Demand analysis What is demand? -demand is desire backed by the ability to pay & the willingness to pay at a certain time and a certain price

Determinants of demand Price of the commodity Price of related goods Income of the consumer Tastes & preferences of the consumer Expectation of price changes in future Size of population Distribution of income

Demand function Dx={ Px,Pr,Y,T,E,P,Yd} Dx= demand for the commodity Px= price of the commodity Pr=price of related goods Y= income of the consumer T = tastes & preferences E= expectations of future price changes P= composition of population Yd= distribution of income

i.e. Demand is inversely proportional to price Law of demand -other things being equal , the demand for a commodity goes up when the price goes down and goes down when the price goes up. i.e. Demand is inversely proportional to price

Assumptions to the law of demand No change in price of related goods No change in income No change in taste & preferences No expectations of future change in prices

Demand schedule & demand curves Individual demand schedule Market demand schedule

Individual demand schedule Price per unit Quantity demanded 1 2 3 4 5 35 30 25 20 15

Market demand schedule Price per unit Qty. dem. A B C Market demand 10 50 25 100 175 12 45 22 83 150 14 40 20 70 130 17 35 18 57 110 30 15 90

Why does demand curve slope downwards? Law of diminishing marginal utility Income effect Substitution effect Diverse uses of commodity Size of consumer groups

Exceptions to the law of demand Giffen goods Distinct or conspicuous goods ( veblen effect) Ignorance Goods of low value Speculative goods

Change in quantity demanded Movement along the demand curve (extension & contraction of demand) Shift of the demand curve (increase & decrease in demand)

Elasticity of demand The elasticity of demand measures the responsiveness of the quantity demanded of a good , to change in its price, price of other goods and changes in consumers income

Types of elasticity of demand Price elasticity Income elasticity Cross elasticity of demand Advertising elasticity of demand

Price elasticity of demand Degrees of Price Ed Unit elasticity of demand {Ed=1} Perfectly elastic demand {Ed=∞} Perfectly inelastic demand {Ed=0} More than unit elastic {Ed>1} Less than elastic {Ed<1}

Measurement of price elasticity of demand Proportionate method Point method

Factors determining price Ed Nature of commodity Availability of substitutes Goods with multiple uses Postponement of use Income Habits, tastes Proportion of income spent Price level Joint demand

Income elasticity of demand Degrees Positive income elasticity Negative income elasticity Zero income elasticity

Cross elasticity of demand Degrees Positive Negative Zero Advertising elasticity of demand