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    Eco ppt

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    Manav Mehar

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    Eco ppt

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    Manav Mehar
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    Eco ppt

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    Manav Mehar

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    © All Rights Reserved
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    of 35

    DEMAND ANALYSIS

    LEARNING OBJECTIVES
     Understand what is effective demand.
     Understand the law of demand.
     Trace the determinants of markets demand for
    different products.
     Formulate demand functions for the market’s
    products.
     Examine the possible causes of increase and shifts
    in demand for the products.
    WHAT IS DEMAND?
     Willingness and ability to buy a
    commodity X at a specific point of time
    is defined as Demand of that
    commodity.
    What is Effective Demand?

    A buyer’s desire for a product in the market backed


    by the ability and willing to pay for its price.

    Definition of Demand - The demand for a product


    refers to the amount of it which will be bought per
    unit of time at a particular price.
    DETERMINANTS OF DEMAND
     Factors Influencing Individual Demand
    • Price
    • Income
    • Tastes, habits and preferences
    • People with different tastes and habits have different
    preferences for different goods
    • Relative prices of other goods – substitute and
    complementary products
    • Consumer’s expectation
    • Advertisement effect
    FACTORS INFLUENCING
    MARKET DEMAND
     Price of the product
     Distribution of income and wealth in the community
     Community’s common habits and scale of preferences
     General standards of living and spending habits of the people
     Number of buyers in the market and the growth of population
     Age structure and sex ratio of the population
     Future expectations
     Level of taxation and tax structure
     Inventions and innovations
     Fashions
     Climate or weather conditions
     Customs
     Advertisement and sales propaganda
    DEMAND FUNCTION
     Demand function is mathematical
    representation of relationship between
    demand of a commodity X and all its
    determinants.

    Dx = f (Px, Ps, Pc, Yd, T, A, N, u)


    DEMAND FUNCTION
    Mathematical of expression of functional relationship between
    determinants (such as price, income, etc., determining variables) and the
    amount of demand of a given product.
    In composing the demand function for a product, therefore, one should
    identify and enlist the most important factors (key variables) which affect
    its demand. To suggest a few, such as:
    • The ‘own price’ of the product itself (P)
    • The price of the substitute and complementary goods (Ps or Pc)
    • The level of disposable income (Yd) with the buyers (i.e., income left after
    direct taxes)
    • Change in the buyers’ taste and preferences (T)
    • The advertisement effect measured through the level of advertising
    expenditure (A)
    • Changes in population number or the number of the buyers (N).

    Using the symbolic notations, we may express the demand function, as


    follows:
    Dx = f (Px, Ps, Pc, Yd, T, A, N, u)
    THE ELEMENTARY THEORY OF DEMAND

    OR LAW OF DEMAND

     Given other things constant (ceteris


    paribus), theory of demand establishes
    inverse relationship between quantity
    demanded of a commodity X and its
    prices.
     In simple word, it explains that an
    increase in price of a commodity leads
    to decrease in its quantity demanded
    and vice versa.
    Qdx = f (Px)
    ASSUMPTIONS UNDERLYING
    THE LAW OF DEMAND
     No change in consumer’s income
     No change in consumer’s preferences
     No change in the fashion
     No change in the price of related goods
     No expectation of future price changes or shortages
     No change in size, age composition and sex ratio of the population
     No change in the range of goods available to the consumers
     No change in the distribution of income and wealth of the
    community
     No change in government policy
     No change in weather conditions
    DEMAND SCHEDULE
     Demand schedule is graphical
    representation of various levels of quantity
    demanded of a commodity corresponding
    to various levels of its price.
    Demand Schedule of Commodity X
    Price of Quantity demanded
    Commodity X of Commodity X

    5 2

    4 4

    3 6

    2 8

    1 10
    DEMAND CURVE

     Demand curve refers to graphical


    representation of various levels of
    quantity demanded at various levels of
    prices.
    Demand Curve
    6

    5
    Price of Com. X

    0
    2 4 6 8 10
    Quantity Demanded of Com. X
    WHY DEMAND CURVE IS
    DOWNWARD SLOPED?
     Consumer’s Psychological pattern
     Income effect
     Substitution effect

    Utility Analysis will explain this in more


    objective manner.
    Example: Raj Kumar & Co., the cabinet-maker has estimated the
    following demand function for the steel cabinets produced by them:

    Qd = 1,500 - 0.03P + 0.09AE


    Where,
    Qd = quantity demanded of steel cabinets
    P= average price of the steel cabinet
    AE = the firm’s advertising expenditure.

    All data are on a quarterly basis. The firm currently spends Rs.10,000
    per quarter on advertising.
    State the demand curve equation for the price-demand relationship. Give
    graphical representation assuming price variable values to be Rs.
    10,000, Rs. 9,000, Rs. 8,000, Rs. 7,000, and Rs. 6,000.
    Solution:
    Substituting the value for AE variable in the above equation, we have
    simplified price-demand equation as follows:

    Qd = 1,500 + 900 – 0.03P

    Thus:
    P1 = Rs. 10, 000 Q1 = 2,400 – 0.03 × 10,000 = 2,400 – 300 = 2,100
    P2 = Rs. 9, 000 Q2 = 2,400 – 0.03 × 9,000 = 2,400 – 270 = 2,130
    P3 = Rs. 8, 000 Q3 = 2,400 – 0.03 × 8,000 = 2,400 – 240 = 2,160
    P4 = Rs. 7, 000 Q4 = 2,400 – 0.03 × 7,000 = 2,400 – 210 = 2,190
    P5 = Rs. 6, 000 Q5 = 2,400 – 0.03 × 6,000 = 2,400 – 180 = 2,200.
    [Plot price and quantity values on a graph]
    INDIVIDUAL AND MARKET
    DEMAND CURVES
     Demand curve of a single consumer is
    denoted as individual demand curve.
     Market demand curve is horizontal
    summation of individual demand curves
    at specific point of time.
     Market demand curve represent the
    market demand pattern of specific
    commodity.
    INDIVIDUAL DEMAND SCHEDULE

     A tabular statement of price/quantity relationship is called


    the demand schedule.
    Individual Demand Schedule
    INDIVIDUAL DEMAND CURVE
    MARKET DEMAND SCHEDULE
    (HYPOTHETICAL DATA)
    MARKET DEMAND CURVE
    MOVEMENT ALONG THE DEMAND
    CURVE:
    CONTRACTION AND EXTENSION OF
    DEMAND
     Decrease in quantity demanded of any
    commodity due to increase in its price is
    called as contraction of demand.
     Increase in quantity demanded of any
    commodity due to decrease in its price
    refers to extension of demand.
    EXTENSION AND CONTRACTION
    OF DEMAND
     The terms ‘extension’ and ‘contraction’ are
    technically used in stating the law of demand.

    Quantity Demanded
    SHIFTS IN DEMAND: INCREASE AND
    DECREASE IN DEMAND
     Shift in demand curve results increase or
    decrease in demand of the commodity.
     Decrease in quantity demanded of any
    commodity due to change in factors other
    than price refers to decrease in demand.
    INCREASE AND DECREASE IN DEMAND

     An ‘increase’ in demand signifies either that more will be


    demanded at a given price or same will be demanded at a
    higher price. An increase in demand really means that
    more is now demanded than before at each and every
    price.
     Likewise, a ‘decrease’ in demand signifies either that less
    will be demanded at a given price or the same quantity
    will be demanded at the lower price. Decrease in demand
    really means that less is now demanded than before at
    each and every rise in price. Shifting the demand curves
    shows the increase and decrease in demand.
    INCREASE IN DEMAND (A) AND DECREASE IN
    DEMAND (B)
    REASONS FOR CHANGE (INCREASE
    OR DECREASE) IN DEMAND
     Changes in income
     Changes in taste, habits and preference
     Change in fashions and customs
     Change in the distribution of wealth
     Change in substitutes
     Change in demand of position complementary goods
     Change in population
     Advertisement and publicity persuasion
     Change in the level of taxation
     Expectation of future changes in prices
    INDUSTRY DEMAND AND FIRM
    OR COMPANY DEMAND

    Industry and Company Demand


    EXCEPTIONAL CASES
     Giffen goods
     Articles of snob appeal
     Speculation
     Consumer’s psychological bias or Illusion
    EXCEPTIONS DEMAND CURVE: UPWARD-
    SLOPING DEMAND CURVE
    Bandwagon Effects

    Demonstration effect of consumption by the others lead to the


    bandwagon effects of change in demand for a product in the market.
    Advertising and fashion play a significant role in this regard .
    BANDWAGON
    EFFECT: THE
    DEMAND CURVE
    SHIFTS TO THE
    RIGHT

    Veblen Effect
    Snob appeal of luxury goods leads to the Veblen effect
    of demand through conspicuous consumption.
    THE MARKET DEMAND CURVE
    FOR VEBLEN EFFECT PRODUCT
    IMPORTANCE DEMAND
    THEORY IN BUSINESS
    MANAGEMENT
     Sales Forecasting
     Marketing Decisions
     Production Decisions
     Financial Decisions
    Thank you

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