UNIT II

DEMAND
 WHAT TO STUDY?
 DEMAND ANALYSIS
 MEANING OF DEMAND
 TYPES OF DEMAND
 LAW OF DEMAND
 DETEMINENETS OF DEMAND
 DEMAND FUNCTION
 ELASTICITY OF DEMAND –Price Elasticity of
demand , Income Elasticity of demand , Cross
Elasticity of Demand
https://www.tutor2u.net/economics/reference/price-elasticity-of-demand
What is DEMAND ANALYSIS ?
 Demand analysis is a research done to estimate or find out
the customer demand for a product or service in a particular
market.
 Demand analysis is one of the important consideration for a
variety of business decisions like determining sales
forecasting, pricing products/services, marketing and
advertisement spending, manufacturing decisions, expansion
planning etc.
 Demand analysis covers both future and retrospective
analysis so that they can analyze the demand better and
understand the product/service's past success and failure too.
WHAT IS DEMAND?

DEMAND MEANS :
WILLING
DESIRE TO PAY
ABILITY
TO PAY
Economists use the term demand to refer to the amount of some good
or service consumers are willing and able to purchase at each price.
Demand is based on needs and wants—a consumer may be able to
differentiate between a need and a want, but from an economist’s
perspective, they are the same thing..

Definitions:
 “Demand for a commodity is the quantity which a
consumer is willing to buy at a particular price at a
particular time.”

 “The demand for anything, at a given price, is the

amount of it which will be bought per unit of time
at that price.” -PROF. BENHAM
TYPES OF DEMAND
1-Based on User:
 Demand for Producer Goods: It is the demand for a
commodity which is used in the manufacturing of
other products by the industries, factories and
manufacturing units.
For Example; raw material, tools, land, plant,
equipment and machinery

 Demand for Consumer Goods: The demand for

finished products by the consumers for final usage is
known as demand for consumer goods.
For Example; grocery products, cosmetics, cars, etc.
2- Based on Dependency on Other Commodity:
 Autonomous Demand: Some commodities creates an
independent demand in the market. These are hardly
influenced by the demand for other commodities.
For Example; mobile phones, apparels, vehicles, etc.

 Derived Demand: The demand for any commodity which

acts as an intermediate or adds to the production of
another product is called derived demand.
For Example; sim cards are in demand because of mobile
phones; apparels create a demand for textile goods,
petrol is in demand due to vehicles, etc.
3- Based on Scale of Usage
 Company Demand: The demand for a commodity by a single
manufacturing unit or company or organisation is called a
company demand.
For Example; demand for Eicher trucks by ‘ABC Transport’
company

 Industry Demand: When the demand for all the companies

belonging to a particular sector or industry is pooled together,
it is termed as industry demand.
For Example; The demand for Eicher trucks by all the transport
companies is seen as its demand for the whole transport
sector.
4-Based on Impact Over Time:
 Short Run Demand: The demand for a commodity changes in the
short run with the immediate difference in its price or other variables.
For Example; if the price of gold rises in the short run, people will
prefer not to buy it till the prices fall, ultimately the short-run
demand for gold will decrease.

 Long Run Demand: The change in the factors deriving the demand
of a particular commodity over the long run, may lead to the
permanent of switching of customers from one product to another or
they may adjust to the prevailing market conditions.
For Example; if a particular telecom service provider rises the tariffs,
people may switch to the services offered by other service providers.
5-Based on Durability
 Demand for Durable Goods: Commodities which are
of fixed or capital nature and once purchased can be
used for an extended period are considered to be
durable goods.
For Example; laptop, furnace, factory building, etc.

 Demand for Non-Durable Goods: Goods which are

consumed in a short interval or perishable are called
non-durable goods.
For Example; FMCG products, petrol, raw material, etc.
 DETERMINENTS OF DEMANDS
Demand is never static; it keeps on varying from
time to time. There are majorly six factors which
affect the demand for a commodity.
 Price of the Commodity: The demand for a
particular product is adversely affected by its price.
When the price of a commodity rises, its demand
decreases and when the price of a commodity falls,
its demand increases.

 Income of the Buyer: If the income of a customer

in monetary term increases, his purchasing power
also increases. Now he can buy more of a particular
commodity than before, ultimately leading to an
increase in the demand for goods; and vice versa.
 Price of Related Commodity: Price of a related
commodity can be bifurcated into the following
 Price of Substitute Commodity: Substitute goods are the products
which can replace a particular commodity owing to similar usage.
 For Example; Rice and bread.
If the price of a substitute good increases, the demand for the
commodity increases and if the price of the supplementary good
decreases, the demand for the commodity also falls.

 Price of Complementary Commodity: Goods that go hand in hand are

known as the complementary commodities.
For Example; Electrical appliances and electricity.
If we consider electrical appliances as our commodity, then electricity
is termed as a complementary good. When the price of electricity rises,
the demand for electrical devices fall, and when the price of electricity
drops, the demand for electrical appliances boosts up.
 Consumer’s Taste or Preference: The consumer’s choice
influences the demand for a commodity. If the consumer prefers a
particular commodity more, the demand for that commodity
increases; and vice-versa.

 Expectations: Future price fluctuations and predictions also

create an impact on a commodity’s demand. If the price of a
particular commodity is assumed to rise shortly, its demand will
increase today and vice-versa.

 Population: When the population of a place rises, the demand for

a commodity automatically goes up and falls with the decrease in
the population.
 LAW OF DEMAND

The law of demand states that other factors being

constant (cetris peribus), price and quantity
demand of any good and service are inversely
related to each other. When the price of a product
increases, the demand for the same product will
fall.
Assumptions of the Law of Demand:

 There is no change in the tastes and preferences of the

consumer;
 The income of the consumer remains constant;
 There should not be any substitutes of the commodity;
 There should not be any change in the prices of other
products;
 There should not be any change in the quality of the
product; and
 The habits of the consumers should remain unchanged.
 No change in government policy
 No change in Fashion
 Exceptions to the Law of Demand:

 conomicsdiscussion.net/law-of-demand/the-
law-of-demand-with-diagram/21903
 Description: Law of demand explains
consumer choice behavior when the price
changes. In the market, assuming other
factors affecting demand being constant,
when the price of a good rises, it leads to a fall
in the demand of that good. This is the natural
consumer choice behavior. This happens
because a consumer hesitates to spend more
for the good with the fear of going out of cash.
 The above diagram
shows the demand curve
which is downward
sloping. Clearly when the
price of the commodity
increases from price p3 to
p2, then its quantity
demand comes down
from Q3 to Q2 and then
to Q3 and vice versa.