Chapter Outline

Market demand
Total and Marginal Revenue
Price Elasticity
Income Elasticity
Cross Elasticity
Why to Estimate Demand?
The success or failure of a business depends primarily on its ability to
generate revenues by satisfying the demand of consumers.
Firms that are unable to attract money from the consumers are soon
forced out of the market.
The fundamental objectives of demand theory is to identify and analyze
the basic determinants of consumer needs and wants.
Knowledge provides the background needed to make pricing decisions,
forecast sales and formulating market strategies.
Revenues => Consumer Demand
Individual Demand
Consumer choice can be a difficult task in a modern
economics system.
Thousand of good are for sale, but the purchases of
most consumers are constrained by their income.
In determining what to purchase , individual
customers face a constrained optimization problem.
Given their income (the constraint),they select that
combination of goods and services that maximizes
their personal satisfaction.

Individual Demand Example
What we wish :-
What we use/buy :-
Implicitly, these choices involves a comparison
of the satisfaction associated with having a
good or service and its opportunity cost i.e.,
What must be given in order to obtain it?
Example:


Rs 50000
Rs
50000
In a Market Economy, opportunity costs are reflected by
prices. Thus prices act as signals to guide consumers
decisions.
A high price denotes a significant opportunity cost, while a
lower price indicates that less must be given up.
Price range Rs 50000
Either OR
Price range Rs1000
Law of Demand
DEFINATION: If all the other factors are constant then there is
an inverse relationship between price and quantity demanded
- as price increases, quantity demanded will decrease.

Law of demand can be
explained in terms of
substitution and income
effects resulting from the
price changes.
Substitution effect
Rs 100000 Rs 100000
Rs 100000000 Rs 100000
Income effect
Market Demand
The market demand for a good or service is
sum of all individual demands.
For example :- Consider a market that consists
of only two buyers, Ramesh and Suresh.
The demand curves shows the relationship
between price and quantity of five star
demanded by Ramesh and Suresh.
Determinants of Market Demand
Changes in price result in changes in the quantity demanded
This is shown as movement along the demand curve.
Changes in non-price factors result in changes in demand
This is shown as a shift in the demand curve.


Non-price determinants of demand-result is a
shift in the demand curve.
Tastes and preferences
Example


Apple Pink Laptop Alien Ware

Income
Rs 100000000 Rs 100000
Prices of related products
Future expectations
Celkon

RS 11000
Samsung MotoG

Rs 11100
Number of buyers

The Market Demand Equation:
QD= f(P, I, Po ,T)
P = Price
I = Income
Po = Price of other goods
T = Taste and preferences


QD = B + apP + aiI + aoPo + atT
The Coefficient ap, ai, ao and at indicate the one unit
change in the associated variables. For example, ap is
the coefficient of price, Its interpretation is that,
holding the other three variables constant, quantity
demanded changes by ap for each one unit change in
price. In most cases ap will be negative.
Where B represents the combined influence of all
the other determinants of demand and ap =< 0.
Market Demand versus Firm Demand
Where a firm is the only seller in a market, the relevant
demand curve is the market demand curve. Consequently the
firm will bear the entire impact of changes in incomes,
consumer preferences , and prices of the other goods.
Similarly the pricing policies of the firm will have a significant
impact on purchasers of the firms product.
Another difference between the firm and market demand is
the quantitative impact of changes in tastes, Income, prices of
other goods.
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