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Demand analysis

Introduction
This chapter explains what is demand from
the consumers point of view, and analyse
demand from the firm perspective
Concept of Demand
Demand is the crucial requirements for
the existence of any business enterprise
A firm is interested in its own profit
and/or sales, both of which depend
partially upon the demand for its product
Decisions by the management with respect
to production, advertising, cost allocation,
pricing etc. is called analysis of demand
What is Demand?
A General Definition:
Demand is the quantity of a good or
resource that buyers (or demanders) are
willing and able to buy under a given set of
conditions over a given period of time.

Conditions: price, income, taste, prices of
related goods, expected prices, number of
buyers, etc
Demand for a commodity
implies
(a) Desire to acquire it
(b) Willingness to pay for it, and
(c) Ability to pay for it
Types of Demand
(a)Autonomous demand: When demand for a
goods is not tied with the demand for some
other goods then it is called autonomous
demand,
For example: Demand for steel
(b) Derived demand: When demand for a
goods is tied with the demand for some
other goods then that goods is called
derived demand
For example: For the production of steel coal
is essential factors of production. Here,
coal is derived demand.
(d) Individual Demand and Market Demand:

An individual demand curve reflects the quantities of a
good a consumer is willing and able to purchase at a
range of possible prices, ceteris paribus (other things
remaining constant), during a given period of time.

A market demand (curve) is the (horizontal) sum of
individual demands.

(e) Income demand:
- Demand for normal goods (price ve, income +ve)
- Demand for inferior goods (eg., coarse grain)

(f) Cross demand:
- Demand for substitutes or competitive goods (eg.,tea
& coffee, bread and rice)
- Demand for complementary goods (eg., pen & ink)



(g) Joint demand: (same as complementary, eg.,
pen & ink)

(h) Direct demand: (eg., ice-creams)


(i) Competitive demand: (eg., desi ghee and
vegetable oils)
Demand Schedule
A demand schedule is a
table showing how
much of a given
product a household
would be willing to
buy at different prices.
Demand curves are
usually derived from
demand schedules.

PRICE
(PER
CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)
Rs 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
Determinants of Demand
Price of the goods
Income
Normal good
Inferior good
Prices of Related Goods
Prices of substitutes
Prices of complements
Advertising and
consumer tastes
Population
Consumer expectations

The Demand Function
A general equation representing the demand
curve
Q
x
d
= f (P
x
,

P
Y
, M, H,)

Q
x
d
= quantity demand of good X.
P
x
= price of good X.
P
Y
= price of a related good Y.
Substitute good.
Complement good.
M = income.
Normal good.
Inferior good.
H = any other variable affecting demand.

Law of Demand
Other things remain
unchanged, as price
rises, the quantity
demanded decreases,
and as price falls, the
quantity demanded
increases; the
relationship between
price and the quantity
demanded is negative.

P increases then
Q decreases
P decreases then
Q increases
The Demand Curve
The demand curve
is a graph
illustrating how
much of a given
product a
household would
be willing to buy
at different prices.


PRICE
(PER
CALL)
QUANTITY
DEMANDED
(CALLS PER
MONTH)
Rs 0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
The Reasons Behind the Law of Demand
The principle of diminishing marginal utility

Income effect
If a products P falls, purchasing power of
consumers income increases, so buy more
Opposite also true if P increases

Substitution effect
If a products P falls it becomes relatively cheaper
than similar, competing products
This incentives consumer to buy more of product
whose P has fallen
Opposite effect occurs if P rises
Exceptions and Importance of Law
of Demand
Exceptions:
Giffen goods
Veblen effect
Expectation regarding future prices (shares, industrial
materials)
Emergencies
Ignorance
Change in fashion, habits, attitudes, etc..

Importance:
Price determination.
To Finance Minister
To farmers
In the field of Planning
Demand (Curve) versus Quantity Demanded
By demand or demand curve we mean
different quantities corresponding to
different prices reflected along a line or a
curve.

By quantity demanded we mean a specific
quantity demanded corresponding to a
specific price.
Changes in Demand versus Changes
in Quantity Demanded
A. Change in quantity demanded Other things
remaining constant when quantity demanded
changes ( rise or fall ) as a result of change in
price of that goods only then it is called change in
quantity demanded.

o Contraction/fall in quantity demanded
o Extension/Rise in quantity demanded

The change is depicted/ represented by the
movement up or down on a given demand curve.
This does not require drawing a new demand
curve.


B. Change in demand When the amount
purchased of a commodity rises or falls
because of the change in factors other than
the price of the commodity. It is called
change in demand.

Types of Changes
Increase in demand

Decrease in demand
This requires drawing altogether a new
demand curve
Factors causing changes (shifts) in demand
(curve):
Changes in income
taste
prices of related goods (substitutes
or complementary goods)
expectations about future prices,
number of buyers

Types of goods
Normal Goods are goods for which demand
goes up when income is higher and for
which demand goes down when income is
lower.
I nferior Goods are goods for which demand
falls when income rises.
Substitute Goods are goods that can serve as
replacements for one another; when the
price of one increases, demand for the other
goes up.
Perfect substitutes are identical products.

Complements are goods that go
together; a decrease in the price of one
results in an increase in demand for the
other, and vice versa.
Shift of Demand Versus
Movement Along a Demand Curve
A change in demand is not
the same as a change in
quantity demanded
A higher price causes lower
quantity demanded and a
move along the demand
curve D
A
Changes in determinants of
demand, other than price,
cause a change in demand,
or a shift of the entire
demand curve, from D
A
to
D
B
.




A Change in Demand Versus a Change in Quantity
Demanded
To summarize:
Change in price of a
good or service leads to
Change in quantity
demanded
(Movement along the
curve)
Change in income,
preferences, or
prices of other goods or
services leads to Change in
demand(Shift of curve)


The Impact of a Change in Income
Higher income
decreases the demand
for an inferior good
Higher income
increases the demand
for a normal good
The Impact of a Change
in the Price of Related Goods
Price of hamburger rises
Quantity of hamburger demanded per
month falls
Demand for
complement
good
(ketchup)
shifts left
Demand for
substitute
good
(chicken)
shifts right
From Household
Demand to Market Demand
Assuming there are only two households in the
market, market demand is derived as follows: