UNIT 2

Demand Analysis
According to Prof. Bober, By demand we mean the various
quantities of a given commodity or service which consumers
would buy in one market in a given period of time at various
prices or at various incomes or at various prices of related
goods.

Demand = Desire + ability to pay + will to spend Ability
to pay: money/purchasing power

Demand depends upon two basic things:-

1. Consumers willingness of purchasing, and
2. Consumers adequacy of purchasing power.
Types Of Demand

Consumers good and Producers goods.
Perishable and Durable goods.
Derived (Cement)and Autonomous Demand(TV,
Furniture).
Industry (Close UP, Colgate) and Company Demand.
Short-run and Long-run Demand. (Price decide quantity,
Quantity decide price)
Joint(Car & Patrol, Pen & Ink) and Composite
Demand(Coal- Rail, Factories, Houses).
Law OF demand

The relation of price to sales is known as the Law of
Demand. It states that higher the price, lower the
demand and vice versa, other things remaining the
same.
The law of demand states that the quantity
demanded and the price of a commodity are
inversely related, other things remaining
constant.

Demand Schedule
Demand Curve
Demand Function
Demand Function
There are two types of demand functions:-

Individual Demand It refers to the quantities of a
commodity demanded at various prices, given
individuals income, prices of related goods and tastes.

Market Demand It refers to the total demand for a
good or service of all the buyers taken together.
Exceptions to the law of demand
In this case, the demand curve does not slope down from
left to right; instead it presents a backward slope from
the top right to down left. This curve is known as an
exceptional demand curve.
Law of demand does not hold good in following cases:-
Some goods are purchased mainly for their snob
appeal. When prices of such goods rise, their snob
appeal increases and they are purchased in larger
quantities.
In the speculative market, a rise in prices is frequently
by larger purchases and a fall in prices by smaller
purchase.

Giffen Goods :- Initially discovered by Robert Giffen. A
Giffen good describes an inferior good that as the price
increases, demand for the product increases.
Veblen Goods:- The amount demanded of these
commodities increase with an increase in their price and
decreases with a decrease in their price. Also known as
a Veblen good.
War.
Depression.
Ignorance Effect(Fair & Lovely Fairer & Lovely)
Speculation(Onion, Sugar etc.)
Necessities(Food, Cloth, Marriages)

Types of Goods
Assumptions of Demand

(A) Individual Demand

Price of the Commodity
Income of the Consumer
Tastes and Preferences
Prices of Related Goods
Advertisement and Sales Propaganda
Consumers Expectation
(B) Market Demand
Tax Rate
Price of the Product
Standard of Living and Spending Habit
Distribution of Income Pattern
The Scale of Preferences
The Growth of Population
Social Customs and Ceremonies
Future Expectation
Inventions and Innovations
Weather Conditions
Demonstration Effect
Circulation of money
Pattern of saving
Availability of Credit
Elasticity Of Demand

The elasticity of demand is the degree of
responsiveness of demand to the change in price.

Elasticity of demand is an important variation on the
concept of demand. Demand can be classified as
elastic, Inelastic or unitary.

Elastic Demand
An elastic demand is one in which the change in
quantity demanded due to a change in price is
large.
For example, automobile rebates have been very
successful in increasing automobile sales by
reducing price. Close substitutes for a product
affect the elasticity of demand.

Inelastic Demand
An inelastic demand is one in which the change
in quantity demanded due to a change in price
is small.
Example:- Consumers will not reduce their food
purchases if food prices rise, although there
may be shifts in the types of food they purchase.
Also, consumers will not greatly change their
driving behavior if gasoline prices rise.
Unitary Elasticity



This means that a one percent change in
quantity occurs for every one percent change in
price.
Price Elasticity
It is a measure of the relationship between a change in the
quantity demanded of a particular good and a change in
its price.

Price Elasticity of Demand = % Change in Quantity
Demanded / % Change in Price

Businesses evaluate price elasticity of demand for various
products to help predict the impact of a pricing on
product sales. Typically, businesses charge higher
prices if demand for the product is price inelastic.
Factors affecting Price Elasticity of
Demand
Nature of the Commodity
Substitutes
Variety of uses
Joint demand
Habit
Time factor
Brand
Distribution of income
Income Elasticity

Income elasticity of demand measures the
responsiveness of the demand for a good to a change in
the income of the people demanding the good.

Income elasticity of demand can be used as an
indicator of industry health, future consumption patterns
and as a guide to firms investment decisions.
Factors affecting income Elasticity
of Demand

Nature of the product:- Commodities are generally
grouped into necessities, comforts and luxuries.
Income level:- Grouping of commodities depends upon
the income level of a country. A car may be a necessity
in a high-income country and a luxury in a poor low-
income country.
Time period:- Income elasticity of demand depends on
the time period. Over the long-run, the consumption
patterns of the people may change with changes in
income with the result that a luxury today may become a
necessity after the lapse of a few years.


Demonstration effect:- The demonstration effect also
plays an important role in changing the tastes,
preferences and choices of the people and hence the
income elasticity of demand for different types of goods.

Frequency:- The frequency of increase in income which
determines income elasticity of demand for goods. If the
frequency is greater, income elasticity will be high
because there will be a general tendency to buy
comforts and luxuries.

Cross Elasticity
In economics, the cross elasticity of demand or cross-
price elasticity of demand measures the
responsiveness of the demand for a good to a change in
the price of another good. It is measured as
the percentage change in demand for the first good that
occurs in response to a percentage change in price of
the second good.
For example:- the two goods, fuel and car
are complements; that is, one is used with the other. In
these cases the cross elasticity of demand will
be negative, as shown by the decrease in demand for
cars when the price for fuel will rise.
Advertising Elasticity

Advertising elasticity of demand is
an elasticity measuring the effect of an increase or
decrease in advertising on a market. Good advertising
will result in a positive shift in demand for a good. AED
is used to measure the effectiveness of this strategy in
increasing demand versus its cost.
Uses of elasticity of demand for
managerial decision Making
The analysis of forces or variables that affect demand
and numerical estimate of these variables are essential
for the firm to make the best operating decision and to
make a plan for its growth.
Some factors or variables that affect the demand are
under the control of a firm.
Such as setting the price of its product.
Expenditures on advertisement.
Quality of its product.


Determination of out put level.
Demand forecasting.
In Dumping:-It occurs when manufacturers
export a product to another country at a price
either below the price charged in its home
market or below its cost of production.
In the determination of prices of joint production.
Determination of Govt. polices.