Demand Analysis

SPJIMR
Dr. Pallavi Mody
E-mail:pallavimody@spjimr.org
 What is law of demand?
• The inverse relationship that exists between
price of a product and its quantity demanded
is known as law of demand.

• The law of demand states that, assuming

other things to remain unchanged, with rise in
price of a product, demand for it would fall and
with fall in price, demand would rise.
 What is demand curve?

The demand curve is a

tool that illustrates
the relationship
between a good's
price and its quantity
demanded.
The relationship shows
that one can sell
larger quantity only
by lowering the
price.
Why does the consumer
behave in this way?
Units of Total Marginal Price of
consumpti Utility Utility burgers
on
(burgers)

1 30 30 10

2 50 20 10

3 60 10 10

4 65 5 10

5 65 0 10
TU increases at diminishing rate
MU diminishes with increase in
consumption

90 40
80
70 30
60
Total Utility

Marginal Utility
50 20
40
30 10
20
10 0
0 0 1 2 3 4 5 6 7
-10
0 2 4 6 8
Number of burgers Number of burgers
 Diminishing MU is the base for
an individual demand curve
• The consumer equates
40 Price with Marginal Utility
to make his purchase
30 decision.
• If price rises, he will
20 reduce his consumption,
tility

in order to equate
arginal U

10 Price=MU, as a result the

demand for bergers will
0
M

fall.
0 1 2 3 4 5 6 7 • Market demand is lateral
-10
summation of individual
Number of burgers demand curves. It is also
downward sloping
Can a demand curve be flat?

Yes, if you are a small insignificant player,

who is “price-taker” in the market, you
could sell as much as you like at the
given price and the demand curve is flat
for you.
But, market demand for any product
would always be downward sloping. If
you are big player who influences the
market dynamics, demand curve will be
downward sloping for you.
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 = 33.3 – 6.6Q or
• Q = 5 - 0.15P
P is price of the product, Q is quantity demanded.
 What does 5 signify?

It sums up the influence

of the factors other
than price that
influence demand for
a product.
• Income
• Demographic
• Technology
• Substitution
• Tastes and
preferences
 What does 0.15 signify?

It is negative, which means

the demand curve slopes
downward.
The value 0.15 determines
the slope of the curve. It
shows change in quantity
demanded as a result of
change in price. It shows
every rupee increase in
price reduces the
demand by 150 units.
 What is elasticity of demand?
Elasticity of demand is the degree of responsiveness of
quantity demanded to change in price.
Price elasticity of demand
= % change in quantity demanded/% change in price

Demand for a good is said to be elastic if the response is

substantial
Demand for a good is said to be inelastic if the response
is slight.
 What are the factors on which
this elasticity is dependent?

• Availability of close substitutes

• Necessities vesus Luxuries
• Time horizon
• Definition of the market
 How do you measure the
elasticity of demand?
1. Percentage method: % change in
quantity demanded of x/% change in price of
x
2. Graphical method: Lower portion of
DD curve/upper portion of DD curve
3. Total outlay method
 The total outlay method
  Price Quantity Turnover Elasticity
Demanded

Original 20 100 2000  

New (1) 10 300 3000 Relatively

elastic

New (2) 10 200 2000 Unit

elastic

New (3) 10 150 1500 Relatively

inelastic
 Does demand respond to other
factors?
Demand for a
 
product
responds to other
factors also and therefore we have
other elasticities

• Income elasticity of demand = % change in

quantity demanded /% change
• Cross elasticity of
Qdx / % change in Py.
•      Advertising elasticity
change in Ad spend
in income
demand = % change in
= % change in Qd / %
 Takeaways?
• How do I use the information given
by the demand function and
elasticity?
• What can drive the consumer to
change his purchase decision?  
• How do I formulate my pricing
policy?