What is Law Of Demand The Demand for a commodity with in price & vice- versa other factor remain same. D is directly proportional to 1/P Assumptions: Income level should remain same. Tastes of the buyer should not change. Price of other goods should remain constant. No new substitutes for the commodity. Price rise in future should not be expected. Rationale For Law Of Demand Substitution effects. Income effects. New consumer creating demand. Expectation: Conspicuous goods. Giffen goods. Conspicuous necessities. Future expectations about price. Impulsive purchases. Ignorance effect.
Market Demand Total quantity that all the consumers/users of a commodity are willing to buy per unit of time at a given price, all other things remaining the same, is called Market Demand for that product. Theory of Demand Provides an Insight into these problems:- Business Executives can know- Factors which determine the size of demand. Elasticities of demand. Possibility of sales promotion through manipulation of prices. Responsiveness of demand to advertisement expenditure. Optimum levels of inventories and sales advertisement cost etc.
Market Demand curve is horizontal summation of individual Demand Curve 6 9 15 22 34 50 0 0 1 2 4 8 1 2 4 6 10 15 5 7 10 14 20 27 10 8 6 4 2 0 Market Demand C B A Price of X Quantity of X Demanded By Derivation of Market Demand Curve Dm Da Db Dc A B C Price Quantity Demanded O Types Of Demand Individual and Market Demand Kinds of the consumers of a product. Demand for Firms Product and Industrys Products. Where market structure is oligopolistic distinction between these is useful from managerial point of view. Autonomous and Derived Demand. Food, cloths, shelter etc. and Land, fertilizers, agro products etc. Demand for Durable and Nondurable goods. Short term and long term demand.
Determinants Of Market Demand Price of the product. Price of the related goods, substitutes, complements. Level of consumers income. Consumers taste and preference. Advertisement of the product. Consumers expectations about future price and supply positions. Demonstration effect and Band Wagon effect. Consumer credit facility. Population of the country (for the goods of mass consumption). Distribution pattern of national income.
Demand Function Dx = f (Px) or Qx = f (Px) Where, Dx - Demand of Good X Qx Quantity of Good X Px Price of Good X P r i c e
Quantity O Q = bo b1P Qx = bo b1Px bo Constant b1 - Slope
Linear Demand Function Non-Linear Demand Function P r i c e
Quantity O Q = boP Q = boP bo > 0 b1 > 0 -b1 -b1 By substituting numerical values for Px a demand schedule may be prepared: Demand Schedule
100 75 50 25 0 Dx = 100 5x0 Dx = 100 5x5 Dx = 100 5x10 Dx = 100 5x15 Dx = 100 5x20 0 5 10 15 20 Dx Dx = bo b1Px Dx = 100 5.Px Px The demand schedule when plotted gives a linear demand curve which gives constant slope (Px/ Dx) 5 10 15 20 0 25 50 75 100 P r i c e
Quantity Dx = 100 5.Px Shift In Demand Curve Reasons for shift in Demand Curve Change in Consumers income. Change in price of the substitute good. Change in consumers taste and preferences through advt. Price of complement changes. Deterioration in quality change in consumers technology, out of fashion seasonality of the product. A B C D1 D2 D3 O Q1 Q2 P1 P2 Quantity of X Demanded (Qx) Price of Xp Multi Variable Demand Function Long run Demand for a Product Dx = f ( Px, M, Py, Pc, T, A)
Px - Price of Commodity X M Consumers Income Py Price of its Substitute Y Pc Price of Complementary Goods T Consumers Taste A Advertisement Expenditure P.T.O. Sheet left to add further If the relationship between Dx and the quantifiable indepentent variables Px, M. Py, Pc, and A is of linear form, the estimable form of the demand function is :- Dx = a + bPx + cM + dPy + gPc + jA Where a is contant term amd b, c, d, e, f, g & j are the coefficients. Impact Of Determinants On Demand Price Effect Substitute Effect Q Q1 Q2 Quantity P r i c e P P1 P2 D Qx 1/Px D D D O O Q Q1 Q2 Py Py1 Py2 Quantity of Tea P r i c e
o f
C o f f e e
Qx Py Complementary Effect Pz Pz1 Pz2 Qx Qx1 Qx2 Quantity of Car P r i c e
o f
P e t r o l
Qx 1/Pc Income Effect I n c o m e
I n c o m e
I n c o m e
Quantity Normal Goods Quantity Necessity Quantity Inferior Goods Tastes & Preferences of Consumer Fashion Advertisement Change in customs Habits Other Factors Sociological as education background, social status, marital status, age, place of residence etc. Weather conditions and climate changes. Availability of credit. Distribution of income, population.