According to the law of demand there is close relationship between price and demand. When the price will be change then the demand also change. Law of demand, The law of demand is an economic law that states that Consumers buy more of a good when its price decreases and less when Its price increases. The consumers demand for the good will move opposite to the movement in the price of the good. So the relation of law of demand will be negative and downward slope. The equation of law of demand is.
Qx = f(Px)
Elasticity of demand.
It was devised by Alfred Marshall. It gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income).The relationship between change in price and demand is indicate the concept of elasticity of demand.
Mathematical definition
There income elasticity of demand can be fall into different categories,like Greater then 1 (normal goods) Less then 1 (inferior goods) Equal to unity (normal goods)
INFERIOR GOODS:
an inferior good is a good that decreases in demand when consumer income rises, Good of which less is consumed (rather than more) when the consumer's income increases. For example, consumers hamburger is an inferior good because when income increases, they can afford to consume more steak and, so, less hamburger. For example, Cheaper cars are examples of the inferior goods. Consumers will generally prefer cheaper cars when their income is constricted. But as a consumer's income increases the demand of the cheap cars will decrease, but on the other hand demand of costly cars will increase, so cheap cars are inferior goods. Intercity bus service is also an example of an inferior good. This form of transportation is cheaper than air or rail travel, but is more time-consuming. When money is constricted, travelling by bus becomes more acceptable, but when money is more abundant than time, more rapid transport is preferred. A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes. Its also called less then unity. There graph will be negative slope.
Characteristics:
Income increase demand decrease (-ve) relationship Downward slop Less elasticity of demand /Unresponsivness elasticity of demand /inelasticity of demand Less then 1. Inverse relationship
NORMAL GOODS:
normal goods are any goods for which demand increases when income increases and falls when income decreases but price remains constant, Another says, A normal good is one that experiences an increase in demand as the real income of an individual or economy increases. The amount of a good bought can either increase, decrease, or stay the same when income increases. For example, A normal good is anything that you are willing and able to buy when your income increases or the price decrease. Normal goods: NEW clothing, NEW car, NEW computer, ,roast. ,beef ,sandwiches Inferior goods: USED clothing, USED car, USED computer, bologna sandwiches There relation of goods will be positive and we cannot draw its graph due to positive relation because it graph shows the supply curve.
Including:
Luxury good - Perception Luxury good - Market Characteristics
Characteristics:
Income increase demand also increase Direct relationship (+ve) relationship More elastic / responsiveness elasticity of demand No diagram More then 1
Equal to unity:
There are also the positive relation due to normal goods that are related these goods, When the equal change in demand due to change in income it will be equal to unity. For example: Income increase is one person then its demand also increase in its same ratio which his income increase there will be called equal change in elasticity of demand, We also cannot draw this graph due to positive relationship.
Characteristics:
Income increase demand increase equally Direct relationship (+ve) relation Perfect inelasticity of demand Equal to 1.
Mathematical formula:
We go back to our formula of: CPEoD = (% Change in Quantity Demanded of Good X)/(% Change in Price of Good Y) For example, For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be:
There are may be fall into: Greater then 1 (substitute goods) Less then 1 (complementary goods) Equal to 0 (independent goods) Now we can explain these terms one by one,
SUSTITUTE GOODS:
This means a good's demand is increased when the price of another good is increased. Conversely, the demand for a good is decreased when the price of another good is decreased. If goods A and B are substitutes, an increase in the price of A will result in a leftward movement along
the demand curve of A and cause the demand curve for B to shift out. A decrease in the price of A will result in a rightward movement along the demand curve of A and cause the demand curve for B to shift in. With substitute goods such as brands of cereal or washing powder, an increase in the price of one good will lead to an increase in demand for the rival product. Cross price elasticity for two substitutes will be positive. For example, in recent years, the prices of new cars have been either falling or relatively flat. Data on price indices for new cars and second hand cars is shown in the chart below. As the price of new cars relative to peoples incomes has declined, this should increase the market demand for new cars and (ceteris paribus) reduce the demand for second hand cars. We can see that there has been a very marked fall in the prices of second hand cars. Therefore, the relation of substitutes goods are positive because when the price of one commodity will be increase or decrease so the quantity demand of other commodity will also move the same direction like increase or decrease.
Characteristics:
Increase in price of one commodity then the increase in demand for another commodity Direct relationship (+ve) relation More elasticity of demand Responsiveness elasticity of demand Ed >1
Complementary goods:
This means a good's demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased.[2] If goods A and B are complements, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift in; less of each good will be demanded. A decrease in price of A will result in a rightward movement along the demand curve of A and cause the demand curve B to shift outward; more of each good will be demanded. An example of this would be the demand for hotdogs andhotdog buns. The supply and demand of hotdogs is represented by the figure at the right with the initial demand D1. Suppose that the initial price of hotdogs is represented by P1 with a quantity demanded of Q1. If the price of hotdog buns were to decrease by some amount, this would result in a higher quantity of hotdogs demanded. This higher quantity demanded would cause the demand curve to shift outward to a new position D2. Assuming a constant supply S of hotdogs, the new quantity demanded will be at D2 with a new price P2. Other examples include:
Peanut butter and jelly Printers and ink cartridges DVD players and DVDs Computer hardware and computer software
Characteristics:
Inverse relation Price increase of one commodity then Qd decrease in other commodity Ed<1 Unresponsiveness elasticity od demand Less elasticity of demand
INDEPENDENT GOODS:
Independent goods are goods that have a zero cross elasticity of demand. Changes in the price of one good will have no effect on the demand of an independent good. A person's demand of nails is independent of his or her demand for bread.
Characteristics:
Price change but the Qd remain constant No relationship Ed =0 Horizontal slop
Points:
Enough time is allowed pass. Consumer and producer fully adjust the price change Effect on demand Some time the price rises but the demand fall slowly.