MANAGERIAL ECONOMICS MODULE 3

BY Mr. Anirban Christ College Institute of Management Bangalore

Demand Analysis
Meaning of Demand: Demand: Demand for a particular commodity refers to the commodity which an individual consumer or household is willing to purchase per unit of time at a particular price. price. Demand for a particular commodity implies: implies:
Desire of the customer to buy the product; product; product; The customers willingness to buy the product; Sufficient purchasing power in the customers possession to buy the product. product.

The demand for a particular commodity by an individual consumer or household is known as Individual demand for the commodity and Summation of the individual demand is known as the Market demand. demand.
Anirban / Micro Economics / Module 3 / CCIM 2

Demand Analysis
Law of Demand: Demand:
Law of demand expresses the relationship between the Quantity demanded and the Price of the commodity. commodity. The law of demands states that, ³Ceteris Paribus, (other things remaining constant) the lower the price of a commodity the larger the quantity demanded of it and vice versa.´ versa. In simple terms other things remain constant, if the price of the commodity increases, the demand will decrease and if the price of the commodity decreases, the demand will increase. increase. P 1 2 3 4 Qd 60 50 40 30

Anirban / Micro Economics / Module 3 / CCIM

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constant. No complementary goods. habit. preference. quality of goods. related products and the price of the product. No change in customs. goods.Demand Analysis Assumptions: Assumptions: No change in taste and preference. No change in substitute products. product. goods. Income of the consumer is constant. Anirban / Micro Economics / Module 3 / CCIM 4 .

prices. The demand schedule may be of 2 types : Individual demand Schedule Market demand Schedule. Anirban / Micro Economics / Module 3 / CCIM 5 .Demand Analysis Demand Schedule: Schedule: A demand schedule is a numerical tabulation that shows the quantity of demeaned commodity at different prices. Schedule.

Demand nal Table Showing the IDC & MDC : i Market Demand Price (Per Kg) Quantity demanded by Individual Customers A B C D 4 3 2 0 3 2 1 0 5 4 3 1 6 5 4 2 6 7 8 9 19 14 10 03 6 Anirban / Micro Economics / Module 3 / CCIM .

Demand Analysis Graphical Representation of IDC & MDC Anirban / Micro Economics / Module 3 / CCIM 7 .

Individual Demand Function : Qdx = f (Px. Ep. P1««. Y. U) ««.Demand Analysis Demand Function: Function: A Mathematical relationship between quantity demanded of the commodity and its determinants is known as Demand Function. Function. When this relationship relates to the demand by an individual consumer it is known as Individual demand function and while it relates to the market its known as market demand function. Pn-1. T. function. Ey. Anirban / Micro Economics / Module 3 / CCIM 8 . PnEy. A.

= Price of product X = Level of Income = Prices of all other products = Taste of the consumer = Advertisement = Expected future income = Expected future price = Other determinants not covered in the list of determinants. determinants. A. P) ««. P1««. P. Ey. consumers. Y. T...Demand Analysis Qdx Px Y P1. D. Pn-1. Anirban / Micro Economics / Module 3 / CCIM 9 . PnP D = Population = Distribution of consumers.Pn-1 . Ep. U. Market Demand Function: Function: Qdx = f (Px.PnT A Ey Ep U = Quantity demanded for product X.

negative. Let the linear form of demand curve : P = a + bq. sloping. Substitution Effect. where a. so slope of the demand curve is negative. q constant and b < 0. Effect.Demand Analysis Causes of downward sloping of Demand Curve: Curve: According to the law of demand there exists a opposite relationship between the PRICE and the QUANTITY DEMANDED.e. Effect. Equiutility. The various reasons for this downwards sloping of demand curves are as follows: follows: Law of Diminishing Marginal Utility and Equi-Marginal utility. dp/dq = b < 0 (Assumption). Income Effect. Electricity). Different Use ( Electricity). Price Effect. and that is why demand curve is downward sloping. i. Anirban / Micro Economics / Module 3 / CCIM 10 . Effect.

Demand Analysis Exceptions of Law of Demand: Demand: In certain cases the slope of Demand Curve is upward i.e. Fancy Cloths etc«) and etc« Conspicuous Consumption (Fancy Diamonds. Demand. it is known as the exceptions of Law of Demand. pens etc«) etc« Depression ( Price and quantity demand is low) Ignorance Effect (High priced commodity is better in quality) Speculation (Future change in price) Anirban / Micro Economics / Module 3 / CCIM 11 . These exceptions are as follows: follows: Giffen Goods (Giffen Paradox) Emergency (War etc«) etc« Conspicuous necessities (Car. High price shoes. positively sloped.

Demand nal i The situations given below are the cases where Individual¶s demand depends on the demands of the other people. Bandwagon Effect (Positive Network Externalit ) : Flatter or more elastic Snob Effect: (Negative Network Externalit ): Steeper or Less Effect: ): elastic Veblen Effect : Steeper or Less elastic Shift (Contraction & Expansion) and Change in Demand: Demand: Anirban / Micro Economics / Module 3 / CCIM 12 . people.

Anirban / Micro Economics / Module 3 / CCIM 13 . Consumer¶s. Additional Factors:( Market Demand) Factors: Population Social. Economic & Demographic distribution of Consumer¶s. Consumer¶s Expectation of future income. price. income.Demand Analysis Factors Determining Demand: Demand: General Factors: Factors: Price of the product Taste and Preference Income Prices of the related goods Additional Factors: (Luxury Goods & Durables) Factors: Consumer¶s Expectation of future price.

Industry Demand and Firm (Company) Demand. Short Run Demand Fluctuations and Long Run Demand Trends. Good. Demand.Demand Analysis Demand Distinctions: Distinctions: Producer¶s Good and Consumer¶s Good. Derived Demand Autonomous Demand. Durable and Perishable Good. Demand. Total Demand and Market segment Demand Short Run Demand and Long Run Demand. Trends. Anirban / Micro Economics / Module 3 / CCIM 14 . Demand. Good.

The demand equation is Q = 90 ± 3P. what is the quantity demanded? If the price is reduced by 1 unit how much the quantity demanded change? The demand equation is Q = 25 ± 5P. At what price would no one be willing to buy any of the commodity? If the commodity is given free. then what is the corresponding price? What would be the demand if the commodity in question were a free good? What is the highest price anybody will pay for the commodity? 2.Demand Analysis Problems: Problems: 1. Anirban / Micro Economics / Module 3 / CCIM 15 . What is the quantity demanded if the price is Rs 3? Assume the demand is 18 units.

constant. determinant. There are mainly five types of Elasticity of Demand : Price Elasticity of demand Income Elasticity of demand Cross Elasticity of demand Promotional Elasticity of demand Expectation Elasticity of demand Anirban / Micro Economics / Module 3 / CCIM 16 . Ed = % change in quantity demanded / % change in the determinant.Elasticity of Demand Elasticity of Demand: Demand: Elasticity of demand is defined as the percentage change in quantity demanded caused one percent change in each of the determinants under consideration while the other determinants are held constant.

Ep = . opposite.(% change in quantity demanded) / ( % change in the Price).Elasticity of Demand Price Elasticity of Demand : Price Elasticity of Demand measures the degree of responsive ness of the quantity demanded of a commodity due to a change in its own price. Price). price. Price Elasticity of Demand are of 5 types : Perfectly elastic demand Perfectly / Absolutely inelastic demand Relatively Elastic demand Relatively inelastic demand Unit Elastic demand Anirban / Micro Economics / Module 3 / CCIM 17 . Here we ignore the ± ve sign as the relation between price and the quantity demanded is opposite.

X). Cross Elasticity of Demand: Demand: Income Elasticity of Demand measures the degree of responsive ness of the quantity demanded of one commodity due to a change in price of some related goods. Exy = .Elasticity of Demand Income Elasticity of Demand: Demand: Income Elasticity of Demand measures the degree of responsive ness of the quantity demanded of a commodity due to a change in money income of the consumer. goods.(% change in quantity demanded) / ( % change in the Money Income). Em = . Income). Anirban / Micro Economics / Module 3 / CCIM 18 .(% change in quantity demand of goods Y) / ( % change in the price of goods X). consumer.

Elasticity of Demand Factors affecting the Elasticity of Demand : Nature of the product Availability of the substitute product Uses of the commodity Income Levels Proportion of Income spent Postpone consumption Price levels Time period Durability Taste & Preference Demonstration Effect Advertisement Special Demand (Medicine) Complementary Goods Expectation of the future price etc« etc« Anirban / Micro Economics / Module 3 / CCIM 19 .

Ea = (% change in quantit demanded) / ( % change in the Expenditure on Advertisement). Advertisement).Elasti it Advertising Demand: Demand: f Demand of r Pr motional Elasti it Promotional Advertising or Promotional Elasti it of Demand measures the degree of responsive ness of the quantit demanded of a commodit due to a change in expenditure on advertising and other sales promotion activities. Anirban / Micro Economics / Module 3 / CCIM 20 . activities.

substitute. Anirban / Micro Economics / Module 3 / CCIM 21 . complementary or substitute.Elasticity of Demand Importance or Significance of Elasticity of Demand: Demand: Practical Importance: Importance: Production Planning Theory of Pricing Theory of distribution Theory of Foreign exchange Theory of International Trade Theory of Public Finance Declaration of Public Utilities Theory of Forecasting of Demand Plenty of Paradox Theoretical Importance: Importance: MR = AR ( 1 ± 1/ e) Monopoly Market and limits of monopoly power Determinants of the status of the commodity.

when P = 5.Elasticity of Demand If the demand function is Q = 225 ± 15p 15p. Given the demand function p = 1 ± q. find the expression of Ed and the value of Ed when q = ¼. Anirban / Micro Economics / Module 3 / CCIM 22 . Find the elasticity of demand.

Demand Forecasting Meaning: Meaning: Forecasting is defined as a study with scientific prediction in regard to an event which may have future demand for goods. Demand forecasting is a prediction or estimation of a future situation. condition. under given condition. services either at the micro level or at the macro level. level. determinant. Demand forecasting is all about prediction rather than estimation as the former one predicts about future trends where as later one tries to find out expected present sales level. given the sales determinant. Anirban / Micro Economics / Module 3 / CCIM 23 .

goods. Anirban / Micro Economics / Module 3 / CCIM 24 . forecasting.Demand orecasting Steps in Demand Forecasting: Forecasting: Identification of the objectives. Inventory Control etc« etc« Determination of the nature of the goods. results. Interpretation of results. Capital Goods Consumer durables Non consumer durables Selection of the proper method of forecasting. objectives. Estimation of quantity and composition of demand Estimation of price. price.

Demand Forecasting Factors involved in Demand Forecasting: Forecasting: Time period Levels of forecasting International level Macro level Industry level Firm level Purpose of forecasting Methods of forecasting Nature of the commodity Nature of the competition Anirban / Micro Economics / Module 3 / CCIM 25 .

Anirban / Micro Economics / Module 3 / CCIM 26 .Demand Forecasting Objectives: Objectives: Helping for continuous production Regular supply for the commodities Formulation of the price theory Effective sales performance Arrangement of finance Determination of the production capacity Labour requirement. requirement.

Demand Forecasting Criteria of a good Forecasting Method: Method: Accuracy Plausibility (Mgt must have confidence and understanding) Durability Availability Economy (Cost Effectiveness) Anirban / Micro Economics / Module 3 / CCIM 27 .

Demand Forecasting Methods of Demand Forecasting: Forecasting: Opinion polling method Consumer¶s Survey Methods  Complete enumeration survey  Sample Survey  End User (Input ± Output) Method Sales force Opinion or Collective Opinion or Reaction Survey Method Expert¶s Opinion Anirban / Micro Economics / Module 3 / CCIM 28 .

Demand Forecasting Mechanical Extrapolation / Trend Projection Method: Method: Graphical ( Fitting trend line by observation) Statistical (Semi average) Algebraic / Least Square (Straight Line. Parabolic & Logarithmic or Exponential) Smoothing Techniques (Moving Average & Exponential Smoothing) ARIMA (Auto regressive integrated moving average or Box ± Jenkin Technique) Econometric Models: Models: Simultaneous Equation Model: Model: Anirban / Micro Economics / Module 3 / CCIM 29 .

Indicators. Leading Indicators Index Nos (Diffusion & Composite Indicators) Statistical Methods: Methods: Naïve Method Correlation Regression Method Simple Linear Equation   Graphical Method Least Square Method Parabolic Regression Model Logarithmic Regression Model Multiple Regression Model Anirban / Micro Economics / Module 3 / CCIM Non Linear Equation    30 .Demand Forecasting Barometric / Leading Indicator Technique: Technique: Coincident Indicators and Lagging Indicators.

Demand Forecasting Methods of Demand Forecasting: Forecasting: Opinion polling method Consumer¶s Survey Methods  Complete enumeration survey  Sample Survey  End User (Input ± Output) Method Sales force Opinion or Collective Opinion or Reaction Survey Method Expert¶s Opinion Anirban / Micro Economics / Module 3 / CCIM 31 .

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