DEMAND ANALYSIS:

Demand for a commodity implies (i) desire for a

commodity (ii) willingness to buy the commodity and (iii)
his ability to purchase the commodity or his ability to pay.
DETERMINANTS OF DEMAND:
1.Price of the commodity(Px)
2.Income of the consumer(I)
3.Price of related commodities(Py)
4.Tastes and Preferences(Tp)
5.Advertisements(Ad)
6. Future Expectations of price and income(Fe)
 Some other factors can be:
7.Age of the consumers(A)
8.Population: Size and composition(Pl)
9. Climate conditions and weather changes(Cl)
10.Phase of the economy: (Pe)
 LAW OF DEMAND:
• It states that all other factors being held constant,
there exists an inverse relationship between price
and quantity demanded of the commodity.
• Assumptions:

(i) The consumer is assumed to be rational.

(ii)There is no change in taste and preferences of
the consumers.
(iii) There is no change in income and prices of
related commodities.
Hypothetical Market Demand Schedule

Quantity demanded by consumer Qx=

∑Di(P)
Price(Px) A B C D

10 1 0 3 0 4

9 3 1 6 4 14

8 7 2 9 7 25

7 11 4 12 10 37

6 13 6 14 12 45
Example: Law of demand: (answer pattern)

• 1.Introduction
• 2.Assumptions
• 3. Hypothetical schedule
• 4.Market demand curve with explanation.
CLASSIFICATION OF GOODS: In terms of:

• Price Effect (PE) :Overall Change in quantity

demanded of a commodity due to a change
in the price.
• Substitution Effect (SE): That part of PE
which measures the change due to the
relative position of the commodity.
• Income Effect(IE): That part of the PE which
measures the change due to real income of
the consumer following the price change.
• PE = SE + IE
 Analysis of the 3 effects for a fall in Price of commodity X:
• For Normal Goods:
• SE (-ve) ↑ + IE (+ve) ↑ =PE↑
• For Inferior Goods:
• SE (-ve) ↑ + IE (-ve)↓=PE↑ , -ve SE > -ve IE
• For Giffen Goods:
• SE (-ve) ↑ + IE (-ve) ↓ = PE↓ , –ve IE > -ve SE
Reasons for downward slope of the demand curve:
1.Diminishing Marginal Utility
2.Substitution effect
3.Income effect
4.New consumers
Exceptions to the Law of Demand:
1. Giffen goods
2. Cases of Interdependence of Demand: Bandwagon,Snob
and Veblen effect
3. Future Expectations
4. Change in fashion
5. Ignorance
 Cases of interdependence of demand:
• 1. Bandwagon effect- Also called ‘Demonstration
effect’- Here the consumer imitates the
consumption habit of other people in order to be
fashionable and not feel left out.
• 2. Snob effect: Represents those consumers who
seek to be different and exclusive by demanding
less of a commodity as more people consume it.
• 3. Veblen effect: These are those individuals who
in order to impress people demand more of
certain commodities, the more expensive these
goods are .
 Analysis of PE,SE and IE for a rise in price of
commodity X
• For Normal goods: SE (-ve) ↓ + IE (+ve) ↓ =PE↓
• For Inferior goods: SE (-ve) ↓ +IE (-ve) ↑=PE↓ ,
-ve SE > -ve IE
• For Giffen goods: SE (-ve) ↓ + IE (-ve) ↑=PE↑ ,
-ve SE <-ve IE
 TO DO:
• Q1.Explain in brief some of the factors affecting
demand?
• Q2.Make a list of the product and services which
as per your consumption can be categorised as:
• Normal good
• Inferior Good and
• Giffen good.
• Q3.Differentiate between ‘change in quantity
demanded and change/shift in demand’.
Q.1Given the following statistically estimated demand
function of X Find the relatedness between
(i) commodity X and commodity Y.
(ii) commodity X and commodity Z.

X = 9 Px-0.2Py0.3Pz-0.1, where Px, Py and Pz are

per unit prices of the commodities X, Y and Z.
 Solution
dX/dPx = -1.8Px-1.2Py0.3Pz-0.1<0(so normal good)

• dX/dPy=2.7Px-0.2Py-0.7Pz-0.1>0 (so X and Y are

substitutes.
• dX/dPz=-0.9Px-0.2Py0.3Pz-1.1< (so Xand Z are
complements)
 Q2.Derivation of demand curve/ demand equation.

Q.2.Points A and B are marked on a linear

demand curve whose quantity and price
coordinates are given below. Find the equation to
the demand curve and also find the Inverse
demand function.
• (i) A (1000, 0) and B (0, 50).
Solutions:

(i) q=1000-20P
So Inv. Demand fn = P=50-(q/20)
Sol 2.(i) q = 35 – (P/100)
• So Inv. Demand fn = P=3500 -100q
 Foreign Exchange Market Equilibrium

• Link:
• https://www.youtube.com/watch?
v=UnVIEX1P2IE