Demand Analysis

What is Demand
Demand refers to the quantities of goods that consumers are willing and able to purchase at various prices during a given period of times.

3-Key elements of Demand Desire to acquire a commodity Willingness to Pay Price for it Ability to pay for it.

DEMAND CURVE
Demand curve is a graphic statement or presentation of quantities of a good which will be demanded by the consumer at various possible prices at a moment of time.

Law of Demand
There is an inverse relationship between price and quantity demanded, other things remaining constant.

Assumptions
Income of the buyers remains same Taste and preference of the buyers doesnt change Price of the related goods (substitute and complements) remains same No close substitute No prestige value of the product in the question

Exceptions to the Law of Demand Giffen Goods Prestigious Goods Speculation Ignorance about quality of Goods

Market Demand
Sum of the various quantities demanded by the number of consumers in the market at various prices for a commodity

Like individual demand curve Market demand curve also slopes downward right.

DEMAND CURVE SLOPE DOWNWARD

Law of diminishing marginal utility Income effect Substitution effect

Factors responsible for increase/decrease in demand

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Change in income Change in population Change in climate Change in taste Change in wealth distribution Fear of shortage Substitutes Advertisement Technical progress Change in real income

Demand Schedule
Demand schedule is a list of prices and quantities i.e shows what quantity is demanded at each of these prices. Individual demand schedule shows the demand of an individual for a commodity at various prices.

Market demand schedule refers to the list of prices and quantity demanded in the market by all the individuals.

TYPES OF DEMAND
Joint demand (Car and Petrol) When two or more commodities are jointly needed to satisfy a single want, then the demand for such goods are said to be joint demand. Direct and derivative demand (House and Carpenter service) When demand for a commodity gives rise to demand for another commodity, then it is said to be as a derived demand. Composite demand (Coal) When a commodity is demanded for a number of uses, then the demand for that commodity is said to composite in nature.

Competitive demand (Fish and Meat) When two goods are close substitutes of one another, then the demand for such goods is said to be competitive in nature.

CHANGES IN DEMAND
1. 2. 3. 4. Extension in demand : More units are demanded at lower price Contraction in demand: Less units are demanded at higher price Increase in demand: More units are demanded at same price or same quantity demanded at higher price Decrease in demand: Less units of the commodity demanded at the same price or same quantity demanded at lower price.

DEMAND FUNCTION
The functional relationship can be expressed algebraically as: Dx=f (p) Where, Dx = Quantity demanded of the commodity x f= Function p= Price of the commodity x

DETERMINANTS OF DEMAND
Price of the product/service Income of the buyer Prices of related products i.e substitution and complementary goods Advertising and sales promotion Consumers taste and preference Consumers expectation

When the determinants are taken in to account, the demand function may as follows: Dx=f (p, y, pr, w, a, u) Where, Dx=Quantity demanded x p=Price of the commodity y=Income of the consumer pr=Prices of related goods w=Taste of the consumer d=Advertisement and sales promotion u=Other determinants of demand for commodity x

Elasticity of Demand
It is the degree of responsiveness of quantity demanded of a good to a change in its price, income or prices of related goods.

Price Elasticity of Demand

It is the degree of responsiveness of a quantity demanded of a good to change in its price, given the consumers income, his tastes and prices of all other good. Or It is the proportionate change in quantity demanded in response to a small change in price, divided by the proportionate change in price.

Determinants of Price elasticity of Demand

Availability of close substitutes (tea) Importance of a commodity in consumers budget (salt, matches,soap) The number of use of a commodity (electricity) Complementarity between goods (petrol and lubricating oil) Time of adjustment (if more time more elastic)

Perfectly Elastic Demand Curve

14 12 10 8 6 4 2 D

10

15

20

25

30

Quantity

Perfectly inelastic demand Curve

30 25 20 15 10 5

10

15

20

25

Quantity

Elasticity of a straight line demand curve

11 Very elastic 10 9 8 Slightly elastic 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 Quantity e = .29 Very inelastic Unit elastic e = 1.0 Slightly inelastic e = 6.33

MEASUREMENT OF ELASTICITY OF DEMAND

Proportionate method Total outlay method: by tracing the the behaviour of the total expenditure of a consumer. Geometric Method a.Measurement by point elasticity of demand b.Measurement on arc elasticity of demand

Income elasticity of demand

It is the degree of responsiveness of quantity demanded to a given change in income.

Problem: Consumer s income rises from Rs 100 to Rs 102, the quantity purchased by him increases from 25 units to 30 units per week. Calculate his income elasticity of demand?

Types of Income elasticity of demand

Zero income elasticity of demand: It refers to a situation where changes in income will have no effect on the quantities demanded. Negative income elasticity of demand: It concerns with a situation where an increase in consumers income leads to a reduction in quantity demanded. (inferior to superior goods) Positive income elasticity of demand:

Positive Income elasticity of demand

a. Unit elasticity of demand: When an increase in income leads to proportionate increase in the quantity demanded. (semi luxury goods such as good quality food, clothing etc) b. Greater than unity: When increase in income leads to more than proportionate increase in the quantity demanded. (luxury goods such as car) c. Less than unity: When increase in income leads to less than proportionate increase in the quantity demanded. ( food, clothing)

Cross elasticity of demand

Change in the demand for one good in response to the change in price of another good represents the cross elasticity of demand of one good for the other.

REVENUE CONCEPTS
Total Revenue : It is the total amount received as sales proceeds. TR=P*Q Average Revenue: It is the revenue per unit of output sold. AR=TR/Q Marginal Revenue: It is the net addition made to the total revenue by selling an extra unit of output. MR=R2-R1/Q2-Q1 Incremental Revenue: It is the difference between the new total revenue and the existing total revenue.

SUPPLY
Supply: It is the quantity of a commodity that its producer or sellers offer for sale at a given prices, at a given period of time. Market Supply: It is the sum of supplies of a commodity made by all individual firms or their supply agencies. Supply schedule Supply curve