Session-2

Demand Analysis
Prof. T.R. Panigrahi

Topics to be Discussed
Demand- Determinants Types of Demand
Individual demand Market Demand

Demand Schedule & Demand Curve. Law of Supply, Determinants of Supply.

 Briefly answer the following questions : a) Why is a person interested in knowing the demand for the shares he has purchased?

Activity

b) Why did department of Post closed the Telegram service form its product range?

Activity
c) Why did the Maruti Udyog Ltd. Cut down the production of petrol-cars and decided to increase the diesel-cars in 2012? d) In this season sale Allensolly, a garment manufacturing company, announced buy 2 and get 1 for free in the mens wear and buy 1 get 1 for womens wear. Why does the company make different strategies for the sale?

Managerial Purpose of Demand Analysis

Important technique for sales fore-casting with a sound base and greater accuracy. Provides a guideline for demand manipulation through advertising and sales promotion programmes. Directs product planning and product improvement. Useful in determining the sales quota and performance appraisal of personnel in sales department. Serves as an anchor for the pricing policy. Indicates the size of market for given products & the market share of the concerned firm. Reflects the scope of business expansion and competitive position of the firm in market trend

Definition of Demand
A schedule of the quantities of a good that buyers are willing and able to purchase at each possible price during a period of time, all other things held constant Demand can also be perceived as a schedule of the maximum prices buyers are willing and able to pay for each unit of a good.

Demand for product implies: a) Desires to acquire it, b) Ability to pay for it, and c) willingness to pay for it
Thus demand for a product refers to the amount of it which will be bought per unit of time at a particular price.

Three facts of Demand

Demand is an effective desire backed by ability & willingness to pay. Or we can say want backed by money. Demand is always related to price & time The demand may be viewed Ex-ante or Ex-post.
Ex-ante demand / intended demand/ potential demand ex-post demand / already purchased or the actual amount paid.

Demand Function and Demand Determinants

Demand function is a comprehensive formulation which specifies the factors that influence the demand for the product.
For example,

Dx = f (Px, Ps, Pc, Yd, W, A, E, T, U) Here Dx, stands for demand for item x (say, a car) Px, its own price (of the car) Ps, the price of its substitutes (other brands/models) Pc, the price of its complements (like petrol) Yd, the Disposable income (the income left after direct taxes or budget of the purchaser/consumer) W, the wealth of the purchaser A, the advertisement for the product (car) E, the price expectation of the user T, taste & preferences of user U, all other factors like Climate & weather condition, customs & tradition, habits .

Law of demand
Suppose you want to buy mangoes. at Rs.100 per dozen you buy 6 dozens. If the price of mangoes increase to 200/- then how much will you buy? Definitely less quantity of goods. What kind of relationship is there between the price and quantity demanded? There is inverse relation. Here we consider only two factors i.e. price and quantity demanded.

Law of demand
The law of demand states that Ceteris paribus (other things remaining the same), higher the price, lower the demand and vice versa. The law is stated primarily in terms of the price and quantity relationship. The quantity

demanded is inversely related to its price.

Assumptions All the other factors which determine are assumed to be constant. Which are those factors? Income of the consumer is constant. There is no change in the availability and the price of the related commodities (i.e. complimentary and substitutes) There are no expectations of the consumers about changes in the future price and income. Consumers taste and preferences remain the same. There is no change in the population and its structure.

Demand Function and Demand schedule

By assuming the non price determinants of the Demand function we reduce the function to Qd = f (Px) Or Dx = f(Px) In the slopeintercept from, the demand curve which may be stated as Dx = + Px, where is the intercept term and the slope which is negative because of inverse relationship between Dx and Px. Suppose, = (-) 0.5, and = 10 Then the demand function is : D=10-0.5P

Demand schedule
Its a tabular representation of the price and the quantity demanded. It tells us the relation between the price of the product and the quantity demanded Two types of demand schedule
1. Individual demand schedule 2. Market demand schedule

Individual Demand Schedule & curve

Price (in Rs.) of Mangoes 60 50 40 30 Quantity demanded per week (in
units) of Individual A
P r i c e
70 60 50 40

DA

2 4 6 8

30 20 10

DA

10

12

Quantity demanded of A

Market Demand Schedule &

Price (in Quantity Quantity Quantity Market Rs.) of demanded demanded demande demand per Mangoes per week d per per week week (in units) of week (in (in units) of
Individual A Individual B units) of Individual C

60 50 40 30

2 4 6 8

1 2 3 4

0 2 4 6

DM = DA+DB+DC 3
8 13 18

Market Demand curve

P r i c e
70 60 50 40 30

Based on the market demand schedule the market demand curve is drawn which is a horizontal summation of individual demand curves.

DA DM DC DB

DM = DA+DB+DC
20 10

DA DB
2 4 6 8

DC

10

12

14

16

18

Quantity demanded of A

Shift in Demand vs Change in Quantity Demanded

P r i c e

Shift in Demand from A to C (Non-price factors)

Change in Quantity Demanded from A to B

A P1 B P2

Q1

Q2

Q3

Quantity demanded of A

Shift in Demand vs Change in Quantity Demanded

A change in price results in a movement along a fixed demand curve. This is called as a change in quantity demanded. A change in any other variable that influences quantity demanded produces a shift in the demand curve or a change in demand.

Factors that can shift a demand curve

Change in consumer incomes: an increase (decrease) in income shifts the demand curve to the right (left). Change in wealth of the consumer: To maintain more electrical equipments a household demands more electricity. Population change: an increase (decrease) in population shifts the demand curve to the right (left). Consumer Preferences: if preference for a particular good increases (decreases), the demand curve will shift to the right (left).

Factors that can shift a demand curve

Consumer Preferences: if preference for a particular good increases (decreases), the demand curve will shift to the right (left). Prices of Related Goods:
Substitutes: goods that can be consumed in place of one another. If the price of a substitute increases (decreases), the demand curve for the original good will shift to the right (left). Example: Pepsi and Coke. Complements: goods that are normally consumed together, i.e. Television sets and cable connections. If the price of a complement increases (decreases), the demand curve for the original good will shift to the left (right).

Exceptions to the Law of Demand

Giffen goods
Articles of snob appeal Speculation Consumers psychological bias or illusion

Types of Demand
Demand for consumers goods & producers goods Perishable and Durable Goods Demands Autonomous and Induced Demand New and Replacement Demands Final and Intermediate Demands Individual and Market Demands Total Market and Segmented Market Demands Industry demand & company Demand Direct and Derived Demands Domestic and Industrial Demands

Definition of Supply
By supply we mean various quantities of a commodity which producers will offer for sale at a particular time at various corresponding prices. In simple words, supply ( like demand ) refers to the quantity of commodity offered for sale at some price during a given period of time.

FACTORS INFLUENCING SUPPLY The price of the product Costs of production Technology The number of suppliers in the market Seasons The attractiveness of other markets Means of transportation and communication. Taxation Policy. Future expectations of rise in prices.

Important determinants of supply

supply function : .. Sx = f (Px,F,T,G,N ) Sx refers to Supply of a commodity (say X) Px price of the commodity, F prices of the factors of production T technical know-how" and G Government Poilicies regarding Taxes & Subsidy. N Other factors like the number of firms.

Supply Function :
Each of the factors influences supply in a different' way. To isolate the effect of other factors we take these other factors as constant while considering the relationship between supply and one of the above variables. Sx = f (Px) Exactly

Qs = c + dP

Law of Supply
Law of supply explains the relationship between price of a commodity and its quantity supplied. Price and supply are directly related. A rise in price induces producers to supply more quantity or the commodity and a fall Prices, makes them reduce the supply. The higher is the price of the commodity the larger is the profit that can be earned, and, thus the greater is the incentive to the producer' to produce more of the commodity and offer It in the Market.

Supply curve
Based on the assumption that there is direct relationship between price and supply. i.e. with increase in price, the quantity supplied is increasing and with decrease in price the quantity supplied is decreasing. supply curve exhibits the information graphically instead of arithmetically. It shows the relationship between price and the quantity supplied.
P r i c e

18

c
14
12 10

b a S

10

18

30

Quantity supplied

Shift/Change in Supply
A shift in supply curve occurs when the producers are willing to offer more or less of a commodity because of reasons other than the price of the commodity. It is also known as the increase or decrease in supply.
P r i c e

S
18

S
1

14
12 10 7

S S1
10 18 30

Quantity supplied

Factors that Shift the Supply Curve

Change in cost of inputs: an increase (decrease) in inputs costs shifts the supply curve to the left (right). Increase in technology: an increase in technological progress shifts the supply curve to the right. Change in size of the industry: if size of an industry grows (shrinks) the supply curve will shift to the right (left).

Applications of Supply & Demand

Interference with the Price Mechanism:
The effect of a price ceiling The effect of a price floor The effect of a subsidy The incidence of taxes

Market Equilibrium Price & Quantity of Supply and Demand

P S

P2
P0 P1 D 0 Q1 Q0 Q2 Q E

Market Equilibrium Price & Quantity of Supply and Demand

Change in Demand supply remaining constant P S

P1
P0 E0

E1

D0 0 Q0 Q 1 Q

D1

Market Equilibrium Price & Quantity of Supply and Demand

Change in supply, Demand remaining constant P S0

S1

P0
P1

E0
E1 D0

Q0

Q1

Market Equilibrium Price & Quantity of Supply and Demand

Change in Both supply and Demand P S0

P1
P0 E0

S1

E1 E2

D0 0 Q0 Q1 Q2

D1
Q

The Effect of a Price Ceiling on Quantity of Supply and Demand

P S

P2
P0 P1 D 0 Q1 Q0 Q2 Q

The Effect of a Price Floor on Supply and Demand

W S

W1
W0

D 0 Q1 Q 0 Q2 Q

The Use of Price Supports

Surplus (Q2-Q1) bought by the government Production quota Q2 introduced by the government S

P P
P1 P1

P0

D 0 Q1 Q2 Q 0 Q1 Q2

D Q

a)

b)

 The demand and supply functions for a product are Qd = 4200 100P Qs = 3000 + 20P If the government imposes a specific tax of Rs.10 per unit, What would be the new equilibrium price of the product?

Solution
When tax is imposed, the supply function becomes Qs = 3000 + 20(P 10) Thus, at equilibrium, 3000 + 20 (P 10) = 4200 100P 4200 3000 + 200 = 120P Or, P = 1400/120 = 11.67.

Exercise
Demand and supply functions for a product are given as Qd = 10,000 4P QS = 3,000 + 6P If the government imposes a sales tax of Rs.200 per unit, find out the share of tax burden borne by the buyer & the seller.

 In an industry, there are only three consumers A, B and C and three firms X, Y and Z. The demand functions for the three consumers are: QA = 130 0.2P QB = 50 0.4P QC = 70 0.4P 0.05P2 The supply functions for the three firms are: QX = 100 + 0.5P QY = 50 + 0.5P QZ = 50 + 1.5P + 0.1P2 What is the equilibrium price of the product?

Car companies cry for stimulus as sales keep falling

TOI | Jul 13, 2013, 05.42AM ISTNEW DELHI

Carmakers have sought a stimulus package from the government to tide over slowdown blues as the weakening economy and poor buyer sentiment saw industry sales witness a decline for the eighth month in a row. The situation has been described as alarming by major manufacturers and industry body Society of Indian Automobile Manufacturers (Siam) said revival sops should include lower duty on manufacturing as well as incentives for scrappage of old vehicles.

Car companies cry for stimulus as sales keep falling

TOI | Jul 13, 2013, 05.42AM ISTNEW DELHI

"I will need to flip a coin to tell you if we see any signs of a turnaround anytime soon. The situation is uncertain, and grim," Siam president S Sandilya said when asked when the market can improve. Car sales fell 9% in June at 1.39 lakh units against 1.53 lakh units in the same month last year. The fall comes despite the addition of new models like Honda Amaze sedan, GM Enjoy MPV and Ford EcoSport mini SUV.

Car companies cry for stimulus as sales keep falling

TOI | Jul 13, 2013, 05.42AM IST NEW DELHI

Economic slowdown and high interest rates have punctured buyer sentiment and traffic at dealerships is at a minimal, despite attractive discounts. Disposable incomes are not rising as corporate earnings have been affected and fear of salary cuts and job losses has seen people defer new purchase plans. Vishnu Mathur, DG at Siam, said confidence booster measures are required to boost buyer sentiment as well as that of the manufacturers. "We have never seen such a protracted spell of declines and there is a fear that if this continues, there will be job losses at car companies, and companies may defer investment plans.

Car companies cry for stimulus as sales keep falling

TOI | Jul 13, 2013, 05.42AM ISTNEW DELHI

Most of the manufacturers have been slashing production to fall in line with the harsh market reality. These include top makers like Maruti Suzuki and Mahindra & Mahindra. "Going forward, we do hope that some immediate short-term measures are announced and implemented by the government to bring back buoyancy in demand which is the need of the hour," Pravin Shah, CEO of Mahindra's Automotive Division, said.

Car companies cry for stimulus as sales keep falling

TOI | Jul 13, 2013, 05.42AM ISTNEW DELHI

Siam's Mathur said excise duty should be brought down to the slabs at which they existed in 2008. "Against the 12% on small cars now, the duty should be reduced to 8%. And for bigger vehicles, there should be a fixed slab of 20% against the three-tier duty of 24%, 27% and 30%," he added.

Case: Maruti Suzuki shares slip over 1% on falling demand concern

By ECONOMICTIMES.COM | 9 Jul, 2013, 09.48AM IST

NEW DELHI: Maruti Suzuki Ltd slipped over 1 per cent (BSE -2.63 %) in morning trade on Tuesday, a day after the country's largest carmaker is understood to have asked 200 contract workers to go on indefinite leave following cut in diesel engine production at its Manesar plant due to low demand.
At 09:40 a.m.; Maruti Suzuki was trading 1.1 per cent lower at Rs 1534.60. It hit a low of Rs 1526 and a high of Rs 1542 in trade today.

Case: Maruti Suzuki shares slip over 1% on falling demand concern

The company has shut the third shift at its diesel engine plant at Manesar, which has an annual capacity of 3,00,000 units. The prolonged slump in the automobile market has resulted in dip in sales coupled with increase in prices of diesel which has resulted in tapering off demand for diesel vehicles.

MSI had reported a 12.6 per cent decline in total sales in June at 84,455 units. During the month, its domestic sales declined 7.8 per cent at 77,002 units.

Case: Maruti Suzuki shares slip over 1% on falling demand concern

"The Manesar diesel engine plant operated at close to full capacity in FY2013 as the demand for diesel vehicles remained strong. "However, the demand for diesel vehicles have moderated off-late with continued increase in diesel prices which necessitated the company to shut the third shift, Angel Broking said in a note.

Case: Maruti Suzuki shares slip over 1% on falling demand concern

While the company's total sales remained weak and posted a steep decline of 10% y-o-y in 1QFY2014; the brokerage firm expects the volumes to improve in 2HFY2014 driven by the expected easing of interest rates and also on account of the festival season which is likely to boost consumer sentiments leading to revival in demand. At Rs 1,552, the stock is trading at 12.8x FY2015 earnings. Angel Broking maintains their 'Buy' rating on the stock with a target price of Rs 1,822.

Diesel Price Rs/Ltr

Date of Change

Petrol Price Rs/Ltr

Date of Change Price Differential

57.61 56.99 57.17 56.04 53.14 52.45 46.25 45.84 41.98

Jul 02, 2013 Jun 01, 2013 May 23, 2013 May 11, 2013 Jan 01, 2013 Sep 14, 2012 Jul 25, 2012 Jun 25, 2011 Jun 26, 2010
July 02, 2009 July 16, 2008

77.73 76.9 69.73 74.14 77.66 74.43 74.23 68.62 55.88

Jul 15, 2013 Jun 29, 2013 Ma 01, 2013 Apr 02, 2013 Mar 02, 2013 Oct 09, 2012 Jul 24, 2012 Jul 01, 2011 Jun 26, 2010
July 02, 2009 July 16, 2008

36.7 38.93

48.76 55.04

20.12 19.91 12.56 18.1 24.52 21.98 27.98 22.78 13.9 12.06 16.11