Demand Analysis Meaning of Demand: Demand for a particular commodity refers to the commodity which an individual consumer or household is willing to

DEMAND

Anirban / Micro Economics / Module 3 / CCIM 2

Demand AnalysisMeaning of 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.

Demand for a particular commodity implies:Desire of the customer to buy the product;The customers willingness to buy the product;Sufficient purchasing power in the customers possession to buy the 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.

Anirban / Micro Economics / Module 3 / CCIM

3

Demand AnalysisLaw of Demand: Law of demand expresses the

relationship between the Quantity demanded and the Price of the commodity.

The law of demands states that,“Ceteris Paribus, (other things remaining constant) the lower the price of a commodity the larger the quantity demanded of it and vice 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.

P Qd

1 60

2 50

3 40

4 30


Demand Analysis

Assumptions: No change in taste and preference. Income of the consumer is

constant. No change in customs, habit,

quality of goods. No change in substitute products,

related products and the price of the product.

No complementary goods.


Demand AnalysisDemand Schedule: A demand schedule is a

numerical tabulation that shows the quantity of demeaned commodity at different prices.

The demand schedule may be of 2 types :

Individual demand Schedule Market demand Schedule.


Demand Analysis Table Showing the IDC & MDC :

Price(Per Kg)

Quantity demanded by Individual Customers

Market Demand

A B C D

6 4 3 5 6 197 3 2 4 5 148 2 1 3 4 109 0 0 1 2 03


Demand Analysis Graphical Representation of IDC &

MDC


Demand Analysis

Demand Function: A Mathematical relationship between

quantity demanded of the commodity and its determinants is known as Demand 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.

Individual Demand Function :Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey. Ep, U)


Demand AnalysisQdx = Quantity demanded for product X.Px = Price of product XY = Level of Income P1..Pn-1 = Prices of all other productsT = Taste of the consumerA = AdvertisementEy = Expected future incomeEp = Expected future priceU = Other determinants not covered in

the list of determinants.Market Demand Function:

Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey, Ep, P, D, U, P)

P = PopulationD = Distribution of consumers.


Demand AnalysisCauses of downward sloping of Demand

Curve: According to the law of demand there exists a

opposite relationship between the PRICE and the QUANTITY DEMANDED, and that is why demand curve is downward sloping.

Let the linear form of demand curve :

P = a + bq, where a, q constant and b < 0, i.e. dp/dq = b < 0 (Assumption), so slope of the demand curve is negative.

The various reasons for this downwards sloping of demand curves are as follows:

Law of Diminishing Marginal Utility and Equi-Marginal utility.

Price Effect. Income Effect. Substitution Effect. Different Use ( Electricity).


Demand AnalysisExceptions of Law of Demand:

In certain cases the slope of Demand Curve is upward i.e. positively sloped, it is known as the exceptions of Law of Demand.These exceptions are as follows:

Giffen Goods (Giffen Paradox) Emergency (War etc…) Conspicuous necessities (Car, Fancy Cloths

etc…) and Conspicuous Consumption (Fancy Diamonds, High price shoes, pens etc…)

Depression ( Price and quantity demand is low)

Ignorance Effect (High priced commodity is better in quality)

Speculation (Future change in price)


Demand AnalysisThe situations given below are the cases where Individual’s demand depends on the demands of the other people.

Bandwagon Effect (Positive Network Externality) : Flatter or more elastic

Snob Effect: (Negative Network Externality): Steeper or Less elastic

Veblen Effect : Steeper or Less elastic

Shift (Contraction & Expansion) and Change in Demand:


Demand Analysis

Factors Determining Demand: General Factors:

Price of the product Taste and Preference Income Prices of the related goods

Additional Factors: (Luxury Goods & Durables) Consumer’s Expectation of future price. Consumer’s Expectation of future income.

Additional Factors:( Market Demand) Population Social, Economic & Demographic distribution of

Consumer’s.


Demand AnalysisDemand Distinctions:

Producer’s Good and Consumer’s Good. Durable and Perishable Good. Derived Demand Autonomous Demand. Industry Demand and Firm (Company)

Demand. Total Demand and Market segment

Demand Short Run Demand and Long Run Demand. Short Run Demand Fluctuations and Long

Run Demand Trends.


Demand Analysis

Problems:1. The demand equation is Q = 90 – 3P. At what price

would no one be willing to buy any of the commodity? If the commodity is given free, what is the quantity demanded? If the price is reduced by 1 unit how much the quantity demanded change?

2. The demand equation is Q = 25 – 5P. What is the quantity demanded if the price is Rs 3? Assume the demand is 18 units, 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?


Elasticity of DemandElasticity of 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.

Ed = % change in quantity demanded / % change in the 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


Elasticity of DemandPrice 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.

Ep = - (% change in quantity demanded) / ( % change in the Price).

Here we ignore the – ve sign as the relation between price and the quantity demanded is opposite.

Price Elasticity of Demand are of 5 types : Perfectly elastic demand Perfectly / Absolutely inelastic demand Relatively Elastic demand Relatively inelastic demand Unit Elastic demand


Elasticity of DemandIncome Elasticity of 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.

Em = - (% change in quantity demanded) / ( % change in the Money Income).

Cross Elasticity of 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 = - (% change in quantity demand of goods Y) / ( % change in the price of goods X).


Elasticity of DemandFactors 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…


Elasticity of Demand

Advertising or Promotional Elasticity of Demand:

Advertising or Promotional Elasticity of Demand measures the degree of responsive ness of the quantity demanded of a commodity due to a change in expenditure on advertising and other sales promotion activities.

Ea = (% change in quantity demanded) / ( % change in the Expenditure on

Advertisement).


Elasticity of DemandImportance or Significance of Elasticity of

Demand:Practical 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: MR = AR ( 1 – 1/ e) Monopoly Market and limits of monopoly power Determinants of the status of the commodity,

complementary or substitute.


Elasticity of Demand If the demand function is Q =

225 – 15p. Find the elasticity of demand, when P = 5.

Given the demand function p = 1 – q, find the expression of Ed and the value of Ed when q = ¼.


Demand ForecastingMeaning: Forecasting is defined as a study with

scientific prediction in regard to an event which may have future demand for goods, services either at the micro level or at the macro level.

Demand forecasting is a prediction or estimation of a future situation, under given condition.

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.


Demand Forecasting

Steps in Demand Forecasting: Identification of the objectives.Estimation of quantity and composition of demand

Estimation of price.

Inventory Control etc…

Determination of the nature of the goods.Capital Goods

Consumer durables

Non consumer durables Selection of the proper method of

forecasting. Interpretation of results.


Demand ForecastingFactors involved in Demand

Forecasting: Time period Levels of forecastingInternational level

Macro level

Industry level

Firm level

Purpose of forecasting Methods of forecasting Nature of the commodity Nature of the competition


Demand ForecastingObjectives: 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.


Demand Forecasting

Criteria of a good Forecasting Method:

Accuracy Plausibility (Mgt must have

confidence and understanding) Durability Availability Economy (Cost Effectiveness)


Demand Forecasting

Methods of Demand 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


Demand ForecastingMechanical Extrapolation / Trend

Projection 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:Simultaneous Equation Model:


Demand ForecastingBarometric / Leading Indicator Technique: Coincident Indicators and Lagging Indicators. Leading Indicators Index Nos (Diffusion & Composite Indicators)

Statistical Methods: Naïve Method Correlation Regression Method Simple Linear Equation

Graphical Method Least Square Method

Non Linear Equation Parabolic Regression Model Logarithmic Regression Model Multiple Regression Model


Demand Forecasting

Methods of Demand 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

Documents

Demand Analysis Meaning of Demand: Demand for a particular commodity refers to the commodity which an individual consumer or household is willing to