MANAGERIAL ECONOMICS

Concept of Demand and Its

Determinants
Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS

Concept of Demand and Its

Determinants

Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS
Concept of Demand

The demand for a commodity arises from the consumer’s

willingness and ability to purchase that commodity.

Creation Survival Profitability

MANAGERIAL ECONOMICS
Demand Function

QX = f (PX, PY, IC, TC)

• Where,

QX = Quantity demanded of commodity X by an individual

per time period
PX = Price per unit of commodity X
PY = Price of related (substitute or complementary)
commodities
IC = Income of the consumer
TC = Tastes and preferences of the consumer
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Substitute and Complementary Good

1 2 3

4 5
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Relationship of Demand with Price

1 2

3
Price of a Quantity
Substitute Good Demand
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Relationship of Demand with Income of the Consumer

1
Income of the Quantity
Consumer Demand Normal
Goods

Inferior
Goods
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Determinants of Demand

Price of that commodity or related commodity

Determinants of Demand

Income, tastes, and preferences of the consumer

Past levels of demand of the consumer

Past levels of income of the consumer

Wealth of the consumer

Credit availability

Government policy
MANAGERIAL ECONOMICS
The Law of Demand

• The law of demand states that other things remaining the

same if the price of any commodity increases its quantity
demanded decreases and vice-versa.

• The law of demand can be represented by a graph.

• The graphical representation of the law of demand is a

curve that determine the relationship between the
quantity demanded and the price of a good.
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Graphical Representation of the Law of Demand

Demand Schedule Demand Curve

P

Price per Quantity

unit (₹) demanded 14
2 80 12
4 70
10
6 60
8 50 8

10 40 6
12 30 4
14 20
2 QD
20 20 40 50 60 70 80
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Shape of the Demand Curve
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Explanations of the Downward Slopping Demand Curve

Assumption of the Diminishing Marginal

1 Utility

Income effect of a change in price

2

Substitution effect of a change in price

3
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Diminishing Marginal Utility

• Utility – refers to the total

satisfaction received by consumer
from consuming a good or service.

• Marginal Utility – refers to the

additional utility that the consumer
gets by consuming one addition
unit of the product.

• Law of Diminishing Marginal Utility

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Income Effect of a Change in Price

₹ 50 per kg ₹ 25 per kg ₹ 30 per kg ₹ 110 per pack ₹ 45 per kg ₹ 315

1 kg 2 kg 2 kg 1 pack 1 kg
₹ 50 ₹ 50 ₹ 60 ₹ 110 ₹ 45

₹ 45 per kg ₹ 20 per kg ₹ 15 per kg ₹ 90 per pack ₹ 35 per kg ₹ 240

1 kg 2 kg 2 kg 1 pack 1 kg
₹ 45 ₹ 40 ₹ 30 ₹ 90 ₹ 35
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Income Effect of a Change in Price

₹ 45 per kg ₹ 20 per kg ₹ 15 per kg ₹ 90 per pack ₹ 35 per kg ₹ 300

1 kg 2.5 kg 3 kg 1 pack 2 kg
₹ 45 ₹ 50 ₹ 45 ₹ 90 ₹ 70

This is the source of the income effect of the fall in price.

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Substitution Effect of a Change in Price

₹ 2526
₹ 911 per 5 kg ₹ 295 per 5 kg ₹ 18 per kg ₹ 71 per kg ₹ 320 per kg
10 kg 5 kg 1 kg 1 kg 1 kg
₹ 1822 ₹ 295 ₹ 18 ₹ 71 ₹ 320

₹ 1125 per 5 kg ₹ 295 per 5 kg ₹ 18 per kg ₹ 71 per kg ₹ 320 per kg ₹ 2456

7 kg 8 kg 1 kg 1 kg 1 kg
₹ 1575 ₹ 472 ₹ 18 ₹ 71 ₹ 320
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Exceptions to the Law of Demand

Giffen
Goods

Veblen
Goods
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Individual and Market Demand

Price Quantity Quantity Quantity Quantity Market

Demanded by Demanded by Demanded by Demanded by Demand
Consumer A Consumer B Consumer C Consumer D
2 40 40 45 18 143
4 30 30 35 16 111
6 24 21 30 13 88
8 18 15 20 12 65
10 14 10 15 11 50
12 10 7 13 8 38
14 8 5 10 6 29
16 6 3 8 4 21
18 4 2 0 0 6
THANK YOU

Biplab Sarkar
Department of Management Studies
biplabsarkar@pes.edu
+91 80 6666 3333 Extn 337