1, Demand Analysis

Demand Analysis
DEMAND:
• Demand indicates desire to buy backed by
adequate purchasing power, willingness to
buy and ability to buy. Thus demand for a
product refers to the amount of it which will
be bought per unit of time at a particular
price.
Types of demand
• 1. Price demand :Demand is only related with price of
the product, keeping other factors constant. Price is
indirectly proportionately related with quantity
demanded
• 2. Income demand : D= f (y ) other factors held
constant). When income increases, the demand for
superior goods increases and vice versa
• 3. Cross demand : D= f (price of related commodity /
other factors held constant) e.g. Demand for tea in
relation to the prices of coffee
DEMAND SCHEDULE
• The demand schedule lists possible prices,
along with quantity demanded at each price.
Price ( Rs ) Quantity Kgs.)

10 20
8 25
6 30
5 35
4 40
DEMAND SCHEDULE
• The diagrammatic representation of demand schedule is
demand curve.
• Individual demand refers to the demand for a commodity by
an individual consumer. Whereas, market demand, is the sum
of the individual demands of all consumers in the market.
• Demand schedule enables to ascertain the likely changes in
the demand as a result of price change. It also enables to
understand easily and correctly the law of demand and
elasticity of demand. From a practical point of view the market
demand schedule proves of great use to businessmen,
especially to monopolists.
LAW of DEMAND
• Law of says that quantity
demanded varies
inversely with price,
other things constant i.
e. higher the price, the
smaller the quantity
demanded or lower the
price, the larger the
quantity demanded
(Alfred Marshall )
Exception to the law of demand
Other things remaining the same are very important
assumption of the law of demand. These assumption or
exceptions are:
• Scarcity: In times of scarcity, although prices are rising, yet people tend
to buy more of the scarce goods.
• Necessaries of life: Some goods are essential and consumer must
consume them at all costs.
• Ignorance: Some time consumers buy more things at high price out of
ignorance.
• Self Display: Certain things are used for self display as in case of
diamonds, , the higher the price, greater may be their attractiveness.
• Giffens Paradox : Giffens Paradox provides an exception to the law of
demand. It is said when the price of Giffen goods/ inferior goods fall, the
demand for such goods also falls and rise with a rise in the in prices.
Factors affecting the demand
There are many factors which affect the demand for a
good. The main factors are price of substitutes, income,
consumers’ taste, season, population, technology,
distribution of wealth etc.
• Substitution Effect: When the price of a good falls, its
relative price makes consumers more willing to purchase
this good and when the price of a good increases, its
relative price makes consumers less willing to purchase this
good. The changes in the relative prices – the price of one
good compared to the prices of other goods – causes the
substitution effect
Factors affecting the demand
• Income Effect: the income effect is the

change in demand for a good or service
caused by a change in a consumer's
purchasing power resulting from a change
in real income.
Change in Quantity Demanded
• Change in Quantity demanded means the movement
along the same demand. A movement along a demand
curve occurs when own price changes, holding other
factors as constant. This result into:
a. Extension of Demand
Change in Quantity Demanded
b. Contraction of demand:
Types of changes in demand
a. Increase in demand:
Types of changes in demand
b. Decrease in demand:
Elasticity of demand
• Elasticity of demand refers the degree of
responsiveness of quantity demanded to
changes in variables such as price, income,
tastes and preferences, price of substitutes
etc. Elasticity is simply a ratio between a cause
and an effect, always in percentage. The
percentage change in effect is divided by
percentage change in cause
Types of elasticity:
• I. Price elasticity of demand : It is a measure
of change in quantity of a commodity
demanded in response to change in the price
of that commodity.
• Є =Percentage change in quantity
demanded/Percentage change in price
• ii) Income Elasticity of demand: It is the
magnitude of change in quantity demanded in
response to change in the income of the
consumer. It is calculated by the formula.
• Є =Percentage change in quantity
demanded/Percentage change in income
• Cross elasticity of demand : It is a measure of
change in quantity demanded in response to
change in prices of other related commodities.
• Є =Percentage change in quantity demanded
of Y commodity/Percentage change in price
of X commodity
Degrees of elasticity of demand
a) Perfectly elastic
b) Perfectly inelastic
c) Unitary elastic
d )Greater than unitary elastic
e) Less than unitary inelastic
Perfectly elastic demand or infinite elasticity
• Even a very small change in

price leads to a very large
change in quantity
demanded it is said to be
perfectly elastic. A perfectly
elastic demand is one in
which any quantity will be
bought at the prevailing
price, but any rise in price
will cause quantity
demanded to fall to zero.
Perfectly inelastic demand
• If demand
remains
unchanged to
any amount of
change in price,
demand is said to
be perfectly
inelastic.
Unitary elastic demand (Equal to one)
• When numerical
value of elasticity of
demand is equal to
one is known as
unitary elastic
demand. It means
that both price and
quantity demanded
change in the same
proportion.
Greater than unitary elastic, elastic demand
(greater than one)
• Demand is said to be
elastic when the
numerical value of
elasticity is greater
than one or unity. It
means that
percentage change in
quantity demanded is
larger than the
price.
Less than unitary elastic, inelastic demand
(less than one)
• If the numerical value
of elasticity of demand
is less than one or
unity, it is called
inelastic demand. I.e.
quantity demanded is
lesser than the
price.
Measurement of Price elasticity of demand
• There are five methods of measuring price

elasticity of demand. These are:
1. Total expenditure method
2. Percentage method
3. Point method
4. Arc elasticity method
5. Revenue method
Total expenditure method
• This method was
developed by Dr.
Marshall. According to
this method in order to
measure the elasticity of
demand it is essential to
know how much and in
what direction the total
expenditure has changed
as a result of change in
the price of a
commodity.
Percentage method
• Ed =(-)percentage change in quantity
demanded/ percentage change in price
• Ed =(-)(ΔQ / Q)/(ΔP /P)
• Ed = (-)P ΔQ/ Q ΔP
Point elasticity of demand
Point elasticity of demand in case of curve
linear demand curve
Arc Elasticity Method
Revenue Method
• Price elasticity of demand can also be
measured with the help of average and
marginal revenue curves with the following
formula.
• Ep = A/ A-M where A= average revenue,
M=marginal revenue
Factors Influencing Elasticity of Demand
• Nature of the Commodity

• Income of the Consumer
• Price of the Commodity
• Habit of the consumer
• Proportion of the income spent by the
consumer on a Commodity
• Availability of substitutes
• Time period.

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Demand Analysis

Price ( Rs ) Quantity Kgs.)

• Income Effect: the income effect is the

• Even a very small change in

• There are five methods of measuring price

• Nature of the Commodity

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