DEMAND ANALYSIS

Meaning of Demand: Demand for a particular commodity refers to the commodity which an individual consumer or household is willing to purchase per unit of time at a particular price. Demand for a particular commodity implies: Desire of the customer to buy the product; The customers willingness to buy the product; Sufficient purchasing power in the customers possession to buy the product. The demand for a particular commodity by an individual consumer or household is known as Individual demand for the commodity and Summation of the individual demand is known as the Market demand. 2

DETERMINANTS OF DEMAND 1.Price of that commodity (Higher the price lower is the Demand) 2.Income of the consumer ( Directly related) 3.Price of related goods 1.Substitutes 2.Complements 4.Taste and preferences 5.Future expectations 1.Related to future income 2.Related to future price of the goods and its related goods

DEMAND ANALYSIS Law of Demand: Law of demand expresses the relationship between the Quantity demanded and the Price of the commodity. The law of demands states that, “ if other things remaining constant the lower the price of a commodity the larger the quantity demanded of it and vice versa.” In simple terms other things remain constant, if the price of the commodity increases, the demand will decrease and if the price of the commodity decreases, the demand will increase. 4

DEMAND ANALYSIS Assumptions: No change in taste and preference. Income of the consumer is constant. No change in customs, habit, quality of goods. No change in substitute products, related products and the price of the product. No complementary goods. 5

EXPLANATION OF THE LAW: 1.Demand Schedule 2.Demand Curve

Demand Schedule: A demand schedule is a numerical tabulation that shows the quantity of demeaned commodity at different prices. The demand schedule may be of 2 types : 1.Individual demand Schedule 2.Market demand Schedule. 7

Table Showing the IDS & MDS : 8 Price (Per Kg) Quantity demanded by Individual Customers Market Demand ABCD

DEMAND ANALYSIS Graphical Representation of IDC & MDC 9 Price/QuantityProductTotal/ Market AB

DEMAND ANALYSIS Demand Distinctions: 1.Individual and market demand 2.Producer’s Good and Consumer’s Good. 3.Derived Demand and Autonomous Demand. 4.Industry Demand and Firm (Company) Demand. 5.Short Run Demand and Long Run Demand. 6.Joint demand and rival demand 10

DEMAND ANALYSIS Demand Function: A Mathematical relationship between quantity demanded of the commodity and its determinants is known as Demand Function. When this relationship relates to the demand by an individual consumer it is known as Individual demand function and while it relates to the market its known as market demand function. Individual Demand Function : Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey. Ep, U) 11

WHERE… Qdx= Quantity demanded for product X. Px= Price of product X Y = Level of Income P1..Pn-1= Prices of all other products T = Taste of the consumer A = Advertisement Ey= Expected future income Ep= Expected future price U = Other determinants not covered in the list of determinants. Market Demand Function: Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey, Ep, U, D, P) P= Population D= Distribution of consumers. 12

Exceptions of Law of Demand: In certain cases the slope of Demand Curve is upward i.e. positively sloped, it is known as the exceptions of Law of Demand. These exceptions are as follows: 1.Giffen Goods (Giffen Paradox) 2.Emergency (War etc…) 3.(Car, Fancy Cloths etc…) and (Fancy Diamonds, High price shoes, etc…) 4.Depression ( Price and quantity demand is low) 5.Ignorance Effect (High priced commodity is better in quality) 6.Speculation (Future change in price) 13

Shift of a demand curve: 1.The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the same. 2. Some of the more important factors are the prices of related goods (both substitutes and complements), income, population, and expectations.substitutescomplements 3.Upward and downward demand curve

SHIFT IN DEMAND CURVE: THE SHIFT FROM D1 TO D2 MEANS AN INCREASE IN DEMAND WITH CONSEQUENCES FOR THE OTHER VARIABLES

ELASTICITY OF DEMAND Elasticity of demand is defined as the percentage change in quantity demanded caused one percent change in each of the determinants under consideration while the other determinants are held constant. Ed = % change in quantity demanded / % change in the determinant. There are mainly five types of Elasticity of Demand : Price Elasticity of demand Income Elasticity of demand Cross Elasticity of demand Promotional Elasticity of demand Expectation Elasticity of demand 16

Price Elasticity of Demand : Price Elasticity of Demand measures the degree of responsiveness of the quantity demanded of a commodity due to a change in its own price. Ep = - (% change in quantity demanded) / ( % change in the Price). Here we ignore the – ve sign as the relation between price and the quantity demanded is opposite. Price Elasticity of Demand are of 5 types : 1.Perfectly elastic demand 2.Perfectly / Absolutely inelastic demand 3.Relatively Elastic demand 4.Relatively inelastic demand 5.Unit Elastic demand 17

1) Elastic: · The % change in quantity > % change in price. · From the diagram below we see a small change in price brings about a large change in the quantity demanded. · This happens when there are many substitutes in the marketplace. Ex: Luxuries goods

2 ) Inelastic: · It is the reverse of elastic. · The % change in quantity < % change in price. · Examples of this are necessities like food and fuel Consumers will not reduce their food purchases if food prices rise, although there may be shifts in the types of food they purchase.

3) Unit elasticity: · The % change in quantity = % change in price. · From the diagram below we see a change in price brings about an exact change in the quantity demanded. · A 2% change in price brings about a 2% change in quantity demanded

4) Perfectly elastic: · The % change in price is zero. · At the market going price P*, the quantity demanded is infinite. · So by the formula of elasticity: · E d (perfectly elastic) = (% change in Q d ) ÷ (% change in price) · =∞÷0 · =∞ Imaginary Situation

5) Perfectly inelastic: The % change in quantity is zero. · At any price, the quantity demanded is the same. · The consumption of this commodity is fixed, and not dependent on price. · E d (perfectly inelastic) = (% change in Q d ) ÷ (% change in price) · =0÷∞ · =0 Ex: Life saving Drug

Income Elasticity of Demand: Income Elasticity of Demand measures the degree of responsiveness of the quantity demanded of a commodity due to a change in money income of the consumer. E y = ( % change in quantity demanded) / ( % change in the Money Income). Cross Elasticity of Demand: Cross Elasticity of Demand measures the degree of responsiveness of the quantity demanded of one commodity due to a change in price of some related goods. E xy = ( % change in quantity demand of goods Y) / ( % change in the price of goods X). 23

INCOME ELASTICITY OF DEMAND Income elasticity of demand can be used as an indicator of industry health, future consumption patterns and as a guide to firms investment decisions.

income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good.elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good. For example, if, in response to a 10% increase in income, the demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2. A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes. inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes. A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in demand. normal goods; an increase in income will lead to a rise in demand. If income elasticity of demand of a commodity is less than 1, it is a necessity good.necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.luxury good or a superior good. A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the demand of a good. These would be sticky goods.sticky goods.

1. High income elasticity of demand: In this case increase in income is accompanied by relatively larger increase in quantity demanded. Here the value of coefficient Ey is greater than unity (Ey>1). E.g.: 20% increase in quantity demanded due to 10% increase in income. 2. Unitary income elasticity of demand: 3. Low income elasticity of demand: 4. Zero income elasticity of demand: (Ey=0). E.g.: No change in quantity demanded even 10% increase in income. 5. Negative income elasticity of demand: In this case increase in income is accompanied by decrease in quantity demanded. Here the value of coefficient Ey is less than zero/negative (Ey<0). E.g.: 5% decrease in quantity demanded due to 10% increase in income.

TYPES OF CROSS ELASTICITY OF DEMAND 1.Zero cross elasticity of demand (when Goods are not related to each other) 2.Negative cross elasticity of demand (In Complementary goods) 3.Positive cross elasticity of demand (Substitute) 4.Infinite cross elasticity of demand (Imaginary situation)

Advertising or Promotional Elasticity of Demand: Advertising or Promotional Elasticity of Demand measures the degree of responsiveness of the quantity demanded of a commodity due to a change in expenditure on advertising and other sales promotion activities. Ea = (% change in quantity demanded) / ( % change in the Expenditure on Advertisement). 29

Factors affecting the Elasticity of Demand : 1.Nature of the product 2.Availability of the substitute product 3.Uses of the commodity 4.Income Levels 5.Proportion of Income spent 6.Postpone consumption 7.Price levels 8.Time period 9.Durability 10.Taste & Preference 11.Demonstration Effect 12.Advertisement 13.Special Demand (Medicine) 14.Complementary Goods 15.Expectation of the future price etc… 30

Importance or Significance of Elasticity of Demand: Practical Importance: 1.Production Planning 2.Theory of Pricing 3.Theory of distribution 4.Theory of Foreign exchange 5.Theory of International Trade 6.Theory of Public Finance 7.Theory of Forecasting of Demand 8.Monopoly Market and limits of monopoly power 9.Determinants of the status of the commodity, complementary or substitute. 31

IMPORTANCE OR SIGNIFICANCE OF ELASTICITY OF DEMAND: 1.Useful in price determination 2.Fixation of rewards for factors of production 3.Helpful in taxation policy 4.Use in international trade 5.Demand forecasting 6.Decision about advertising and promotional activities 7.Decision about investment

RELATION BETWEEN TR,MR,AR AND PRICE ELASTICITY OF DEMAND Revenue is the income generated from the output produced by firms and then sold in goods markets. It is also known as sales turnover. TOTAL REVENUE = Price per unit x Quantity sold ( TR = p x q) AVERAGE REVENUE = PRICE = Total revenue divided by output - the average revenue curve for a business is the same as their demand curve. MARGINAL REVENUE = the change in total revenue as a result of selling one extra unit of output. TOTAL REVENUE is maximised when marginal revenue = zero

RELATION BETWEEN TR,MR,AR AND PRICE ELASTICITY OF DEMAND (EXAMPLE) PriceQuan.TRMRAR