DEMAND

ANALYSIS
 DEMAND
Quantity demanded-
The amount of a good or service
consumers are willing and able to
purchase during a given period of
time.
 Factors affecting demand/
Determinants of demand
1. The price of good or service
2. The income of consumers
3. The prices of related goods or service
4. The tastes or preference pattern of
consumers
5. The expected price of the product in
future periods
6. The number of consumers in the market
 DEMAND
• Buyer side of market
• Demand is essential for creation,
survival and profitability of firm
• Two types of demand relation

Ordinary
Generalized
demand
demand
Function/demand
functions
Function
 Generalized Demand Functions-
It shows how quantity demanded is
related to product price and five other
functions that affect demand.

Qd= ƒ (P,M,P R,T,P e,N)

Where , ƒ means is a function of or depends on
Qd =quantity demanded of the good or service
P = price of good or service
M = income of consumers
PR = prices of related goods or service
T = tastes or preference pattern of consumers
Pe = expected price of the product in future periods
N = number of consumers in the market
 Ordinary Demand Function-

It shows the relation between quantity

demanded and the price of the product
when all other variables affecting
demand are held constant.

Qd=ƒ (P)
 Types Of Demand
• Individual Demand
• Market Demand
• Autonomous demand
• Derived demand
• Demand for Durable goods
• Demand for Non-Durable goods
• Short term Demand
• Long term Demand
 Types Of Demand
•Individual Demand- A quantity of commodity which
an individual is willing to buy at a particular price at

a specific time.

•Market Demand- The market demand for a

commodity is simply the horizontal summation of
demand curve of all consumers in the market.

•Autonomous demand- The demand for commodity

which arises on its own.

•Derived demand-The demand for commodity which

arises on its parent product.
 Types Of Demand
• Demand for Durable goods-The goods whose
total utility is not exhausted in one single use.
• Demand for Non-Durable goods- The goods
whose total utility is exhausted in one single
use.
• Short term Demand- The demand for goods that
are demanded over a short period.
• Long term Demand- The demand for goods that
are demanded over a long period.
 Law of Demand
If a price of a commodity falls , the quantity
demanded of it will rise, and if price of the
commodity rises, its quantity demanded will
decline when other factors are kept constant.
According to law of demand , there is inverse
relationship between quantity and price when
other factors are constant.
 Law of Demand
• Demand schedule- The Price Quantity
tabular representation of (Rs) demanded
relationship between 12 10
price and quantity
demanded. 10 20
• Demand curve- The 8 30
graphical representation 6 40
of quantity demanded at
4 50
different price levels.
2 60
 Law of Demand
Price

0 10 20 30 40 50 60
Quantity
Changes in Demand Curve
Extension

Contraction
Price

0 10 20 30 40 50 60
Quantity
Changes in Demand Curve
Shift in the demand
curve to the right
Price

0 10 20 30 40 50 60
Quantity
Changes in Demand Curve
Shift in the demand
curve to the left
Price

0 10 20 30 40 50 60
Quantity
 Deviation from the Demand
Curve
1. Veblen effect (Goods with prestige value)-

Founded by Thorstein Veblen-Higher the price

higher the value of commodity.

2. Giffin goods (basic necessity)- founded by Sir

Robert Giffin. Higher the value of product
higher the expenditure on the commodity.
 Deviation from the Demand
Curve
• Band wagon effect-
Depends upon the consumer tastes
and preferences. The trend is seen
irrespective of the pricing.
 Law of Supply
Concept of Supply :
Supply of commodity is the schedule of the
quantities of a commodity that would be offered
for sale at all possible prices during a period of
time.
Supply is the actual quantity which is actually
brought in the market.
 Law of Supply
• When the price of commodity rises , the
quantity supplied of it in the market increases
, when the price of commodity falls , its
quantity demanded decreases , other factor
determining the supply remaining the same.
• The quantity supplied is directly proportional
to the price of the commodity.

Qsx= ƒ(P)
 Law of Supply
• Supply schedule- The Price Quantity
tabular representation of (Rs) Supplied
relationship between 500 100
price and quantity
supplied. 510 150
• supply curve- The 520 200
graphical representation 530 225
of quantity supplied at
540 250
different price levels.
550 275
 Law of Supply
Price

0 100 150 200 225 250 275

Quantity
 Supply
Supply is dependent on six factors-
• Production technology
• Prices of factors- such as wages
• Future price expectations
• Taxes and subsidies
• Number of producers
• Objectives of the firm
• Prices of other products
 Concept of Elasticity
Elasticity of demand is the degree of
responsiveness of quantity demanded
of a good to a change in its price,
consumer’s income and prices of
related goods.
 Types of elasticity
•Price elasticity of demand
- Point Price elasticity of demand
- Arc Price elasticity of demand

•Income elasticity of demand

•Cross price elasticity of demand

 Price elasticity of demand
It indicates the degree of responsiveness of
quantity demanded of a good to the change
in its price remaining other factors constant.

Price elasticity of demand is defined as the ratio

of the percentage change in quantity demanded
of a commodity to a percentage change in price.

ep = Percentage change in quantity demanded

Percentage change in price
 Price elasticity of demand

Point Price elasticity of demand-

The elasticity at a given point on the demand curve

Arc Price elasticity of demand-

The elasticity at a given range on the demand

curve.
 Degree of Elasticity
• Elastic demand -When the percentage change in quantity demanded is greater than the
change in price.

• InElastic demand -When the percentage change in

quantity demanded is lesser than the change in price.

• Unitary Elastic demand -When the percentage change in

quantity demanded is equal to the change in price.

• Perfectly inelastic demand -When the change in price does not affect the quantity
demanded.

• Perfectly elastic demand -When the smallest change in price affect the quantity
demanded either to zero or to the level of infinity.
 Degree of Elasticity

• When elasticity (ep)>1 Elastic

• When elasticity (ep)<1 Inelastic
• When elasticity (ep)=1 Unitary elastic

• When elasticity (ep)=0 Perfectly inelastic

demand

• When elasticity (ep)=∞ Perfectly elastic

demand
 Graphical representation of
Elasticity
• Elastic demand

PX
A

0
Qd

Quantity demanded is proportionately more than the

reduction in pricing.
 Graphical representation of Elasticity

• Inelastic demand-

PX

0 Qd

Quantity demanded is proportionately less than the

reduction in pricing.
 Graphical representation of
Elasticity
• Unitary elastic demand-

PX
A

0
Qd

Quantity demanded is in absolute proportion with reduced

pricing.
Types of demand with respect to
elasticity
o Perfectly inelastic-
px

0 Qd

o Perfectly elastic-
px

0 Qd
 Income Elasticity of Demand
It indicates the degree of responsiveness
of quantity demanded of a good to the
small change in the income of consumer.

Income = Percentage change in purchases of a good

Elasticity Percentage change in income
 Relation between income
elasticity and types of goods
• Goods having income elasticity more than one
and which therefore bulks larger in consumer’s
budget as he becomes richer are called normal
goods or luxuries.

• Goods having income elasticity less than one

and which claims declining proportion of
consumer’s income as he becomes richer are
called inferior goods or necessities.
 Cross Elasticity of Demand
• Degree of responsiveness of demand for
one good in response to the change in
price of another good represents the cross
elasticity of demand of one good for the
other.

Cross = Percentage change in quantity demanded of X

Elasticity Percentage change in price of good Y
 Relation between cross elasticity
and types of goods
• Substitute goods-They are competing goods.
With the rise in price of one good X the quantity
demanded of other good Y increases. Eg- Tea
& Coffee. The Cross elasticity of demand is
positive
• Complementary Goods-With the rise in price of
one good X the quantity demanded of other
good Z decreases. Eg- Bread and Butter. The
Cross elasticity of demand is Negative.