You are on page 1of 35

Analysis of Demand

8/14/2013

Meaning
Desire for a commodity backed by the ability and willingness to pay for it. A want with three attribute 1. Desire to buy 2. Willingness to pay 3. Ability to pay Becomes effective demand A meaning full statement regarding the demand for a commodity should contain The quantity demanded Price Time Place

8/14/2013

What factor affect the demand for a commodity


Price of the commodity Income of the consumer Price of related goods (substitute & complementary) Fashion, tastes and preferences of consumers Number of consumers Future expectation of change in price Seasonal goods Credit facility Advertisement of the product Demonstration effect Distribution pattern of national income
3

8/14/2013

Demand function
Dx = f ( Px , Y , T , P, F , P 1, P 2 ....) Dx = Demand for commodity x Px = price of commodity x T = tastes P = preference F = fashion P 1, P 2 .... = price of other commodities
8/14/2013 4

Law of demand
Other things remaining the same, demand will be more when price is less and it will be less when price is more.

8/14/2013

Demand schedule and curve


Price (Rs.) Quantity demand (units) 25 20 15 10 5 Q Q1 D P1 P R I C E P

2 4 6 8 10

Quantity Demand
8/14/2013 6

Exceptions of the law of demand


Inferior goods (Giffen goods) Expectations of changes in the price in future Fashion Possibility of war Ignorance Snobbery : status symbol ( snob effect)
8/14/2013 7

Why does a demand curve slope downwards to the right


Law of diminishing marginal utility Income effect Substitution effect Many uses of a commodity Band wagon effect

8/14/2013

Increase and decrease in demand


Increase in demand Price Shift in demand curve upward

Quantity demand
8/14/2013 9

Increase and decrease in demand


Price Shift in demand curve downwards Decrease In demand

Quantity demand
8/14/2013 10

Increase and decrease in demand


Increase in demand Price Shift in demand curve Decrease In demand

Quantity demand
8/14/2013 11

Extension and contraction in demand


Price extension

Quantity demand

8/14/2013

12

Extension and contraction in demand


contraction Price

Quantity demand

8/14/2013

13

Extension and contraction in demand


contraction Price

extension Movement Along The demand curve

Quantity demand

8/14/2013

14

Market demand schedule and curve


Price 2 4 6 8 10 P R I C E P R I C E Demand of A 25 20 15 10 5 P R I C E B Quantity demand
15

Demand of B 20 18 14 10 6

Market demand (A+B) 45 38 29 20 11

Market demand A+B

A
8/14/2013

Types of demand
Derived demand Joint demand Composite demand (many use of a commodity) Direct demand (autonomous demand)

8/14/2013

16

Band wagon effect


In laymans term the bandwagon effect refers to people doing certain things because other people are doing them, regardless of their own beliefs, which they may ignore or override. The perceived "popularity" of an object or person may have an effect on how it is viewed on a whole. For instance, once a product becomes popular, more people tend to "get on the bandwagon"
8/14/2013

and buy it, too.

17

Snob effect
In microeconomics, the snob effect is a phenomenon referring to the situation where the demand for a certain good by individuals of a higher income level is inversely related to the demand for the good by individuals of a lower income level. The "snob effect" contrasts most other microeconomic models, in that the demand curve can have a positive slope, rather than the typical negatively sloped demand curve of normal goods.

8/14/2013

18

Elasticity of demand

8/14/2013

19

Elasticity of demand
The degree of responsiveness of the demand for a good to a change in its price is called elasticity of demand.
percentage change in quantity demanded price elasticity = percentage change in price q p q p ep = = q p p q

8/14/2013

20

Categories of Elasticity
Relative elasticity of demand: EP > 1 Relative inelasticity of demand: 0 < EP < 1 Unitary elasticity of demand: EP = 1 Perfect elasticity: EP = Perfect inelasticity: EP = 0

8/14/2013

21

Determinants of elasticity of demand


Price level (very costly & very cheap are elastic) Substitutes are available (elastic) Nature of the commodities
Necessaries (inelastic) Comforts(elastic) Luxuries(elastic)

Various uses (elastic) Postponement (some time elastic) Habit (inelastic) Joint demand (both are same)
22

8/14/2013

Point method
elasticity of demand at a point on a straight line is lower sgement of the demand curve AT = ed = upper sgement of the demand curve AS
PRIC E S Upper segment

Lower segment

T
8/14/2013

QUANTITY

23

Point Elasticity of Demand


Elasticity differs along a linear demand curve.

8/14/2013

24

Total outlay method


If price and total expenditure move in the same direction= elasticity < 1 If price and total expenditure move in the opposite direction= elasticity > 1 If total expenditure remains the same whether price increases or decreases = elasticity = 1
Price E=1 E>1

8/14/2013

E<1 Total

25

Income Elasticity
The percentage change in quantity demanded caused by a percent change in income. %Q Y = Income EY =

%Y

Consumer goods Essential Comfort Luxuries


8/14/2013

Coefficient of income ed E<1 E=1 E>1

Effect on sales with change in income Less than proportionate change in sale Almost proportionate change in sale More than proportionate increase in sale 26

The Cross-Elasticity of Demand


The percentage change in quantity consumed of one product as a result of a percent change in the price of a related product, i.e. complementary goods or substitutes goods.

%QA EX = %PB

For a +ve cross-elasticity the products are substitutes product For8/14/2013 a ve cross-elasticity the products are complimentary27

Arc Elasticity of Demand


Elasticity which is measured over a discrete interval of a demand curve.
Q2 Q1 P2 P 1 Ep = (Q1 + Q2 ) / 2 ( P 1+P 2) / 2
Ep = Coefficient of arc price elasticity Q1 = Original quantity demanded Q2 = New quantity demanded P1 = Original price P2 = New price
28

8/14/2013

Uses of elasticity in business decisions


Price and cross elasticity's of demand are of greater significance in the pricing of a product aimed at maximizing the total revenue in the short run. Income elasticity of a product is of a greater significance in production planning and management in the long run particularly during the period of a business cycle. The income elasticity also used to define the normal and inferior goods.
+ve income elasticity is normal goods -ve income elasticity is inferior goods
8/14/2013 29

Example
Demand for computer depends on its price, income, price of substitutes, advertisement. qc = f ( pc , y, ps , A) qc = 50 1.5 pc + 0.5 y + 2.0 ps + 0.8 A if price = 40, income = 60, price of substitutes = 30 and A = 25 then if we replace these then demand = 100,000 Given these demand the business policy follow these changes increase the computer price by 10% increase its ad - expenditure by 20% in anticipation of an increase in income by 8%, and no change in the cometitors price. the company would like to know whether it would be advisable to make the planned changes? 8/14/2013 30

Q P Q P 40 = = 1.5 = 0.6 P Q P Q 100 60 = 0.3 EY = 0.5 100 30 = 0.6 ES = 2 100 25 = 0.2 E A = 0.8 100 The impact become Qc = 100 0.6(10) + 0.3(8) + 0.6(0) + 0.2(20) = 100.4 EP = so the demand estimate shows 100,400 - 100,000 = 400 units This is not a significant increase in demand because decline in demand for computer by 600 units due to 10% increase in price. The company would better be advised not to increase in price but 8/14/2013 rely on increase in PC user' s income and advertisement.
31

Sol.

Assignment - 3
1.The price of a commodity falls from Rs. 10 to Rs. 5 and its coefficient of price elasticity of demand is 2. how much quantity will be demanded to the changed price where original quantity demanded is 40. 2.A decline of Rs.2 in the price leads to an increase o f 10 units in the demand as a result of which demand goes up to 100 units and price declines to Rs.8. calculate price elasticity of demand.
8/14/2013 32

Assignment - 3
3. If the demand function is q=100-5p find the elasticity of the demand at p=10. 4. the demand law is given by x=10-p near the point x=4, and p=6. if the price increases by 5%; determine the percent decrease in demand and hence an approximation to the elasticity of demand. 5. If the demand law is x=20/(p+1), find elasticity of demand with respect to price at the point where p=3.
8/14/2013 33

Assignment - 3
6. What is meant by elasticity of demand? Explain what are different methods of measuring elasticity of demand. Suppose price elasticity co-efficient for a commodity is estimated at -2. what does it mean? 7. What do you mean by demand . Explain the difference between change in demand and change in quantity demand for a commodity.
8/14/2013 34

Thank you
8/14/2013 35