Demand Analysis.pdf

Economics for Engineers

1. Unit - I
THEORY OF DEMAND

2. Introduction
Demand and supply are the two forces through which market
economy functions.
In a market economy what goods are produced and in what
quantities are determined by demand and supply for various
goods.
In a competitive market, prices of goods and services are
determined through interaction of demand and supply of them.
The prices in turn influence demand for and supply of goods and
play an important role in allocation of scarce resources in a
market economy.
Demand and supply describes how buyers of goods and sellers of
goods behave in response to changes in process of goods and
other factors.
S NEHRA EFE UNIT I 2

3. Concept of Demand
The terms desire and demand are used inter-changeably.
Demand = Desire + Ability to pay (sufficient purchasing
power) + Willingness to pay or to spend
Demand has THREE components:
1.Quantity demanded
2.Price
3.Time
Demand depends upon utility of the commodity.

3S NEHRA EFE UNIT I

4. Demand and Quantity
Demanded
Demand refers to different possible quantities to be
purchased at different possible prices of a commodity.
Quantity demanded refers to a specific quantity to be
purchased against a specific price of the commodity.
S NEHRA EFE UNIT I 4

5. Demand function
It shows the functional relationship between demand for a commodity
and its determinants.

It can be expressed as:

DX = f (PX, PZ, Y, T, E, N, Yd )
DX= Demand for commodity X
PX= Price of commodity X
PZ= Prices of related goods
Y = Income of consumer
T = Taste and preferences of consumer
E = Future expectation
N = No. of consumers
Yd= Distribution of income


S NEHRA EFE UNIT I 5

6. Determinants Factors affecting
Individual Demand
1.Price of a commodity -
2.Price of related goods – Substitute goods (AC & Cooler)
& Complementary goods (Computer & software)
3.Income of the consumer -
4.Taste and preferences of the consumer – Influenced by
advertisement (mobile phone), change in fashion
(jeans, ethnic wear), climate (cold drinks, umbrella),
new inventions.
5.Consumers expectations – Gold, onions


S NEHRA EFE UNIT I 6

7. Factors influencing market
demand
1.Population Size/Number of Buyers - Ex- More aged
population will require more medicines.
2.Distribution of Income – Even distribution will create
more demand.
S NEHRA EFE UNIT I 7

8. Review question - Factors affecting
the demand for a car in an economy
Demand will depend on –
1.Price
2.Income
3.Price of related goods
4.Preference of the consumer
5.Expectations
6.Population
7.Climatic conditions
8.Government policy etc.
8S NEHRA EFE UNIT I

9. Review questions
1.Nike becomes very unpopular. What will happen to the demand
for Reebok?
2.A firm offers 6 mugs by way of gift with every 500 gm pack of
instant coffee. Name the products the demand for which will
suffer a set back? How?
3.Imagine that you are a new global auto maker planning to enter
the Indian market. List the various demand aspects you think
are important.
4.Explain factors affecting – Mobile phones, TV, Computers.
5.Identify the major factors influencing market demand for – Ice
Cream, Sugar, Jeans.

9S NEHRA EFE UNIT I

10. Law of demand
The law of demand explains the inverse relationship
between the price and quantity demanded of the
commodity.
Other things being equal, price and quantity demanded of a
commodity move in the opposite direction.
DX = f (PX), ceteris paribus

10S NEHRA EFE UNIT I

11. Assumptions of the law
1.No change in price of related goods – Substitute goods (AC and
Cooler) & Complementary goods (Computer and software)
2.No change in Income of the consumer -
3.No change in taste and preferences of the consumer – Jeans
4.No change in consumer expectations – Ex – Ukraine war and crude
oil prices
5.No change in population

11S NEHRA EFE UNIT I

12. Demand Schedule – A tabular
representation
12S NEHRA EFE UNIT I
It is a tabular presentation showing the different quantities of a good
that buyers of the good are willing to buy at different prices during a
given period of time.

Price (per kg) Qty Demanded (Kg per month)
23 6
33 5
40 4
50 3

13. Demand Curve – A graphical
representation
13S NEHRA EFE UNIT I
The graphical representation of the demand schedule is called a
demand curve.

14. Why demand curve slope downwards ?
1.Law of diminishing marginal utility – Consumer will prefer
to buy additional unit only at lower price.
2.Income effect – As the price of a commodity decreases,
the real income of the consumer increases.
3.Substitution effect – When price of any commodity
increases while prices of other substitute goods remain
unchanged, consumers would prefer any one of these
substitute goods.
4.Entry and exit of new customers –
5.Various uses – Ex- Sugar, Electricity, Milk
14S NEHRA EFE UNIT I

15. Exceptions of the law
1.Giffen goods/ Inferior goods – Demand for inferior goods like
coarse grains will not increase even when their prices fall
2.Articles of distinction – Ex- Jewellery, Luxury goods (Veblen
effect)
3.Necessities of life – Ex- Foodgrains, Medicines
4.Future expectations regarding change in price –Uncertainty in
Afghanistan and price of dry fruits
5.Ignorance / illusion – Stock clearance sale
6.Abnormal conditions – Ex- Wars, Famines, Flood

15S NEHRA EFE UNIT I

16. What will happen to demand for goods
at the time of economy slow down
(Covid-19) ?
1.Real estate
2.Electronics
3.Luxury cars
4.Designers product
5.Travel and tourism
6.Restaurant business
Luxury market do shrink but not hard - hitted by economic
slow down.

16S NEHRA EFE UNIT I

17. Change in quantity demand
Movement along the same demand curve
Other things being equal, when there is a change in the
price of the commodity, the resulting change in
demand is shown along the same demand curve.
When the price of commodity falls, its demand
expands it is called as ‘extension of demand’.
When the price rise will result in the reduction of
demand it is called as ‘contraction of demand’.

17S NEHRA EFE UNIT I

18. Change / Shift in the demand
curve
When the demand changes on account of the factors other
than price, there will be a shift in the demand curve. This
situation is termed as change in demand.
When, the demand of the product increases due to any
other factor, it is called increase in demand
(upward/rightward shift).
When, quantity demanded falls due to factor other than
rise in product price, it is called as decrease in demand
(downward/leftward shift).
18S NEHRA EFE UNIT I

19. Increase in demand
The causes of increase in demand are:
1.Increase in the income of the consumers in case of
normal goods.
2.Decrease in the income of the consumers in case of
inferior goods.
3.Increase in the price of substitute goods.
4.Fall in the price of complementary goods.
5.Consumers’ taste becoming stronger in favour of the
good.

S NEHRA EFE UNIT I 19

20. Decrease in demand
The causes of decrease in demand are:
1.Fall in the income of the consumers in case of normal
goods.
2.Rise in the income of the consumers in case of inferior
goods.
3.Fall in the price of substitute goods.
4.Rise in the price of complementary goods.
5.Consumers’ taste becoming unfavourable towards the
good.
S NEHRA EFE UNIT I 20

21. Change in quantity
demanded vs. change in
demand
21
Change in quantity demanded Change in demand
S NEHRA EFE UNIT I

22. Review question – Movement &
shift
1.The Microsoft Xbox 360 gaming console is getting its price
slashed in India, making it all the more affordable for gamers
who’ve been eyeing it for long.
2.When V! Telecom company, offered reduced internet rates,
its volumes of internet use risen sharply.
3.People buy more long-stem roses in the week of the
Valentine's day.
4.Dell computer’s lowers its prices on all type of laptop models.
5.The government mandates that regular bulbs can no longer
be sold and the consumers make the switch to LED bulbs.
22S NEHRA EFE UNIT I

23. Elasticity – The concept
The responsiveness of one variable to changes in another.
When price rises, what happens to demand?
Demand falls
BUT!
How much does demand fall?

S NEHRA EFE UNIT I 23

24. If price rises by 10% - what happens to demand?
We know demand will fall
By more than 10%?
By less than 10%?
Elasticity measures the extent to which demand will
change.
S NEHRA EFE UNIT I 24

25. Elasticity - Types
1.Price elasticity of demand
2.Income elasticity of demand
3.Cross elasticity of demand

S NEHRA EFE UNIT I 25

26. Price Elasticity of Demand
Price elasticity of demand is the percentage change in
quantity demanded given a percent change in the price.
It is a measure of how much the quantity demanded of a
good responds to a change in the price of that good.
The responsiveness of demand to change in price.

S NEHRA EFE UNIT I 26

27. Price Elasticity
Price Elasticity of Demand:
◦Where % change in demand is greater than % change in
price – elastic
◦Where % change in demand is less than % change in price
- inelastic

S NEHRA EFE UNIT I 27

28. Computing the Price
Elasticity of Demand
The price elasticity of demand is computed as the
percentage change in the quantity demanded divided by
the percentage change in price.

Price Elasticity =Percentage Change in Qd
of DemandPercentage Change in Price
S NEHRA EFE UNIT I 28

29. Degrees/coefficients of PEd
There are five coefficients of price elasticity of demand.

S NEHRA EFE UNIT I 29

30. Perfectly Inelastic Demand - Elasticity =
0
S NEHRA EFE UNIT I 30
Quantity
Price
4
5
Demand
100
2. ...leaves the quantity demanded unchanged.
1. An
increase
in price...
Life saving medicines,
Essential food item

31. Inelastic Demand - Elasticity is less than
1
S NEHRA EFE UNIT I 31
Quantity
Price
4
51. A 25%
increase
in price...
Demand
10090
2. ...leads to a 10% decrease in quantity.
When consumption cannot be postponed or the
expenditure on it is very small or its close substitutes
are not available in the market

32. Unit Elastic Demand - Elasticity equals 1
S NEHRA EFE UNIT I 32
Quantity
Price
4
51. A 25%
increase
in price...
Demand
10075
2. ...leads to a 25% decrease in quantity.

33. Elastic Demand - Elasticity is greater
than 1
S NEHRA EFE UNIT I 33
Quantity
Price
4
5
1. A 25%
increase
in price...
Demand
10050
2. ...leads to a 50% decrease in quantity.
Luxury goods; close substitutes of the
commodity are large; the commodity has
many uses

34. Perfectly Elastic Demand -Elasticity
equals infinity
S NEHRA EFE UNIT I 34
Quantity
Price
Demand
4
1. At any price
above 4, quantity
demanded is zero.
2. At exactly 4,
consumers will
buy any quantity.
3. At a price below 4,
quantity demanded is infinite.
In our real life, we do not have any such
commodity having perfectly elastic demand

35. Determinants of Price
Elasticity of Demand
Demand tends to be more elastic :
If the good is a luxury
The longer the time period
The larger the number of close substitutes
Can be postponed
More income is spent on the goods
Price level – Moderate
Not a Joint good
If have more uses
Habits

S NEHRA EFE UNIT I 35

36. Determinants of Price
Elasticity of Demand
Demand tends to be more inelastic:
If the good is a necessity
If the time period is shorter
The smaller the number of close substitutes
Cannot be postponed
Little income is spent on the goods
Price level – High & low
Joint goods
If have less uses
Habits

S NEHRA EFE UNIT I 36

37. Review question
1.Will the demand be – Elastic or inelastic for the
following products and why?
A.Cooking gas
B.Cigarettes
C.OLED TV
D.Diamonds
E.Bosh Washing Machine
S NEHRA EFE UNIT I 37

38. Review question
You are a Hyundai car dealer, and you know that the price
elasticity of demand for Hyundai cars is 1.5. What will
happen to your total revenue from Hyundai car sales if you
raise your prices?
S NEHRA EFE UNIT I 38

39. ANSWER
Because price elasticity of demand for Hyundai cars is
greater than 1, an increase in price will reduce total
revenue.
NOTE: Revenue is NOT profit!

S NEHRA EFE UNIT I 39

40. Review question
Suppose you are the manager of a theater. You currently
charge the same admission price to all customers,
regardless of age. You hire an economist to determine the
price elasticity of demand for admissions by age, and he
tells you that at the current price, demand by adults is
inelastic and demand by children is elastic. If you want to
increase your total revenue by adjusting admission prices,
how should they be adjusted?
S NEHRA EFE UNIT I 40

41. Answer
The solution is a 2- tier price system, with higher prices for
adults and lower prices for children.
S NEHRA EFE UNIT I 41