Demand Analysis

DEMAND:
• Demand indicates desire to buy backed by
adequate purchasing power, willingness to
buy and ability to buy. Thus demand for a
product refers to the amount of it which will
be bought per unit of time at a particular
price.
 Types of demand
• 1. Price demand :Demand is only related with
price of the product, keeping other factors
constant. Price is indirectly proportionately
related with quantity demanded
• 2. Income demand : D= f (y ) other factors held
constant). When income increases, the demand
for superior goods increases and vice versa
• 3. Cross demand : D= f (price of related
commodity / other factors held constant) e.g.
Demand for tea in relation to the prices of coffee
 DEMAND SCHEDULE
• The demand schedule lists possible prices,
along with quantity demanded at each price.

Price ( Rs ) Quantity Kgs.)

10 20
8 25
6 30
5 35
4 40
 DEMAND SCHEDULE
• The diagrammatic representation of demand schedule
is demand curve.
• Individual demand refers to the demand for a
commodity by an individual consumer. Whereas,
market demand, is the sum of the individual demands
of all consumers in the market.
• Demand schedule enables to ascertain the likely
changes in the demand as a result of price change. It
also enables to understand easily and correctly the law
of demand and elasticity of demand. From a practical
point of view the market demand schedule proves of
great use to businessmen, especially to monopolists.
 LAW of DEMAND
• Law of says that
quantity demanded
varies inversely with
price, other things
constant i. e. higher the
price, the smaller the
quantity demanded or
lower the price, the
larger the quantity
demanded (Alfred
Marshall )
 Exception to the law of demand
Other things remaining the same are very important
assumption of the law of demand. These assumption
or exceptions are:
• Scarcity: In times of scarcity, although prices are rising, yet
people tend to buy more of the scarce goods.
• Necessaries of life: Some goods are essential and consumer
must consume them at all costs.
• Ignorance: Some time consumers buy more things at high price
out of ignorance.
• Self Display: Certain things are used for self display as in case of
diamonds, , the higher the price, greater may be their
attractiveness.
• Giffens Paradox : Giffens Paradox provides an exception to the
law of demand. It is said when the price of Giffen goods/ inferior
goods fall, the demand for such goods also falls and rise with a
rise in the in prices.
 Factors affecting the demand
There are many factors which affect the demand for a
good. The main factors are price of substitutes, income,
consumers’ taste, season, population, technology,
distribution of wealth etc.
• Substitution Effect: When the price of a good falls, its
relative price makes consumers more willing to purchase
this good and when the price of a good increases, its
relative price makes consumers less willing to purchase this
good. The changes in the relative prices – the price of one
good compared to the prices of other goods – causes the
substitution effect
 Factors affecting the demand

• Income Effect: the income effect is the

change in demand for a good or service
caused by a change in a consumer's
purchasing power resulting from a change
in real income.
 Change in Quantity Demanded
• Change in Quantity demanded means the movement
along the same demand. A movement along a demand
curve occurs when own price changes, holding other
factors as constant. This result into:
a. Extension of Demand
 Change in Quantity Demanded
b. Contraction of demand:
 Types of changes in demand
a. Increase in demand:
 Types of changes in demand
b. Decrease in demand:
 Elasticity of demand
• Elasticity of demand refers the degree of
responsiveness of quantity demanded to
changes in variables such as price, income,
tastes and preferences, price of substitutes
etc. Elasticity is simply a ratio between a cause
and an effect, always in percentage. The
percentage change in effect is divided by
percentage change in cause
 Types of elasticity:
• I. Price elasticity of demand : It is a measure
of change in quantity of a commodity
demanded in response to change in the price
of that commodity.
• Є =Percentage change in quantity
demanded/Percentage change in price
 Types of elasticity:
• ii) Income Elasticity of demand: It is the
magnitude of change in quantity demanded in
response to change in the income of the
consumer. It is calculated by the formula.
• Є =Percentage change in quantity
demanded/Percentage change in income
 Types of elasticity:
• Cross elasticity of demand : It is a measure of
change in quantity demanded in response to
change in prices of other related commodities.
• Є =Percentage change in quantity demanded
of Y commodity/Percentage change in price
of X commodity
 Degrees of elasticity of demand
a) Perfectly elastic
b) Perfectly inelastic
c) Unitary elastic
d )Greater than unitary elastic
e) Less than unitary inelastic
 Perfectly elastic demand or infinite
elasticity
• Even a very small change
in price leads to a very
large change in quantity
demanded it is said to be
perfectly elastic. A
perfectly elastic demand
is one in which any
quantity will be bought at
the prevailing price, but
any rise in price will
cause quantity
demanded to fall to zero.
 Perfectly inelastic demand
• If demand
remains
unchanged to
any amount of
change in price,
demand is said
to be perfectly
inelastic.
Unitary elastic demand (Equal to one)
• When numerical
value of elasticity of
demand is equal to
one is known as
unitary elastic
demand. It means
that both price and
quantity demanded
change in the same
proportion.
 Greater than unitary elastic, elastic
demand (greater than one)
• Demand is said to
be elastic when the
numerical value of
elasticity is greater
than one or unity.
It means that
percentage change
in quantity
demanded is larger
than the
percentage change
in price.
 Less than unitary elastic, inelastic
demand (less than one)
• If the numerical
value of elasticity of
demand is less than
one or unity, it is
called inelastic
demand. I.e.
percentage change
in quantity
demanded is lesser
than the percentage
change in price.
 Measurement of Price elasticity of
demand
• There are five methods of measuring price
elasticity of demand. These are:
1. Total expenditure method
2. Percentage method
3. Point method
4. Arc elasticity method
5. Revenue method
 Total expenditure method
• This method was
developed by Dr.
Marshall. According
to this method in
order to measure the
elasticity of demand it
is essential to know
how much and in
what direction the
total expenditure has
changed as a result of
change in the price of
a commodity.
 Percentage method
• Ed =(-)percentage change in quantity
demanded/ percentage change in price
• Ed =(-)(ΔQ / Q)/(ΔP /P)
• Ed = (-)P ΔQ/ Q ΔP
Point elasticity of demand
Point elasticity of demand in case of
curve linear demand curve
Arc Elasticity Method
 Revenue Method
• Price elasticity of demand can also be
measured with the help of average and
marginal revenue curves with the following
formula.
• Ep = A/ A-M where A= average revenue,
M=marginal revenue
 Factors Influencing Elasticity of
Demand
• Nature of the Commodity
• Income of the Consumer
• Price of the Commodity
• Habit of the consumer
• Proportion of the income spent by the
consumer on a Commodity
• Availability of substitutes
• Time period.