Managerial Economics: Law of Demands.pptx

What is the Law of Demand?

The law of demand states that the quantity demanded of a good shows an inverse relationship with the price of a good when other factors are held constant (cetris peribus). It means that as the price increases, demand decreases.

The law of demand is a fundamental principle in macroeconomics. It is used together with the law of supply to determine the efficient allocation of resources in an economy and find the optimal price and quantity of goods.

1. DEMAND

2. WHAT IS DEMAND? Demand refers to the consumer’s desire and willingness to buy a product or service at a given period or over time. Consumers must also have the ability to pay for something they want or need as determined by their disposable income budget. -income remaining after deduction of taxes and other mandatory charges, available to be spent or saved as one wishes.

3. LAW OF DEMAND The Law of Demand states that when prices rise , demand will fall and when prices fall , demand will rise . It is simply an expression of the negative or inverse relationship between price and demand. This means that the one affecting demand is solely the price . Price rises Demand fall Demand rises Prices fall

4. EXCEPTION TO THE LAW OF DEMAND: 1. GIFFEN GOODS These are inferior goods for which the quantity demanded increases when the price of goods increases. Some examples of it are wheat, potatoes, and rice. 2. VEBLEN GOODS Veblen goods are luxury goods for which the quantity demanded increases when the price of goods increases. Examples are cars, yachts, and designer jewelries.

5. 3. ESSENTIAL  GOODS Individual will keep purchasing necessities regardless of whether the cost increases. Examples are medications, or essential staples like salt, rice and sugar. 4.MARKET SATURATION When a market become saturated with a particular product, the Law of Demand may not hold, as the demand for the product may decrease despite a decrease in price. 5.EXPECTATION OF PRICE CHANGE There are times when the price of product increases and market conditions are such as the product may get more expensive. In such cases, consumers may buy more of these products before the price increases any further.

6. IMPORTANCE OF LAW OF DEMAND: 1. PRICING STRATEGY By analyzing the demand curve, businesses can determine the optimal price point for a product or service that will maximize revenue. 2. MARKET ANALYSIS By examining changes in the quantity demanded of goods in response to changes in its price, analysts can gain insights into consumer preferences, market trends, and the overall health of the economy.

7. 3 . CONSUMER BEHAVIOR By understanding how consumer respond to changes in price, businesses can better understand their customer’s needs and preference. 4. PUBLIC POLICY Understanding how changes in price will impact consumer behavior is crucial to designing effective policies that achieve their intended outcomes.

8. DEMAND SCHEDULE The Demand Schedule refers to a tabular representation that shows the quantity demand a consumer is willing to buy given alternative prices. This is a way of showing the inverse relationship between price and quantity demand.

9. In the chart, it is seen that while price is increasing, quantity demanded is decreasing and while price is decreasing, quantity demand by the consumer is increasing.

10. DEMAND CURVE The Demand Curve is a graphical representation of the inverse relationship between price and quantity demand. We can use the demand schedule to plot the demand curve.

11. SHIFT IN DEMAND Shift in demand represents a change in the quantity of a product or service that consumers seek at any price point, caused or influenced by a change in economic factors other than price. The demand curve shifts when the quantity of a product or service demanded at each price level changes.

12. RIGHTWARD SHIFT If the quantity demanded at each price level increases, the new points of quantity will move rightward on the graph to reflect an increase.

13. LEFTWARD SHIFT If the quantity demanded at each price level decreases, the new points of quantity will move leftward on the graph, hence shifting the demand curve leftward.

14. ELASTICITY is a concept in economics that talks about the effect of change in one economic variable on the other. ELASTICITY DEMAND refers to the degree to which demand responds to a change in an economic factor. commonly referred to as price elasticity of demand .

15. PRICE ELASTICITY DEMAND FORMULA:

16. FOUR TYPES OF ELASTICITY: 1 . PRICE ELASTICITY OF DEMAND measures how demand responds to a change in price or income. PED FORMULA = % Change in Quantity Demanded % / Change in Price

17. 2. CROSS ELASTICITY OF DEMAND concept measuring the responsiveness in quantity demanded of one good when the price of another change. CED = (% Change in Quantity Demanded for one good (X)%) / (Change in Price of another Good (Y))

18. 3. INCOME ELASTICITY OF DEMAND refers to the sensitivity of the quantity demanded for a certain good to a change in the real income of consumers who buy this good. IED FORMULA = % Change in Quantity Demanded% / Change in Income

19. 4. ADVERTISING ELASTICITY OF DEMAND a measure of a market's sensitivity to increases or decreases in advertising saturation. measured by its ability to generate new sales. INELASTICITY   when demand remains constant regardless of price changes.

20. FACTORS AFFECTING DEMAND: 1. PRICE increase in prices reduces customers’ wants and needs for a product and vice versa. 2. CHANGES IN INCOME when income goes up , consumer buy more and w hen income goes down , consumer buy less .

21. 3. AVAILABILITY AND PRICES OF SUBSTITUTE if the price of product A increases significantly, consumer switch to its cheaper substitute or alternative, thus decreasing the demand for product A. 4. AVAILABILITY AND PRICES OF COMPLEMENTARY GOODS If the price of complementary good for product A falls , then the demand for both increases . If the price of complementary good for product A rises , then the demand for both decreases . Complementary Goods – are things that are often sold and used together .

22. 5. CHANGES IN THE NUMBER OF CONSUMER the more the buyers, the higher the demand. the fewer the buyers , the lower the demand. 6. CHANGES IN TASTE AND PREFERENCES if a product is on trend or becomes popular, the demand for it increases . if a product is outdated or if an alternative becomes more popular, its demand decreases .

23. 7. FUTURE/ PRICE EXPECTATIONS When consumer expect the price of commodities to rise, they demand or buy more. When people expect the price to fall, they are discourage to buy low instead they wait until that times come. 8. CREDIT RISK The credit policy of suppliers or banks also affects the demand for a commodity.

24. 9. CLIMATIC FACTOR The demand for commodities depends on the climatic conditions of a region such as cold, hot, humid, and dry. 10. GOVERNMENT POLICY Government policies have direct impact on the demand for various commodities. If taxes are high then the cost of that product will be high and demand will be low due to such rise in price and vice versa.

25. TYPES OF DEMAND: 1. PRICE DEMAND a demand for different quantities of a product or service that consumers intend to purchase at a given price and time period assuming other factors, such as prices of the related goods, level of income of consumers, and consumer preferences, remain unchanged. = f( ) where: = Demand for commodity A f = Function =Price of commodity A  

26. 2. INCOME DEMAND a demand for different quantities of a commodity or service that consumers intend to purchase at different levels of income assuming other factors remain the same. = f ( ) where: = Demand for commodity A f = Function = Income of consumer A  

27. 3. CROSS DEMAND the demand for different quantities of a commodity or service whose demand depends not only on its own price but also the price of other related commodities or services. = f ( ) where: = Demand for commodity A f = Function = Price of commodity B  

28. 4.  INDIVIDUAL DEMAND & MARKET DEMAND the classification of demand based on the number of consumers in the market. Individual Demand = the quantity of a commodity or service demanded by an individual consumer at a given price at a given time period. Market Demand = the aggregate of individual demands of all the consumers of a product over a period of time at a specific price while other factors are constant.

29. Aggregate Demand = the total amount of demand for all finished goods and services produced in an economy. Aggregate Demand= C+I+G+Nx where: C= Consumer spending on goods and services I= Private investment and corporate spending on non-final capital goods (factories, equipment, etc.) G= Government spending on public goods and social services (infrastructure, Medicare, etc.) Nx = Net exports (exports minus imports)

30. 5. JOINT DEMAND the quantity demanded two or more commodities or services that are used jointly and are, thus demanded together. 6. COMPOSITE DEMAND the demand for commodities or services that have multiple uses. 7. DIRECT DEMAND & DERIVED DEMAND Direct Demand = the demand for commodities or services meant for final consumption. Derived Demand = the demand for a product that arises due to the demand for other products.

31. DEMAND ESTIMATION AND FORECASTING Estimation vs. Forecasting ESTIMATION Looks for links between data and operations, finding the reason behind the numbers and using this information to plan for the future. FORECASTING Is driven by numbers rather than stories. It issues predictions based on past records without necessarily delving into why certain patterns have occurred.

32. DEMAND ESTIMATION Is the process of finding current values of demand for various of prices and other determining variables. Business enterprise needs to know the demand for its product. An existing unit must know current demand for its product in order to avoid underproduction or overproduction.

33. STEPS IN DEMAND ESTIMATION: Identification of independent variables such as price, price of substitutes, population etc. Collection of data on the variables from past records, publications of various agencies etc. Development of a mathematical model or equation that indicates the relationship between independent and dependent variables. Estimation of the parameters of the model. Development of estimates based on the model.

34. TOOLS AND TECHNIQUES: Consumer surveys Consumer clinics and focus groups Market experiment Statistical Techniques

35. DEMAND FORECASTING Accurate demand forecasting is essential for a firm to enable it to produce the required quantities at the right time and to arrange well in advance for the various factors of production. Demand forecasting refers to an estimate of future demand for the product. It is essential to distinguish between forecast of demand and forecast of sales.

36. LEVELS OF DEMAND FORECASTING: MACRO – LEVEL - is related to the business conditions prevailing in the economy as a whole. INDUSTRY LEVEL- prepared by different trade association in order to estimate the demand for particular industries products. FIRM LEVEL – it is more important from managerial viewpoint as it helps the management in decision making with regard to the firms demand and production.

37. TYPES OF DEMAND FORECASTING: 1. Short Term Demand Forecasting 2. Long Term Demand Forecasting