Managerial Economics

Demand Analysis

Importance of Demand Analysis for the Managers

Provides insights necessary to effectively manipulate demand Helps forecast sales and revenues

Veena Pailwar Professor IMT, Nagpur

Demand Schedule
Demand: A Definition Quantity of a good or service a buyer (or buyers) would buy for a given price Price of Orange (Rs/ Unit) 10 Quantities Demanded (Units Per time period) 50 60 70 80 90

Demand Relationship
Demand Schedule (Table) Demand Curve Demand Function

9 8 7 6

Individual Demand Curve

The highest quantity of a good at each price the consumer is Willing to Buy/ demand, ceteris paribus (all other factors other than the price remaining the same). Law of Demand
Q/time unit

Demand Function Q = f( P, Ps, Pc, I, W, E)

+ + + + P: Price of the good Ps: Price of substitute good Pc: Price of Complementary good I : Income W: Wealth E:Expectations Demand function includes all the important variables that influence quantity demanded

Rs/Q

Unwilling to Buy

Willing to Buy

The demand curve is downward sloping.

 The Market Demand Curve is the horizontal 8 sum of the individual demand curves.
Price of Orange (Rs/ Unit)
10 9 8 7 6

Ram

Radha

Market

A Change in Quantity Demanded

Price A to B: Increase in quantity demanded A B

70

40

110

Quantities Quantities Quantities Demanded Demanded Demanded Ram Radha Market

50 60 70 80 90 20 30 40 50 60 70 90 110 130 150

10 6

D0 4 7 Quantity

Assumption: Factors other than the price of the commodity are constant

Consumer Surplus

A Change in Demand
Price D0 to D1: Increase in Demand

The value consumers get from a good but do not have to pay for. I got a great deal!
That company offers a lot of bang for the buck! Dell provides good value. Total value greatly exceeds total amount paid. Consumer surplus is large.

I got a lousy deal!

That car dealer drives a hard bargain! I almost decided not to buy it! They tried to squeeze the very last cent from me! Total amount paid is close to total value. Consumer surplus is low.

6 D1 D0 7 13 Quantity

Assumption: Factors other than the price of the commodity are variable

Consumer Surplus The Discrete Case

Price 10 8 6 4 2 D 1 2 3 4 5 Quantity Consumer Surplus: The difference between the highest price a consumer is willing to pay and the actual price the consumer pays (Area shown by green Colour)

Consumer Surplus The Continuous Case

Price Rs 10 8
Consumer Surplus

Value of 4 units

6 4 2 D 1 2 3 4 5 Quantity Total Cost of 4 units