Demand Analysis

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 Demand
The fundamental objective of demand theory is
to identify and analyse the basic determinants of
consumer needs and wants.

Understanding of the forces behind demand is

essential to managers. Such knowledge provides
the background needed to make price decisions,
sales forecast, and formulate marketing
strategies.

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 Demand
The demand curve is a graph used in
economics to illustrate how much of a
product or service will be bought at any price.

Demand for products is ever-evolving

because certain factors increase or decrease
the demand for specific products.

An awareness of what the demand curve is,

and what shifting it and moving along it
mean, can clue you in to business changes
you might need to implement with your
products. 3
 Definition of Demand

Demand indicates how much of a

good consumers are both willing
and able to buy at each possible
price during a given time period,
other things constant

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 Law of Demand

Says that quantity demanded

varies inversely with price, other
things constant

The higher the price, the smaller the

quantity demanded

The lower the price, the larger the

quantity demanded

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 Demand Schedule & Demand Curve for Pizza

(b) Demand Curve

$18
(a) Demand Schedule
a
Price per Quantity Demanded
$15
Pizza per Week (millions)

Price per Pizza

$12 b
a) $15 8
b) 12 14
$9 c
c) 9 20
d) 6 26
e) 3 32 $6 d

$3 e

$0
8 14 20 26 32
Millions of Pizzas per week
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 Movement along the Demand Curve

$15.00 a

The movement from 12.00 b

say, b to c, is a
9.00 c
change in quantity
Price
demanded and is 6.00 d

shown as a 3.00 e
movement along the D
0
demand curve and 8 14 20 26 32
can only be caused Millions of pizzas per week

by a change in price.
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8
Shift in the Demand Curve

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Shift in the Demand Curve

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 Shifts versus Movements Along the Demand Curve
A shift in the demand curve is caused by a factor affecting
demand other than a change in price. If any of these factors
change then the amount consumers wish to purchase changes
whatever the price. The shift in the demand curve is referred to
as an increase or decrease in demand.

The Demand curve could shift to the right if:

The good became more popular (e.g. fashion changes or
successful advertising campaign)
The price of a substitute good increased
The price of a complement good decreased
A rise in Consumer incomes
Seasonal factors
Taste and Preference
Increase in Population
. 11
 Shifts versus Movements Along the Demand Curve

A movement along the demand curve occurs

when there is a change in price, other factors
affecting demand are assumed to be held
constant.

A change in price leads to a movement along the

demand curve and is referred to as contraction or
extension in demand.

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 Shift in the Demand Curve

Price
Entire demand curve shifts
leftward when:
• Income or wealth ↓
• Price of substitute ↓
• Price of complement ↑
• Population ↓
• Expected price ↓
•Taste and preference

D1
D2

Quantity

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 Why Demand Curve Slopes
downwards?

1. Quantity demanded varies

inversely with price, other things
constant. The higher the price, the
smaller the quantity demanded. The
lower the price, the larger the
quantity demanded
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 2. Substitution Effect
As the price of a commodity falls (Tea), price of its
substitute goods (Coffee) remain the same, the consumer
will buy more of that (Tea) commodity. Therefore with a
fall in price, the demand will increase due to favorable
substitution effect.

For instance, the price of meat falls and the prices of other
substitutes say poultry and beef remain constant. Then
the households would prefer to purchase meat because it
is now relatively cheaper. The increase in demand with a
fall in the price of meat will move the demand curve
downward from left to right.

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 3.Income Effect

When the price of a good decreases, a

person’s real income increases 
increased ability to buy a good  increase
in quantity demanded

When the price of a good increases  real

income declines  reduces the ability to
buy a good  decline in quantity
demanded

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 4. Psychological Effects

When the price of a commodity

falls, people favor to buy more
which is natural and
psychological.

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 5. Multiple Use of Commodity

There are some commodities which have

multiple uses. For example electricity can be
put to different uses like heating, lighting,
cooling, cooking etc. If its price falls, people
use it for other uses. A rise in price of
electricity will force the consumer to
minimise its use. Thus with a fall and rise in
price of electricity its demand rises and falls
accordingly.

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Exceptional Law of Demand

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 1. Giffen Paradox (goods)
This particular economic paradox was propounded
by Scottish economist, Sir Robert Giffen. He
observed consumption pattern of low-paid Ireland
wage earners early in 19th century. Sir Robert Giffen
arrived at after observing the purchasing tendency of
the poor low-paid Ireland wage earners, the demand
for a particular good tends to increase even when its
price increases.
During the famine, as the price of (staple food)
potatoes rose, poor consumers had little money left
for more nutritious but expensive food items like
meat. The lack of money led them to buy more
potatoes and less meat. 20
Giffen Goods

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 Chinese Example
Two Harvard Economists (Robert T. Jensen and Nolan
Miller, 2008) used poor Chinese consumers who consume
more rice or noodles (staple diet) as prices go up.

As with the poor Irish, people need a certain amount of

calories to survive. For the Chinese, they get their calorie
intake by eating rice, vegetables or meat. However to the
poor Chinese meat is very expensive and as the price of
rice goes up they can no longer afford the luxury of meat,
yet they still need to get to their calories. So they eat rice
instead, which is still relatively cheap compared to meat.
Therefore this is a much accurate example of Giffen
behaviour in action. 22
 2. Conspicuous Consumption
This exception to the law of demand is associated with
the doctrine propounded by Thorsten Veblen. A few
goods like diamonds etc are purchased by the rich and
wealthy sections of the society. The prices of these
goods are so high that they are beyond the reach of
the common man. The higher the price of the
diamond the higher the prestige value of it. So when
price of these goods falls, the consumers think that
the prestige value of these goods comes down. So
quantity demanded of these goods falls with fall in
their price. So the law of demand does not hold good
here.
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 3. Ignorance

Sometimes people may not aware of the

actual price of a commodity in the market.
Hence they may buy more units even at
high prices. Sometimes the consumer is
haunted by the phobia that a high-priced
commodity is better in quality than a low-
priced one.

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 4. Demand for Necessary Goods

Demand law does not operate in

necessary goods like medicine. Even price
rise such goods are purchased. Similarly,
when prices of medicine falls nobody
consume more units of such goods other
than what is necessary.

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 5. Future changes in prices
Households also act speculators. When
the prices are rising households tend to
purchase large quantities of the
commodity out of the apprehension that
prices may still go up.

When prices are expected to fall

further, they wait to buy goods in
future at still lower prices. So quantity
demanded falls when prices are falling.
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 6. Speculation

Speculation refers to a guesswork in

buying and selling of stocks
expecting a changes in its price.

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 7. Fear of Shortage

When Households anticipate serious

shortage in goods, they purchase
more goods even though their price
rises.

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 8. Emergency
Emergencies like war, famine etc. negate
the operation of the law of demand. At
such times, households behave in an
abnormal way.

Households draw attention to scarcities

and induce further price rises by making
increased purchases even at higher
prices during such periods.

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