Name : Karoj H.

Najman

class: 4

Stage.B

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Engineering Economic Studies

Creative step Definition step Conversion step to same scale to facilitate comparative evaluation Decision step Elasticity of demand. Price changes and their effect on demand changes. It depends on whether the consumer product is a necessity or a luxury. Law of diminishing return. A process can be improved at a rate with a diminishing return. Example: cost of inspection to reduce cost of repair and lost production.

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Demand
1.Define Demand. Demand indicates the quantities of products (goods service) which the firm is willing and financially able to purchase at various prices, holding other factors constant. 2. Define Determinants of Demand: An individuals demand for a commodity depends on his desire and capability to purchase it. Apart from the desire to purchase, there are many other factors which influence the purchase of a product (demand). These are known as demand determinants. 6. Define the Law of Demand: The relation of price to quantity demanded / sales is known as the law of demand. Law of demand states that the higher the price is the lower the demand is and vice versa, holding other factors as constant.

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

1. A market is nothing more or less than the locus of exchange; it is not necessarily a place, but simply buyers and sellers coming together for transactions. 2. The law of demand states that as price increases (decreases) consumers will purchase less (more) of the specific commodity. a. The demand schedule (demand curve) reflects the law of demand it is a downward sloping function and is a schedule of the quantity demanded at each and every price.

As price falls from P1 to P2 the quantity demanded increases from Q1 to Q2. This is a negative relation between price and quantity, hence the negative slope of the demand schedule; as predicted by the law of demand.

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

1. utility (use, pleasure, jollies) from the consumption of commodities. 2. The change in utility derived from the consumption of one more unit of a commodity is called marginal utility. 3. Diminishing marginal utility is the fact that at some point further consumption of a commodity adds smaller and smaller increments to the total utility received from the consumption of that commodity. b. The income effect is the fact that as a person's income increases (or the price of item goes down [which effectively increases command over goods] more of everything will be demanded. c. The substitution effect is the fact that as the price of a commodity
increases, consumers will buy less of it and more of other commodities.

3. Demand Curve a. Price and quantity - again the demand curve shows the negative relation between price and quantity. b. Individual versus market demand - a market demand curve is simply an aggregation of all individual demand curves for a particular commodity. c. Nonprice determinants of demand; and a shift to the left (right) of the demand curve is called a decrease (increase) in demand. The nonprice determinants of demand are: 1. tastes and preferences of consumers, 2. the number of consumers, 3. the money incomes of consumers, 4. the prices of related goods, and 5. consumers' expectations concerning future availability or prices of the commodity.

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

d. Changes in demand versus in quantity demanded

An increase in demand is shown in the first panel, notice that at each price there is a greater quantity demanded along D2 (the dotted line) than was demanded with D1 (the solid line). The second panel shows a decrease in demand, notice that there is a lower quantity demanded at each price along D2 (the dotted line) than was demanded with D1(the solid line).

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Movement along a demand curve is called a change in the quantity demanded. Changes in quantities demanded are caused by changes in price. When price decreases from P1 to P2, the quantity demanded increases from Q1 to Q2; when price increases from P2 to P1 the quantity demanded decreases from Q2 to Q1. 4. The law of supply is that producers will supply more the higher the price of the commodity. a. Supply schedule - are the quantities supplied at each and every price. 5. Supply curve - is nothing more than a schedule of the quantities at each and every price. a. There is a positive relation between price and quantity on a supply curve. b. Changes in one or more of the nonprice determinants of supply cause the supply curve to shift. A shift to the left of the supply curve is called a decrease in supply; a shift to the right is called an increase in supply. The non price determinants of supply are: 1. resource prices, 2. technology, 3. taxes and subsidies, 4. prices of other goods, 5. expectations concerning future prices, and 6. the number of sellers.

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

A decrease in supply is shown in the first panel, notice that there is a lower quantity supplied at each price with S2 (dotted line) than with S1 (solid line). The second panel shows an increase in supply, notice that there is a larger quantity supplied at each price with S2 (dotted line) than with S1 (solid line).

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

The following graphical analysis portrays a market in equilibrium. Where the supply and demand curves intersect, equilibrium price is determined (Pe) and equilibrium quantity is determined (Qe)

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

8. What Highlights of the law of demand: 1. The relationship between price and quantity demanded is inverse. 2. Price is the independent variable and demand the dependent variable. 3. Law of demand assumes that except for price and demand, other factors remain constant. 9. What is Demand Shift: (Change in demand) Factors shift the demand for a particular product either on the right side of the demand curve or to the left side of the demand curve based on the changes in price. These factors, other than the price of a good that influence demand are known as demand shifters. The shift in the demand either to the left or right is called the demand shift. 10. What are the Exceptions to law of demand: 1. In share markets on would have noticed that the rise in price of the shares increases, the sales of the shares while decrease in the price of the shares results in decrease of sale of the shares. 2. Some goods which act as status symbol and have a snob appeal fall under this category. Here when the price of the product rises then the appeal of the product also rises and thus the demand. Some example are diamonds and antiques. 3. Finally, ignorance on the part of the consumer may cause the consumer to buy at a higher price, especially when the rise in price is taken to mean an improvement in quality and a reduction in price as deterioration in quality. 11.Define Individual demand : The quantity of a product demanded by an individual purchaser at a given price is known as individual demand.

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

12.Define Market demand : The total quantity demanded by all the purchasers together is known as the market demand. 13. What are the types of Demand function 1. Consumption function 2. Product consumption function 3. Differences in regional incomes 4. Income expectation and demand 14. What are the Characteristics of demand function ? 1. The long run relationship between consumption and income is some what stable, and expenditure on consumption is usually about 85 to 90% of the income. 2. The consumption function is highly unstable in short runs and the relationship between income and consumption cannot be predicted by any mathematical formula. 3. During the periods of economic prosperity, there is an absolute increase in the expenditure on consumption, but decrease as a percentage of income during periods of depression, the consumption declines absolutely but the expenditure on the consumption increases as a percentage of income. 4. In the periods of economic recovery, the rate of increase in consumption is higher than the rate of the decline in consumption in times of recession. 15. Define Product consumption function: This function can be defined as the relationship between the total income of the consumer and sales of particular products. It means that when there is a change in income there is a change in the demand for particular products. 16. Define Income expectations and Demand:

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Expectations are related to peoples estimates of the level and durability of the future economic conditions. The demand for many consumer durables (household appliances like TV, Washing machine, etc) is often sensitive to general expectations regarding income level. 17. What are the features of advertising demand relationship ? 1. Even when there is no advertising effort done, there will be a certain amount of sales possible for a particular product by virtue of its presence in the market. 2. There is a direct relationship between advertising and sales. Thus when there is an increased spending on advertisements. It will bring in more sales. 3. Increase in advertisements will lead to more than proportionate increase in sales only to a point. After that any increase in advertisement will have only less than proportionate effect on sales.

18. Define Elasticity of Demand: Elasticity of demand is defined as the percentage change in quantity demanded caused by one percent change in the demand determinant under consideration, while other determinants are held constant. 19. Define demand determinant It is the degree of change in demand to the degree of change in any of the demand determinants. 20.What are the Various Elasticities ?
1. Price elasticity of demand

2. Income elasticity of demand 3. Cross elasticity of demand 4. Promotional elasticity 5. Exportations elasticity of demand

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

21. Define Price Elasticity of Demand Price elasticity of demand can be defined as the degree of responsiveness of quantity demanded to a change in price. 22. What are the Types of price elasticity: 1. Perfectly elastic demand 2. Absolutely inclastic demand or perfectly inelastic demand 3. Unit elasticity of demand 4. Relatively elastic demand 5. Relatively inelastic demand 23.Define Absolutely inelastic demand or perfectly inelastic demand (ep=): Absolutely inelastic demand is where a change in price howsoever large, causes no change in the quantity demanded of a product. Here, the shape of the demand curve is vertical. 24.Define Relatively elastic demand (ep>1): It is where a reduction in price leads to more than proportionate change in demand. Here the shape of the demand curve in flat. 25.What are theFactors determining price elasticity of Demand ? The elasticity of demand depends on the following factors namely 1. Nature of the product 2. Extent of usage 3. Availability of substitutes 4. Income level of people 5. Proportion of the income spent of the product 6. Urgency of demand and 7. Durability of a product.

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)