and the willingness and ability to pay a certain price Demand Analysis Demand in Economics is the desire to possess something and the willingness and ability to pay a certain price in order to possess it. Chapter Three Managerial Economics

A complete statement of Demand must state Demand Analysis A complete statement of Demand must state ► market dimension – whose demand ► price dimension – at what price ► time dimension – for how long. Gopal demands 30 litres of milk, at Rs 20/- per litre, per month. Chapter Three Managerial Economics

Determinants of Demand The price of commodity X. Demand Analysis Determinants of Demand The price of commodity X. - higher the price less of it is demanded. - lower the price more of it is demanded. Chapter Three Managerial Economics

Determinants of Demand The price of substitutes of X. Demand Analysis Determinants of Demand The price of substitutes of X. while buying commodity X, consumer considers price of substitutes for X available in the market. Chapter Three Managerial Economics

Determinants of Demand Income of the consumer. Demand Analysis Determinants of Demand Income of the consumer. - disposable income of a consumer has direct influence on demand for X that consumer wants to buy. Chapter Three Managerial Economics

Determinants of Demand Utility of the commodity. Demand Analysis Determinants of Demand Utility of the commodity. - demand arises because product X has utility for the consumer, Chapter Three Managerial Economics

Determinants of Demand Quality of the commodity. Demand Analysis Determinants of Demand Quality of the commodity. - better the quality of product X more will be the demand for it. Chapter Three Managerial Economics

Determinants of Demand Taste & Fashion. Demand Analysis Determinants of Demand Taste & Fashion. - if product X is favored over other products more of it will be demanded in the market. Chapter Three Managerial Economics

Determinants of Demand Size of population Demand Analysis Determinants of Demand Size of population - more the number of buyers for product X more of it will be demanded in the market. Chapter Three Managerial Economics

Determinants of Demand Expectations about future prices. Demand Analysis Determinants of Demand Expectations about future prices. - if price of product X is expected to rise in near future, more of it will be demanded in the market. ( see deals on the Stock Exchange) Chapter Three Managerial Economics

Determinants of Demand Climatic conditions Demand Analysis Determinants of Demand Climatic conditions - Demand for product X is influenced by changes in seasons. Chapter Three Managerial Economics

Determinants of Demand Psychology of the consumers Demand Analysis Determinants of Demand Psychology of the consumers - if more and more are purchasing product X, others are influenced to buy more of X – a band wagon effect Chapter Three Managerial Economics

Determinants of Demand Psychology of the consumers Demand Analysis Determinants of Demand Psychology of the consumers - if no one or a few are purchasing product X, others are influenced to buy more of X to feel different– a snob effect Chapter Three Managerial Economics

Determinants of Demand Advertisements and salesmanship. Demand Analysis Determinants of Demand Advertisements and salesmanship. - in modern markets demand for product X, can be created through advertisements and sales promotion Chapter Three Managerial Economics

Demand Analysis Demand Function We have seen that demand depends on or is a function of so many variables. Hence this function is expressed as Qxd = f(Px,P1, Yd, U,Q,T,A . . . . etc) As this is a very complicated relationship, we assume that all the other variables are constant, and study relation between price of X & quantity demanded; expressed as under. Qxd = f(Px) where P1 = P0; Yd = Yd0; U = U0; etc. Chapter Three Managerial Economics

Demand Analysis The Law of Demand Other things remaining the same , quantity demanded of a commodity is inversely related to its price. when the price rises the quantity demanded falls when the price falls the quantity demanded rises Chapter Three Managerial Economics

The Law of Demand - demand curve. Demand Analysis The Law of Demand - demand curve. Chapter Three Managerial Economics

Expectations of further changes in price and speculation Demand Analysis The Law of Demand exceptions- (1) Expectations of further changes in price and speculation The law does not hold good when people expect prices to rise further. Even though prices have risen today, consumers buy more in anticipation of further price increases. A typical observation on Stock Exchanges. Chapter Three Managerial Economics

exceptions- (2) Giffen’s paradox The Law of Demand Demand Analysis The Law of Demand exceptions- (2) Giffen’s paradox Incase of low priced essentials like bread, when price falls consumers use money saved, increase in their real income, to buy other products, instead of buying more bread. Chapter Three Managerial Economics

exceptions- (3) Qualitative changes The Law of Demand Demand Analysis The Law of Demand exceptions- (3) Qualitative changes if the price is taken as yardstick for quality of commodity, mere rise in price may increase demand for it. Chapter Three Managerial Economics

exceptions- (4) Price illusions The Law of Demand Demand Analysis The Law of Demand exceptions- (4) Price illusions consumer in the modern world is governed more by the price illusions that higher the price, better the product. Chapter Three Managerial Economics

Display of standard of living Demand Analysis The Law of Demand exceptions- (5) Display of standard of living consumer is governed by the demonstration effect. expensive jewellery, cars are purchased not because they are needed but to show consumer’s wealth. Chapter Three Managerial Economics

Movement along the demand curve vs. shift of curves. Demand Analysis The Law of Demand Movement along the demand curve vs. shift of curves. If we consider the price of the commodity the only factor influencing demand, demand moves along the curve. But when factors other than price are considered . Then we have either increase or decrease in demand at the same price. Chapter Three Managerial Economics

Movement by shift of curves. Demand Analysis Movement by shift of curves. More is demanded at the same price, or same quantity is demanded at higher price. original demand increased demand Chapter Three Managerial Economics

Movement by shift of curves. Demand Analysis Movement by shift of curves. Less is demanded at the same price, or same quantity is demanded at lower price. original demand decreased demand Chapter Three Managerial Economics

Demand analysis - for durable & non-durable goods Durable goods – can be stored - used over a period of time - have maintenance & operating costs Demand depends on expected availability or shortages rate of obsolescence economy – in recession demand for durables is postponed Chapter Three Managerial Economics

Demand analysis - for durable & non-durable goods Non- Durable goods – cannot be stored, are perishable Demand depends on prevailing conditions & style incomes convenience Chapter Three Managerial Economics

Demand analysis - Long run & Short run demand Short run Demand exists at a point of time. With its immediate reaction to change in price and income. Long run Demand exists over a period of time as a result of price changes, competition, product improvement etc. Chapter Three Managerial Economics

Demand analysis - Direct and Derived demand Direct Demand exists when the good is required for direct consumption to satisfy human want Derived Demand exists to meet demand for other product. Like demand for cement to meet demand for houses or roads Chapter Three Managerial Economics

Demand analysis - Joint or Complimentary Demand Tea & sugar Tyre & Tube Houses & Cement These goods have to be consumed together to satisfy the want of the consumer. Hence they are demanded jointly. Chapter Three Managerial Economics

Demand analysis - Cross Demand Demand for substitutes takes form of cross demand. Consumer may demand more of Coffee not as its price has fallen, but because price of Tea has increased. Chapter Three Managerial Economics

Demand analysis - Composite Demand Composite demand implies that a commodity under consideration can be put to several uses. e.g. electricity ca be used for lighting, cooking, or ironing; computers or TV. same can be said of Steel or Coal. Chapter Three Managerial Economics

Demand analysis - Industry Demand and Firm Demand demand for medicines of Glaxo is a firm demand but that for all medicines and drugs is industry demand. In a monopoly both are identical & in perfect competition both are absolutely different. In perfect competition, a firm is a price taker & not price maker. Chapter Three Managerial Economics

Demand analysis - market demand and segment demand overall demand for a product in the total market is market demand. while demand for that product in villages, or through mail order, or for shopping complexes is market segment demand for these three segments. Chapter Three Managerial Economics