In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given period of time. The relationship between price and quantity demanded is also known as the demand curve. Preferences which underlie demand, are influenced by cost, benefit, odds and other variables.
1 Factors influencing demand
4.1 Elasticity along linear demand curve 4.2 Constant price elasticity demand 4.3 Perfectly elastic demand 4.4 Perfectly inelastic demand
5 Market structure and the demand curve
6 Inverse demand function
7 Residual demand curve
13.1 In psychopharmacology 13.2 In energy conservation
14 See also 15 Notes 16 Further reading 17 External links
Factors influencing demand
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Price elasticity of demand
Elasticity along linear demand curve The slope of a linear demand curve is constant. The elasticity of demand changes continuously as one moves down the demand curve because the ratio of price to quantity continuously falls. At the point the demand curve intersects the y-axis PED is infinitely elastic, because the variable Q appearing in the denominator of the elasticity formula is zero there. At the point the demand curve intersects the x-axis PED is zero, because the variable P appearing in the numerator of the elasticity formula is zero there. At one point on the demand curve PED is unitary elastic: PED equals one. Above the point of unitary elasticity is the elastic range of the demand curve (meaning that the elasticity is greater than one). Below is the inelastic range, in which the elasticity is less than one. The decline in elasticity as one moves down the curve is due to the falling P/Q ratio.
Constant price elasticity demand Constant elasticity of demand occurs when
Q = a
displaystyle Q=aP^ c
where a and c are parameters, and the constant price elasticity is
c ≤ 0.
displaystyle cleq 0.
Perfectly elastic demand Perfectly elastic demand is represented by a horizontal demand curve. Under perfect price elasticity of demand, the quantity demanded is directly correlated with the price. Any change in price would infinitely change the quantity demanded. All of the market demand for the commodity or good is only at one price. The market demand is zero at any other price. Goods with highly elastic demand are typically goods with many substitutes as well as very expensive, luxury goods. An example of a good with perfectly elastic demand would be pizza or sports cars.
Perfectly inelastic demand Perfectly inelastic demand is represented by a vertical demand curve. Under perfect price inelasticity of demand, the price has no effect on the quantity demanded. The demand for the good remains the same regardless of how low or high the price. Goods with (nearly) perfectly inelastic demand are typically goods with no substitutes. For instance, insulin is nearly perfectly inelastic. Diabetics need insulin to survive so a change in price would not effect the quantity demanded.
Market structure and the demand curve In perfectly competitive markets the demand curve, the average revenue curve, and the marginal revenue curve all coincide and are horizontal at the market-given price. The demand curve is perfectly elastic and coincides with the average and marginal revenue curves. Economic actors are price-takers. Perfectly competitive firms have zero market power; that is, they have no ability to affect the terms and conditions of exchange. A perfectly competitive firm's decisions are limited to whether to produce and if so, how much. In less than perfectly competitive markets the demand curve is negatively sloped and there is a separate marginal revenue curve. A firm in a less than perfectly competitive market is a price-setter. The firm can decide how much to produce or what price to charge. In deciding one variable the firm is necessarily determining the other variable
Inverse demand function Main article: Inverse demand function In its standard form a linear demand equation is Q = a - bP. That is, quantity demanded is a function of price. The inverse demand equation, or price equation, treats price as a function g of quantity demanded: P = f(Q). To compute the inverse demand equation, simply solve for P from the demand equation. For example, if the demand equation is Q = 240 - 2P then the inverse demand equation would be P = 120 - .5Q, the right side of which is the inverse demand function. The inverse demand function is useful in deriving the total and marginal revenue functions. Total revenue equals price, P, times quantity, Q, or TR = P×Q. Multiply the inverse demand function by Q to derive the total revenue function: TR = (120 - .5Q) × Q = 120Q - 0.5Q². The marginal revenue function is the first derivative of the total revenue function; here MR = 120 - Q. Note that the MR function has the same y-intercept as the inverse demand function in this linear example; the x-intercept of the MR function is one-half the value of that of the demand function, and the slope of the MR function is twice that of the inverse demand function. This relationship holds true for all linear demand equations. The importance of being able to quickly calculate MR is that the profit-maximizing condition for firms regardless of market structure is to produce where marginal revenue equals marginal cost (MC). To derive MC the first derivative of the total cost function is taken. For example, assume cost, C, equals 420 + 60Q + Q2. Then MC = 60 + 2Q. Equating MR to MC and solving for Q gives Q = 20. So 20 is the profit maximizing quantity: to find the profit-maximizing price simply plug the value of Q into the inverse demand equation and solve for P.
Residual demand curve The demand curve facing a particular firm is called the residual demand curve. The residual demand curve is the market demand that is not met by other firms in the industry at a given price. The residual demand curve is the market demand curve D(p), minus the supply of other organizations, So(p): Dr(p) = D(p) - So(p )
Is the demand curve for PC firm really flat? Practically every introductory microeconomics text describes the demand curve facing a perfectly competitive firm as being flat or horizontal. A horizontal demand curve is perfectly elastic. If there are n identical firms in the market then the elasticity of demand PED facing any one firm is
PEDmi = nPEDm - (n - 1) PES where PEDm is the market elasticity of demand, PES is the elasticity of supply of each of the other firms, and (n -1) is the number of other firms. This formula suggests two things. The demand curve is not perfectly elastic and if there are a large number of firms in the industry the elasticity of demand for any individual firm will be extremely high and the demand curve facing the firm will be nearly flat. For example, assume that there are 80 firms in the industry and that the demand elasticity for industry is -1.0 and the price elasticity of supply is 3. Then
PEDmi = (80 x (-1)) - (79 x 3) = -80 - 237 = -317 That is the firm PED is 317 times as elastic as the market PED. If a firm raised its price "by one tenth of one percent demand would drop by nearly one third." if the firm raised its price by three tenths of one percent the quantity demanded would drop by nearly 100%. Three tenths of one percent marks the effective range of pricing power the firm has because any attempt to raise prices by a higher percentage will effectively reduce quantity demanded to zero.
Different types of goods demand
Negative demand: If the market response to a product is negative, it
shows that people are not aware of the features of the service and the
benefits offered. Under such circumstances, the marketing unit of a
service firm has to understand the psyche of the potential buyers and
find out the prime reason for the rejection of the service. For
example: if passengers refuse a bus conductor's call to board the bus.
The service firm has to come up with an appropriate strategy to remove
the misunderstandings of the potential buyers. A strategy needs to be
designed to transform the negative demand into a positive demand.
No demand: If people are unaware, have insufficient information about
a service or due to the consumer's indifference this type of a demand
situation could occur. The marketing unit of the firm should focus on
promotional campaigns and communicating reasons for potential
customers to use the firm's services. Service differentiation is one
of the popular strategies used to compete in a no demand situation in
Latent demand: At any given time it is impossible to have a set of
services that offer total satisfaction to all the needs and wants of
society. In the market there exists a gap between desirables and the
availables. There is always a search on for better and newer offers to
fill the gap between desirability and availability. Latent demand is a
phenomenon of any economy at any given time, it should be looked upon
as a business opportunity by service firms and they should orient
themselves to identify and exploit such opportunities at the right
time. For example, a passenger traveling in an ordinary bus dreams of
traveling in a luxury bus. Therefore, latent demand is nothing but the
gap between desirability and availability.
Seasonal demand:Some services do not have an all year round demand,
they might be required only at a certain period of time. Seasons all
over the world are very diverse. Seasonal demands create many problems
to service organizations, such as:- idling the capacity, fixed cost
and excess expenditure on marketing and promotions. Strategies used by
firms to overcome this hurdle are like - to nurture the service
consumption habit of customers so as to make the demand unseasonal, or
other than that firms recognize markets elsewhere in the world during
the off-season period. Hence, this presents and opportunity to target
different markets with the appropriate season in different parts of
the world. For example, the need for Christmas cards comes around once
a year. Or the, seasonal fruits in a country.
Criticism E. F. Schumacher challenges the prevailing economic assumption that fulfilling demand is the purpose of economic activity, offering a framework of what he calls "Buddhist economics" in which wise demands, fulfilling genuine human needs, are distinguished from unwise demands, arising from the five intellectual impairments recognized by Buddhism:
.mw-parser-output .templatequote overflow:hidden;margin:1em 0;padding:0 40px .mw-parser-output .templatequote .templatequotecite line-height:1.5em;text-align:left;padding-left:1.6em;margin-top:0 The cultivation and expansion of needs is the antithesis of wisdom. It is also the antithesis of freedom and peace. Every increase of needs tends to increase one’s dependence on outside forces over which one cannot have control, and therefore increases existential fear. Only by a reduction of needs can one promote a genuine reduction in those tensions which are the ultimate causes of strife and war.
In energy conservation Main article: Energy demand management Energy demand management, also known as demand-side management (DSM) or demand-side response (DSR), is the modification of consumer demand for energy through various methods such as financial incentives and behavioral change through education.
^ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. p. 79. ISBN 9780131334830..mw-parser-output cite.citation font-style:inherit .mw-parser-output .citation q quotes:"""""""'""'" .mw-parser-output .citation .cs1-lock-free a background:url("//upload.wikimedia.org/wikipedia/commons/thumb/6/65/Lock-green.svg/9px-Lock-green.svg.png")no-repeat;background-position:right .1em center .mw-parser-output .citation .cs1-lock-limited a,.mw-parser-output .citation .cs1-lock-registration a background:url("//upload.wikimedia.org/wikipedia/commons/thumb/d/d6/Lock-gray-alt-2.svg/9px-Lock-gray-alt-2.svg.png")no-repeat;background-position:right .1em center .mw-parser-output .citation .cs1-lock-subscription a background:url("//upload.wikimedia.org/wikipedia/commons/thumb/a/aa/Lock-red-alt-2.svg/9px-Lock-red-alt-2.svg.png")no-repeat;background-position:right .1em center .mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration color:#555 .mw-parser-output .cs1-subscription span,.mw-parser-output .cs1-registration span border-bottom:1px dotted;cursor:help .mw-parser-output .cs1-ws-icon a background:url("//upload.wikimedia.org/wikipedia/commons/thumb/4/4c/Wikisource-logo.svg/12px-Wikisource-logo.svg.png")no-repeat;background-position:right .1em center .mw-parser-output code.cs1-code color:inherit;background:inherit;border:inherit;padding:inherit .mw-parser-output .cs1-hidden-error display:none;font-size:100% .mw-parser-output .cs1-visible-error font-size:100% .mw-parser-output .cs1-maint display:none;color:#33aa33;margin-left:0.3em .mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration,.mw-parser-output .cs1-format font-size:95% .mw-parser-output .cs1-kern-left,.mw-parser-output .cs1-kern-wl-left padding-left:0.2em .mw-parser-output .cs1-kern-right,.mw-parser-output .cs1-kern-wl-right padding-right:0.2em
^ Colander, David C. Microeconomics 7th ed. pp. 132–133. McGraw-Hill 2008.
^ The perfectly competitive firm's demand curve is not in fact flat. However, if there are numerous firms in the industry the demand curve of an individual firm is likely to be extremely elastic, for a discussion of residual demand curves see Perloff (2008) at pp. 245–246.
^ The form of the inverse linear demand equation is P = a/b - 1/bQ.
^ Samuelson, W & Marks, S. Managerial
^ a b c Perloff, Jeffrey M. (2008). Microeconomics. pp. 243–246.
^ E. F. Schumacher, “Buddhist Economics,” in Asia: A Handbook, Guy Wint, ed., (London: 1966).
^ E. F. Schumacher, Small is Beautiful (1973), p. 31.
Friedman, Milton (December 1949). "The Marshallian
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