DEMAND

ANALYSIS
Demand – Desire + ability to pay +
willingness to pay

o Demand is relative term –

 Price
 Time
 Place
 Definition of DEMAND:
 Refers to the number of units of a particular
good or service that consumers are willing to
buy under stated conditions of time, place, price,
and so forth. (Ceteris Paribus)
 Thus demand is a function of a number of
independent variables or demand determinants;
it can be expressed as an algebraic equation
or by a graph or table.
Demand Applications
 Problem #1: The Company, a department store,
conducted a study of the demand for men’s ties. It
found out that the average daily demand, Q, in terms
of price, P, is given by the following equation:
 Q = 60 – 5P.
a) How many ties per day can the store expect to sell at a
price of Rs3 per tie?
b) If the store wants to sell 20 ties per day, what price
should it charge?
c) What would be the demand if the store offered to give
the ties away?
d) What is the highest price that anyone would be willing
to pay for these ties?
e) Plot the demand curve.
Answer to Problem #1
a) Replace P by 3 in the equation:
Q = 60 – 5(3)
Q = 60 – 15
Q = 45 ties
b) Replace Q by 20 in the equation:
20 = 60 – 5P
20 – 60 = -5P
-40 = -5P
Rs8 = P
 Continuation
We should assume that P = 0, and substitute P by
its value in the equation:
Q = 60 –5(0)
Q = 60 –0
Q = 60 ties
d) We should assume that the highest price that
someone will be willing to pay is the price to buy
the minimum units, that is 1:
1 = 60 –5P
1 – 60 = -5P
-59 = -5P
P = Rs 11.80
Demand Table
P Q TR
Rs 12 0 0
10 10 100
8 20 160
6 30 180
4 40 160
2 50 100
0 60 0

Use the following equation to fill on the TR column: TR = P x Q

Q = 60 – 5P
 P Q Demand Curve
$ 12 0 14
12
10 10 10
8 20 8

6 30 Price 6
4
4 40 2
2 50 0
20 40 60
0 60 Quantity
Determinants of demand

 The determinants of demand are variables that

affect the amount of a product purchased.
 1. Number of Consumers:
 More consumers in a market, greater demand,
 Less consumers in a market, less demand

 2. Consumers’ Tastes & Preferences:

 Mode or Fad
Continuation

 3. Consumers Income
 Normal Goods: goods for which demand is positively
(directly) related to income, e.g., steak, clothes,
leisure time.
Income elasticity of demand d is positive
 Inferior Goods: goods for which demand is
negatively (inversely) related to income, e.g.,
potatoes, bread.
Income elasticity of demand d is negative
Continuation

 4. Price of Closely Related Goods

 A) Substitutes. If products A and B are substitutes, a price increase in
A will generate an increase in the demand for B.Example, when the
price of beef increases, the demand for chicken increases.

Cross elasticity of demand dx/y is positive.
 B) Complements. If products a and B are complements, a price
increase in A will generate a decrease in the demand for
B.Example, when the price of bread increases, the demand for jelly
decreases.

Cross elasticity of demand dx/y is negative
 5. Consumer Expectations
 Do consumers expect incomes and prices to increase or decrease in the
near future?
DEMAND LAW
 Inverse relationship between price (P) and
quantity demanded (Qd):
 When Price increases, quantity demanded
decreases.
 P  Qd 
 When price decreases, quantity demanded
increases.
P   Qd 
Continuation

 There are 2 effects which explain the inverse

relationship between the price of a product and
the quantity demanded:
 1. The Substitution Effect:
 When the price of a product decreases, new buyers will enter
the market. The product will be cheaper relative to other
products and the consumers will substitute them for the
product.
 2. The Income Effect:
 Consumers will by more when the price is lower.
 Individual Consumer’s Demand
QdX = f(PX, I, PY, T)
QdX = quantity demanded of commodity X
by an individual per time period
PX = price per unit of commodity X
I = consumer’s income
PY = price of related (substitute or
complementary) commodity

T= tastes of the consumer

 QdX = f(PX, I, PY, T)

QdX/PX < 0
QdX/I > 0 if a good is normal
QdX/I < 0 if a good is inferior
QdX/PY > 0 if X and Y are substitutes
QdX/PY < 0 if X and Y are complements
Market Demand Curve
 Horizontal summation of demand curves
of individual consumers

 Bandwagon Effect
 Snob Effect
Horizontal Summation: From
Individual to Market Demand
 Market Demand Function
QDX = f(PX, N, I, PY, T)
QDX = quantity demanded of commodity X
PX = price per unit of commodity X
N = number of consumers on the market
I = consumer income
PY = price of related (substitute or
complementary) commodity

T= consumer tastes
Why demand curve slopes downwards ?
 Law of diminishing marginal utility
 Income effect
 Substitution effect
 Multiplicity of uses

price

Qt. demanded
Exception to the law of demand

 Giffen Goods
 Prestigious goods
 Buyers illusions
 Necessary goods
 Brand loyalty