1. 3/21/2012
DEMAND… Meaning
Unit – II Engineering Economics Demand = Desire to buy
Meaning of Demand + Ability to pay
Individual and Market Demand Schedule
Law of Demand
+ Willingness to pay
Backed up by adequate P u r c h a s i n g Powe r
Shape of Demand Curve Always at a P r i c e
Elasticity of demand – Always be expressed in terms of specific Q u a n t i t y
Measurement, Related to T i m e
Affecting Factors, Pourush
Sachin
Practical importance Sachin Pourush
Demand… definition The Circular Flow Model
The demand for a particular good is the amount that Markets and Prices
will be purchased at a given price and at a given time.
Inputs
> Inputs
Input Markets
- Veera Anstey
Exp
Income
The demand for anything, at a given price, is the
amount of it which will be bought per unit of time at Households
Firms
that price.
Exp Rev
- Benhaur
Products Product Markets Products
Demand is defined as the amount of commodity or
service bought per unit of time at a given price. <
Sachin Pourush - Edward Sachin Pourush
Characteristics of Demand Determinants of Demand
It is expressed in numbers rather approximation Price of the Commodity (P)
Its backed up by ability to pay Price of related commodity (Pr)
Demand must mean demand per unit of time means Price expectation in future (Pe)
quantity demanded is a flow (e.g. 1Mn Oranges/week) Taste & preference (T)
Demand is always in a market Income of consumer (Y)
Individual-specific or environmental factors (S)
Demand Function
Mathematically,
Dx = f (P, Pr, Pe, T, Y, S)
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2. 3/21/2012
Few other Determinants of Demand Demand Function
Sachin
Pourush
Income distribution Demand is a function of various factors like:
Wealth distribution
Price Price of related
Population size commodity
Population age distribution Taste & Preference
The interest rate
Functions
Price
Expected
Income Level
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Types of Demand Price Demand
Price Demand* The relationship between the price and demand of a
Cross Demand* commodity, other things remains constant
Individual Demand & Market Demand
Income Demand* Mathematically, 2.00
1.75
Long run or Short run Demand Dx = f (Px) As price rises, the quantity
demanded falls
1.50
Industry or Company Demand 1.25
1.00
0.75
0.50
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Demand
Income Demand Cross Demand
The relationship between income of the consumer and The demand derived from the relation between the
the quantity demanded of a commodity, other things price of related commodity (substitute or
being equal complementary) and the quantity demanded
2.00 2.00
1.75 As income rises, the Mathematically, 1.75 Fall in price of one commodity
quantity demanded rises raises the demand for other
1.50 1.50
Mathematically, Dx = f (Ps)
1.25 1.25
Dx = f (Y) 1.00 1.00
0.75 0.75
0.50 0.50
0 7 Sachin Pourush
9 11 13 15 17 0 7 Sachin Pourush
9 11 13 15 17
Demand Demand
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3. 3/21/2012
Cross Demand Demand Schedule
The demand derived from the relation between the Demand Schedule is one way Demand Schedule for Coffee Beans
price of related commodity (substitute or of showing the relationship Price of coffee Quantity of coffee
complementary) and the quantity demanded between quantity demanded beans (per Rupee) beans demanded
& price.
2.00 7.1
2.00 OR
Mathematically, 1.75 With fall in price of good, demand for A series of prices placed in 1.75 7.5
complementary good falls
Dx = f (Pc)
1.50
ascending / descending order 1.50 8.1
1.25
with corresponding quantities. 1.25 8.9
1.00
0.75
It is a numerical tabulation 1.00 10.0
0.50
that shows the quantity that
0.75 11.5
will be demanded at some
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selected price. 0.50 14.2
Demand
Demand Schedule Types of Demand Schedule
Analyzing given demand Demand Schedule for Coffee Beans
Individual Demand Schedule
schedule for Alice, who often eats
Price of coffee Quantity of coffee
Coffee beans in her breakfast, beans (per Pound) beans demanded
A schedule or a list of various quantities of a
living her own, we can say: (per gallon) commodity which an individual consumer purchases
She often keeps an eye on the $ 2.00 7.1 at different prices in market
price i.o.t to trade-off its 1.75 7.5
consumption within her income. Market Demand Schedule
1.50 8.1
She increases her consumption A schedule which represents quantities of a
when the price get lower and 1.25 8.9
vice-versa
commodity which all consumers will buy at all
1.00 10.0 possible prices at a given moment.
0.75 11.5
0.50 14.2 Sachin Pourush
Individual Demand Schedule Individual Demand Curve
A schedule or a list of various quantities of a It is a graph of the individual
commodity which an individual consumer purchases at demand schedule
different prices in market 6
5
Price of Milk per Kg. Quantity Demanded by Jena It shows how much of a consumer
(in Rupees) (in Kg.) 4
want to buy at any given price
5 1 3
and,
2
4 2
1
3 3 Alternatively, it shows how much
0 1 2 3 4 5
2 4 a consumer is willing to pay for Quantity of coffee beans
(billions of pounds)
each unit of a good.
1 5
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4. 3/21/2012
Market Demand Schedule Market Demand Curve
A schedule which represents quantities of a commodity The market demand curve is the horizontal sum of the individual
which all consumers will buy at all possible prices at a demand curves of all consumers in that market.
given moment. (a) (b) (c)
Symbolically, Zena’s Individual
Demand Curve
Kane’s Individual
Demand Curve
Market Demand Curve
DM = DA + DB + … + Dn Price of
coffee
Price of
coffee
Price of
coffee
beans (per beans (per beans (per
pound) pound) pound)
Price of Milk ($) Demand of Zena Demand of Kane Market Demand $2 $2 $2
5 1 2 1+2=3
DMarket
4 2 3 2+3=5 1 1 1
DDarla DDino
3 3 4 3+4=7
2 4 5 4+5=9 0 20 30 0 10 20 0 30 40 50
Quantity of coffee beans Quantity of coffee beans Quantity of coffee beans
1 5 6
Sachin Pourush 5 + 6 = 11 (pounds) Sachin Pourush
(pounds) (pounds)
Definitions of Law of Demand Law of Demand… With an Example
Demand Schedule for Coffee Beans
The law of demand states that amount demanded Analyzing given demand
increases with a fall in price and diminishes with a rise in schedule for Alice, who Price of coffee beans Quantity of coffee
price. often eats Coffee beans in (per Rupee) beans demanded
Marshall her breakfast, living her 2.00 7.1
Law of demand states that people will buy more at lower own, we can say:
prices and buy less at higher prices, ceteris paribus, (or 1.75 7.5
She increases her
other things remaining the same). 1.50 8.1
consumption when the price
Samuelson
get lower and vice-versa 1.25 8.9
Usually a larger quantity of a commodity will be
demanded at a lower price that a higher price. She often keeps an eye on 1.00 10.0
Benham the price i.o.t to trade-off 0.75 11.5
its consumption within her
Sachin Pourush Sachin Pourush
0.50 14.2
income.
Alice’s Demand Curve Features of Law of Demand
Price of A demand curve is a graph of the
coffee bean
(per gallon) demand schedule; it shows how much There is an inverse relationship between price and
of a good consumers want to buy at quantity demanded.
any given price and, alternatively, it
$2.00
shows how much a consumer is Demand is a dependent variable over the
willing to pay for each unit of a independent variable Price
1.75 good.
1.50 (The curve below is interpolated It is merely a qualitative statement. As such it does
1.25 from 7 demand points.) not indicate quantitative changes in price and
1.00 demand.
0.75 As price rises,
the quantity
Demand Generally, the demand curve slopes downwards
curve, D
0.50 demanded falls
from left to right.
0 7 9 11 13 15 17
Sachin Pourush
Quantity of coffee beans Sachin Pourush
(billions of pounds)
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5. 3/21/2012
Exceptions To The Law of Demand Why The Curve is Downward Sloped
Sachin
Pourush
With fall in price, demand falls & vice-versa Law of diminishing marginal utility
Giffen’s Paradox People tend to switch towards superior goods
High level of consumption, when price is low
Veblen’s Effect Demand of goods portraying status symbol
Fear of Shortage Anticipating future shortage, people purchase more
New consumers enter to the market of a product
Fear of Future Rise In Price Fall in price of a superior good leads to rise in ‘Real
Speculation Expecting rise or fall in prices
Conspicuous Consumption Special uses in modern lifestyle
Income’ of the consumer
Emergencies ‘Substitution Effect’ in case of inferior good
Ignorance &
Necessaries Sachin Pourush
Elasticity of Demand Elasticity of Demand
An important aspect of a product's demand curve is Elasticity is a measure of responsiveness of one
how much the quantity demanded changes when the variable to change in other.
price changes. The economic measure of this response Marshall
is the price elasticity of demand. The elasticity of demand measures the
responsiveness of the quantity demanded of a
Simply, It is a calculable change in the quantity good, to change in its price, price of other goods
demanded due to a relative change in any and changes in the consumer’s income.
determinant of demand. Dooley
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Elasticity of Demand… kinds The Mathematical Representation of Elasticity
Sachin
Pourush
Q
Price Elasticity % Q Q
Elasticity = =
Income Elasticity % P P
P
Cross Elasticity
Because the demand curve is downward sloping and the
Substitution Elasticity supply curve is upward sloping the elasticity of demand is
NEGATIVE and the elasticity of supply is POSITIVE.
Complementary Elasticity
Often these signs are implicit and ignored.
Ep=
Ep= Percentage Change In Quantity Demanded
Percentage Change in Price
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6. 3/21/2012
Demand Elasticity… Labels Demand Elasticity… Labels
Sachin
Pourush
Perfectly elastic (e=∞) Elastic : the condition of demand when the
percentage change in quantity is larger than
Relatively elastic (e<1) the percentage change in price
Inelastic: the condition of demand when the
Price
Perfectly inelastic (e=o) percentage change in quantity is smaller than
the percentage change in price
Relatively inelastic (e>1) Unitary Elastic: the condition of demand when
Quantity
the percentage change in quantity is equal to
the percentage change in price
Unitary elastic (e=1)
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Elasticity… Quick wick Demand Elasticity… Example
Elasticity: the responsiveness of quantity to a change If a 2% increase in price of Chairs resulted in a 1%
in another variable
decrease in quantity demanded,
Price Elasticity of Demand: the responsiveness of
quantity demanded to a change in price the price elasticity of demand would be equal to
Price Elasticity of Supply: the responsiveness of approximately 0.5
quantity supplied to a change in price
Income Elasticity of Demand: the responsiveness of because,
quantity demanded to a change in income Ep=
Ep= Percentage Change In Quantity Demanded
Percentage Change in Price
Cross Price Elasticity of Demand: the responsiveness
of quantity demanded of one good to a change in
thus,
the price of another good Ep=
Ep= 1% =0.5 OR – 0.5
2%
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Measurement of Elasticity Determinants of Elasticity
Point Method Number and Closeness of Substitutes
Gra p h i c a l Me th o d s The more alternatives you have the less likely you are to pay
Arc Method
high prices for a good and the more likely you are to settle for
Total Expenditure/ Total Outlay Method something that will do.
Time horizon
Variants of use
Income of consumer
Proportion of income spent in the consumption
Necessities versus Luxuries
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7. 3/21/2012
Practical Importance of Elasticity Applications of Elasticity
Elasticity enables a producer to answer: Incidence of Indirect Taxation
"If I lower the price of my product, how much more will I Distribution of wealth
sell?"
Effect of changing price on firm revenue.
"If I raise the price, how much less will I sell?"
Income elasticity – as an indicator of industry health,
"If we learn that a resource is becoming scarce, will
future consumption patterns and as a guide to firms
people scramble to acquire it?"
investment decisions.
Effect of international trade & terms of trade effects.
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Production
Unit – II Engineering Economics
Chapter – 2
Production
Factors of production
Production is the act of creating 'use', 'value' or
Law of Variable Proportion
'utility' that can satisfy a want or need.
Law of Returns to Scale
Any effort directed toward the realization of a
Internal & External Economies/ Diseconomies of Scale desired product or service is a "productive" effort.
Diseconomies of Scale The performance of such act is production.
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Ways of Creating Utility Importance of Production
Usage Utility Improves standard of living of people
Transforming to a usable form
(Transforming Cotton into Mattress)
Let consumers satisfy their need / wants
Place utility Enables firms to generate income
Providing things at place where you need it Creates national wealth
(Selling Packaged Drinking Water)
Generates revenue to the government
Time utility
Providing things on time when you need it
(e-Selling – Selling product over internet / TV; e-reservation)
Service utility
Adding service to same product
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8. 3/21/2012
Factors Affecting Production Factors / Means of Production
Resource availability All the resources used in production
Technology available Physical, non-human inputs used in production (e.g.
Banking and Credit policies factories, machines, tools, stationary, phone, lights
Government policies etc)
Socio-cultural Factors Significant Factors:
Land (L)
Economic situation
Labor (N)
Capital (K)
Organization (O)
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Land Land - Features
The whole of the materials and forces which nature Available in abundance yet scarce
gives freely for man’s aid in land and water, in air, light Indestructible
and heat.
Immobile
- Marshall
Differs in variety
In economics, any space virtual/ real partially or
Passive factor
wholly occupied for the establishing business
Basis of all other factors
It can be air, ocean, earth surface.
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Labor Labor - Features
By labor is meant the economic work of man, whether Mobile
with the hand or with the head. Active factor
- Marshall Divisible on the basis of functional specialization
All the physical or mental efforts made by an Inseparable from worker
individual with a view to earn a reward.
Productivity can be increased, money is motivation
It includes skilled & unskilled, technical & non-
technical, ordinary & managerial.
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9. 3/21/2012
Capital Capital - Features
Capital consists of those kinds of wealth, other than Result of saving to earning ratio
free gifts of nature, which yield income. Secondary factor
- Marshall Mobility
All the man-made inputs given to the business
It appears in various forms like plant and
machinery, tools, buildings, roads, dams, bridges,
means of transportation and communication.
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Enterprise / Entrepreneur Entrepreneur - Features
An entrepreneur is a person who performs dual function Purposeful activity
of risk-taking and control. Risk element
- F. H. Knight Dynamic process
An agent who unites all factors of production – Coordination of resources
land, labor and capital
Schumpeter considers entrepreneur as an innovator
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Factors Classification
Fixed factor inputs
Inputs that remain fixed for a certain period of time
irrespective of scale of production
e.g. Land, Building, Machineries etc.
Variable factor inputs
All the factor inputs that varies as the scale of
production varies
e.g. Raw material, electricity, other bills etc.
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