Demand: by Dr. Gitanjali

Demand
BY DR. GITANJALI
Significance of demand analysis
• Demand –Most critical economic
decision variable
• Business activity is always market-
determined.
• Demand is one of the crucial
requirements for the functioning of
any business enterprise its survival
and growth.
Importance of Demand Analysis
•It is of profound
significance to
management.
•Production planning
•Inventory planning
•Cost budgeting
•Purchase plan
•Pricing decision
•Advertisement
budget
•Profit planning
Questions
• Why is a person is interested in
knowing the demand for the shares
he has purchased?
• Why should the FCI be concerned
about the demand for food grains to
be released for Public Distribution
system?
• Why does the Maruti Udyog Ltd ask
one of its officers to estimate the
demand for Premier 118NE in 1990?
• Why does a bank analyze the
seasonal demand for credit?
Demand
• Demand means the the quantity of a
commodity which a household is
willing to purchase per unit of time at
a particular price.
• Desire of the consumer to buy the
product
• His willingness to pay for the product
• Sufficient purchasing power to buy the
product or ability to buy for it
Demand
• The term demand has always a reference
to ‘ a price’, ‘ a period of time’ and ‘ a
place’
• A meaningful statement regarding demand
for a commodity should include
• The quantity demanded
• The price at which a commodity demanded
• The time period over which the commodity is
demanded
• The market area in which the commodity is
demanded
Determinants of Demand
• The determinants are called the
explanatory variable,the quantity
demanded is the explained variable.
• Price of the commodity
• Income (Real) of the consumer
• Prices of the related goods
• Tastes and preferences
• Advertisement
• Expectations of future prices
Other Determinants
• Additional factors related to luxury
goods and durables
• Consumer’s expectation of future prices
• Consumer’s expectations of future income
• Additional factors related to market
demand
• Population
• Socioeconomic and demographic
distribution of consumers
Demand Function
• Dx=f (Px, Py, Pz,B,W,A,E,T,U)
• Px=Price of it’s own product
• Py=Price of it’s substitutes
• Pz=Price of it’s complement
• B= Income of the consumer
• W= Wealth of the purchaser
• A= Advertisement for the product
• E= Price expectation of the user
• T= Taste or preference of the user
• U= All other factors
Demand Curve
• A generalized demand function is a
multivariate function.
• But demand curve is a single
variable demand function
• Dx= D(Px)
The Demand Curve
• The demand curve is the graphic
representation of the law of demand.
• The demand curve slopes downward
and to the right.
• As the price goes up, the quantity
demanded goes down.
A Sample Demand Curve
Price (per unit)
PA A
D
0
QA
Quantity demanded (per unit of time)
The Law of Demand
• Law of demand – there is an inverse
relationship between price and
quantity demanded.
• Quantity demanded rises as price falls,
other things constant.
• Quantity demanded falls as prices rise,
other things constant.
Other Things Constant
• Other things constant places a
limitation on the application of the
law of demand.
• All other factors that affect quantity
demanded are assumed to remain
constant, whether they actually remain
constant or not.
Ceteris Paribus ( other things remaining
constant)
• Income of the consumer is constant
• There is no change in the availability
and the price of the related
commodities.
• There are no expectations of the
consumers about changes in the future
price and income.
• Consumers’ taste and preferences
remain the same.
• There is no change in the population
and its structure.
Exceptions to the Law of Demand
• Goods purchased for their snob
appeal or ostentation,called Veblen
goods such as diamonds, curios.
Managerial implication- High premium
price
• Rise in the price of the shares and
Industrial materials
• The Giffen case or inferior good
• Expectations of change in the price
of the commodity
Types of demand
 Demand for producer’s Goods and
consumer’s Goods
 Durable and Perishable Goods
 Autonomous demand and Derived
demands
 Company and Industry Demands
 Total Market and Segmented Market
Demands
 Domestic and Industrial demands
 Short-term demand and long-term demand
 Individual and Market demands
Market Research and Law of Demand
• Price information as a predictor of
quality
• Perception of a man as a
experienced in purchasing generally
choose a low-priced or
inexperienced in purchasing will
select a high priced one
• Consumer sometimes behave
irrationally
• Purchasing Behaviour is repetitive
Shifts in Demand Versus Movements Along
a Demand Curve
• Demand refers to a schedule of

quantities of a good that will be bought
per unit of time at various prices, other
things constant.
• Graphically, it refers to the entire
demand curve.
a Demand Curve
• Quantity demanded refers to a specific

amount that will be demand per unit
of time at a specific price.
• Graphically, it refers to a specific

point on the demand curve.
a Demand Curve
• A movement along a demand curve is the
graphical representation of the effect of
a change in price on the quantity
demanded.
a Demand Curve
• A shift in demand is the graphical

representation of the effect of
anything other than price on
demand.
Change in Quantity Demanded
$2 B
Price (per unit)
Change in quantity demanded

(a movement along the curve)
A
$1
D1
0
100 200
Shift in Demand
Change in demand
(a shift of the curve)
$2
Price (per unit)
B A
$1
D0
D1
100 200 250
Shift Factors of Demand
• Shift factors of demand are factors
that cause shifts in the demand
curve:
• Society's income.
• The prices of other goods.
• Tastes.
• Expectations.
• Taxes on subsidies to consumers.
Income
• An increase in income will increase
demand for normal goods.
• An increase in income will decrease
demand for inferior goods.
Price of Other Goods
• When the price of a substitute good
falls, demand falls for the good
whose price has not changed.
• When the price of a complement
good falls, demand rises for the good
whose price has not changed.
TASTE
•A change in taste will change
demand with no change in price.
Expectations
• If you expect your income to rise,
you may consume more now.
• If you expect prices to fall in the
future, you may put off purchases
today.
Taxes and Subsidies
• Taxes levied on consumers increase
the cost of goods to consumers,
thereby reducing demand.
• Subsidies have an opposite effect.
The Demand Table
• The demand table assumes all the
following:
• As price rises, quantity demanded
declines.
• Quantity demanded has a specific time
dimension to it.
• All the products involved are identical in
shape, size, quality, etc.
The Demand Table
• The demand table assumes all the
following:
• The schedule assumes that everything
else is held constant.
From a Demand Table to a Demand Curve
• You plot each point in the demand
table on a graph and connect the
points to derive the demand curve.
• The demand curve graphically
conveys the same information that is
on the demand table.
• The curve represents the maximum
price that you will pay for various
quantities of a good – you will
happily pay less.
A Demand Table $6.00

A Demand Curve
Price per DVD rentals 5.00
Price per DVDs (in dollars)

cassette demanded per
week 4.00 E
A $0.50 9 3.50 G
3.00 D
B 1.00 8 Demand for
C
C 2.00 6 2.00 DVDs
D 3.00 4 1.00
F B
A
E 4.00 2 .50
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of DVDs demanded (per week)
Individual and Market Demand Curves
• A market demand curve is the
horizontal sum of all individual
demand curves.
• This is determined by adding the
individual demand curves of all the
demanders.
Individual and Market Demand Curves
• Sellers estimate total market demand
for their product which becomes
smooth and downward sloping
curve.
From Individual Demands
to a Market Demand Curve
(1) (2) (3) (2) (3) $4.00

Price per Alice’s Bruce’s Cathy’s Market G
cassette demand demand demand demand 3.50
Price per cassette (in dollars)

3.00 F
A $.0.50 9 6 1 16 E
B 1.00 8 5 1 14 2.50
D
C 1.50 7 4 0 11 2.00
D 2.00 6 3 0 9 C
1.50
E 2.50 5 2 0 7 B
F 3.00 4 1 0 5 1.00
A
G 3.50 3 0 0 3 0.50
H 4.00 2 0 0 2 Cathy Bruce Alice Market demand
0
2 4 6 8 10 12 14 16
Quantity of cassettes demanded per week
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Concept of supply
• The amount of commodity which
producers are able and willing to
offer for sale at a given price.
• Supply is related to scarcity.
• A supply schedule is a tabular
representation of data on the
quantity supplied and the price of the
good.
• The diagrammatic representation of
the supply schedule
curve is known
is known
as supply
as
curve. curve.
supply
Supply Function
• The price below which the seller will
refuse to sell is called Reserve Price.
• Sx=f(Px,Py,Pz,Pf,Pr,O,W,E,T)
• Px –Product Price
• Py,Pz-Prices of other goods in the market
• Pf-Prices of factors of production needed
to produce good
• O- Objective of the producer
• W- Weather,strikes and other short-run
forces.
• E- Firm’s expectations about future
prospects for prices,costs,sales,the state
of economy in general.
Other determinants of supply
• Time factor
• Taxation policy
• Political disturbances
• Means of transport and
communication
• Agreement among the producers
• Government procurements or other
government controls
• Costs of production in the long-run.
The Law of Supply
• Sx=f(Px), other things remaining
constant.
• Sx=Amount supplied of good x
• P= Price of good X
• The law of supply states that”other
things remaining constant, more of a
commodity is supplied at a lower
price.”It can be explained by two
reasons.
Reason behind rising supply curve
• An increase in price generally
implies higher profits leading
producers to offer increased
quantities.
• In the long-run due to higher
profitability,new producers may enter
the field of production leading to
increase in output.
Limitations of Law of Supply
• Future Prices
• Agricultural Output
• Subsistence Farmers
• Factors other than prices not
remaining constant
Supply schedule
• A supply schedule is a tabular statement
that gives a full account of supply of any
given commodity in a given market at a
given time
• Individual supply schedule
• Market supply schedule
• Individual supply schedule states the
quantities of a commodity a producer
would offer for sale at different prices.
• A market supply schedule for a given
commodity is the sum of individual supply
for all those firms which are engaged in
the production of a given commodity
during a given period.
Shifts in supply and change in supply
• Movement along the same supply
curve represents contraction or
expansion in supply as a result of
change in the price of the
commodity.
• Change in supply occurs because of
change in any of the determinants of
supply, other than price.
Backward-sloping supply curve
• Rising wages induce more work, but
after a point leisure is preferred to
labour.
• A special supply curve-Govt’s supply

of electricity at a constant rate and
no more.
Elasticity of supply
• It can be defined as the degree of
responsiveness of supply to a given
change in price.
• Es= Poportionate change in quatity
supplied/proportinate change in
price
Types of Supply Elasticities
• Perfectly inelastic supply
• Infinitely elastic supply
• Unit elasticity
• Relatively elastic supply
• Relatively inelastic supply.
• Cross Elasticity of supply-It means
change in quantity supplied of one
commodity when the price of another
commodity changes.
Joint Supply and Composite Supply
1) When two or more commodities are
supply together,it is joint supply
e.g.wheat and husk, hides and
bones.When one is produced,the
production of other goods takes
place naturally
2) When a single commodity is
supplied by several resources,it is
called composite supply e.g. energy
can be supplied by electricity,gas
and oil
Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Supply
Equilibrium price Equilibrium

$2.00
Demand
Equilibrium
quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Markets Not in Equilibrium
• Excess Supply
• Price is above equilibrium price.
• Producers are unable to sell all they
want at the going price.
Markets Not in Equilibrium
• Excess Demand
• Price is below equilibrium price.
• Consumers are unable to buy all they
want at the going price.
Excess Supply
Price of
Ice-Cream
Cone
Supply
2.00
Demand
0 4 7 10 Quantity of
Ice-Cream Cones
Excess Supply
Price of
Ice-Cream
Cone
Supply
2.00
Demand
Ice-Cream Cones
Excess Supply
Price of
Ice-Cream
Cone
Supply
$2.50
2.00
Demand
Ice-Cream Cones
Excess Supply
Price of
Ice-Cream
Cone
Supply
$2.50
2.00
Demand
Quantity Quantity Ice-Cream Cones
demanded supplied
Excess Supply
Price of
Ice-Cream
Cone
Excess
supply Supply
$2.50
2.00
Demand
demanded supplied
Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
Demand
Ice-Cream Cones
Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
Demand
Ice-Cream Cones
Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Demand
Ice-Cream Cones
Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Demand
supplied demanded
Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Excess
demand Demand
supplied demanded
Analysing Changes in Equilibrium
• Decide whether the event shifts the
supply or demand curve (or both).
• Decide whether the curve(s) shift(s)
to the left or right.
• Determine how the shift affects
equilibrium price and quantity.
How an Increase in Demand Affects the
Equilibrium
Price of
Ice-Cream
Cone
Supply
2.00
Initial
equilibrium
D1
0 7 10 Quantity of
Ice-Cream Cones
Equilibrium
Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream...
Supply
2.00
Initial
equilibrium
D1
0 7 10 Quantity of
Ice-Cream Cones
Equilibrium
Price of
Supply
2.00
Initial
equilibrium
D2
D1
0 7 10 Quantity of
Ice-Cream Cones
Equilibrium
Price of
Supply
$2.50 New equilibrium

2.00
Initial
equilibrium
D2
D1
0 7 10 Quantity of
Ice-Cream Cones
Equilibrium
Price of
Supply

2.00
2. ...resulting
in a higher Initial
price... equilibrium
D2
D1
0 7 10 Quantity of
Ice-Cream Cones
Equilibrium
Price of
Supply

2.00
2. ...resulting
in a higher Initial
price... equilibrium
D2
D1
0 7 10 Quantity of
3. ...and a higher Ice-Cream Cones
quantity sold.
How a Decrease in Supply Affects the
Equilibrium
Price of
Ice-Cream
Cone
S1
2.00 Initial equilibrium
Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Equilibrium
Price of
1. An earthquake reduces
Ice-Cream
the supply of ice cream...
Cone
S1
Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Equilibrium
Price of
Ice-Cream
Cone S2
S1
Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Equilibrium
Price of
Ice-Cream
Cone S2
S1
New
$2.50 equilibrium
Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Equilibrium
Price of
Ice-Cream
Cone S2
S1
New
$2.50 equilibrium

2. ...resulting
in a higher
price...
Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
• Given a shift in the demand
curve,price will rise less or fall less if
the supply curve is elastic.
• Given a shift in the demand
curve,price will rise more or fall more
if the supply curve is inelastic.
Shift in Supply Curve
• Given a shift in the supply curve,the
price will rise less or fall less if
demand curve is elastic.
• Given a shift in the supply curve,the
price will rise more or fall more if the
demand curve is inelastic.
Shift in both demand and Demand
• If both demand and supply increase, sales
are bound to increase but the price may or
may not rise.
• Price would rise if the amount which
would now be demanded at the old price
exceeds the supply which would now be
made at old price.
• But the price would fall the amount now
will be supplied at the old price is more
than the amount now demanded at that
price.
Conclusion
• Market economies harness the
forces of supply and demand.
• Supply and demand together
determine the prices of the
economy’s goods and services.
• Prices are the signals that guide the
allocation of resources.

Demand: by Dr. Gitanjali

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Demand

• Demand refers to a schedule of

• Quantity demanded refers to a specific

• Graphically, it refers to a specific

• A shift in demand is the graphical

Change in quantity demanded

A Demand Table $6.00

Price per DVD rentals 5.00

Price per DVDs (in dollars)

(1) (2) (3) (2) (3) $4.00

Price per cassette (in dollars)

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

• A special supply curve-Govt’s supply

Equilibrium price Equilibrium

$2.50 New equilibrium

$2.50 New equilibrium

$2.50 New equilibrium

2.00 Initial equilibrium

2.00 Initial equilibrium

2.00 Initial equilibrium

2.00 Initial equilibrium

2.00 Initial equilibrium

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