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Market Demand Analysis

Demand for a product implies


Desire to acquire it
Willingness to pay for it and
Ability to pay for it.
All the above three aspects should be satisfied to
establish demand.
Example: A miser may have a desire to acquire a luxury
car and he also has the ability to pay for it. However, his
does not have the willingness to pay for it
A poor man may have a desire to acquire a car. He also
has the willingness to pay for it. But he has no ability to
pay for it. Thus, in these two cases there is no demand.

Factors Influencing Demand


Dx = D(Px, Py, Pz, B, W, A, E, T, U)
Where,
DX is the demand for item x
Px is the price for item x.
Py is the price of the substitute
Pz is the price of its complements
B is the income of the purchaser
W is the wealth of the purchaser
A is the advertisement for the product
E the price expectation of the user
T is the taste or preferences of user
U all other factors.

Factors Influencing Demand


Demand for a product is inversely related to its
price. An increase in price, results in decrease in
demand.
As the income of the consumer increases,
people buy more of normal goods.
If Y is the substitute of X, then if the price of Y
goes up, then the demand for X also tends to
increase.
If Z is the complement of X, then as the price of
Z falls, the demand for Z goes up and therefore,
the demand for X tends to go up.

Demand Schedule and Demand


Curve
Demand Schedule
Px (in Rs.)

Dx(in Units)

9.5

2.

9.0

3.

8.5

4.

8.0

5.

7.5

Demand Schedule and Demand


Curve
Demand Curve
As price rises, demand falls and as
price falls, the demand extends.

Shifts in Demand Curve


Shifts in Demand Curve
Increase in the quantity demanded at the
same price.

Shifts in Demand Curve


Shifts in Demand Curve
Decrease in the quantity demanded at the
same price.

Shifts in Demand Curve


Shifts in Demand Curve
Decrease in the quantity demanded when
the price increases.

Types of Demand
Business cyclerefers to fluctuations in
economic output in a country and has four
phases - recession, depression, recovery,
and expansion.
In the company sense, business cycle
referstostages in thelifespan of asingle
company. Phases in a company's life may
include: birth (or start up), growth,
maturity, decline, and demise.

Types of Demand
Different types of Demand are:
Direct Demand: Refers to demand for goods
meant for final consumption. Example demand
for consumers goods like food items, garments
and houses. Direct demand is not contingent
upon the demand for other products.
Derived Demand: Refers to demand for goods
which are needed for further production.
Example: Industrial raw materials, machine
tools and equipments.

Types of Demand
Domestic Demand: Refers to demand
for goods meant for domestic
purposes.
Industrial demand: Refers to demand
for goods meant for industrial
purposes.
Example: Refrigerator and coal has
both domestic and industrial demand.

Types of Demand
Autonomous Demand: Refers to demand
not derived or induced. All direct demands
may be loosely called autonomous.
Induced demand: Refers to demand for a
product that is tied to the purchase of
some parent product.
Example: Demand for cement is induced by
the demand for housing. The demand for
sugar may be induced by the purchase of
tea.

Types of Demand
Perishable Demand: Refers to
demand for goods which are nondurable or can be used only once.
Example bread or cement
Durable Demand: Refers to demand
for a product that can be used
repeatedly. For example, shirt, car or
a machine which can be used
repeatedly.

Types of Demand
Individual and Market Demand:
Refers to demand for goods from the
individuals and by the aggregate of
individuals (i.e., the market).
Price of
X (Rs.)

Market
(Total)

10

10

16

Law of Demand
Law of Demand: According to the law of
demand, there is inverse relationship
between price and quantity demanded, other
things remaining the same.
Consider
Price (Rs.)
Quantity
the
Demand Schedule
Demande
d

12

10

10

20

30

40

50

60

Exceptions to Law of Demand


Giffen Goods

Giffen goods are some varieties of inferior goods.


Sir Robert Giffen or Ireland first observed that people used to
spend more their income on inferior goods like potato and
less of their income on meat. But potatoes constitute their
staple food. When the price of potato increased, after
purchasing potato they did not have enough money to buy
meat.
So the rise in price of potato compelled people to buy more
potato and thus raised the demand for potato. This is against
the law of demand. This is also known as Giffen paradox.
The increase in demand is due to the income effect of the
higher price outweighing the substitution effect.

Exceptions to Law of Demand


Conspicuous necessities
Certain things become the necessities of modern life. So
we have to purchase them despite their high price.
The demand for AC, T.V. sets, automobiles and
refrigerators etc. has not decreased in spite of the
increase in their price. These things have become the
symbol of status. So they are purchased despite their
rising price.

Change in fashion:
A change in fashion and tastes affects the market for a
commodity. When a broad toe shoe replaces a narrow toe,
no amount of reduction in the price of the latter is
sufficient to clear the stocks.

Exceptions to Law of Demand


Future changes in prices: Households
act as speculators. When the prices are
rising households tend to purchase large
quantities of the commodity out of the
apprehension that prices may still go up.
Ignorance: A consumers ignorance is
another factor that at times induces him
to purchase more of the commodity at a
higher price.

Law of Diminishing Marginal


Utility
Law of Eventual Diminishing Marginal Utility:
After sufficient units of a commodity have been
consumed, a consumer experiences diminishing
marginal utility for the additional units consumed.
i.e., additional utility from each additional unit of a
commodity goes on diminishing.
As the number of units available increases, the
needs to which these units may be put become
less and less important and therefore yield less
and less utility.
Utility means happiness or satisfaction.

Law of Diminishing Marginal


Utility
Example: Let a consumer has Rs.1300.00.
He spends Rs.700.00 on housing
He spends Rs.100.00 on education
He spends Rs.500.00 on entertainment
Instead if he spends in the following manner
He spends Rs.400.00 on housing
He spends Rs.600.00 on education
He spends Rs.300.00 on entertainment
By this, readjustment, he will have higher level of
satisfaction (or utility), compared to the loss of total
utility on housing and entertainment.

Price Elasticity
Price
elasticity of demand is the measure of degree of
responsiveness of the quantity demanded with respect to a
change in the own price of the commodity.
It indicates the extent to which demand changes when price of
the commodity changes.
It is given as:
Where is the incremental change in Q and P.
It can also be written as:
Where, is the marginal demand and is the average demand

Price Elasticity
Let

the price of the good changes


from $5 to $10 and the quantity
demanded changes from 100 units to
60 units.
Thus, % change in price is 100% and
% change in quantity demanded is
-40%.
The price elasticity of demand is =
-0.4

Price Elasticity

Example of Price Elasticity of


Demand
Consider the demand function, Q =
10 0.5P.
Determine the elasticity at P = 10.

Example of Price Elasticity of


Demand

Formula:
= -0.5
When P = 10, Q = 10-0.5(10) = 5
Therefore,

Interpretation of elasticity
coefficient
e = -2 indicates that a 1% change in
the price would lead to 2% change in
quantity demanded.
e= 1 indicates that a 1% change in the
price would lead to 1% change in
quantity demanded.
E =-0.08 indicates that a 1% change in
the price would lead to less than 1%
(0.8%)change in quantity demanded.

Interpretation of elasticity
coefficient
Consider the demand curve in a
hyperbolic form.
or
Where, a and n are constants.
Estimate the price elasticity of
demand.

Interpretation of elasticity
coefficient

Numerical Question
Consider the relationship between quantity demanded
for electric hair-dryer and the price of it.
Q = 30,000 - 1,000P
Where, Q is the sales of the hair-dryer and P is its
price.
How many hair-dryers could be sold at Rs.22.50 each?
What price should be charged to sell 12,000 hairdryers?
At what price would hair-dryer sales be zero
Calculate point price elasticity of demand at a price of
Rs.20.

Cross (Price) Elasticity of


Demand
Cross
(Price) elasticity of demand is given as:

If > 0 then I and j are substitute goods.


If Eij = 0 if and only if i and j are independent
goods (Not related)
Eij < 0 then i and j are complementary
goods. An increase in price of sugar reduces
the quantity of tea demanded.

Elasticity of Demand Factors

Nature of the commodity: The demand for necessities is inelastic. But the demand for
luxuries is elastic
Extent of use: A commodity having a variety of uses has a comparatively elastic demand.
Range of substitutes: The commodity which has more number of substitutes has relatively
elastic demand.
Income level: People with high incomes are less affected by price changes than people with
low incomes.
Proportion of income spent on the commodity: When a small part of income is spent on the
commodity, the demand is inelastic
Urgency of demand / postponement of purchase: The demand for certain commodities
(such as medicines) are highly inelastic because their purchase cannot be postponed
Durability of a commodity: If the commodity is durable then is used it for a long period.
Therefore elasticity of demand is high.
Purchase frequency of a product/ recurrence of demand: The demand for frequently
purchased goods are highly elastic than rarely purchased goods.
Time: In the short run demand will be less elastic but in the long run the demand for
commodities are more elastic.

Income Elasticity of Demand


Types of Income Elasticity


When Ei = 0, the increase in income of the individual
does not make any difference in the demand for that
commodity.
When Ei<0, the increase in the income of consumers
leads to less purchase of those goods
When Ei = 1, the change in income leads to the same
percentage change in the demand for the good.
When Ei>1, the change in income increases the demand
for that commodity more than the change in the income.
When Ei<1, the change in income increases the demand
for the commodity but at a lesser percentage than the
change in the income.

Income Elasticity of Demand


Normal goods exhibit positive income elasticity of demand.
It means as the income increases, the consumer demands
more goods at the given price level.
Also the quantity of goods demanded increases with
income.
Inferior goods exhibit negative income elasticity of demand.
It means the quantity demanded for inferior goods
decreases as income increases.
Example the demand for inter-city bus service decreases
with rise in income levels.

Income Elasticity of Demand