 module 27 static and dynamic aspects of demand 2. Whenever we make discussion about static and dynamic aspects of the demand length under which there is an adjustment in the demand of the commodity play an important role. Under static demand in fact time has no role in the determination of demand of the commodity. Static demand simply refers to instantaneous adjustment because of price change. If there is some price change there is an instantaneous adjustment in the quantity demand of the commodity. But there are several reasons due to which instantaneous adjustments do not occur. It might be because of psychological reasons might be because of technological reasons and whenever we talk about psychological reasons there is a price change but consumer is not willing to adjust his consumption pattern. The consumers habits are not changes immediately. If someone is using wheat to get satisfaction he is not willing to change his consumption pattern. He is not willing to use some substitute of wheat in short run. As far as the quantity demand is likely to change because of price change so to observe total effect to observe total change in quantity demand it requires certain time period. So if we make discussion about the demand under a long run that involves certain time period. For example, whenever there is a change in price there is a gradual adjustment in the quantity demand and that gradual adjustment in the quantity demand is because of cost of adjustment that involves search cost, technological cost and institutional barriers to change. When we talk about search cost suppose someone is using tomatoes to get satisfaction someone is purchasing different quantities of tomatoes against different prices. If we talk about price of tomato changes then consumer will try to find out some other place from where he can get tomatoes at a cheaper price. It involves a search cost to find out some other place to purchase tomatoes. Demand for organic eggs. Organic eggs are not available everywhere. Now what will they have to do? They have to search out where they can purchase organic eggs. What will they have to do to search for them? They have to do some effort. They have to search for them. When they have searched for organic eggs available at that particular place then what will they have to do to purchase them? They have to go there. When they go what will they have to do? Again they have to bear because of travel cost. Now if all these expenditures are gathered then it becomes a significant portion significant portion of the consumer's income. So what do they do? Say the price has changed. Yes let's wait and see what happens. Because of the search cost to purchase that item becomes expensive then what do they do? But over a period of time when they have complete information then what will happen? There is a significant decrease in quantity demand for that particular commodity. The price has changed immediately. Consumer is getting satisfaction by using that particular fruit or vegetable. Immediately there is increase in price of the commodity. There should be some significant decline in the purchase of that commodity depending upon the relationship between price and quantity demand for fruit. But what are the expectations of the consumer? The consumer is expecting that this increase or temporary increase will be normal in the future. What will he do? He will postpone his purchase for some time. With the expectation that when there will be a normal price then I will adjust my quantity. How much should I purchase? Under short run the association between price and quantity demand is relatively less sensitive as compared to change in price and quantity in long run. But that decrease will be relatively less as compared to decrease in long run. The cost of adjustment and consumer's expectation are the same. Now let me talk about the same pattern here. Whenever we make a discussion about consumer expectations, what does it refer to? It refers to the uncertainty of the future price change. If the consumer is expecting that prices will decrease in the future then what will he do? He will postpone his purchase. If he is expecting that prices will increase in the future then what will he do? He will increase the demand for that particular commodity. So what is the expectation? He plays a key role in the demand for the commodity. At least in the long run demand for the commodity. What will happen in the short run? Relatively less adjustment. In the long run there is relatively larger change in the quantity demand. Another important thing is that we cannot observe consumer expectations. But what can we observe? What will be the price? Can't we materialize the consumer's expectations? What can we materialize? What is the expected price? If the price is 5 rupees then what will happen tomorrow? If it is 10 rupees then I will increase my demand for that particular commodity. But if the expectation is that some prices will decrease in the future then what will I do? I will postpone my consumption today. So what will happen in the long run? Change in quantity is relatively larger as compared to change in quantity demand under short run. To understand this demand theory concept, there was a theory of permanent income hypothesis. What are the components of that permanent income hypothesis? There are two components in which one is called permanent income and the other is transitory income. The observable income of a consumer has two components. One is permanent income and the other is transitory income. And consumption decision making consumer is based on the basis of permanent income. What is the expected long run income of the consumer? And on the basis of that expected long run income of the consumer, consumer decides how much he should carry out the expenditure. So similarly whenever we make discussion about the demand, expected price is just like permanent income. The energy consumption behavior is assumed to depend upon the expected prices of the commodities. Under the perspective of the short run and long run, the short run will simply observe the initial effect of change in price. If the price changes, immediately in quantity demand, the change will be the short run demand. But when you talk about the long run perspective, then it requires a certain time period to observe total impact of change in price on quantity demand. As we said earlier, the short run effects are relatively smaller, whereas the long run effects are relatively larger. When I talk about demand curves, usually under the short run, demand curves are relatively steeper. But what happens in the long run? These curves become flatter. The long run demand curve basically depicts total impact of change in price on quantity demand. When we talk about estimation of long run demand relation with market data, usually it is difficult to estimate this long run association by using market data. The reason for this is that it is not possible for us to keep other factors constant. Over a period of time, there is change in other factors that can influence the demand of a commodity. Then there are other complications. If we talk about the price of a product consistently, then over a longer period of time, it results in structural changes. If a commodity is high on a permanent basis, then people will substitute that commodity with some other commodity. If we talk about the price of a commodity persistently, because of that persistent high price, then what happens is that it will create incentives to send new substitutes in the market. And if a persistent or low price of any commodity is made, then what happens is that there are incentives for new uses of that particular product. So, expected prices and consistent increase or decrease in prices of a commodity over a longer period of time results in structural change of the consumption pattern. Thank you very much.