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DEMAND ANALYSIS

SCHOOL OF LEGAL STUDIES

DR. KUMARA J N
AY 2021 -2022
 INTRODUCTION TO DEMAND.

• Demand determines the size and pattern of market. All business activities are
mostly demand driven.

• The firm’s production planning, sales and profit targeting, revenue maximization,
pricing policies, inventory management, advertisement and marketing strategy all
are dependent on the demand of its product.
CONCEPT OF DEMAND .

• 1. Desire to acquire a product-willingness to have it,

• 2. Ability to pay for it-purchasing power to buy it,
• 3. Willingness to spend on it,
• 4. Given/particular price, and
• 5. Given/particular time period.

• The presence of first three elements constitute the ‘want’. Thus, it is evident
that without reference to specific price and time period, demand has no
meaning.
DISTINCT CONCEPTS OF DEMAND

• Direct and derived demand:

• Domestic and industrial demand:
• Perishable and durable goods demand:
• New and replacement demand:
• Final and intermediate demand
• Short run and long run demand

LAW OF DEMAND

The law of demand states an inverse relationship between the price of a

commodity and its quantity demanded, if other things remaining constant
(Ceteris Paribus), i.e., at higher price, less quantity is demanded and at lower
price, larger quantity is demanded.
 ASSUMPTIONS

• The money income of consumer should remain the same.

• There should be no change in the scale of preference (taste, habit & fashion) of
the consumer.
• There should be no change in the price of substitute goods.
• There should be no expectation of price changes of the commodity in near future.
• The commodity under question should not be prestigious or of snob appeal
DEMAND SCHEDULE AND DEMAND CURVE

Si. no,. Price Qty. Demand

1 10 2

2 8 4

3 6 6

4 4 8

5 2 10
DETERMINANTS OF DEMAND / DEMAND FUNCTION.

• Dx = Demand for x commodity (say, tea)

• Px = Price of x commodity (of tea)
• Ps = Price of substitute of x commodity (coffee)
• Pc = Price of complementary goods of x commodity
(sugar, milk)
• Yd = Disposable income of the consumer
• T = Taste and Preference of the consumer
• A = Advertisement of x commodity
• W = Wealth of purchaser
• C = Climate
• E = Price expectation of the consumer
• P = Population
• G = Govt. policies pertaining to taxes and subsidies
• U = Other factors (unspecified/unidentified)
CONTI.

➢ Price Effect
➢ Substitution effect
➢ Income Effect
➢ Taste, preference and habits of consumers
➢ Accumulated savings and expected future income
➢ Advertisement
➢ Climate
➢ The number & composition
➢ Government Policy
CHANGES IN QUANTITY DEMANDED VERSUS CHANGES IN DEMAND
REASONS FOR CHANGE ( INCREASE OR DECREASE ) IN DEMAND.
• Changes in real income
• Changes in the Tastes, preferences, habits and fashion of consumer
• Fashions and customs
• Change In the level and distribution of wealth
• Change in substitutes
• Advertisement and Publicity persuasion
• Changes in the value of money
• Changes in the level of Taxation
CONTI.

• Change in demand position of complementary goods

Eg: shoe and shoe laces
• Change in population
Eg: population and sex ratio determines the demand for certain products
• Increase in Import duties
• Future expectations of price changes
• Changes in the price of the commodity
• Change in the savings
EXCEPTIONS TO THE LAW OF DEMAND
• Giffen Good :- Exam:- cheaper varieties like bajra, low priced rice, low priced bread,
cheaper vegetable like potatoes
• Exam:- The Irish Potato Famine (1845 to 1849) is a classic example of the Giffen goods concept. Potato is a staple in the Irish diet. During
the potato famine, when the price of potatoes increased, people spent less on luxury foods such as meat and bought more potatoes to stick to
their diet.

• Exam:- He observed that when the price of bread increased, then the low-paid British wage earners bought more of bread and not less. Since
the wage earners diet was mainly bread, with the increase in price they were forced to cut down their consumption of meat and other
expensive food items

• Veblen Good :- Like a high priced gold necklace, A cell phone model with high cost
has more demand in the market.
• The expectation of price change
• Luxury good
• Necessary good
NETWORK EXTERNALITIES IN MARKET DEMAND

• In real world their might be interdependence of demand of one person with

other individuals. This situation is called “network externalities”
What is externality ?
• a consequence of an industrial or commercial activity which affects other
parties without this being reflected in market prices, such as the pollination of
surrounding crops by bees kept for honey
Two such network externalities are
• 1. Bandwagon effect
• 2. The snob effect: Veblen effect
 CONTI.

1. Bandwagon effect:
• Consumers demand for certain products seem to be determined not by their
usefulness but by bandwagon or demonstration effect.
• Demand in such cases are affected by trend setters like film stars, group leaders,
neighbors etc.
• This shifts the demand curve towards right
2. The Snob effect :Veblen Effect
• Desire of a rich person to buy something very exclusive is called snob or Veblen
effect.eg : exclusive expensive paintings etc.
• Sonob effect is also called Veblen effect
ELASTICITY OF DEMAND- INTRODUCTION

1. When other things remaining the same, percentage changes in demand

particular commodity due to certain percentage change in its price is known as
elasticity of demand.
2. Prof. Alfred Marshal, “The elasticity (or Responsiveness) of demand in a
market is large or small according to the amount demanded increases much or
little for a given rise in price.”
CONTI.

1. Price elasticity of demand = Percentage change in quantity demanded/

Percentage change in price
2. ΔQ/ΔP / P/Q
3. For example, suppose that a 10-percent increase in the price of an ice-cream
cone causes the amount of ice cream you buy to fall by 20 percent.
4. In this example, the elasticity is 2, reflecting that the change in the quantity
demanded is proportionately twice as large as the change in the price.
TYPES OF PRICE ELASTICITY OF DEMAND.

1. Perfectly Elastic - E=Infinity

2. Perfectly inelastic - E = 0
3. Highly Elastic Demand - E>1
4. Highly inelastic - E<1
5. Unitary Elastic Demand - E =1
PERFECTLY ELASTIC DEMAND
• It is on imaginary situation
• 0.25 or 0.10 % Change
• In price 10 % or 15 %
Change in demand.
• 10/0.25= 40
Price Qty. Deamnd
10 10
10 20
10 30
10 40
• Examples:- luxury products such as jewels, gold, and high-end cars.
PERFECTLY INELASTIC DEMAND

• 10% OR 15 %Change In price

• 0.25 % OR 0.10 % Change in demand.
• 0.25/10=0.025

Price Qty. Demand

10 10
20 10
30 10
40 10
• Examples:- lifesaving drug, Emergency services, drugs and essential food
item
HIGHLY /RELATIVE ELASTIC DEMAND

• 5% Change In price
• 20% Change in demand
• 75%/50%=1.5

Price Qty. Demand

100 100
150 25
• For example, air-travel for vacationers is very sensitive to price.
HIGHLY/ RELATIVELY INELASTIC

• 20 % Change In price
• 5 % Change in demand
• 20%/50%=0.4

Price Qty. Demand

100 100
150
• Example:- 80goods like salt and sugar, Goods which have no close substitutes
Necessary
like electricity and eggs. Life saving drugs, Addictive items like cigarettes, drugs etc.
Low priced goods, consumption of which doesn’t affect the budget of individuals like
pencils, combs, needles, matchboxes etc
UNITARY ELASTIC DEMAND

• 10% Change In price

• 10% Change in demand
• 10%/10%=1
Price Qty. Demand
1 30
10 20
1. Example: The price of digital cameras increases by 10%, the quantity of digital
cameras demanded decreases by 10%.
2. Mobile phones
3. Home appliances
RULE OF THUMB FOR ELASTICITY

1. The flatter is the demand curve that passes through a given point, the greater
is the price elasticity of demand.

2. The steeper is the demand curve that passes through a given point, the
smaller is the price elasticity of demand.
HOW TO CALCULATE ELASTICITY ?
1. PERCENTAGE METHOD
Price Qty. Demand
5 10
3 30

Price Qty.
Demand
3 30
5 10
Answer = -1
2. POINT METHOD
1.
CONTI.
1.
FACTORS AFFECTING ELASTICITY OF DEMAND

• Nature of commodity
• Commodities having several uses
• Availability of substitute goods-
• Consumer’s income
• . Proportion of expenditure

• Durability of the commodity

• Influence of habit and customs-
• Complementary goods-
INCOME ELASTICITY OF DEMAND .

1. Other things remaining the same due to certain percentage change in

consumer’s income if there is certain percentage change in demand it is known
as income elasticity of demand. It means the ratio of percentage change in
quantity demanded due to percentage change in income of consumers.

2. Or E = change in Q/Change in income* Y1+Y2/Q1+Q2 (Arc Method)

TYPES/ DEGREE OF INCOME ELASTICITY

1. Unitary income elasticity Em = 1

When percentage in demand is equal to percentage change in income.
2. Income elasticity greater than unity Em >1
When change in demand is more responsive to change In income.
3. Income elasticity less than unity Em<1
When change in demand is more sensitive the change in income.
4. Zero income elasticity Em=0
When the change in income does not affect the demand of a commodity.
CROSS ELASTICITY OF DEMAND

1.
DEMAND FORECASTING

• Demand Forecasting can be done at any of the levels namely

1. Micro, Macro and industry level.
2. It helps in production planning, sales forecasting, control of business and
inventory control
3. Further in growth and long term industry programmes, stability, economic
planning and policy making
4. Forecasting can be done for short term or for long term
5. Short term refers to less than an year
SHORT TERM FORECASTING

• Short term forecasting is concerned with optimum utilization of resources

• Short term forecasting is helpful in :
● Evolving a sales policy
● Determining price policy ( to clear off stocks in off season and take
advantage of peak season)
● Evolving a purchase policy
● Fixation of sales target
● Determining short term sales target
LONG TERM FORECASTING

1. Long term forecast is for period of 3-5 years where production capacity
may be expanded or reduced
Long term forecasting helps in :
2. Business Planning
3. Manpower planning
4. Long term financial planning
GENERAL APPROACH TO DEMAND FORECASTING

1. Specification of objectives
2. Identification of demand determinants
Demand for consumer durables is different from non durables and capital goods
and hence demand functions are also different
3 Choice of method of forecasting
Based on availability of data a suitable method of forecasting is used
Generally regression analysis is used for long term forecasting
4. interpretation
IMPORTANCE OF FORECASTING

1. Importance for the producers.

2. Importance for policy makers and planners.
3. Importance for estimating financial requirements.
4. Utility for determination of sales target & incentive.
5. Importance for regular supply of labour and raw material is made possible by
demand forecasting.
6. Production planning is possible with the help of demand forecasting.
7. Use for other groups of the society researchers, social workers and other who
have a futuristic approach.
REFERENCES

1. Robert Pindyck, Daniel Rubinfeld and Prem Mehta,: “ Microeconomics”7th Edition, Pearson
Education.
2. William Boyes and Michael Melvin: “Textbook of Economics”; 6th e, Biztantra publications.
3. Dominick Salvatore: “Managerial Economics”, 7e, Oxford University Press.
4. Robert S. Pindyck, Daniel L Rubinfeld: “Microeconomics” 6th Edition; Pearson Education
5. John Sloman & Mark Sutcliffe: “Economics for Business”; 3e, Pearson Education,
6. Gregory N Mankiw: “Economics – Principles and Applications”; Cengage Learning
7. N Gregory Mankiw: “Principles of Economics”; 7th e. 2 Cengage Learning
E SOURCES

1. https://www.businesstopia.net/economics/micro/price-elasticity-demand
2. https://www.youtube.com/watch?v=4oj_lnj6pXA
3. https://www.tutor2u.net/economics/reference/price-elasticity-of-supply
4. https://www.tutor2u.net/economics/reference/theory-of-demand