DEMAND

the desire to own anything, the ability to pay for it, and the willingness to pay during a specific period.

Elements of the Law of Demand As Melvin and Boyes

The quantity of a well-defined good or service. People are willing and able to buy. During a particular period of time. Decreases/increases as the price of that good or service rises/falls. All other factors remain constant.

Factors affecting demand

Good's own price Price of related goods Personal Disposable Income Tastes or preferences Consumer expectations about future prices and income

Demand Curve

Price Elasticity of Demand

The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand (PEoD) is: PEoD = (% Change in Quantity Demanded)/(% Change in Price) Or = P/Q Q/P

Interpreting values of price elasticity

0= perfectly inelastic demand 0-1= inelastic demand 1= unitary elasticity 1-= elastic = perfectly elastic

example : You are a cement producer who has to calculate the price elasticity of demand at various points

Price ($ per ton) 50 40 30

Quantity (thousands of tons) 500 600 700

20
10

800
900

Find the price elasticity of demand at various points along the demand curve. You decide to calculate elasticity by examining the effects of price declines from $50 to $40, $40 to $30, etc. To calculate the price elasticity of demand between a price of $50 and $40 on the demand curve, divide the percentage change in quantity demanded by the percentage change in price.

Similarly, you can find the elasticity between prices of $40 and $30, $30 and $20, and $20 and $10.

Income Elasticity of Demand

measures the relationship between a change in quantity demanded for good X and a change in real income. FORMULA YED= % change in demand divided by the % change in income Or YED= Y/Q Q/Y

Normal goods have a positive income elasticity of demand so as consumers income rises, so more is demanded at each price level i.e. there is an outward shift of the demand curve Inferior goods have a negative income elasticity of demand. Demand falls as income rises. Typically inferior goods or services tend to be products where there are superior goods available if the consumer has the money to be able to buy it.

Interpretation
We have to look at the size and the sign of a particular figure. -If the sign is positive and the size is greater than 1, its a income elastic. - If the sign is negative and the size is smaller than 1, its a income inelastic.