DEMAND ANALYSIS

Learning Objectives

1. Understand what is effective demand.

2. Explain the law of demand.
3. Trace the determinants of markets demand for different products.
4. Formulate demand functions for the markets products.
5. Examine the possible causes of shifts in demand for the products.
 Effective Demand
A buyers desire for a product in the market
backed by the ability and willing to pay for its
price.

Definition of Demand - The demand for a product

refers to the amount of it which will be bought per
unit of time at a particular price.
 Determinants of Demand
Factors Influencing Individual Demand
Price
Income
Tastes, habits and preferences
People with different tastes and habits have different
preferences for different goods
Relative prices of other goods substitute and
complementary products
Consumers expectation
Advertisement effect
 Factors Influencing Market Demand
Price of the product
Distribution of income and wealth in the community
Communitys common habits and scale of preferences
General standards of living and spending habits of the people
Number of buyers in the market and the growth of population
Age structure and sex ratio of the population
Future expectations
Level of taxation and tax structure
Inventions and innovations
Fashions
Climate or weather conditions
Customs
Advertisement and sales propaganda
 Demand Function
Mathematical of expression of functional relationship between determinants
(such as price, income, etc., determining variables) and the amount of
demand of a given product.
In composing the demand function for a product, therefore, one should
identify and enlist the most important factors (key variables) which affect
its demand. To suggest a few, such as:
The own price of the product itself (P)
The price of the substitute and complementary goods (Ps or Pc)
The level of disposable income (Yd) with the buyers (i.e., income
left after direct taxes)
Change in the buyers taste and preferences (T)
The advertisement effect measured through the level of advertising
expenditure (A)
Changes in population number or the number of the buyers (N).
Using the symbolic notations, we may express the demand function, as
follows:
Dx = f (Px, Ps, Pc, Yd, T, A, N, u)
 Demand Schedule
A tabular statement of price/quantity relationship is called
the demand schedule.
Individual Demand Schedule
A Market Demand Schedule (Hypothetical Data)
 Market Demand Curve
In graphical terms, a market demand curve for a product
is derived through the horizontal summation of all
individual buyers demand curves for the given product.
Demand Curve
Demand curve refers to the graph of a demand schedule,
measuring price on the Y-axis and quantity demand on
the X-axis. Usually, a demand curve has a downward
slope, representing an inverse relationship between price
and demand.
A Linear Demand Curve
 The Law of Demand

The conventional law of demand, however, relates to the

much simplified demand function:
D = f (P)
Demand Curve
 Assumptions Underlying the Law of
Demand
No change in consumers income
No change in consumers preferences
No change in the fashion
No change in the price of related goods
No expectation of future price changes or shortages
No change in size, age composition and sex ratio of the population
No change in the range of goods available to the consumers
No change in the distribution of income and wealth of the
community
No change in government policy
No change in weather conditions
Exceptions Demand Curve: Upward-sloping Demand
Curve
 Exceptional Cases
Giffen goods
Articles of snob appeal
Speculation
Consumers psychological bias or Illusion
 Extension and Contraction of Demand

The terms extension and contraction are

technically used in stating the law of demand.

Quantity Demanded
 Increase and Decrease in Demand

An increase in demand signifies either that more will be

demanded at a given price or same will be demanded at a
higher price. An increase in demand really means that
more is now demanded than before at each and every
price. Likewise, a decrease in demand signifies either
that less will be demanded at a given price or the same
quantity will be demanded at the lower price. Decrease in
demand really means that less is now demanded than
before at each and every rise in price. Shifting the
demand curves shows the increase and decrease in
demand.
Increase in Demand (A) and Decrease in Demand (B)
 Reasons For Change (Increase or
Decrease) in Demand
Changes in income
Changes in taste, habits and preference
Change in fashions and customs
Change in the distribution of wealth
Change in substitutes
Change in demand of position complementary goods
Change in population
Advertisement and publicity persuasion
Change in the level of taxation
Expectation of future changes in prices
Industry Demand and Firm or Company
Demand

Industry and Company Demand

 Short-run and
Long-run Demand

Bandwagon Effects
Demonstration effect of consumption by the others lead
to the bandwagon effects of change in demand for a
product in the market. Advertising and fashion play a
significant role in this regard.
 Bandwagon
Effect: The
Demand Curve
Shifts to the Right

Veblen Effect
Snob appeal of luxury goods leads to the Veblen effect
of demand through conspicuous consumption.
The Market Demand Curve for
Veblen Effect Product
P: 3. Raj Kumar & Co., the cabinet-maker has estimated the following
demand function for the steel cabinets produced by them:
Qd = 1,500 - 0.03P + 0.09AE
Where,
Qd = quantity demanded of steel cabinets
P= average price of the steel cabinet
AE = the firms advertising expenditure.
All data are on a quarterly basis. The firm currently spends Rs.10,000
per quarter on advertising.
State the demand curve equation for the price-demand relationship. Give
graphical representation assuming price variable values to be Rs. 10,000,
Rs. 9,000, Rs. 8,000, Rs. 7,000, and Rs. 6,000.
Solution:
Substituting the value for AE variable in the above equation, we have
simplified price-demand equation as follows:
Qd = 1,500 + 900 0.03P
Thus:
P1 = Rs. 10, 000 Q1 = 2,400 0.03 10,000 = 2,400 300 = 2,100
P2 = Rs. 9, 000 Q2 = 2,400 0.03 9,000 = 2,400 270 = 2,130
P3 = Rs. 8, 000 Q3 = 2,400 0.03 8,000 = 2,400 240 = 2,160
P4 = Rs. 7, 000 Q4 = 2,400 0.03 7,000 = 2,400 210 = 2,190
P5 = Rs. 6, 000 Q5 = 2,400 0.03 6,000 = 2,400 180 = 2,200.
[Plot price and quantity values on a graph]