.

Example:- Suppose our income is Rs.15 per day . we want to buy apples

whose price is Rs.5 per Kg. It means with our fixed income of Rs.15 we can

buy 3 kg of apples in case , the price of apple s comes down to Rs.3 per Kg.

then after buying 3 kg of apples we will left with Rs. 6. It means our real

income increase. This may be spent on buying 2 more Kg. of apples. Thus,

fall in price causes increases in real Income & so extension in demand &

vice-versa.

3. Substitution effects:-

The Substitution effect is the effect that change in relative prices of

Substitutes goods has on the Quantity demanded. Substitutes are goods that

can be used in place of each other for ex- tea & coffee, coca-cola & Pepsi

cola are substitutes.

Tea & Coffee are Substitutes of each other. If price of tea goes down, the

consumers may Substitute Tea for coffee, although price of coffee remains

the same. Thus demand for Tea extends due to its becoming less expensive

because of a fall in price. Contract to it, if the price of tea goes up the

consumer will substitute relatively less expensive coffee for the which is

now relatively more expensive. Consequently , the demand for tea contracts.

4. Different Uses:-

Some goods have more than one uses. Milk for example, may be used for

drinking and for making cured and cheese. At its very high prices, an

individual consumer may buy milk only for drinking, but at the reduced

price more milk may be bought for making cured & cheese as well. Thus,

the demand for commodity with alternatives uses tends to extend consequent

upon the fall in their prices.

Size of Consumer Groups:-

When the price of a commodity falls, then many consumers, who are unable

to buy that commodity at its previous price, come forward to buy it. The

market demand goes up.

For Example :- When the price of apple is Rs.30.00 per kg then handful of

consumers buy it. The demand is limited. As the price comes down to Rs.

15.00 Per kg. Then many consumers are willing to buy apples at this new

favourable price. The total demand for apples goes up. Change in price

causes change in the size of consumer group affecting change in total

demand.

Exceptions to the Law of Demand or Exceptional Demand Curve:-

There are some exceptions to the law of demand. It means there are some

commodity whose demand extends when price rises and contracts when

price falls. Demand curve of such commodities slopes upwards from left to

right. It is called positive slope.

(1) Articles of Distinction or Vebelen goods.

(2) Ignorance

(3)Giffen Goods

(4) Expectation of rise or fall in price in future

(5) Consumer’s Psychological Bias or illusion.

(6) Necessaries of Life.

(7) Commodities with special brand & Trade Mark

(8) War & emergency

(9) Small past of total expenditure.

(1) Articles of Distinction or Vebelen Goods:-

Valuable goods (named after American Economist T.Vebelen) are articles of

distinction or Luxury goods like Jewellery, original works of Art by great

Artists.

Articles of distinction according to vebelen, command more demand when

their prices are high. Diamonds, gems and costly carpets etc. will have more

demand when their prices are high. In case, their prices go down they no

longer remain articles of distinction and so have less demand.

(2) Ignorance :-

Many a time, consumers out of sheer ignorance or poor judgement consider

a commodity to be of low quality if its price is low & of high quality if its

price is high. Behham gave an interesting example:- Before world war II an

Illustrated book was published in U.K. & Priced at 10 $. But it could not

attract many buyers. Another edition of the same book was published after

world war II & this was published after World War II & this time it was

priced 3 and ten shillings which was higher than previous price.

(3) Giffen Goods :-

Giffen goods (named after the nineteenth century economist Sir Robert

Giffen ) are those inferior goods whose demand fall when their price falls so

that the law of demand doesn’t hold good. For example, Bajra is an Inferior

good for a consumer ordinarily. As the price Bajra Falls, real income of the

consumer rises. With increased real income a consumer may, demand more

of ‘wheat’ and thus his demand for ‘Bajra’ may fall. In this way, fall in the

price of inferior goods is accomplished by fall in their demand and vice-

versa.

(4) Expectation of rise or fall in price in future :-

If prices are likely to rise more in future then even at the existing higher

prices people may demand more units of the commodity in the present.

Contrily, if prices are likely to fall further in the future then even at the

existing lower prices people may demand less units of the commodity in the

present, in the hope of buying more in the future . This situation renders the

slope of demand curve positive. However, this exception to the law of

demand holds goods only if it has earlier not been specified as assumption of

the law.

(5) Consumer’s Psychological Bias or Illusion:-

When the consumer is wrongly biased against the quality of a commodity

with the price change, he may contract his demand for that commodity with

a fall in price, sometimes sophisticated consumers do not buy when there is

a stock clearance sale at reduced prices, thinking that the goods may be of

bad quality.

(6) Necessaries of Life:-

Those goods which are necessaries of life such as wheat , gas ,rise, salt,

kerosene oil, sugar are not affected by the application of the law .Whatever

may be the price, consumers, have no option but to buy it.

(7) Commodity with special Brand & trade mark:-

If a consumer is in the habit of consuming a commodity having a special

brand or trade mark, the consumer will buy the same commodity even if its

price is raised. How ever a very high price of the same commodity can affect

the demand for the same. For example, consumers using lipton tea or

Nescafe office or Reynolds Pen or Maruti Car or colgate tooth paste, will go

on consuming these goods will the rise in the price of these goods will not

affect their Demand. Thus, the law of demand will not apply.

(8) War or Emergency:-

During war or emergency, there is always a fear of the shortage of the

availability of goods, thus the consumers try to pile up the stock of goods,

however the price may rise. The low will not apply in such circumstances,

but this is not the real exception to the law.

(9) Small part of total expenditure:-

The commodity on which a very small part of the total expenditure is

incurred e.g. post card, salt etc. The law will not operate because of change

in the price of such items.

Market Research & Law of Demand:-

Market research consists of consumer Surveys, i.e. Studies of buyer’s

motives, attitudes, preferences and purchasing habits. Information is

gathered from personal interviews and mailed questions and the same is

supplemented by indirect study such as interviews with market observers.

Who study the behavior of the buyer thought observation. When Such

Surveys are studied, They throw light on the Characteristics of demand for

various products. It Can bring about the sharpening of marketing targets,

Improvements of distribution methods & adoption of Sales improvement

techniques.

When the producers increased their prices, they found that Sales

increased very Significantly. One researcher found that many consumers feel

that it is risky &uncertain to go in for a low – priced product. The customer

who purchased high priced product was cautions. Thus, it can be concluded

that the consumer Behavior is not So Simple that buyers do not behave

according to Law of Demand.

Types of Demand (or Demand Distribution)

Demand analysis is studied for specific purposes. In order to study the

potential goods they are classified into several types. They are as follows:-

1. Demand for Consumer’s goods & producers goods.

2. Demand for perishable goods & durable goods.

3. Autonomous demand and derived demand.

4. Industry demand and company demand.

5. Short -run demand & Long- run demand.

6. Joint demand & composite demand.

7. Market demand & market segments.

8. Price demand, Income demand & Cross demand.

9. Individual demand & Market demand,

1. Demand for Consumer’s goods & Producer’s goods:-

(1) Goods and services for final consumption are called consumer’s

goods. These include those consumed by human beings as food items,

clothes, utensils, medicines, services of teacher’s, doctors etc, animal

e.g. grains etc. Producer’s goods refer to the ones used for the

production of other goods such as plant & machines, factory

buildings, raw materials, services of business employees etc.

(2) Demand for Consumer’s goods is director autonomous. Demand

for producer’s goods is derived. It is based on the demand for the

output.

(3) Demand for Consumers goods depends upon Marginal utility.

While demand for producers goods depends on Marginal productivity

or the marginal revenue product.

2. Demand for Perishable goods & Durable goods:-

Perishable or non-durable goods are those goods which can be

consumed only one. On the other hand, durable goods are those goods

the utility from which occrues over a period of time. For example, the

durable goods like ceiling fax, refrigerator, car, furniture etc. are used

over a no. of years. While perishable goods like bread, milk, fish ,

paper cup & plates , vegetables are consumed once & their utility is

over. The relevance of drawing this distinction is that the consumer

may not be particular about durability & quality of perishable or non-

durable goods, while for durable goods these usually cost more and

therefore the consumer is very cautions while deciding on their

purchase & may consult those whose Judgement he values, while for

the perishable goods he may rely upon his own judgement.

3. Autonomous Demand & Derived Demand:-

Spontaneous demand for goods which is based on the urge to satisfy

some wants directly is called autonomous demand. Demand for

consumer’s good is autonomous or direct. For example, bathing soap

is required for cleaniless. It is a final demand, Autonomous demand

for consumption goods on the utility of products.

Derived Demand represents the demand for a product which is

required for producing another product & depends on the quantity

demanded of the final product. For example:- steel is required for

producing water pipes, fans, steel, furniture etc. Similarly, demand for

car’s battery or petrol is a derived demand, for it is linked to the

demand for a car. There is hardly anything whose demand is totally

Independent of any other demand. But the degree of this dependence

varies widely from product to product.

Thus, the distinction between auto nomous & derived demand is more

of degree than of kind. Sometime a distinction is also drawn between

direct & Indirect demand, and that distinction is close to the diff.

between autonomous and derived demand respectively. Goods that are

demand for their own sake have direct demand, while goods that are

needed in order to obtain some other goods Indirect demand. In this

Sense, are consumer’s goods have direct demand while all producer’s

goods including money, have Indirect demand.

4. Industry Demand & Company Demand

Most goods today are produced by more than one firm or company

and So, there is a difference between the demand facing an company

or firm and that facing a Industry. For example , cars in India are

manufactured by maruti Udyog, Hindustan Motors, Premiere

Automobiles & Standard Motor Products of India. Demand for Maruti

car is a firm’s (company) demand where as demand for all kind of

cars is industries demand. Similarly demand for godrej’s

refrigerator’s is a firm’s demand for all kind/brands of refrigerator is

the Industry’s demand.

The distinction is very important because while there are close

Substitutes for firm’s products, no such close substitute exists for

Industry’s product. Thus, while a Maruti Car is a close substitute for a

flat Car or modern new Car like Santro or Indica, it is only a poor or

distant substitute for a Bajaj Scooter.

5. Short-Run Demand & Long-Run Demand:-

Short-run demand represent the existing demand which is based on

immediate reaction to price changes, income fluctuation and other

explanatory variables. Long-Run demand, on the other hand is that

demand. Which emerges after the influence of price changes, product

development, promotional efforts and other Factors over time is

allowed to adjust the market to the new situation. In the long run, new

customers may start purchasing the product. Some products may not

be demanded anymore. Therefore long-term demand deals with the

way the demand will shift with the passage of time.

The factors which influence the demand in the short-run are different

from those which determine the demand in the long-run. In the short-

run some factors are constant such as competitive structure, the

market position relative to substitutes. In the long-run, the factors

which need to be taken into account are changes in tastes, technology

and the way of life.

6. Joint Demand & Composite Demand:-

Demand for most of the commodities in real life, is independent of

each other. But there are several commodities the demand for whch is

interrelated - Interrelation in demand makes for physically different

goods interlinked and interdependent. Broadly, two types of

interrelationship exist in demand for such commodity.

(i) Joint or Complementary Demand:-

When two goods are demanded in conjunction with one another at the

same time to satisfy a single want, they are said to be joint or

complementary demand. Examples are pen and ink, camera & film,

Car & petrol, Bread & Butter, Coffee, Sugar & Milk, Pipe & pipe

tobacco.

(ii) Composite Demand:-

A commodity is said to be in composite demand when it is wanted for

several different uses. Steel is needed for manufacturing cars,

buildings, Construction of railways, Chemical industries etc, Wool is

required in clothing, Carpet manufacturing and in several other

industries. Electricity also has a composite demand as it is used for

lighting, Cooking, T.V., Radio and many other electrical appliances

by a household.

7. Market Demand & Market Segments:-

Demand for a certain product has to be studied not only in its totality

but also by breaking it into different segments viz, geographical areas,

sub-products, uses of the product, sensitivity to price, distributive

channels, size of customers, product varieties.

And if any one or more of these differences are significant in terms of

product price , profit margins, competition, seasonal patterns or

cyclical sensitivity, then this division of demand into different

segments gives rise to the concept of market segment as distinguished

from the total market. Thus the ‘total market’ refers to the total

demand for a product whereas ‘market segment’ signifies a part of it.

For example- One can talk about the domestic demand for maruti cars

verses (Domestic + foreign) demand for that product; demand for steel

for household (kitchen) vis-à-vis its demand for industrial uses,

demand for fish by households vis-à-vis that bulk buyers(e.g. hotels,

restaurants, guest house) and consumption(heena) demand for fish

versus industrial demand for fish (cattle feed etc)

The distinction is useful particularly in finding out the problem area.

For example- if a classification is made between domestic & foreign

demand, one can analyse the causes of poor foreign market, if that is

the case and find out the ways of augmenting that market. Similarly, if

the market for, say maruti cars is excellent in southern India & poor in

the northern part of the country, the company could study the

classified data and discover for itself the most approximate ways of

dealing with such a problem.

8. Price Demand, Income Demand & Cross demand:-

Price Demand refers to the various quantities of a product purchased

by the consumer at alternatives price. In price demand, the demand

function is based on a single variable price. Thus D = F (p) where D

refers to Demand, F shows functional relationship (between the price

& Demand) and p devotes price of the product.

Income Demand refers to the various quantities of a commodity

demand by the consumer at alternative level of his changing money

income. In Income Demand, the Demand function is based on the

Income variable (Y). Thus, D = F (Y).The Income demand function is

usually a direct function. It indicates that demand extends with the

wise in Income & vice-versa.

Cross Demand refers to the various quantities of commodity (Say

Coffee) purchased by the consumer is relation to change in the price

of a relation commodity (Say tea) which may either be a Substitute or

a Complementary product. Thus cross demand function may be stated

as follow:- D = f (Pb), where D = the Demand for the Commodity ‘a’.

Generally rise is the price of one Commodity Say ‘b’ or Coffee brings

a rise in the demand for its related commodity Say ‘b’ or Tea & vice-

versa.

9. Individual Demand & Market Demand:

5. Determination of Demand or Demand function:

Demand of a particular commodity at any given time is determine by the

following factors:-

(i) Price of the Commodity. (Px).

(ii) Price of the related goods (Px).

(iii) Income of the consume (Y).

(iv) Faster & preferences of the Consume (T).

(v) Expectation of price change of the commodity (E).

In addition to the above, the market demand is also determined by

following factors:

(vi) Size & Composition of production. (P).

(vii) Distribution of Income (yd)

Of course, in the case of market demand function, we shall consider Income,

tastes & expectations of all the consumers in the market for a particular.

Market demand function may be expressed thus:-

Dx = ( Px, Pr, Y, T, E, P, Yd)

Various determination of the market demand for a commodity are discussed

as under:-

Elasticity of Demand

Introduction & Meaning:-

Law of Demand tells us about the direction of change in demand for good as

a result of change in its price. Thus, the law is a mere qualitative statement.

It simply states that when price rises demand contracts. But it doesn’t

explain how much the demand will change. The concept that explains the

proportional change in the amount demanded for a product as a result of

change into price, is called the concept of elasticity of demand.

Meaning: -

Demand for a good depends upon its price, income of the consumer and

price of related goods. Accordingly, elasticity of demand of three types: -

1. Price elasticity of demand.

2. Income elasticity of demand.

3. Cross elasticity of demand.

Definition: -

1. Being given by Dr. Marshall, elasticity is a measure of the elasticity is a

measure of the responsive of one variable to change in other.”

2. Being given by Dooley, “The elasticity of demand measure the

responsiveness of the quality demanded for a good, to change in its price,

price of other goods & change in consumer’s income.”

3. Unitary Elastic Demand :

Unitary Elasticity of demand is one is which a percentage change is price

producer an equal change in demand. If 5% fall is Price is followed by 5%

extension is demand ,then it will be a case of unitary elastic demand

I. e. (-) 5% = 1 ( unit ) - 5%

This type of demand curve is called Rectangular Hyperbola. Areas of

Different rectangles drawn from different points on this curve are always

Equal. In this Ed = 1 (unitary)

4. Greater than unitary elastic or elastic Demand:-

Greater than unitary elastic demand is one in which a given percentage

change in price produces relating more percentage change in demand. If 5%

Fall is price cause 20% (change extension is demand, then it will be an

exauple of greater tham uritary elastic demand

(5) Less than Unitary elastic or Inelastic Demand :-

Less than unitary elastic Demand is one in which a given percentage (%)

change is price producer relatinely den percentage (%) change is Demand .

When fall in price by 4% is accomp-amied by extersion is Demand , them

Ed = (-) Lam than unitary Ed < 1,

All the five degrees of elasticity of demand are Illustrated in fig 6. on ox-

axis quantity mandedde

And on oy –axis price is shown. (1) A B Line represents perfectly Inelastic

Demand,(2)

CD Line represents perfectly elastic demand (3) EG Line represents Less

than unitary elastic demand, (4) Ef Line represento greater than witany

elastic demand and (5) M N curne represents umitary elastic demand.

The adove account makes it clear that price El of demand maybe

anything between

Zero (0). It is further clarified with the help of the following table.

Value of Elasticity coefficients and theie Description

S.No. Value of

Elasticity

Co-efficient

Degrees of

Elasticity

Description.

1 Ed=0 Perfectly Change in price causes no

Inelastic

Demand

chage in quantity demanded

2 Ed<1 Leb than unitary

Clastic Demand

Peccentage change in

Demanded

Is Lenthan to change in Price

3 Ed =1 Unitary Elastic

Demand

Percentage Change in

Demand

Is equal to %Change in Price

4 Ed >1 Greater than

Unitary Elastic

demand

Percentage Change in

demand

Is more than Percentage

Change in price.

5 Ed =0 Perfectly

Elartic Demand

Little change in price

Cawses anunfinite

Change in Demand.

4. Measurement of Price Elasticity of Demand:-

Measurement of Price Elasticity of Demand:-

Whether price elasticity of demand is (1)Unitary or (2)Greater than unitary

or (3) Less than unitary, is known by is measurement.

There are five methods of measuring price Elasticity of Demand :

1. Total Expenditure Method.

2. Proportionate Method.

3. Point Elasticity Method.

4. Arc Elasticity Method.

5. Revenue Method.

(1) Total Expenditure Method :-

Total Expenditure method of measuring elasticity of demand was evolved by

Dr. Marshall. According to this method, in order to measure the elasticity of

demand it is essential to know how much and in what direction the total

expenditure has changed as a result of change in the price of goods.

i. Elasticity of demand is unity, when due to use or fall in the price of

goods, total remains unchanged.

ii. Elasticity of demand is greater than unity, when due to fall in price,

total expenditure goes up & due to rise in price total expenditure goes

down, that is when total expenditure moves in opposite direction

compared to change in price.

(iii) Elasticity of demand is less than unity, when due to fall in price, total

expenditure goes down and due to rise in price total expenditure moves in

the same direction as change in price.

Measurement of elasticity of demand by total on they method can be

explained with help of table 1 & 2

Table 1. Total expenditure method

Elasticity of demand Price Total expenditure

Greater than

unitary

Rise

fall

Down

Up

Unity Rise

fall

Unchanged

Unchanged

Less than

unity

Rise

fall

Up

Down

Table 2. Shows the effect of change in price on elasticity of demand.

Total expenditure method

Price of Commodity Quantity TE Effect on TE Elasticity of Demand

2 4 8 Same Te

4

1

2

8

8

8

Unity elasticity

2

4

1

4

1

10

8}

4}

10}

Less Te

More Te

Greater than unity

2

4

1

3

2

4

6}

8}

4}

More Te

Less Te

Less than unity

Above table Signifies the following :-

(1) Unitary Elastic Demand:-

First part of table 2 indicates that when price of the good is Rs. 2.00,

total Expenditure on it is 8.00 Rs. When price rises to 4.00 or falls to

re. 1.00, the total Expenditure remains the same, i.e, Rs. 8.00. In other

words, change in price has no effect on total expenditure.

(2) Greater than Unitary Elasticity:-

Second part of Table 2, shows that when price of the good is Rs. 2.00,

total Expenditure on it is 8.00 Rs. When price rises to Rs. 4.00 total

expenditure comes down from Rs. 8.00 to 4.00 and when price falls to

Re. 1, total expenditure goes up from Rs. 4.00 to Rs. 10.00. In other

words, change in price results into change in total expenditure in the

opposite direction.

(3) Less than Unitary Elasticity:-

Third part of Table 2, indicates that when price of the good is Rs. 2.00

total expenditure on it is Rs. 6.00. Whwn price rises to Rs. 4.00, total

expenditure goes up to Rs. 8.00 and when price falls to Rs. 1.00, total

expenditure comes down to Rs. 4.00. In other words, change in price

leads to change in total expenditure in the same directrion.

Fig 7, illustrates total outlay mathod of measuring price elasticity of

demand. In this figure, total Expenditure is shown on OX-axis and

price on OY-axis. Line TE represents total expenditure line. BC part

of TE Line represents unitary elasticity(Ed=1). It points out that when

price is OM, total Expenditure is MC. When price rises to ON, total

Expenditure remains the same, i.e, NB = (MC). TB part of TE line

represents greater than unitary elasticity of demand (Ed>1). It

signifies that whwn price rises from ON to OR, total expenditure

comes down from NB to RA, i.e, it moves in the opposite direction.

EC part of TE line represents less than unitary elasticity of demand

(Ed<1). It signifies that when price falls from OM to OP, then total

expenditure also comes down from MC to PD, i.e, it moves in the

same direction. Prof. Lei bhafsky has made use of the following

formula.To measure price elasticity of demand.

ED = 1- Ex

P

Proportionate or percentage method

Proportionate or Percentage Method:-

The second method of measuring price elasticity of demand is called

proportionate or percentage method. As per this method proportionate

change in Demand is divided by proportionate change in price. Its formula is

as under:

Ed = Proportionate change in demand for Good-x

Proportionate change in Price of Good-x

Or

Change in Quantity Demanded

Ed = (-) Initial Demand

Change in Price

Initial Price

= Q1 – Q = Q

Q (-) Q

(-) p-p P

P P

Ed = (-) Q :- P = Q x P

Q P Q P

Ed = (-) P x Q

Q P

Here Q = Indian Demand of Quantity, Q1 = Change demand. P = Indian

Price of the good P1 = Change Price, Q-Q (Change in demand) P =P1–P

(Change in Price) [= Change .

Ed = (-) Pm x Q

Qm P

Pm = Minimum Price

Qm = Minimum Quantity

P = Change in Quantity

Change in Price

Change in Demand

Initial Demand = (-) D = D x P = D x P

Change in Price D D P D P

Initial Price P D x P

P P D H.P

(3) Point Elasticity of Demand 15/9/2012

(3) Point Elasticity of Demand:-

Point Elasticity refers to price elasticity of demand at any point on the

demand curse .Acc . to leftuich , “ Elasticity computed at a single point on

the curse for an infinitety small change in price, is point elasticity.

(1) Linear Demand Curse

Ed = P x Q

Q P

= OP x QQ1

OQ PP1

= AQ x BC - 1

AP AB

‘s ABC & QN are Similar

So the ratio of sides are equal.

BC = QN – 2

AB AQ

Elasticity of Demand

Ed = AQ x QN = QN – 3

PA AQ AP

‘s MPA & ‘s AQN are similar

QN = AN – 4

PA AM Ed = AN = Lower portion

AM Lipper Portion of Demand course

< U > 1

> < 1

It is clear from fig, that as we move upward from point P , elasticity of

demand become greater than unity & near to OY-Axis it advances towards

Infinity () . On the other hard, as we move downward from point P,

elasticity of demand become less than unity & near to OX-Axis it advance

toward Zero Elasticity.

(2) Non-linear Demand Curve:-

When demand curve is non-linear than to know the elasticity of

demand at any point located on it, a tangent is so drawn as to touch

this point Consequently, this point will divide the tangent into two

parts. Lower segment of the tangent is than divided by the upper

Segment, the resultant divided will indicat price elasticity of demand.

Elasticity of demand at Point ‘P’ on Demamd curve DD is to be

Calculated. First of all, we draw a tangent MN on point ‘P’ of the

demand curve. At point ‘P’, Demand curve & tangent MN coincide

and this slope is equal. Consequently at point ‘P’, elasticity of demand

is PN/PM.

Factors Determining the Peice

Elasticity of Demand

1. Nature of the Commodity:

In Economics, all goods are divided into three categories i.e,

(i) Neccessaries.

(ii) Comforts.

(iii) Luxuries.

Ordinarily, demand for essential goods like, salt, kerosene oil,

match boxes etc., is less than unit elastic or inelastic.

Piece changes has no effect on their demand.

piece elasticity of demand for luxuries like.air – conditiones,

costly furniture, gold & diamond jewellery etc. is greater than

unity i.e., elastic . change in price of good has inpaction demand

price elasticity of demand is unity in case of comforts, i.e., milk,

transistor, cooler, fan etc.

(2) Availability of substitutes :

Goods having substitutes available at reasonable price such as tea

& coffee, per & ball pen, milk shake & lassi, sandals & chapples etc.

Home elastic demand . it is so because if the price of one of the

substitutes falls, people buy more of it. Commodity that do not have any

substitutes e.g. cigarette, liquor etc. have elastic Demand.

2. Goods with different uses; goods that can be put to diff. uses have

elastic demand.

For Instance, elasticity has many uses. It can be used for heating,

lighting, cooling etc. When elasticity changes are high, it is used for

lighting purpose only and so its demand for other less urgent uses will

fall considerably.

(4) Postponment of the use :-

Goods whose demand can be postponed to a future period have elastic

demand for example, if demand for building houses can be postponed

then demand for building-material such as bricks, cement, sand, time,

gravel etc. Will become elastic on the other hand, goods whose demand

cannot be postponed, e.g. demand for meals when hungry or for drink

when feeling-thirsty, have inelastic demand.

(5) Income of the Consumer :-

People having very high or very low income, ordinarily, have inelastic

demand. It is so because rise or fall in the prices has very little effect on

their demand. On the other hand, demand of middle-income people is

elastic. Rise in the prices of goods demanded by these people leads to

contraction in their demand.

(6) Influence of habit & Custom :-

Demand for those goods is inelasticity to which consument become

habituated e.g. cigarette, coffee, etc. Despite rise in their prices people

demand such goods in more or less the same Quatity.

(7) Proportion of Income Spent on a Commolity:-

Goods on which a consumer spends a very small proportion of his

Income have Inelastic Demand, e.g. newspaper, tooth-paste, bot-polish

etc. Rise in their prices doesn’t contact their demand. On the other hand,

goods on which a consumer spends a large proportion of his Income have

elastic demand. e.g. clothes, nutritive food, desent cooler etc. Rise in

their prices causes contract of their demand.

(8) Price Level:-

Very high-puiced goods have Inelastic demand e.g. diamonds, jewellery,

costly conpetsete. Change in price of these goods carses little low priced

goods have also Inelastic demand, e.g. post card, cheap vegetasles match

box etc. Change in the price of these goods causes little in their demand.

(9) Time:-

Demand for a goods is Inelastic in short-priod & elastic in long-peried. It

is so because a consumer can Change his habits in the long-sure. Falls in

the price of a good therefore, leads to more extansion I its demand in the

long run.

(10) Joint Demand:-

Goods demanded jointly have Inelastic demand, e.g. can & pestrol, pen

sink Camera & film. Rise in the price of postrol may not contralt its

demand if there is no fall in the demand for case.

(11) Durable goods:-

In Case of durable goods like T.V. Car, Refrigerator etc. Once they are

purchased, they are used for considerable period & therefore, even if

their price falls, demand doesnot expad much because purchese have

already been made. Demand for durable goods, therefore, tends to be less

elastic in the short-period & more elastic in the long-period.

(11) Reccurence of Demand:-

It the demand for a Commodily is of a recurring nature, its price elasticity

is higher than that of a commodity whiches purchased only Once for

intance, bicycles, tape-recordance radius etc. are purchased only once,

hence their price elasticity will be less.

(13) Other factors:-

The other factors determining the elasticity of demand are:-

(i) Government Policy in relation to the purchase of a commodity. If the

government does not allow the purchase of certain goods, their demand will

be inelastic and if there is no restriction imposed by the government on the

purchase of a community, then its demand will be elastic.

(ii) Urgency of Demand;

The more urgent the demand of a community, the more inelastic

demand will be for it. E.g cigrattes for the smokers, beteses for the betel

chewers.

Income Elasticity of Demand :-

Other things such as price of the given commodity, prices of related goods,

taste of the consumer etc remaining coustart, percentage change in the

quantity demand of a thing caused by a given percentage change income of

the consumer is called income elasticity of demand.

Definition:-In the words of Watson’ “Income Elasticity of demand meas the

ratio of the % change in the quantity demand to the % change in income.”

6.1 Measurement of Income Elasticity

6.1 Measurement of Income Elasticity:-

Income Elasticity can be measured by the following formula:

EY= Proportionate change in Quantity Demand

Proportionate change in Income

EY=

Hence (EY= Income elasticity of demand, Q = Change in the

Quantity demand,

Q = Initial demand, y = Change in Income

Y = Initial Income.

Degree of Income Elasticity of Demand:-

(1) Positive Income Elasticity of demand

(i) Unity Income Elasticity of Demand.

(ii) Less than Income Elasticity of demand.

(iii) More than Unitary Income Elasticity of Demand.

(2) Negative Income Elasticity of demand.

(3) zero Income Elasticity of demand.

Positive Income Elasticity of Demand:-

Income Elasticity of demand for a good is positive, when with an

increase in the Income of a Consumer, his demand for the good ioncreased

and with a decrease in the Income of the Consumer his demand for the good

decreases.

Income Elasticity of demand is positive in case of normal goods.

Positive Income Elasticity of demand can be of three types:-

(i) Unitary Income Elasticity of Demand :-

Positive Income Elasticity of demand is unitary When a given % Change

in Income is followed by equal % in demand. For example if Income

Increases by 100% &demand also Increase by 100%.

Thus , Ey= 100% =1(unitary)

100%

(ii) Less than unitary Income Elasticity of Demand :-

Positive income Elasticity of demand is less than unitary When

percentage change in demand is less than% change in Income. For

example if Income increase by 100% but demand increase by just

50%,then.

Ex=50% =1 (less than unitary)

100% 2

(iii) More than unitary Income elasticity of Demand:-

Positive income elasticity of demand is more than unitary when %

change in demand is more than % change in income. For Instance, if

Income in words by 100% but demand increases by 200% then,

Ey = 200% =2(Greater than unitary)

100%

(2) Negative Income Elasticity of Demand:-

Income elasticity of demand is negative when increase in the income of

the consumer is accomparied by fall in demand of a good & decrease in

Income is followed by rise in demand. Negative Income elasticity refers

to Inferior goods also known as giffen goods. In slopes Dow wards from

left to right.

(3) Zero-Income Elasticity of demand:-

Income elasticity of demand is zero , when change in the Income of

Consumer Evokes no change no change his demand, for necessaries like

salt has Zero elastey.

6.3 Importance of Income Elasticity in Business:-

The concept of income elasticity of demand is very Income in business on

the following grounds:-

(1) Decision Regarding Investment

(2) Forecasting of demand

(3) Classification of commodities

(1) Decision regarding Investment:-

The rates at which income are rising in developed countries result is

doubling of their income is a period of so to 25 years. Even is under-

developed countries like. India, national Income is growing, though growth

rate is not as steady as in the case of developed countries. Their rise in

national Income does ‘n ‘t affect demand of various good uniformly . Form

the point of view of the produces, their effect is of considerable importance

as it them is reallocaty resources. They

Invest more in those industries where the income elasticity of demand is

greater than unity (EY>1) as demand for these product increases more than

proportionatly to income.

(2) Forecasting of Demand :-

The knowledge of income elasticity of demand is also useful in forecasting

the influence of possible future changes in economic activity on demand.

But such an exercise needs caution. If the income change is permanent, there

is a greater likelihood of changes in demand because the changes can be

planned & habits can be modified.

(3) Classification Of Commodities :-

The income elasticity helps in classifying the commodities. Thus following

points may be noted in this regard :

(i) When income elasticity(EY) is positive, the commodity is of normal type.

(ii) When income elasticity(EY) is negative, the commodity is inferior. For

instance cereals like jowar, bajra etc are inferior goods, so their income

elasticity is negative.

(iii) If income elasticity coefficient is positive & > one (EY>1), the

commodity is a luxury.

(iv) If income elasticity coefficient is positive but less than unity (EY<1).

Income is inelastic.

(v) If income elasticity coefficient is zero, the commodity is neutral. Zero

income inelastic.

Income Sensitivity & Income Elasticity :-

Another concept used for measuring the effect of income changes on the

demand for various commodities is that of income sensitivity of demand.

It refers to the ratio of percentage change in expenditure (in money or rupee

terms) to percentage change in income.

= percentage change in money or rupee exp. During period ‘t’

Percentage change in disposable income during period ‘t’

A positive income sensitivity suggests a more than proportionate increase in

expenditure with an increase in income. If income sensitivity is negative, it

implies that commodity is inferior. For example- negative income sensitivity

for bus services would mean that as income increases people prefer more

expensive automobile services, say, a taxi service over the bus service, for

which the demand goes down, Other examples can be coarse grain & coarse

cloth.

7. Cross Elasticity Of Demand :-

There is a mutual relationship between change in price and quantity

demanded of two related goods.

Change in the price of one good can cause change in the demand for the

related good.

Cross elasticity of demand is a mea of change in quantity demand of good –

y, as a result of change in the price of good-x.

In the words of Ferguson,” The cross elasticity of demand is the proportional

the of good –x demand from a given relative change in the price of the

related good-x.

Measurement of Cross Elasticity of Demand:-

E c = To change in Demand of Good x

To change in price of good – x.

E c = Change in Quantity demand x

Original quantity of

Change in price of y

Original Price of y. x100

Q x Q x x P y

Q x = Q x P y

P y

E c = P y = x O Q x

Q x P y

Here Py = Original Price of good – y, P y = Change in price of good = y ,

Q x = Original quantity demand of x, Q x = Change in the Quantity Deal

of X.

Degrees of cross Elasticity of

Degrees of Cros s Elasticity of Demand :-

Cross Elasticity of demand can be of three types :-

(i) Positive

(ii) Negative

(iii) Zero Cross Elasticity of demand.

(i) Positive :- When goods are Substitutes of each other, than a given

% rise in the price of good Will lead to a given % increase in the

demand for the other good. In other Words, Cross Elasticity of

demand is positive in case of substitutes.

Ec=py X Qx= 50X50=5=2.5(Ec>1)

Qx Py 50 50 2

(ii) Negative:- In case of complementary goods,% change rise in the

price of one leads to % Full demand for the other. Cost equally

cross Elasticity of demand in regative & save is by putting a mines

sigh before Ec.

(iii) Zero Cross Elasticity of Demand: - Cross Elasticity of Demand

& zero when two goods are not related to each other . for ex, in

price what will have no effect on the demand for slase . Ec = O.

7.3 Important of Cross Elasticity:-

Cross Elasticity help certain Businessman to mould their business policies.

Similarly demand for rain coats is bound to multiply considerably is the face

of a rise is the price of umbrellas & vice-versa.

8. Business/Managerial User & Importance of Price Elasticity of Demand:-

The concept of price elasticity of demand is of greater Significance is the

field of Industry, trade & practical application of price elasticity of demand

can be enumerated as under:

(1) Significance in Price Determination:-

(i) Determination of Price under Monopoly.

(ii) Price Discrimination.

(iii) Price Determination of Joint Supply.

(iv) Resumeration of Factors of Production.

(v) Dumping.

(2) Importance in Government Policy Formulation:-

(i) Advantage to Finance Minister.

(ii) Distribution of Burden of Taxation.

(iii) Importance for the policy of Nationalisation.

(iv) Price Control Policy.

(v) Fixing rate of Exchange.

(vi) Protection to Industries.

(3) Demand Forecasting.

(4) Fixation of Rail Freight Changes:

(5) Wage determination.

(6) International trade.

(7) Paradox of poverty.

(8) Effect of employment.

(9) Effect of change in supply.

(1) Significance in Price Determination :-

The concept of price elasticity of demand is helpful in determining the price

under the following situations :

(i) Determination of Price Under Monopoly :-

A monopolist always takes into consideration the price elasticity of demand

of his product while determining its price. (a) if it is elastic, he will fix low

price per unit. Low price means more demand, large sales & hence large

total revenue. (b) If demand is inelastic, he will fix high price per unit. High

price with demand remaining more or less constant (being inelastic), means

large total revenue.

(ii) Price discrimination :-

When a monopolist sells his product at different price, it is called price

discrimination. A monopolist can practice price discrimination when price

elasticity of demand for his product for different uses and for different

consumers is different.He will charge more price from those consumers

whose demand is inelastic and less price from those whose demand is

elastic. For instance, demand for electricity for domestic use is inelastic. On

the other hand, demand for electricity for industrial use is elastic.If rates are

high an industry can use coal or oil to run its machine.

(iii) Price Determination of Joint Supply:-

goods which are produced simultane aueouly in the same act of production

are called joint supply goods e.g. cotton &cotton Seeds ; oil &oil –Cakes etc.

elasticity of demand of suce goods is taken into consideration while fixing

their price. if demand for cotton is inelastic.

(iv) Remuneration of factors of prodrction:-

Price elasticity of demand also plays an important role in the theory of factor

–price the returns of each factor of production depends rpon the elasticity of

demand for its service is inelastie , the produces will be prepared to pay a

high price. For it .on the hand if demand is elastic , its returns will upay len

price or at most the prenailing price for hiring its services.

(v) Dumping :-

Dumping means selling of the product in a foreign market. Dumping is only

useful if the domestic market. Dunping is only useful, if the demand for the

product is elastic .the seller does get much profit when the commodity, he is

Selling has any in elastisc Demand.

(2) Importance in government policy formulation:-

The concept of elasticity of demand plays an Important role in the

formulation of government policies in the following fields:-

(1) Advantage to finance Minister:-

Which planning new Taxes a finance minister takes into consideration

elasticity of demand (a) Taxes an goods homing elastic demand will yield

hew It is so become taxes will raise than price s them bring down their

demand hen demand means less revenue (b) goods having in elastic

demand are taxed at a higher rate.

(ii) Distribution of Burden of taxation:-

concept of price elasticity of demand is important in determining the

burden of indirect taxes like sales tax exaice duty etc. on produce s

consumes It the demand for a good is inelastic , the burden of Indirect

tax will be more on the consumes price of the good will increase due to

the inelastic of the tax bet demand being Inelastic will not contract .

(iii) Importance for the policy of Nationalisation:-

A policy, by virtue of which industries enterprises are brought under the

ownership, contral s Management of the good is called policy of

Nationalisation. Government nationalisation those enterprises demand for

whose products is inelastic. e.g. electricity, supply of water, telephone ,

railways etc. Price of there service can be liked very high.

To protect the consumers against such as exploitation , government normally

nationalizes these public utility services.

(iv) Price Control Policy: -

the government must take into account the elasticity of demand for a

commodity before imposing statutory price control on it. Similarly in order

to stabilize prices of agricultural goods, the gout must know their level of

demand & elasticity coefficients. In the events of large stocks & falling

prices, the gout. Followers the policy of output control.

(V) Fixing rate of exchange: -

While fixing a proper rate of exchange for its currency, the gout can take

considerable help from the concept of elasticity of demand when taking a

decision to revalue or devalue the country’s currency, the gout has to

carefully study the impact of such a decision elasticity of demand for its

exports & imports comes handy in analyzing this impact.

(vi) protection to industries: -

the gout gives protection to are industry if its feels that the industry cannot

fare the foreign competition. while giving protection or providing subsidy to

an industry, the gout. Keeps in mind the elasticity of demand for its product

& generally giver protection to those industries, whose product demand is

elasticity & doesn’t give any protection to those industries whose demand is

less elastic.

(3) Demand forecasting: -

while price & crors elasticities are useful for pricing policy, income

elasticity can be used for forecasting demand for the product in the future.

Thus, producting planning & management in the long run depends

significantly upon the knowledge of income elasticity, as the business men

can the find out the impact of changing income levels on the demand for this

commodity.

(4) fixation of rail freight charges: -

if the railway services have an in elastic demand (i.e. these is no subsitute

the form of road transport etc.), railway can fix higher freight charges for

moving goods from one place to another. If, on the other hand, goods can be

transported easily by Trucks or other means of transport, railways will

charge lowerrates for their service. This method is known as the method of

fixing charges on the basis of “ what the traffic can bear.”

(5) Wage determination: -

labour organizations while getting the wages of their members fixed, always

take into consideration the elasticity of demand for their services. If the

demand for the services of the laboures in elastic, the possibility of getting

their wage fixed is remote.

(6) International Trade:-

The concept of elasticity of demand is also important in the field of

international Trade A ccauwny goin by increasing the price of her

export if their demand in the importing country is inelastic. If their

demand in the importing country is elastic, then the exporting country

will reduce the price & increase her total exports & there by stand to

gain. A country will be able to import those goods cheaply whose

demand is elastic.

(7) Foradox of poverty :-

Those connected with agriculture know it very well that despite good

harvest of many agricultural products their return interests of money-

income is very low. It means more production instead of yields more.

Income actually yields len income than before this situation is referred

to as paradox of poverty. The reasons for it is that demand for most of

the farm products is inelastic. When the supply these products

increase & their prices fall, then their demand dosen’t extend

correspondingly. As a result total revenue out of their sales goes

down.

(8) Effect on employment:-

Effect of automatic machines on employment depends on elasticity of

demand for the goods produced by such machines. Initially use of

such machines course unemployment and prices of the goods also fall.

If demand for these goods is more elastic than fall in their prices will

be accompanied by relatively more increase in their demand.

(9) Effect of change in supply:-

The effect of change in supply on price depends upon elasticity of

demand. If the demands is elastic, increase in supply will greatly

increase the quantity supposed, but will have a very small effect on

price i.e. price will not fall much. If, however the demand is inelastic,

Increase in supply will lead to great fall in price.

Advertisement & Elasticity of demand:-

Advertising Consists of those activities by which visual or oral message are

addressed to selected respondents for the purpose of informing and

influeucap them to buy products or services or to act or be inclined

fovoducts towards ideas, persons, trade marks, institutions or association

featured. There are two important fruition of management , Advertising (i) to

Shift the Demand curve to the right & (ii) to reduce the elasticity of demand

the main purpose of raising the demand for to push up the sales by raising

the demand for the product the salient features of the advt. Sales relationship

are:-

(i) A certain amount of Sales is possible even without any Advertising.

(ii) Other things i.e, price, Quality, channels of dispitnistion and similar

factors affecting Sales remaining the Same, these is a direct relations of

between the extent of advertiement & the volume of Sales. Thus , an

increase in expuditine on admenti is likely to lead to an increase in Sales

(iii) Up to a point, an increase in adnesti semat Will read to a more

proportionate increase in Sales, But Beyond this pt. An increase in Sales in

adnt .Will read to loss the proportionate Increase in Sales till the Saturation

let. Is reached, after which these Will no increase in Sales

Advertising Elasticity of Demand :-

The expansion of demand by means of advertising & other propostional

effesto may be measured by adut elasticity of demand, also called

promotional Elasticity the promotional elasticity measured the

responsinenen of demand the promotional elasticity meas

The formula for its measurement is as given below :-

Ea = Proportionate change in sales

Proportionate change on Advt. Expenditure

=S2-S1 :- A2-A1

S2-S1 A2+A1

Here, Ea stands for advt. el;asticity, S stands for sales & A stands for

Advertising outlays.

9.2 # Factors Affecting advertising elasticity :-

The advertising elasticity of demand is affected by a number of

factors, the imp. Over are as under :-

(i) The stage of the products market development, that is whether it

is a new product or a product with a growing market or with an

established market.

(ii) The extent to which competitors react to the company’s advt.

either by further advertising or by increased sales effects.

(iii) If the quality & quantity of advt. of a product is superior to the

past and at puseut it is also superior to that of the competitors,

than the advt. elasticity will behigh.

(iv) The influence of non-advertisement determinates of demand such

as growth trends, prices, income etc. and the extent to which these

can be successfully determined with a view to dominating their

effect in demand analysis.

(v) The Time interval that elapses between the advt expenditure &

response of sales to the expenditure, which is difficult to predict

because it depends upon the type of the product , the methods of

advt. etc.

(vi) The delayed effect of company’s past advertisement and the

extent to which it affects current & future sales.

Since the objective of determining the advertisement elasticity of

demand is to find out the effect of advertised on sales as compared to the

sales that would have been achieved without advt., it is necessary to

isolate & eliminate the effect of these factors.

Company can’t go beyond the limitation defined in the memorandum.

(4) It form the Basic relationship between the Company &

Outsiders;-

The memorandum of association is an indicator or guidline of the

company’s activity to outsiders. It is a public document that tells other of

company’s finaucial capacity, its capacity to make contracts, its aims,

objectives and field of activity. Those who deal with company are

expected to know what the company’s memorandum of association

contains. The memorandum is open to all who deal with or plan to deal

with the company. Any Contract made with the company that gets

beyond the scope of the memorandum is not binaling on the company

and those who deal with it.

(5) It Contains Ceauses that gives important information about the

company:-

The relenant information includes the name of the company, the

address of its registered office , the company’s share Capital and

whatever it is limited by shares or by guarantee, the objects of the

company, its sphere of activities and its limitation. In short, it gives

the viewer a pictures of the company.

Forms of Memorandum of Association:

Under the provision of the Companies Act, 1956 different from of

memorandum of association have prescribed for different types of

companies. Acc to Sec. 14 of the Act, the memorandum of

association can be in the following forms.

(i) form of Table B-which is the memorandum of association of a

company limited by shares.

(ii) Form of Table C-which is the memorandum of association of a

company limited by guarantee and not having a share Capital.

(iii) Form of Table D-which is the memorandum of association of a

company limited by guarantee & having a share Capital.

(iv) Form of Table E-which is the memorandum of association of an

unlimited Company.

Legal Requirement of Memorandum of Association:-

As per the provision of section 15, the memorandum of association

shall:-

(i) Be printed and limited into paragraph consecutively.

(2) Be signed by each subscriber, who shall add this address, description and

occupation.

(3) Be signed in the presence of at least one witness, who shall attest the

signature, and shall likewise add his address, description & occupation.

The witness can be the same for all members of the company, but one

member can’t be a witness for another.

A minimum of seven members of a public company, & two members of a

private company must be the signatovies to the memorandum of association,

which can also be signed by their authorized agents.

There is also a stamp-duty to be paid for the memorandum of association,

the amount of this duty varies from state to state.

Subject matter of memorandum of association:-

Section 13 of the Companies Act 1956, prescribes the contents of the

memorandum of association. The memorandum must contain:-

(1) The name of the Company.

(2) The address of the Company’s registered office.

Arc Elasticity of Demand

4). Arc Elasticity of Demand:-

If there is infinitely small change in the price & quantity Demand then

proportionate method is more reliable.

If the changes are considerable then % method or proportionate method will

be of little help.

According to Watson, “ Arc Elasticity is the Elasticity at the mid – point of

an arc of the demand curve.”

Ed = (-) Change in D :- P

½(Q1+Q) ½(P1+p)

= (-) Q1 – Q x ½(P1+P)

½(Q1+Q) P1 – P

= (-) Q1 – Q X P1+P

Q1+Q P1 – P

Degree of Price Elasticity of Demand

(1) Perfectly Elastic Demand:-

A perfectly elastic Demand is one in which a little change in price will

cause an infinite change in demand. In this case, a very little rise in

price causes the demand to fall to zero & a very little fall in price

causes the demand to extent to infinity.

(2) Perfectly inelastic Demand:-

A perfectly inelastic demand is one in which a change in price

produces no change in the quantity demanded. Thus change in price

cause no change in Demand. In this Case, Ed=0

P Q P Q

P 4 1 Q P 2 4 Q

P1 2 4 Q1 P1 4 1 Q1

=(-) 4 – 1 X 2 + 4 = (-) 1 - 4 X 4 + 2

4 + 1 2 – 4 1+4 4 – 2

= (-) 3 X 6 = (-) – 3 X 6

5 –2 5 2

= - 9 = 1 4 = 9 = 1 4

- 5 5 5 5

This method is more appropriate than % method.

Revenue Method

Fifth method of calculating price elasticity of demand is called Revenue

Method. Sale proceeds that a firm obtains by selling its products is called its

revenue. Supposing by selling 10 metres of clothes, a firm gets Rs. 50.00,

then this amount of Rs. 50.00 will be called the Total Revenue of the firm.

By point elasticity Method:-

Ed = PB

PA

‘

5. Factors Determining the Price Elasticity Demand:-

In real life we find that elasticity of Demand for some goods is unitary , for

others it is greater than unity (or elastic) and for still others it is less than unit

(or inelastic) Main factor determining the price elasticity of demand are as

under :

(1). Nature of the Commodity.

(2). Availability of Substitutes.

(3). Goods with different uses.

(4). Poistponement of the use.

(5). Income of the Consumer.

(6). Iufluence of Habit & custom.

(7). Proportion of Income Spent on a Commodity.

(8). Price level.

(9). Time.

(10). Joint demand.

(11). Durable goods.

(12). Reccurence of demand.

(13). Others factors.

Responsibility Accounting (Transfer Price)

1. Introduction : As stated earlier, one of the fundamental functions of

management accounting is facilitating managerial coutrod. Various devices

are used by the management in performing this important function.

Responsibility accounting is one of the most recent developments in this

field. Responsibility accounting lays emphasis on performance of

individuals where responsibilities are fixed for persons and divisions

accountable for the same. The concept of responsibilities accounting is

closely related to the system of budgetary control & standard costing.

2. Acc. to schaltke , R.W & Johnson, H.G., “ the management accounting

system that ties budgeting and performance reporting toa decentralized

organization is called responsibility Accounting.”

3. Meaning & Definition of Responsibility Accounting :

Responsibility Accounting is a system of control where responsibility is

assigned for the control of Costs. The person are made responsible for the

control of costs. Proper authority is given to the persons so they are able to

keep up their performance is not according to the predetermined standards

then the persons who are assigned this duty will be personally responsible

for it.

In Responsibility accounting the emphasis is on men rather than on systems.

For example , If Mr. A , the manager of a department prepares the cost

budget of his department , then he will be made responsible for keeping the

budgets under control. A will be Supplied with full Information of costs

incurred by his department. In case the costs are more than the budgeted

costs, then a will try to find out reasons & take necessary corrective

measures. A will be personality responsible for the performance of this

department.

Definition :- Acc. to Institute of cost and works Accountants of India

(ICWA)

Responsibility accounting is “a system of management accounting under

which accountability is established according to the responsibility delegated

to various levels of management and a management Information reporting

system Instituted to give adequate feedback in terms of the delegated

responsibility. Under this system divisions or units of an organization under

a specified authority in a person are developed as responsibility centers

evaluated individually for their performance.”

Fundamental Aspects or essential features of Responsibility

Accounting :-

An Analysis of the definitions given above reveals the following important

features or fundamental aspects of responsibility accounting.

Fundamental aspect of Responsibility accounting

1. Inputs and Outputs or Costs & Revenues.

2. Planned & Actual Information or Use of budgeting.

3. Identification of Responsibility Centres.

4. Relationship between Organisation Structure and responsibility

Accounting System.

5. Assigning costs to Individuals and Limiting their efforts to

Controllable Costs.

6. Transfer pricing policy.

7. Performance Reporting.

8. Participative management.

9. Management by Exception.

10. Human Aspect of Responsibility Accounting.

1. Inputs and Outputs or Costs & Revenues:-

The implementation and maintenance of responsibility accounting

system is based upon information relating to inputs & outputs. The

physical resources utilized in an organization ; such as quantity of raw

material used and labour hours consumed, are termed as inputs. These

inputs expressed in the monetary terms are called revenues. Thus,

responsibility accounting is based on cost & revenue information.

2. Planned & Actual Information or use of budgeting:-

Effective Responsibility accounting requires both plannend future &

actual financial information. It is not only the historical cost &

revenue data but also the planned future data which is essential for the

implementation of responsibility accounting system.

Activities competing for limited resources and decide Whether to approver

or disapprover it”

4. Cost & Benefit Analysis should be understandable We should consider

the cost involved and the likely Benefits to accrue. Only those projects

should be taken first where benefit is more as compared to the cost involved.

5. the Final Step involved in 2BB is Control with Selecting, approving

decision Packages and finalising the Budget.

* Benefits or Advantages of Zero – Base Budgeting :-

1. Allocate fund .

2. Efficiency of the mgt.

3. Identifying economical & Wasteful areas.

4. Optimum Utilisation of Resources.

5. Helpful in determining the utility.

6. Helpful in Realising organizational goal.

* Limitations of ZBB :-

1. Not possible in respect of Non- financial Matter.

2. Diff. In formulation & Ravking of Decision Padages.

3. No flexibility.

4. Timely Process.

5. Costly/Expences.

Budgeting & Budgetary Control.

Meaning of Budget:- A budget is a predetermined statement of mgt policy

during a giving period of which provides a standard of comparison with the

results actually achieved.

Meaning & Nature of Budgetary control.:-

Budgetry control is a process of determining various budgeted figures for the

enterprise for future period & then comparing the Budgeted figures with the

actual performance for calculating variance if any.

Definition:- acc. To Brown & Howard, Budgetary Control is a system of

controlling costs which includes preparation of Budgets, coordinating the

department & establishing responsibilities comparing actual performance

with the Bageted & acting upon results to achiene maximum profitability .

Coutents of Budgets control process:–

1. Objects are set by preponing Budgets.

2. Business is dinided in to diff responding centers & preparation of diff

budgets.

3. Comparing of actual with budgets in various.

Responsibility center

4. Collective Measures if actual so less than the Standard.

Features of Budgetauy Control:-

1. Planning

2. Coordination.

3. Controlling

Budget / Budgeting/ & Budgetany Control

A Budgct is a Blue plint of a plan expressed is quautitative terms.

Budgeting is technique for formulaty Budgets.

Budgetany Control refer to principles Proecdanes & practices of acriering

Giving objective through Budget.

Objectives of Budgetany Control:

1. Plan for future through Budgets.

2. Coordinate the actinities of different Depts.

3. Operate vauious cost centers with efficiency & economy

4. Elemination of wasted & increase in Profitability.