Subject: Managerial Economics MBA-Sem-I 2017-18 Unit-I

Demand Analysis What is Demand? A product or service is said to have demand when three conditions are satisfied Desire on the part of the buyers to buy Willingness to pay for it Ability to pay the specified price for it

Factors Determining Demand Price of the product (P) Income level of the consumer (I) Tastes and preferences of the consumer (T) Prices of related goods which may be substitutes / complementary (PR) Expectations about the prices in future (EP) Expectations about the incomes in future (EI) Size of the population (SP) Distributions of consumers over different regions(Dc) Advertising efforts (A) Any other factor capable of affecting demand (O)

Demand Function Demand function is a function which describes a relationship between one variable and its determinants. Mathematically, the demand function for a product A can be expressed as follows: Qd = f (P,I,T,PR,EP,EI,SP,DC,A,O)

Law of Demand The Law of Demand states: Other things remaining the same, the amount of quantity demanded rises with every fall in the price and vice versa. Assumptions of Law of Demand Operation of the Law of Demand

Exceptions of Law of Demand Where there is shortage of necessities feared Where the product is such that it confers distiction (Veblen goods) Giffen’s paradox Incase of ignorance of price changes

Changes in Demand Increase in Demand Decrease in Demand Extension and Contraction in Demand Significance of the Law of Demand

Elasticity of Demand The term ‘elasticity’ is defined as the rate of responsiveness in the demand of a commodity for a given change in price or any other determinants of demand.

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

Price Elasticity of Demand Price elasticity= Proportionate change in the qunatity demanded for product X / Proportionate change in the price of X The same is expressed as Edp= (Q2-Q1)/Q1 (P2-P1)/P1 Where Q1 is the quantity demanded before price change, Q2 is quantity demanded after price change, P1 is the price before change and P2 is the price after change.

Income Elasticity of Demand Income elasticity= Proportionate change in the quantity demanded for product X / Proportionate change in income The same is expressed as Edp= (Q2-Q1)/Q1 (I2-I1)/I1 Where, Q1 is the quantity demanded before price change, Q2 is quantity demanded after price change, I1 is the income before change and I2 is the income after change.

Cross Elasticity of Demand Cross elasticity of demand= Proportionate change in the quantity demanded for product X / Proportionate change in the price of Y The same is expressed as Edp= (Q2-Q1)/Q1 (P2Y-P1Y)/P1Y Where, Q1 is the quantity demanded before price change, Q2 is quantity demanded after price change, P1Y is the price before change and P2Y is the price after change in case of product Y. Cross elasticity is always positive for substitutes and negative for complements

Advertising Elasticity of Demand Advertising elasticity= Proportionate change in the quantity demanded for product X / Proportionate change in advertising costs The same is expressed as Edp= (Q2-Q1)/Q1 (A2-A1)/A1 Where, Q1 is the quantity demanded before price change, Q2 is quantity demanded after price change, A1 is the advertisement cost before change and A2 is the advertisement cost after change.

Measurement of Elasticity Perfectly elastic demand Perfectly inelastic demand Relatively elastic demand Relatively inelastic demand Unity elasticity

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