1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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