Demand

Definition of demand:The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. The demand curve is usually downward sloping, since consumers will want to buy more as price decreases. Demand for a good or service is determined by many different factors other than price, such as the price of substitute goods and complementary goods. In extreme cases, demand may be completely unrelated to price, or nearly infinite at a given price. Determinants of demand:Levels of income A key determinant of demand is the level of income evident in the appropriate country or region under analysis. As a generality, the higher the level of aggregate and/or personal income the higher the demand for a typical commodity, including forest products. More of a good or service will be chosen at a given price where income is higher. Thus determinants of demand normally utilize some form of income measure, including Gross Domestic Product (GDP). Population Population is of course a key determinant of demand. Although all forest products do not necessarily enter final consumer markets, the actual markets are largely presumed to be functionally related to population. Growing populations are positively correlated to timber demands in the aggregate, as well as specifically to individual forest products. Frequently, population and income estimators are combined, as in the case of the use of Gross Domestic Product per capita. End market indicators The use of end market indicators as determinants of demand is frequently incorporated into demand analysis. For example, much of the final use of forest products is linked to construction (residential and total). Indicators and trends related to construction activities, or which are determinants of construction, provide indirect estimates of the influence of these activities as the source of derived demand for wood. Housing starts, public investments, interest rates, etc. can be highly correlated to timber demand.

Availability and price of substitute goods Consumption choices related to timber are also influenced by the alternative options facing users in the relevant marketplace. The availability of potential substitute products, and their prices, weigh heavily in determining the elasticity of demand, both in the short run (static) sense and over time (long run). Fuel wood, as a dominant use of timber in the Asia Pacific Region, reflects conditions of very limited options for energy sources at 'reasonable' prices. Rural low income or subsistence populations simply do not have 'options' regarding energy - they use wood or go without. Demand, at this basic level, in almost perfectly inelastic. The cost (if only implicit in terms of gathering time) does not materially affect consumption quantity. Suitability of alternative goods and services is, in part, a question of knowledge as well as availability. Market information regarding alternative products, quality, convenience, and dependability all influence choices. Under conditions of increased scarcity and rising prices for tropical hardwood panels, for example, users have a positive incentive to search for and investigate the suitability of alternatives that were previously overlooked or ignored. Tastes and preferences All markets are shaped by collective and individual tastes and preferences. These patterns are partly shaped by culture and partly implanted by information and knowledge of products and services (including the influence of advertising). Different societies use forest products differently because of these differences in taste and preferences. For example, markets for wood products in Japan are commonly recognized as requiring very high product quality standards, the importance of visual attributes of wood, and other preferences not commonly found in many other markets.

LAW OF DEMAND The relationship between price and the amount of a product people want to buy is what economists call the demand curve. This relationship is inverse or indirect because as price gets higher, people want less of a particular product. This inverse relationship is almost always found in studies of particular products, and its very widespread occurrence has given it a

special name: the law of demand. The word "law" in this case does not refer to a bill that the government has passed but to an observed regularity.1 There are various ways to express the relationship between price and the quantity that people will buy. Mathematically, one can say that quantity demanded is a function of price, with other factors held constant, or: Qd = f (Price, other factors held constant) A more elementary way to capture the relationship is in the form of a table. The numbers in the table below are what one expects in a demand curve: as price goes up, the amount people are willing to buy decreases. (A widget is an imaginary product that some economist invented when he could not think of a real product to use in an example.) A Demand Curve Price of Widgets $1.00 $2.00 $3.00 $4.00

Number of Widgets People Want to Buy 100 90 70 40

The same information can also be plotted on a graph, where it will look like the graph below.

If one of the factors being held constant becomes unstuck, changes, and then is held constant again, the relationship between price and quantity will change. For example, suppose the price of getwids, a substitute for widgets, falls. Then, people who previously were buying widgets will reconsider their choices, and some may decide to switch to getwids. This would be true at all possible prices for widgets. These changes in the way people will behave at each price will change the demand curve to look like the table below. A Demand Curve Can Shift Price of Widgets $1.00 $2.00 $3.00 $4.00

Number of Widgets People Want to Buy [100] becomes 80 [90] becomes 70 [70] becomes 50 [40] becomes 10

These are the same changes shown in a graph.

ELASTICSITY OF DEMAND (1) PRICE ELASTICITY OF DEMAND (2)CROSS ELASTICITY OF DEMAND

(3)

ARC ELASTICITY

(1)Price elasticity of demand is defined as the measure of responsiveness in the quantity demanded for a commodity as a result of change in price of the same commodity. It is a measure of how consumers react to a change in price. [1] In other words, it is percentage change in quantity demanded as per the percentage change in price of the same commodity. In economics and business studies, the price elasticity of demand (PED) is a measure of the sensitivity of quantity demanded to changes in price. It is measured as elasticity, that is it measures the relationship as the ratio of percentage changes between quantity demanded of a good and changes in its price. In simpler words, demand for a product can be said to be very inelastic if consumers will pay almost any price for the product, and very elastic if consumers will only pay a certain price, or a narrow range of prices, for the product. Inelastic demand means a producer can raise prices without much hurting demand for its product, and elastic demand means that consumers are sensitive to the price at which a product is sold and will not buy it if the price rises by what they consider too much. Drinking water is a good example of a good that has inelastic characteristics in that people will pay anything for it (high or low prices with relatively equivalent quantity demanded), so it is not elastic. On the other hand, demand for sugar is very elastic because as the price of sugar increases, there are many substitutions which consumers may switch to. (1)When the price elasticity of demand for a good is inelastic (|Ed| < 1), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue of producers rises, and vice versa. (2)When the price elasticity of demand for a good is elastic (|Ed| > 1), the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue of producers falls, and vice versa. (3)When the price elasticity of demand for a good is unit elastic (or unitary elastic) (|Ed| = 1), the percentage change in quantity is equal to that in price. (4)When the price elasticity of demand for a good is perfectly elastic (Ed is undefined), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue of producers falls to zero. The demand curve is a horizontal

straight line. A banknote is the classic example of a perfectly elastic good; nobody would pay £10.01 for a £10 note, yet everyone will pay £9.99 for it. (5)When the price elasticity of demand for a good is perfectly inelastic (Ed = 0), changes in the price do not affect the quantity demanded for the good. The demand curve is a vertical straight line; this violates the law of demand. An example of a perfectly inelastic good is a human heart for someone who needs a transplant; neither increases nor decreases in price affect the quantity demanded (no matter what the price, a person will pay for one heart but only one; nobody would buy more than the exact amount of hearts demanded, no matter how low the price is).

The formula used to calculate the coefficient of price elasticity of demand for a given product is

Conventions differ regarding the minus sign, considering remarks like "price elasticity of demand is usually negative". This simple formula has a problem, however. It yields different values for Ed depending on whether Qd and Pd are the original or final values for quantity and price. This formula is usually valid either way as long as you are consistent and choose only original values or only final values. Or, using the differential calculus form:

This can be rewritten in the form:

CROSS ELASTICITY OF DEMAND In economics, the cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of another good. It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2. The formula used to calculate the coefficient cross elasticity of demand is

or:

In economics, the cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of another good. It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2. The formula used to calculate the coefficient cross elasticity of demand is

or:

In the example above, the two goods, fuel and cars(consists of fuel consumption), are complements - that is, one is used with the other. In these cases the cross elasticity of demand will be negative. In the case of perfect complements, the cross elasticity of demand is infinitely negative. Where the two goods are substitutes the cross elasticity of demand will be positive, so that as the price of one goes up the quantity demanded of the other will increase. For example, in response to an increase in the price of carbonated soft drinks, the demand for non-carbonated soft drinks will rise. In the case of perfect substitutes, the cross elasticity of demand is equal to infinity. Where the two goods are complements the cross elasticity of demand will be negative, so that as the price of one goes up the quantity demanded of the other will decrease. For example, in response to an increase in the price of fuel, the demand for new cars will decrease. Where the two goods are independent, the cross elasticity demand will be zero: as the price of one good changes, there will be no change in quantity demanded of the other good. When goods are substitutable, the diversion ratio - which quantifies how much of the displaced demand for product j switches to product i - is measured by the ratio of the cross-elasticity to the own-elasticity multiplied by the ratio of product i's demand to product j's demand. In the discrete case, the diversion ratio is naturally interpreted as the fraction of product j demand which treats product i as a second choice,[1] measuring how much of the demand diverting from product j because of a price increase is diverted to product i can be written as the product of the ratio of the crosselasticity to the own-elasticity and the ratio of the demand for product i to the demand for product j. In some cases, it has a natural interpretation as the proportion of people buying product j who would consider product i their `second choice.' ARC ELASTICITY Arc elasticity is the elasticity of one variable with respect to another between two given points.

The y arc elasticity of x is defined as:

where the percentage change is calculated relative to the midpoint

The midpoint arc elasticity formula was advocated by R. G. D. Allen due to the following properties: (1) symmetric with respect to the two prices and two quantities, (2) independent of the units of measurement, and (3) yield a value of unity if the total revenues at two points are equal.[1] Arc elasticity is used when there is not a general function for the relationship of two variables. Therefore, point elasticity may be seen as an estimator of elasticity; this is because point elasticity may be ascertained whenever a function is defined. For comparison, the y point elasticity of x is given by:

suppl y Total amount of a product (good or service) available for purchase at any specified price. It is determined by: (1) Price: producers will try to obtain the highest possible price whereas the buyers will try to pay the lowest possible price—both settling at the equilibrium price where supply equals demand. (2) Cost of inputs: lower the input price the higher the profit at a price level and more product will be offered at that price. (3) Price of other goods: lower prices of competing goods will reduce the price and

the supplier may switch to switch to more profitable products thus reducing the supply. Determinants of supply:1.Prices of different goods including substitutes 2. Number of suppliers 3. Production function and technology 4. Prices of different inputs including wage rates, interest 5. Producers' future expectations if more producers enter a market, the supply will increase, shifting the supply curve to the right. Resource Prices the prices that a producer must pay for its resources (inputs) influence supply. Resource prices affect the cost of production. As resource prices increase, the cost of production increases. As a result, producers must receive higher prices to be willing to produce any given level of output. Technological Changes changes in technology usually result in improved productivity. Increased productivity can reduce the cost of production. A decrease in the cost of production will increase supply.

prices of Other Products of the Firm if a firm produces more than one product, a change in the price of one product can change the supply of another product. For example, automobile manufacturers can produce both small and large cars. If the price of small cars rises, the producers will produce more small cars. This draws the resources of the plant into the production of small cars and away from the production of large cars. Therefore, the supply of large cars will decrease. producer Expectations

changes in producers' expectations about the future can cause a change in the current supply of products. For example, if producers of peanuts were to anticipate a price rise in the future, they may prefer to store their peanuts and sell them later. As a result, the current supply of peanuts would decrease. law

of supply

The relationship between the quantity sellers want to sell during some time period (quantity supplied) and price is what economists call the supply curve. Though usually the relationship is positive, so that when price increases so does quantity supplied, there are exceptions. Hence there is no law of supply that parallels the law of demand. The supply curve can be expressed mathematically in functional form as Qs = f(price, other factors held constant). It can also be illustrated in the form of a table or a graph.

A Supply Curve Price of Widgets $1.00 $2.00 $3.00 $4.00

Number of Widgets Sellers Want to Sell 10 40 70 140

The graph shown below has a positive slope, which is the slope one normally expects from a supply curve

If one of the factors that is held constant changes, the relationship between price and quantity, (supply) will change. If the price of an input falls, for example, the supply relationship may change, as in the following table.

A Supply Curve Can Shift Price of Widgets $1.00 $2.00 $3.00 $4.00

Number of Widgets Sellers Want to Sell [10] becomes 20 [40] becomes 60 [70] becomes 100 [140] becomes 180

The same changes can be shown with a graph that shows the supply curve shifting to the right. Notice each price has a larger quantity associated with it.