DEMAND ANALYSIS

DEMAND
Quantity demandedThe amount of a good or service consumers are willing and able to purchase during a given period of time.

Factors affecting demand/ Determinants of demand

1. 2. 3. 4. The price of good or service The income of consumers The prices of related goods or service The tastes or preference pattern of consumers 5. The expected price of the product in future periods 6. The number of consumers in the market

DEMAND
Buyer side of market Demand is essential for creation, survival and profitability of firm Two types of demand relation

Generalized demand functions

Ordinary demand Function/demand Function

Generalized Demand FunctionsIt shows how quantity demanded is related to product price and five other functions that affect demand.

Qd= (P,M,PR,T,Pe,N)
Where ,

means is a function of or depends on

Qd =quantity demanded of the good or service P = price of good or service M = income of consumers PR = prices of related goods or service T = tastes or preference pattern of consumers Pe = expected price of the product in future periods N = number of consumers in the market

Ordinary Demand FunctionIt shows the relation between quantity demanded and the price of the product when all other variables affecting demand are held constant.

Qd= (P)

Types Of Demand
Individual Demand Market Demand Autonomous demand Derived demand Demand for Durable goods Demand for Non-Durable goods Short term Demand Long term Demand

Types Of Demand
Individual Demand- A quantity of commodity which an individual is willing to buy at a particular price at a specific time. Market Demand- The market demand for a commodity is simply the horizontal summation of demand curve of all consumers in the market. Autonomous demand- The demand for commodity which arises on its own. Derived demand-The demand for commodity which arises on its parent product.

Types Of Demand
Demand for Durable goods-The goods whose total utility is not exhausted in one single use. Demand for Non-Durable goods- The goods whose total utility is exhausted in one single use. Short term Demand- The demand for goods that are demanded over a short period. Long term Demand- The demand for goods that are demanded over a long period.

Law of Demand
If a price of a commodity falls , the quantity demanded of it will rise, and if price of the commodity rises, its quantity demanded will decline when other factors are kept constant. According to law of demand , there is inverse relationship between quantity and price when other factors are constant.

Law of Demand
Demand schedule- The tabular representation of relationship between price and quantity demanded. Demand curve- The graphical representation of quantity demanded at different price levels. Price (Rs) 12 10 8 6 4 2 Quantity demanded 10 20 30 40 50 60

Law of Demand

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Changes in Demand Curve

Extension Contraction

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Changes in Demand Curve

Shift in the demand curve to the right

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Changes in Demand Curve

Shift in the demand curve to the left

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Deviation from the Demand Curve

1. Veblen effect (Goods with prestige value)Founded by Thorstein Veblen-Higher the price higher the value of commodity. 2. Giffin goods (basic necessity)- founded by Sir Robert Giffin. Higher the value of product

higher the expenditure on the commodity.

Deviation from the Demand Curve

Band wagon effectDepends upon the consumer tastes and preferences. The trend is seen irrespective of the pricing.

Law of Supply
Concept of Supply : Supply of commodity is the schedule of the quantities of a commodity that would be offered for sale at all possible prices during a period of time. Supply is the actual quantity which is actually brought in the market.

Law of Supply
When the price of commodity rises , the quantity supplied of it in the market increases , when the price of commodity falls , its quantity demanded decreases , other factor determining the supply remaining the same. The quantity supplied is directly proportional to the price of the commodity.

Qsx= (P)

Law of Supply
Supply schedule- The tabular representation of relationship between price and quantity supplied. supply curve- The graphical representation of quantity supplied at different price levels. Price (Rs) 500 510 520 530 540 550 Quantity Supplied 100 150 200 225 250 275

Law of Supply

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Supply
Supply is dependent on six factors Production technology Prices of factors- such as wages Future price expectations Taxes and subsidies Number of producers Objectives of the firm Prices of other products

Concept of Elasticity
Elasticity of demand is the degree of responsiveness of quantity demanded of a good to a change in its price, consumers income and prices of related goods.

Types of elasticity
Price elasticity of demand - Point Price elasticity of demand - Arc Price elasticity of demand Income elasticity of demand

Cross price elasticity of demand

Price elasticity of demand

It indicates the degree of responsiveness of quantity demanded of a good to the change in its price remaining other factors constant. Price elasticity of demand is defined as the ratio of the percentage change in quantity demanded of a commodity to a percentage change in price. ep
=

Percentage change in quantity demanded Percentage change in price

Price elasticity of demand

Point Price elasticity of demandThe elasticity at a given point on the demand curve Arc Price elasticity of demandThe elasticity at a given range on the demand

curve.

Degree of Elasticity
Elastic demand -When the percentage change in quantity demanded is greater than the change in price.

InElastic demand -When the percentage change in quantity demanded is lesser than the change in price.
Unitary Elastic demand -When the percentage change in quantity demanded is equal to the change in price. Perfectly inelastic demand -When the change in price does not affect the quantity demanded. Perfectly elastic demand -When the smallest change in price affect the quantity demanded either to zero or to the level of infinity.

Degree of Elasticity
When elasticity (ep)>1 When elasticity (ep)<1 When elasticity (ep)=1 When elasticity (ep)=0 Elastic Inelastic Unitary elastic

Perfectly inelastic demand Perfectly elastic demand

When elasticity (ep)=

Graphical representation of Elasticity

Elastic demand
PX A

Qd

Quantity demanded is proportionately more than the reduction in pricing.

Graphical representation of Elasticity Inelastic demand-

PX A

B 0

Qd

Quantity demanded is proportionately less than the reduction in pricing.

Graphical representation of Elasticity

Unitary elastic demandPX A

Qd

Quantity demanded is in absolute proportion with reduced pricing.

Types of demand with respect to elasticity

o Perfectly inelasticpx

Qd

o Perfectly elasticpx

Qd

Income Elasticity of Demand

It indicates the degree of responsiveness of quantity demanded of a good to the small change in the income of consumer.

Income = Elasticity

Percentage change in purchases of a good Percentage change in income

Relation between income elasticity and types of goods

Goods having income elasticity more than one and which therefore bulks larger in consumers budget as he becomes richer are called normal goods or luxuries. Goods having income elasticity less than one and which claims declining proportion of consumers income as he becomes richer are called inferior goods or necessities.

Cross Elasticity of Demand

Degree of responsiveness of demand for one good in response to the change in price of another good represents the cross elasticity of demand of one good for the other.
Cross = Percentage change in quantity demanded of X Elasticity Percentage change in price of good Y

Relation between cross elasticity and types of goods

Substitute goods-They are competing goods. With the rise in price of one good X the quantity demanded of other good Y increases. Eg- Tea & Coffee. The Cross elasticity of demand is positive Complementary Goods-With the rise in price of one good X the quantity demanded of other good Z decreases. Eg- Bread and Butter. The Cross elasticity of demand is Negative.