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Demand Analysis

. with rise in price of a product.What is law of demand? The law of demand states that. assuming other things to remain unchanged. demand for it would fall and with fall in price. demand would rise. For all normal goods there exists an inverse relationship between price and its quantity demanded.

. The relationship shows that one can sell larger quantity only by lowering the price.What is demand curve? The demand curve is a tool that illustrates the relationship between a good's price and its quantity demanded.

What is the basis of law of demand? .

The law of Diminishing Marginal Utility Units (burgers) 1 2 3 4 5 Total Utility Marginal Utility 30 20 10 5 0 Price of burgers 10 10 10 10 10 30 50 60 65 65 TU increases at diminishing rate & MU diminishes with increase in consumption .

he will reduce his consumption in order to equate new price with MU as a result the demand will fall. -10 Number of burgers .Diminishing MU is the base for an individual demand curve 40 30 Marginal Utility 20 10 0 0 1 2 3 4 5 6 7 The consumer equates Price with Marginal Utility to make his purchase decision. If price rises. If price falls. he will increase his consumption in order to equate new price with MU as a result the demand will rise.

It is also downward sloping. Market demand curve continues to slope downwards as more and more consumers find the product affordable when the price falls. .What is market demand curve? Market demand is lateral summation of individual demand curves.

P= Q= . The practical use of the the demand function is for ³Demand Forecasting´.What is demand function? The equation that describes the demand curve is called the demand function. ± . It allows precise prediction of change in quantity demanded when the price is changed. . P P is price of the product. Q is quantity demanded. Q or .

Demand is also influenced by Income Demographic Technology Substitution Tastes and preferences In the equation. Q = . the demand would be units. it shows that even if P= . s) (Q is measured in . P. It determines the position of the demand curve.What does 5 signify in the equation? The intercept sums up the influence of the factors other than price that influence demand for a product.

It shows how much would be the change in quantity demanded as a result of change in price. P. In the equation. The value . Q = .15 signify in the equation? The coefficient is negative. it shows every rupee increase in price reduces the demand by units (Q is measured in s). . which means there is inverse relation.What does 0. determines the slope of the curve.

The concept of Elasticity of Demand .

There are of four types of elasticities: Price elasticity of demand Income elasticity of demand Cross elasticity of demand Advertising elasticity of demand .What is elasticity of demand? Elasticity of demand is the degree of responsiveness of quantity demanded to change in price of product. income and advertising. prices of other products.

What is the price elasticity of demand? How do you measure it? Price elasticity of demand is the degree of responsiveness of quantity demanded to change in price of the product Ratio method: % Change in Q % Change in P Graphical method: Lower portion of DD curve Upper portion of DD curve Total outlay/Turnover method Price Original Change (1) Change (2) Change (3) 20 10 10 10 Quantity Demanded 100 300 200 150 Turnover 2000 3000 2000 1500 Relatively elastic Unit elastic Relatively inelastic Elasticity .

. Ratio Method: % Change in Q % Change in income For all normal goods the income elasticity of demand is positive. It is very important factor that determines the demand for a product over a long period of time.What is the income elasticity of demand? How do you measure it? Income elasticity of demand is the degree of responsiveness of quantity demanded to change in income of the consumer.

Advertising elasticity of demand is the % change in quantity demanded divided by % change in ad-spend.What are other measures of elasticity of demand? Cross elasticity of demand is the % change in quantity demanded of good x divided by % change in price of y. .

Insights from demand analysis How do I use ³The Demand Analysis´ to my advantage and formulate my ³Price Output Policy´? .

you lose rectangle I but gain III. TR = I + II At price . If I+II < II+III. . TR= II + III By dropping price.5 Demand II 100 III 200 Quantity . Price 2 I 1.Guiding the Price Policy At price . the decision to drop price is worthwhile as maximizing TR is the objective.

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