7. Demand And Analysis Of Decision Making.pptx

7. Demand And Analysis Of Decision Making.pptx

1. Demand And Analysis Of Decision Making .

2. Basis of Demand: Demand is one of the most important aspects of managerial economics. This is so because the theory of firm is the heart of managerial economics while demand is the heart of the firm. A firm would not be established or survive if sufficient demand for its product did not exist or could not be created. That is, a firm could have the most efficient production techniques and the most effective management, but without a demand for its product that is sufficient to cover at least all production and selling costs over the long run, it simply would not survive. Demand is, thus, essential for the creation, survival, and profitability of a firm.

3. Demand: Demand is the quantity of a commodity that consumer are willing and able to purchase during a specific period of time under a given set of economic condition. The demand for a commodity or a product can either be an individual demand for a commodity or for market demand. In managerial economics we are primarily interest in the demand for a commodity face by the firm. This depends on the size of total market. Market demand is the sum of the demand functions for all individual consumers in the market. So first we discuss individual demand and after that we derive market demand with the help of individual demand.

4. Individual Demand: Individual demand refers to the demand for the commodity from the individual point of view. The analyses of individual demand are based on the law of demand, demand schedule & curve and demand function . Law of demand: Holding all other things constant, there is inverse relationship between the price of a good and the quantity of the good demanded per time period. It mean that when price of a commodity increasing demand for that commodity will decrease and vice versa while keeping other things constant that is income of the consumer, test of the consumer, price of the related goods etc. This theory can also represent with individual demand schedule and curve. An Individual’s Demand Schedule:

5. The various quantities demanded of a particular commodity are presented here in a schedule. At arbitrarily chosen prices, the quantity of a commodity an individual consumer is expected to demand is explained by the schedule. The above individual’s demand schedule show the inverse relation between price and quantity demand.

6. Individual Demand Curve: The Individual demand curve base on the above schedule is as follows. The curve of the individual demand showing the law of demand as price rise with fall in the demand and vice-versa. The slope of the curve is negative which show the inverse relationship between price and quantity demanded

7. The Demand Function: Demand function is a mathematical function showing relationship between the quantity demanded of a commodity and the factors influencing demand. QDx = f ( Px , Py , T, Y) In the above equation, QDx = Quantity demanded of a commodity Px = Price of the commodity Py = Price of related goods T = Tastes and preferences of consumer Y = Income level  

8. In every market when firm’s price of a commodity increases, sales will decline, the firm would probably sell more units of the commodity by lowering the price. The firm also faces an inverse relationship between prices of the commodity. When the price rises, the quantity demanded decreases and sales will also declines and vice-versa. On the other hand, when the consumer’s income rises purchase of good X, will also increase if it is normal good (shoes, food, housing). But demand will decrease in case of inferior goods. The quantity demanded of a commodity by an individual also depends on the price of related commodities. The individual will purchase more of a commodity if the price of a substitute commodity increases or if the price of complementary goods falls .

9. Any change in the tastes, fashion of the consumer also change the quantity demanded. Thus quantity demanded increases with a fall in its price, with an increase in the consumer’s income with an increase in the price of the substitute commodities and a reduction in the price of complementary goods, and with an increased taste for the commodity. On the other hand the quantity demanded of a commodity declines with the opposite changes.

10. Market Demand: The  aggregate of the  demands  of all potential  customers  ( market   participants ) for a specific  product  over a specific  period  in a specific market. (OR)The quantity demanded of a product by all the consumers at different prices is called market demand .

11. Market Demand curve: The market demand curve for a commodity is the horizontal summation of the demand curves of all the consumers in the market. Let we explain it with an example, we assume that we have four individual’s (consumers A,B,C&D) demand for a commodity in a market.

12. The market demand curve for a commodity shows the various quantities of the commodity demanded in the market per time period at various alternative prices of the commodity, while holding everything else constant. The market demand curve for a commodity (just as an individual’s demand curve) is negatively sloped indicating that price and quantity are inverse related.

13. Market Demand Function: Market Demand function is a mathematical function showing relationship between the quantity demanded of a commodity and the factors influencing market demand. QDx = F ( Px , Py , N, Y, T ) In the above equation, QDx = Quantity demanded of a commodity Px = Price of the commodity Py = Price of related goods N = Number of the consumer in the market Y = Income level T = Tastes and preferences of consumer

14. The Demand face by a firm: Since the analysis of the firm is central to managerial economics, we are primarily interested in the demand for a commodity face by a firm. The demand for a commodity face by a particular firm depends on the Size of the market Nature of the commodity Structure or Form of market.(Monopoly, oligopoly, Monopolistic competition & Perfect competition)