Demand Analysis

Dr. Utpal Chattopadhyay

Asst. Professor,
NITIE, Mumbai

Meaning of Demand

Effective Demand has to fulfill

three basic characteristics

Desire to buy
Willingness to pay
Ability to pay

Demand for a commodity has

always reference to:
A Price
A Period of time
A Place
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Types of Demand

Demand for Consumers &

Producers Goods
Demand for Perishable &
Durable Goods
Autonomous & Derived Demand
Individual & Market Demand
Firm & Industry Demand
Short-term & long-term
Demand
Domestic & Overseas Demand

Factors affecting
Demand

Price of goods:
o
o

Own Price
Prices of related products

Prices of substitute goods

Prices of complementary goods

Income of consumers
Consumers tastes & preferences
Future Expectations
o
Income
o
Price
No. of consumers
Distribution of consumers

Demand Function
A Typical demand function:

Dx= f (Px,Py, I, T,E,C,u)

Dx= Demand for good X
Px= Price of good X
Py= Price of other goods
I= Income
T= Tastes & preferences
E= Future expectations
C= No. of consumers & their distribution
u=residual factors
A simplified version:

Dx= f (Px)

with ceteris paribus assumption

Demand Curve
A Demand curve shows the amount of the
commodity buyers would like to purchase at
different prices. It depends on prices (own
as well as related commodities), income,
tastes and no. of consumers.
D = F (P) with tastes, incomes, prices
of other goods and no. of consumers etc.
Price held constant.
Law of Demand says More (less) will
bought at lower (higher) price.

D
P1

Demand

P2
P3

D
Q1

Q2

Quantity
Q3

Supply Curve
A Supply curve shows the amount of the
commodity sellers would like to offer at
various prices. It depends on product price,
input prices and technology.
S = F (P) with input prices and
technology held constant.
Price

Supply
P1

Quantity supplied
increases as the
price increases

P2
P3
S
Q1

Q2

Q3

Quantity

Equilibrium Price
Equilibrium price is that price where the quantity
demanded equals the quantity supplied (market
clearing price). In the short run market price may not
equal equilibrium price. But in the long run market
price approximates the equilibrium price
Price
S
D
Pe

Equilibrium Price

Quantity
Qe

Market Mechanism
When market price (Pm1) is above equilibrium price
(Pe) there is Excess Supply (or Surplus). Producers
reduce price. Quantity demanded increases and
quantity supplied decreases. Market continues to
adjust until Pe is reached.
Price
S
Pm1

Excess Supply

Pe
Pm2
Excess Demand

When Pm2 < Pe,

there is Excess
Demand (or
shortages) in the
market. This puts
upward pressure
on price and it
continues to rise
till price reaches
to Pe.

Quantity
Qe

Stability of Equilibrium
Walarasian Vs. Marshallian Stability
Stability of a market based on price adjustment
is called Walrasian Stability, while the one based
on quantity adjustment is called Marshallian
Stability
Price
D

At Q1, demand price

(Pd) exceeds supply
price (Ps). Thus more
of the commodity will
Market Equilibrium be made available in
the market until Q
reaches Qe. This is
Marshallian Stability.

Pd
Pe
Ps

S
Q1

Qe

Quantity

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Change in Demand

Extension/contraction in
demand (movement along
a demand curve)
caused by changes in
own price
Increase/ decrease in
demand (shift in demand
curve)
caused by changes in
other determinants of
demand
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Movement along a
Demand Curve

Impact of change in own price

on demand

Price
Dx
P3
P1
P2

Dx
D3

D1

D2

Quantity

Income and Substitution Effects of a

(own) price change

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Shifts in Demand Curve

An rightward/upward (leftward/downward)
shift in demand curve results in an increase
(decrease) in equilibrium price.
Factors affecting shifts in
Demand
Price

Income
D2
S

D1
P2

D3

Price of related goods

Consumers tastes &
preferences
Expectations

P1

Others (bandwagon effect )

P3

D2
S

D3
Q3 Q1

Q2

D1
Quantity

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Change in Income &

Demand

For normal (superior) goods, if

income increases demand also
increases

For inferior goods, demand falls

when income increases (why?)

What is a Giffen good?

An inferior good for which a rise in its

price makes people buy even more of that
good
This is because for such goods a strong
income effect outweighs the substitution
effect of a price change
Law of Demand does not hold good in
case of Giffen goods (Other exceptions to
the Law include: luxury/ status goods,
expectations on future prices etc.)

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Engel Curve

Named after the 19th century German

Statistician Ernst Engel
It shows how the quantity demanded of a
good changes with change in consumers
income level
It states that the lower a familys
income, the greater is the proportion of it
spent on food
The conclusion was based on a budget
study of 153 Belgian families
For normal goods, the Engel curve has a
positive slope. That is, as income
increases, the quantity demanded
increases. For inferior goods , the Engel
curve has a negative slope, meaning that
as a consumer earns more income,
he/she will be able to buy better goods
and thus stop buying the inferior goods

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Change in Prices of
Related Goods & Demand

For substitute goods, if

price of one good (say X)
increases demand for the
other (say Y) also increases

In case of complementary
goods, if price of one good
(say A) increases demand
for the other (say B) falls

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Shifts in Supply
An rightward (leftward) shift in supply curve
results in an decrease (increase) in
equilibrium price.
Factors affecting shifts in
supply
Input Prices
Price

Technology

S3
D1

S1
S2

Price of substitutes
Taxes

P3

Market speculation

P1
P2

No. of firms
Others (e.g. weather for
agricultural products)

S3
S1

D1
S2
Q3 Q1

Q2

Quantity

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Simultaneous Shifts in
Demand and Supply
A hypothetical case where both
demand and supply shift rightward.

D2

S1

D1
P1

E1

P1

S2

E2

P1

S1

D1

S2
Q1

D2

Q1 Q1 Q2

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