Demand Analysis

1. DemanD analysisDemanD analysis

2. What is DemanD?What is DemanD?
““Demand means effective desire or want for a commodity Demand means effective desire or want for a commodity
which is backed up by the ability (purchasing power) which is backed up by the ability (purchasing power)
and willingness to pay for it”. and willingness to pay for it”.
Demand = Desire + Ability to pay + Willingness to Demand = Desire + Ability to pay + Willingness to
spendspend
Demand is a relative concept – not absoluteDemand is a relative concept – not absolute
It is related to price , time and place.It is related to price , time and place.
““The demand for a commodity refers to the amount of it The demand for a commodity refers to the amount of it
which will be bought per unit of time at a particular pricewhich will be bought per unit of time at a particular price
( in a particular market)”.( in a particular market)”.

3. inDiviDual anD market DemanDinDiviDual anD market DemanD
Individual Demand Individual Demand : Individual demand for a product is : Individual demand for a product is
the quantity of it a consumer would buy at a given price, the quantity of it a consumer would buy at a given price,
during a given period of time.during a given period of time.
Market demandMarket demand : Market demand for a product is the : Market demand for a product is the
total demand of all the buyers in the market taken total demand of all the buyers in the market taken
together at a given price during a given period of time.together at a given price during a given period of time.
Demand Schedule: Demand Schedule: ‘ A tabular statement of price – ‘ A tabular statement of price –
quantity (demanded) relationship at a given period of quantity (demanded) relationship at a given period of
time’time’
 Individual demand schedule Individual demand schedule
 Market demand schedule. Market demand schedule.

4. types of DemanDtypes of DemanD
Individual demand & Market demandIndividual demand & Market demand
Demand for capital goods and demand for Demand for capital goods and demand for
consumer goodsconsumer goods
Autonomous demand & Derived demandAutonomous demand & Derived demand
- Direct & indirect demand- Direct & indirect demand
Demand for durable & non-durable goodsDemand for durable & non-durable goods
- Replacement demand in case of durable goods- Replacement demand in case of durable goods
Short term demand & Long term demandShort term demand & Long term demand

5. Determinants of DemanDDeterminants of DemanD
Price of the productPrice of the product
Price of the related goodsPrice of the related goods
Consumer’s income levelConsumer’s income level
Distribution pattern of national incomeDistribution pattern of national income
Consumer’s taste and preferencesConsumer’s taste and preferences
Advertisement of the productAdvertisement of the product
Consumer’s expectation about future price and supply positionConsumer’s expectation about future price and supply position
Demonstration effect and Band-Wagon effectDemonstration effect and Band-Wagon effect
Consumer credit facilityConsumer credit facility
Demography and growth rate of populationDemography and growth rate of population
General std. of living and spending habitsGeneral std. of living and spending habits
Climatic and weather conditionsClimatic and weather conditions
Customs Customs
 Demand Function:Demand Function: It states the (functional/mathematical) It states the (functional/mathematical)
relationship between the demand for the product ( dependent relationship between the demand for the product ( dependent
variable) and its determinants ( independent variables). variable) and its determinants ( independent variables).

6. laW of DemanDlaW of DemanD
Statement of LawStatement of Law : “ Other things being equal, the higher the price of a : “ Other things being equal, the higher the price of a
commodity, the smaller is the quantity demanded and lower the commodity, the smaller is the quantity demanded and lower the
price, larger the quantity demanded”.price, larger the quantity demanded”.
Factors behind Law of demandFactors behind Law of demand
Substitution effectSubstitution effect
Income effectIncome effect
Utility Maximising behaviourUtility Maximising behaviour
Exceptions to Law of demandExceptions to Law of demand
Expectation regarding future pricesExpectation regarding future prices
Giffen goodsGiffen goods
Articles of snob appeal / Veblen effect Articles of snob appeal / Veblen effect
Consumer’s psychological bias ( about quality and price Consumer’s psychological bias ( about quality and price
relationship)relationship)

7. Changes in quantity DemanDeD & Changes Changes in quantity DemanDeD & Changes
in DemanDin DemanD
Changes in quantity demanded is related to Changes in quantity demanded is related to
law of demand i.e. due to changes in pricelaw of demand i.e. due to changes in price..
When with a fall in price more of a commodity is When with a fall in price more of a commodity is
demanded, there is EXTENSION of demand & when demanded, there is EXTENSION of demand & when
with a rise in price less of a commodity is purchased, with a rise in price less of a commodity is purchased,
there is CONTRACTION of demand.there is CONTRACTION of demand.
Changes in demand is caused by changes in Changes in demand is caused by changes in
various other determinants of demand, the various other determinants of demand, the
price remaining unchanged.price remaining unchanged.
When more of a commodity is bought than before at When more of a commodity is bought than before at
any given price there is INCREASE in demand & any given price there is INCREASE in demand &
when less of a commodity is bought than before at any when less of a commodity is bought than before at any
given price there is DECREASE in demand.given price there is DECREASE in demand.

8. elastiCity of DemanDelastiCity of DemanD
Elasticity of demand is the degree of responsiveness of Elasticity of demand is the degree of responsiveness of
demand to the changes in its determinants.demand to the changes in its determinants.
(A) (A) PRICE ELASTICITY O DEMANDPRICE ELASTICITY O DEMAND
The extent of response of demand for a extent of response of demand for a
commodity to the changes in its price, other commodity to the changes in its price, other
determinants of demand remaining constant determinants of demand remaining constant
is called price elasticity of demand. is called price elasticity of demand.
eep = p = Proportional changes in quantity demandedProportional changes in quantity demanded
Proportional changes in priceProportional changes in price
eep = Q /Q P /Pp = Q /Q P /P
eep = Q / Q p = Q / Q XX P / P / PP
eep = Q / P p = Q / P X X P / QP / Q

9.  Types of price elasticity of demandTypes of price elasticity of demand
Perfectly elastic demandPerfectly elastic demand
Perfectly inelastic demandPerfectly inelastic demand
Relatively elastic demandRelatively elastic demand
Relatively inelastic demandRelatively inelastic demand
Unitary elastic demandUnitary elastic demand
 Determinants of price elasticity of demandDeterminants of price elasticity of demand

- Nature of commodity - Uses of commodity - Nature of commodity - Uses of commodity
- Availability of substitutes - Durability of - Availability of substitutes - Durability of
commoditycommodity
- Possibility of postponement - Income level of - Possibility of postponement - Income level of
consumersconsumers
- Price range of the product - Complementary - Price range of the product - Complementary
relationshiprelationship
- Knowledge level of consumers - Frequency of purchase- Knowledge level of consumers - Frequency of purchase
- Proportion of expenditure on the product - Time period - Proportion of expenditure on the product - Time period

10.  Practical applicationPractical application
-Pricing decisions - Factor rewarding Pricing decisions - Factor rewarding
-Terms of trade - Foreign exchange rates Terms of trade - Foreign exchange rates
-Tax rates - Public utilities Tax rates - Public utilities
(B)(B) INCOME ELASTICITY OF DEMANDINCOME ELASTICITY OF DEMAND
The degree of responsiveness of demand for a
commodity to the changes in the consumers’ income is
known as income elasticity of demand
ey = Q / Y X Y / Q
Types of income elasticityTypes of income elasticity
1. Unitary income elasticity 2.Income elasticity grater 1. Unitary income elasticity 2.Income elasticity grater
than onethan one
3. Income elasticity less than one 4.Zero income elasticity 3. Income elasticity less than one 4.Zero income elasticity
5. Negative income elasticity5. Negative income elasticity

11.  Practical applicationPractical application
-Growth rate of firm - Demand forecasting Growth rate of firm - Demand forecasting
-Production planning - Marketing plan Production planning - Marketing plan
(C) (C) CROSS ELASTICITY OF DEMANDCROSS ELASTICITY OF DEMAND
The degree of responsiveness of demand for a The degree of responsiveness of demand for a
commodity to a given change in the price of some commodity to a given change in the price of some
other related commodity is known as cross elasticity of other related commodity is known as cross elasticity of
demand.demand.
eexy = xy = Proportional change in demand for XProportional change in demand for X
Proportional change in the price of YProportional change in the price of Y

eexy = Qx Py xy = Qx Py XX Py Qx Py Qx

12. (D) (D) ADVERTISING / PROMOTIONAL ADVERTISING / PROMOTIONAL
ELASTICITY OF DEMANDELASTICITY OF DEMAND
The degree of responsiveness of demand for a The degree of responsiveness of demand for a
commodity tocommodity to
given change in the advertising or promotional given change in the advertising or promotional
expenses isexpenses is
known as cross elasticity of demand.known as cross elasticity of demand.
eea= a= Proportional change in demand for XProportional change in demand for X
Proportional change in the advertisementProportional change in the advertisement
expenditureexpenditure
eea = Qx ad.exp a = Qx ad.exp XX ad.exp Qx ad.exp Qx
(E)(E) SUBSTITUTION SUBSTITUTION ELASTICITY OF DEMANDELASTICITY OF DEMAND
The degree of responsiveness of demand ratio between The degree of responsiveness of demand ratio between
X & YX & Y
to a given change in their price ratio is known as to a given change in their price ratio is known as
substitution substitution
elasticity of demand.elasticity of demand.
ee
ss= = Proportional change in the ratio of demand for X & demand for YProportional change in the ratio of demand for X & demand for Y
Proportional change in the ratio of price of X & price of YProportional change in the ratio of price of X & price of Y
ee
s = s = (Qx / Qy)(Qx / Qy) (Px / Py) (Px / Py)
(Qx / Qy) (Px / Py)(Qx / Qy) (Px / Py)

13.  Measuring price elasticity of Measuring price elasticity of
demanddemand
- Total Expenditure Method - Total Expenditure Method
- Point Method- Point Method
- Arc Method- Arc Method

14. DemanD foreCastingDemanD foreCasting
Demand forecasting is predicting or anticipating Demand forecasting is predicting or anticipating
the future demand for a productthe future demand for a product..
 Micro level Micro level  Industry level Industry level  Macro level Macro level
 USES OF DEMAND FORECASTING DATAUSES OF DEMAND FORECASTING DATA

Short term demand forecastingShort term demand forecasting
1)1)Evolving production policyEvolving production policy
2)2)Determining price policyDetermining price policy
3)3)Evolving purchase policyEvolving purchase policy
4)4)Fixation of sales targetsFixation of sales targets
5)5)Short term financial policyShort term financial policy
Long term demand forecastingLong term demand forecasting
1)1) Business planningBusiness planning
2)2)Man power planningMan power planning
3)3)Long term financial planningLong term financial planning

15. Individual Demand Individual Demand
AnalysisAnalysis

16. Basis of inDiviDual DemanDBasis of inDiviDual DemanD
UtilityUtility
-- From the commodity point of viewFrom the commodity point of view
- From Consumers’ point of view- From Consumers’ point of view
Approaches to Consumer Demand AnalysisApproaches to Consumer Demand Analysis
oCardinal Utility approachCardinal Utility approach
- - Total utilityTotal utility
- Marginal utility- Marginal utility
 LAW OF DIMINISHING MARGINALUTILITYLAW OF DIMINISHING MARGINALUTILITY
Assumptions underlying cardinality approachAssumptions underlying cardinality approach
- Rationality- Rationality
- Limited money income- Limited money income
- maximisation of satisfaction- maximisation of satisfaction
- Utility is cardinally measurable- Utility is cardinally measurable
- Diminishing marginal utility- Diminishing marginal utility
- Constant marginal utility of money- Constant marginal utility of money

17. Consumer’s equilibriumConsumer’s equilibrium
- One commodity model- One commodity model
- Multiple commodity model- Multiple commodity model – THE LAW OF EQUIMARGINAL – THE LAW OF EQUIMARGINAL
UTILITYUTILITY
Ordinal Utility ApproachOrdinal Utility Approach
 Assumptions underlying ordinal approachAssumptions underlying ordinal approach
-RationalityRationality
-Ordinal utilityOrdinal utility
-Transitivity & consistency in choiceTransitivity & consistency in choice
-NonsatietyNonsatiety
-Diminishing marginal rate of substitutionDiminishing marginal rate of substitution
Marginal rate of substitutionMarginal rate of substitution - - MRS is the rate at which one commodity can MRS is the rate at which one commodity can
be substituted for another, the level of satisfaction remaining the same. be substituted for another, the level of satisfaction remaining the same.
Diminishing MRSDiminishing MRS – – The quantity of a commodity that the quantity of a The quantity of a commodity that the quantity of a
commodity that a consumer is willing to sacrifice for an additional unit of commodity that a consumer is willing to sacrifice for an additional unit of
another goes on decreasing when he goes on substituting one commodity for another goes on decreasing when he goes on substituting one commodity for
another.another.

Indifference CurveIndifference Curve - Indifference curve is a locus of points, each - Indifference curve is a locus of points, each
representing a different combination of two substitute goods, which yield the representing a different combination of two substitute goods, which yield the
same level of utility or satisfaction to the consumer.same level of utility or satisfaction to the consumer.
Indifferent MapIndifferent Map

18.  Properties of Indifference curveProperties of Indifference curve
-Indifference curves have a negative slopeIndifference curves have a negative slope
-Indifference curves are convex to the originIndifference curves are convex to the origin
-Indifference curves do not intersect with each otherIndifference curves do not intersect with each other
-Indifference curves are not tangent to one anotherIndifference curves are not tangent to one another
-Upper indifference curve always indicate a higher level of satisfactionUpper indifference curve always indicate a higher level of satisfaction
 Budgetary constraint & Budgetary constraint & The Budget LineThe Budget Line
The limitedness of the income acts as a constraint on how high a consumer The limitedness of the income acts as a constraint on how high a consumer
can ride on his/her indifference map.can ride on his/her indifference map.
 Consumer’s EquilibriumConsumer’s Equilibrium