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Chapter 3

Demand Analysis Determinants of Market

Demand Law of Demand Elasticity of Demand Measurement & its use Demand Forecasting Techniques of Demand Forecasting.


1. Meaning of Demand. 2. Individual Demand. 3. Market Demand. 4. Determinants of Demand. 4.1.1 Factors Influencing Individual Demand. 5. Demand Function. 6. Demand Schedule. 6.1.1.Individual Demand Schedule. 6.1.2.Market Demand Schedule.


7. The Demand Curve. 7.1.1 The Individual Demand Curve. 7.1.2. The Market Demand Curve. 8. Law of Demand Assumptions & Exceptions. 9. Change in Quantity Demanded Versus Change in Demand. 9.1.1. Extension & Contraction of Demand. 9.1.2.Increase & Decrease in Demand.

9.1.3.Reasons for change Increase / Decrease in

Demand. 9.1.4.Autonomous Demand & Derived Demand. 9.1.5.Joint Demand & Composite Demand. 9.1.6.Indifference Schedule &Curve (Short Note) 9.1.7.Substitution Effect, Giffen Goods etc.(Short Notes) 10. Elasticity of Demand Price , Income & Cross Elasticity.. how to calculate elasticity .. Types of Elasticitys etc. *********************

Demand: Demand means a desire backed by

money. A man has numerous desires. He attempts to satisfy his needs. The economics studies a human behaviour as a relationship between unlimited wants & limited means that have alternative uses. In simple words, economics is the science of adjustment between unlimited wants & limited resources.

In the ordinary sense of the term, Demand

means to ask for a particular thing. Sometimes, it also means, asking for a thing authoratively.

For transferring our desires into demand we should have the capacity to fulfil these desires. A choice is exercised and then something is demanded. Capacity to fulfil these desires implies the ability & willingness to pay the price. That is why demand is defined as desire backed by purchasing power, i.e., money & willingness to pay the respective price at that point of time.

Demand = Desire + Ability to Buy + Price +

Willingness + Point of Time.

Important Features Of Demand:

It is an effective desire. It is a relative concept. It is expressed in contact with price & time.

Determinants Of Demand / Factors Affecting / Influencing Demand :

The Price of the Product / Commodity. The income of the consumer. The price / availability of substitutes. The population. Consumers Preference, Taste & Needs. Advertisement & sales promotion. Provision of social security. Other facilities (e.g., After sales service, Warranty, etc.)

Demand Schedule
A table showing different quantities demanded

by an individual consumer (or a number of consumers) of a commodity a different prices is known as the Demand Schedule.


Types of Demand Schedule

Individual Demand Schedule.

Market Demand Schedule.


Autonomous Demand

Derived Demand


Autonomous Demand arises as independent

of the demand for any commodity may be due to biological or physical needs like food, clothing, etc.

demand for complimentary or for supplementary commodities which supplements or provides additional utility from the use of other goods is a derived demand. For example, Power switch is complementary to T.V.Set.

Law of Demand: When price increases () demand

decreases () & when price decreases () demand increases () But certain assumptions are there for Law Of Demand these are: The income of the consumer remains constant. The prices of the substitutes remain constant. The taste & preferences of the consumer remains constant. Population remains constant & There is no change in income distribution.

Exemptions to the Law of Demand:

Serious shortage of a commodity.

Prestigious Commodity.
Price of essential commodity (e.g. Blood).

Expected increased in income. Unexpected rise in the price of a commodity.


Change in Demand: The change in Demand is of two fold nature

Increase & Decrease in Demand. Expansion & Contraction in Demand.


Demand Curve
Types of Demand Curve : Individual Demand Curve. Industry / Market Demand Curve. Graphically It can be presented as follows. Now Refer The Figure Drawn


Types of Demand
Price Demand Income Demand Cross Demand


Points to Remember
In price demand when price increases demand

In Income Demand when Income increases the consumer

may purchase superior quality goods & Income if Income decreases consumer may purchase inferior quality goods.
In case of Cross demand the quantity demanded of one

product gets effected / changed due to change in the price of another product / substitute. Example : PEPSI & COCO-COLA.


University Question / Subject Question- Generally Asked

Why Demand Curve Slopes Downwards (From Left to Right) ? Reasons:-------------When price falls, it becomes comparatively cheaper than the price of substitutes so more demand is registered. With a fall in the price, the real income of consumer increases. The Law of Diminishing Marginal Utility is applied. When price falls, more commodities are purchased in order to equal price to marginal utility. There lies the Consumer Equilibrium. When the price falls, those who cant purchase goods earlier can purchase now. This is addition to total consumers which increases demand.

Elasticity of Demand
Price Elasticity [ep] / [Ep] Income Elasticity [eY] / [EY]

Cross Elasticity [eC] / [EC]


A ) Formula For Calculating -Price Elasticity [ep] /

[Ep] :
Percentage Method Point Method / Ratio Method Arc Method Total Revenue Method / Total Outlay Method

Total Revenue Method / Total Outlay Method

Elasticity of demand can also be measured

with the help of Total Revenue of the firm or total expenditure of the consumer on the product concerned. If a slight fall in the price leads to a sizeable increase in demand, it will cause an increase in total revenue. The demand in this case will be highly elastic.


If, on the other hand, there is a fall in the total

revenue because a fall in price does not lead to an equivalent increase in quantity demanded , it would be inelastic & would be shown by a fall in total revenue. Since the proportionate change is known as a case of unit elasticity, in terms of total revenue, we shall find that total revenue remains constant as price & demand changes.

Now refer to the problem / illustration

Reference Mukund Mahajan Page 4.16


Formula For Calculating -Income Elasticity [eY] / [EY]

Percentage Method Point Method / Ratio Method Arc Method


Formula For Calculating -Cross Elasticity of Demand [ec] / [Ec ]

Percentage Method Point Method / Ratio Method Arc Method


Points to remember .

Perfectly Elastic Situation = ep or ey or ec = Infinite

Perfectly Inelastic Situation = ep or ey or ec = 0

(Zero) [Example Salt]. Unitary / Unit Elastic Situation = ep or ey or ec = 1 (one) Relatively / Highly Elastic = ep or ey or ec = 1 ( Greater than 1) Relatively Inelastic / Inelastic = 1 (Less than 1)


Significance / Uses of Concept of Price Elasticity of Demand

Pricing under Imperfect Competition. Policy Formulations by the Government. Resource Prices. Terms of Trade. Rate of Exchange. Public Utilities.

Ref. MM/4.18/C.No.04

Demand Forecasting
Necessity / Importance Achievement of planned objectives. Preparing a Budget. Stabilization of Production & Employment. Future expansion. Long Term Investment programmes. Sales Budgeting. Control of Inventories.

There are basically two types:

Short Term Purpose production planning , price policy , cost effectiveness, etc.

Long Term Purpose Diversification of production & training , raising of funds/ capital , Manpower planning etc.


Criteria for a Good Method of Demand Forecasting


Accuracy. Availability. Flexibility. Consistency. Durability.


Techniques / Methods of Demand Forecasting

Interview & Survey Method:

Past Experience:
Other Methods: Controlled Experiments


Forecasting Demand for New Product

Evolutionary Approach.

Substitute Approach.
Growth Curve Approach. Opinion-Polling Approach. Sales Experience Approach. Vicarious Approach