Theory Of Demand~~~~PROJECT PART 1

NOTE: These post will be considered as Theory of Demand~~~~Part 4 as it covers the PED, YED and XED.


In general, during the presentation of the project, we were discussing about the factors affecting supply, demand, Price Elasticity of Demand(PED), Income Elasticity of Demand(YED), and Cross Elasticity of Demand(XED).

FACTORS AFFECTING DEMAND~~~
The factors include, change in people's income, population, fashion and tastes, substitute and complementary goods and advertising.
When peoples income increases, they would want to buy more and more; thus increasing demand. A fall in income however would also lead to a fall in demand. @.@

A picture from http://www.fivecentnickel.com/2011/03/03/adjusting-to-an-increase-in-income/
by Laura Martinez

An increase in population will also increase the demand for G&S and visa versa.(You don't say.....)
Because of us humans being very choosy and only choose things to our liking's. For example;

 "MAMA, I don't want that phone!"says Junior Robert. "Why's that son?" says Mama. And Robert replies "'cause it's soo out of fashion! Who uses flip-open phones these days?" 

What J. Robert does not want...
From www.gadgetreview.com

...and what he saw next door...begging his Mama to get it...
From www.telegraph.co.uk

=.=

...and that leads to the fashion and taste point. If firms are able to identify and be up-to-date with fashions, they 'should' have an increase in demand. If not, well, they've just lost Junior Robert in the potential consumer's list.

As for the substitute and complementary goods, well, I THINK I've stated their meaning in the previous TOD chapters so refer back XD but anyways.... How do they affect the demands? Simple, if one G&S were to have a change in price, say decrease, then the demand for the substitute G&S would increase. For the Complementary G&S, if supply for the 'main' product(cars) were to increase, then the demand for the substitute product(petrol) would increase.

Advertising, the most basics of basics, is a method used often by almost every firms to attract consumers to buy their G&S, thus an increase in demand.


FACTORS AFFECTING SUPPLY~~~
As stated in the beginning TOD Part 2~~~~ no matter how many demands a firm receives, the extra demands will going down the gutter if firms are UNABLE to fulfill them.
This would refer to the ability and capacity to produce the G&S. This can come from an improvement in technology, expertise, and change in cost of production(COP).

Technology has helped mankind in thousands of ways and it is because of these machines that firms continues to thrive with new machinery; leading to an increase in efficiency. This is more to the capital intensive method, where firms relies on machines more than labour.

The old fahioned was of washing...
From www.primaculture.com

...to this.
From www.savegaselectricity.com

Expertise would basically mean the strong points of a firms labour. An accountant that's lazy to.... count(?) ...doesn't quite fit into the picture, otherwise the firm will have no idea on their capital. So the expertise and how a firm uses them to their maximum potential is key to having a good firm that can fulfill all their demands.

As for the COP... increase in the cost of any factor of production may result in the decrease in supply as reduced profits might see producers less willing to produce that certain G&S.

PRICE ELASTICITY OF DEMAND(PED)~~~

This would refer to the responsiveness of the quantity demanded(Qd) of a G&S to a change in it's price(P).
It's formula can be written as;

PED= (%change in Qd)/(%change in P)

There's something special about PED, and that is their value is constantly a -ve value. That's cause the graph is downward sloping(Most of the time).

In some cases, they are horizontal and not touching the Quantity(X-axis) which shows it's a Perfectly Elastic Demand; meaning that for a given price, the Qd is infinite. However, if there is a slight change in price then Qd might decrease to 0.

From en.wikipedia.org.
Since there's lil time, too lazy to 'draw' it. SRY!!!

There are also situations where the DD curve is in vertical position, not touching the Price(Y-axis). This means that even for a big change in price, there'll be little or no change in Qd. This is better known as Perfectly Inelastic Demand. A good example would be oil. Did you know, that around 10 years ago, oil was sold at around RM1.00 per litre? Now it's like RM1.90 per litre. Have your parents stopped buying petrol? Instead, I bet, they've bought more cars...@.@

www2.yk.psu.edu

Case 1: When there is a change in percentage for Price, there is a bigger change in percentage for demand. This shows that the G&S is elastic, as a slight change in Price will make a big impact on demand. This would happen when PED>1

Over here, we can see that a small decrease in P from P1 to P2 (Say 10 %), the Qd has increased greatly from Q1 to Q2(Say 20%).
From www.agmrc.org

Case 2: Inelastic demand (PED<1) shows that even if there was a big change in Price, there'll only be a small change in Qd.

In this picture, we can see that a big decrease in P from P1 to P2(say 20%), the Qd has increased only slightly from Q1 to Q2 (Say 10%).
From www.agmrc.org  

Case 3: This is when the PED=1. It is also known as Unitary DD. This is when the percentage change in P would equal to the percentage change in Qd

Over here, it is quite clear that the change in P is approximately the same as the change in Qd.
From en.wikibooks.org

PED has their own determinants, such as the availability of substitute G&S, degree of necessity/essentially, proportions of income spent on the goods, time and habit's formed.

To 'cut' a grandma's story short: availability of sub. G&S- if there are many, then the goods would most likely be elastic,(stated when talking about factors affecting demand) and visa versa.

Degree of necessity- If it's important to the consumer, no matter how much the price changes, the consumer will continue to buy the G&S(a cause for inelastic DD) and visa versa.

Proportions of income spent on that G&S-If P of the G&S is a small % in the consumers income, then he/she will continue buying it and if P of the G&S is a big % in the consumers income, then he/she will might stop buying it if the price increases even a little. Why buy Subway that costs around 1/5 of your pocket money when you can buy a burger that costs around 1/8 of your pocket money?

Habit- It's hard to suddenly change from being a frequent buyer of Pringels to buy Mr Potato, right?!?!?!

Time- There are two terms within time, short-term and long-term. In short-term, it basically means that even if the price were to change a lot, people might still continue to buy it as no close substitutes has been found. However, in the long-term Qd would change greatly as consumers has found a substitute to the G&S.

[TO BE CONTINUED....]