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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
ME Project Work
Elasticity of Demand On Subsitute
Goods
(Price of Petrol and Demand of Diesel)
Submitted To: Submitted By:
Dr. Mandeep Kaur Shubham
MBA 1st Sem.
2017116
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
Project Title
To measure the elasticity of demand in case of substitutes.
(Price of Petrol and demand of Diesel).
Project summary
Elasticity of demand means how much quantity demanded
change of a good with change in price of related good. In this we
take the prices of tea and study the demand variation of coffee.
Prepared by
Shubham Mahajan
MBA 1st Sem.
2017116
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
Application of the Project
As a student of I.K. Gujral Punjab Technical University, given with live project of elasticity of
demand in case of substitute goods. I have chosen the substitution of two:
Price of petrol, demand for diesel
Price of Diesel, demand for petrol
I will go by the guidelines provided and will try to find the substitution of both of these
commodities in respect to their prices.
Basically, the substitution effect is when there is a change in the quantity demanded of a product
due to change in the price of its substitute product. The changes may be increase in the price of
one commodity and will result in increase of the demand for another commodity which is a
substitute commodity of the first one. Similarly, it can be a decrease in the price of one
commodity and will result a decrease in the demand for its substitute commodity.
The idea that as prices rise, consumer will replace more expensive items with the less costly
alternatives. So, I am going to apply this concept in the project of Petrol and Diesel.
LAW OF DEMAND
The law of demand is a microeconomic law that states, all other factors being equal, as the price
of a good or service increases, consumer demand for the good or service will decrease, and vice
versa. The law of demand says that the higher the price, the lower the quantity demanded,
because consumers’ opportunity cost to acquire that good or service increases, and they must
make more tradeoffs to acquire the more expensive product.
The chart below depicts the law of demand using a demand curve, which is always downward
sloping. Each point on the curve (A, B, C) reflects a direct correlation between quantity
demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will
be P1, and so on.
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
The law of demand is so intuitive that you may not even be aware of all the examples around
you.
-When shirts go on sale, you might buy three instead of one. The quantity that you demand
increases because the price has fallen.
-When plane tickets become more expensive, you’re less likely to travel by air and more likely to
choose the less expensive options of driving or staying home. The amount of plane tickets that
you demand decreases to zero because the cost has gone up.
The law of demand summarizes the effect price changes have on consumer behavior. For
example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if
the price of pizza increases. John might demand 10 pizzas if they cost $10 each, but only 7
pizzas if the price rises to $12, and only 4 pizzas if the price rises to $20.
The law of demand is one of the most fundamental concepts in economics. It works with the law
of supply to explain how market economies allocate resources and determine the prices of goods
and services.
ASSUMPTIONS OF LAW OD DEMAND-
1. the customer thinks rationally
2. the customer has perfect knowledge
3. the income of customer remains same
4. the taste, habbit and preferences of the customer remain same
5. there is no change in the value of money
6. independent commodities
7. utility can be measured
8. there is continuous consumption
9. suitable units
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
OBJECTIVES OF THE STUDY
This project, based on secondary data emphasizes on implementing the theory of Law of
Demand on the speculative change in price and demand of reliance jio active subscribers in the
following assertive manner-
1. to draw a relation between the price change and quantity demanded of the services.
In industry it is very important to forecast to the consequences of price change, price
hike or starting charges for a free service/ product on the demand of the same.
Degree of elasticity of demand
In case of substitute goods, there is a positive cross elasticity of demand. A given percentage rise
in the price of one commodity will lead to a given percentage rise in the demand of another
commodity.
As in substitute goods the degree of elasticity is positive, so when price of Petrol increases, the
demand for Diesel also increases. If price of Diesel increases, the demand for Petrol will also
increase.
Prices of Petrol and Diesel for in the past few years. This data I have taken from the Website of
Indian Oil Corporation. As to be more accurate, in that website, the prices are given for different
cities of India. I have taken these prices for the Capital city (Delhi).
Year Price of Petrol Price of Diesel
Year Price of petrol Price of diesel
2008 50.56 34.80
2009 44.72 32.87
2010 51.43 40.10
2011 63.70 41.12
2012 67.78 41.29
2013 68.58 50.25
2014 71.56 57.28
2015 66.93 50.93
2016 65.65 55.19
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
Consumptions of Diesel and Petrol in India
All these amounts are in Million Tonnes)
Year Consumption of diesel Consumption of petrol
2008 42.9 9.29
2009 47.67 10.33
2010 51.67 11.26
2011 56.32 12.82
2012 60.07 14.19
2013 64.75 14.99
2014 69.08 15.74
2015 65.07 15.28
2016 67.35 15.96
Note: The units that are consumed in the last two years (2015 & 2016) of both Petrol and Diesel
were not given in that case study from which I have collected the consumption data of both of
these commodities. So I found it by applying the Least Square Method of Time Series analysis,
through which we can predict the exact value of future requirements. I found those values by
applying the following formulas:
Y= a + bx
∑Y= na + b ∑X
∑XY=a sum of X + B ∑X square
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
All the graphs for every two years of each commodity.
2008 & 2009
price of petrol
demand of diesel
2008-2009
price of diesel
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
demand for petrol
2010 & 2011
price of petrol
demand of diesel
2010 & 2011
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
price of diesel
demand of petrol
2012 & 2013
price of petrol
demand of diesel
2012 & 2013
PREPARED BY SHUBHAM MAHAJAN
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
price of diesel
demand of petrol
2014 & 2015
price of petrol
demand of diesel
2014 & 2015
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
price of diesel
demand of petrol
2015 & 2016
price of petrol
demand of diesel
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
2015 & 2016
price of diesel
demand of petrol
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ELASTICITY OF DEMAND IN CASE OF SUBSITUTE GOODS
REFERENCES:-
Wikipedia
Economic times.
PREPARED BY SHUBHAM MAHAJAN
