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Demand & Supply
•   What is demand?
•   Law of demand
•   Exceptions to law of demand
•   Demand function
•   Individual and Market demand curves
•   Types of demand
    Price, Income & Cross demand
•   Elasticity of demand
•   Demand forecasting techniques
•   Law of Supply, Supply curve & Elasticity
    of Supply
DEMAND ANALYSIS
MEANING OF DEMAND
• Demand for a commodity refers to
  the quantity of the commodity which
  an individual consumer household is
  willing to purchase per unit of time
  at a particular price.
• Individual Demand
• Household Demand
MEANING OF DEMAND
Demand for a commodity implies
Desire of the consumer to buy the
 product
His willingness to buy the product
Sufficient purchasing power in his
 possession to buy the product.
Law of Demand
• A decrease in the price of a good, all other
  things held constant, will cause an
  increase in the quantity demanded of the
  good.
• An increase in the price of a good, all
  other things held constant, will cause a
  decrease in the quantity demanded of the
  good.
• Note: refer notes for all other things held
  constant.
• QDx = f(Px)
• This the mathematical relationship
  between the quantity demanded and
  the price of the product X.
• There is a inverse relationship
  between the quantity demanded and
  the price of the product.
DEMAND FUNCTION
 The demand function can be written
in a simple mathematical language
as:
   Q = f(Px, Py , Pz ,…..Pn ; I; T; A)
DEMAND FUNCTION
    The amount demanded (per unit of time)
    of a commodity X by a consumer (denoted
    by Qx ) depends upon:
•   Price of the commodity (Px)
•   Price of substitutes (Ps) and complements
    (Pc)
•   Income of the household (I)
•   Tastes and preferences of the household
    (T) and,
•   The amount annually spent on
    advertisement of the product (A)
DEMAND FUNCTION
   In case we are analyzing the
  demand for goods which are durable,
  storable and are expensive, we have
  to add these variables also:
• Consumers’ expectations of future
  prices (Ep) and,
• Consumers’ expectations future
  income (Ey)
DETERMINANTS OF
         DEMAND
The determinants of demand are:
• Price of the commodity
• Prices of related commodities
• Income of the household
• Tastes and preferences
• Expectations
• Advertisements
Prices of related
          commodities
• The demand for a commodity
  depends also on the prices of its
  substitutes   and     complementary
  goods.
Tea and coffee, pizza and burger,
  these are the substitutes for which
  the change in the price will affect the
  demand of the other in the same
  direction.
• By    definition,   the   relationship
  between demand of a product (tea)
  and the price of its substitute
  (coffee) is positive is nature. When
  price of the substitute (coffee) of a
  product (tea) falls ( or increases),
  demand for the product falls (or
  increases).
• A Commodity is deemed to be a
  complement of another when it
  complements the use of the other.
• When the use of any two goods goes
  together so that their demand changes
  (increases or decreases) simultaneously,
  they are treated s complements.
• Example: Milk and sugar, Petrol and car,
  Tea, razor and blade printer and
  cartridge, Camera and film
Income of the household
• Income is the basic determinant of
  the quantity demanded of a product
  as it determines the purchasing
  power of the consumer. That is why
  the people with higher current
  disposable income spend a larger
  amount on normal goods and
  services than those wit lower
  incomes.
Income of the household
• For the purpose of income-demand
  analysis, goods and services may be
  grouped under four broad categories,
  viz., (a) essential consumer goods;
  (b) inferior goods; (c) normal goods
  and (d) prestige or luxury goods
Income of the household
• Essential consumer goods (ECG) Example:
  food grains, salt, vegetables oils, matches,
  cooking fuel, a minimum clothing and
  housing, etc.
• Quantity demanded of such goods
  increases with increase in consumer’s
  income only upto a certain limit, other
  factors remaining the same.
• Inferior Goods: bajra is inferior to
  wheat and rice, Bidi is inferior to
  cigarette, kerosene stove is inferior
  to gas-stove, traveling by bus is
  inferior to traveling by taxi.
• The demand for inferior goods
  increases upto a certain level with
  the increase in the income and then
  starts    decreasing     with  further
  increase in the income beyond a
  point of income.
• Normal Goods: Technically, normal
  goods are those which are demanded
  in     increasing      quantities as
  consumers’ income rises. Clothing is
  the most important example of this.
• Demand for such goods increases
  with the increase in income of the
  consumer, but at different rates at
  different levels of income.
• Demand for normal goods initially
  increases rapidly, and later, at a
  lower rate.
• Prestige or Luxury Goods: These are
  consumed mostly by the rich section
  of the society, e.g., luxury cars,
  stone studded jewellery, costly
  cosmetics, antiques.
• Demand for such goods arises only
  beyond a certain level of consumer’s
  income.
Tastes and preferences
• These depend           on the social
  customs, religious values attached to
  a commodity, habits of the people,
  the general life-style of the society.
Change in Quantity
   Demanded

Price
                  An increase in price
                  causes a decrease in
                  quantity demanded.
P1

P0



                               Quantity
        Q1   Q0
Change in Quantity
   Demanded

Price
             A decrease in price
             causes an increase in
             quantity demanded.


P0

P1

                          Quantity
        Q0   Q1
Law of Supply
• A decrease in the price of a good, all
  other things held constant, will cause
  a decrease in the quantity supplied
  of the good.
• An increase in the price of a good, all
  other things held constant, will cause
  an increase in the quantity supplied
  of the good.
Change in Quantity Supplied
                       A decrease in price
     Price             causes a decrease in
                       quantity supplied.

     P0

     P1



                             Quantity
             Q1   Q0
Change in Quantity Supplied
                       An increase in price
     Price             causes an increase in
                       quantity supplied.

     P1

     P0



                             Quantity
             Q0   Q1
Market Equilibrium
Price

     D0   D1       S0
                        An increase in demand
                        will cause the market
P1
                        equilibrium price and
P0                      quantity to increase.



                            Quantity
           Q0 Q1
Market Equilibrium
Price

     D1   D0       S0
                        A decrease in demand
                        will cause the market
P0
                        equilibrium price and
P1                      quantity to decrease.



                            Quantity
           Q1 Q0
Market Equilibrium
Price                       An increase
                            in supply
     D0           S0   S1   will cause
                            the market
                            equilibrium
                            price to
P0                          decrease and
P1                          quantity to
                            increase.

                       Quantity
          Q0 Q1
Market Equilibrium
Price                       A decrease
                            in supply
     D0           S1   S0   will cause
                            the market
                            equilibrium
                            price to
P1                          increase and
P0                          quantity to
                            decrease.

                       Quantity
          Q1 Q0
THE LAW OF DEMAND
    The law of demand states that the
amount demanded of a commodity and
its price are inversely related, other
things remaining constant.
  Exceptions to the Law of Demand:
 (i) Griffin goods
   (ii) Commodities which are used as
status symbols (snob effect)
 (iii) Expectations of change in the price
of the commodity
INDIVIDUAL AND MARKET
  DEMAND SCHEDULES
 A demand schedule at any particular time
refers to the series of quantities the
consumer is prepared to buy at its
different prices.
  The demand schedule for an individual
consumer is called an individual demand
schedule. Likewise, if we have similar
demand schedules for all consumers in the
market, we can add up the quantities
demanded of the commodity by these
consumers at each price and get a
summed-up schedule called the market
demand schedule.
INDIVIDUAL DEMAND
    SCHEDULE FOR ORANGES

Price of oranges   Quantity demanded
(Rs. Per dozen)    of oranges (dozens)
           5                1
         4                  2
         3                  3
         2                  4
         1                  5
MARKET DEMAND
SCHEDULE FOR ORANGES
Price of   Quantity demanded of        Market
oranges    oranges by consumers        demand of
           (dozens)                    oranges
                                       (dozens)
            A      B      C       D
   10        1     0      3       0         4

   9         3     1      6       4        14

   8         7     2      9       7        25

   7        11     4     12       10       37

   6        13     6     14       12       45
INDIVIDUAL DEMAND CURVE

                                         The demand schedule when
                  D                      represented diagrammatically
Price of good X




                        Individual       is known as the demand curve.
                        Demand           When this diagram is based on
                        Curve            an individual demand schedule,
                                         we get an individual demand curve.
                                     D

             O
                      Units of good X
Why do Demand Curves Slope
       Downwards?
• Reasons
• More uses when the price falls
• Raise in real income of consumer
• Substitution effect
MARKET DEMAND CURVE
                       Y

                               MAR
                                   KET
                                       DE
PRICE OF GOOD X




                                             MAN
                                                D   CUR
                                                        VE


                  10                                         ∑D
                  9
                  8
                                                     DC
                  7
                  6                           DA
                                        DD
                                   DB

                   O                                              X
                           4
                                   UNITS OF GOOD X
TYPES OF DEMAND
• Derived demand and autonomous demand
• Demand for producers’ goods and
  consumers’ goods
• Demand for durable and non-durable
  goods
• Industry demand and firm demand
• Total demand and market segment
  demand
• Short-run demand and long-run demand
Derived and Autonomous
          Demand
• Those inputs or commodities which are
  demanded to help in further production of
  commodities are said to have Derived
  demand. Ex raw materials, machines
• Autonomous demand, is the one where a
  commodity is demanded because it is
  needed for direct consumption. Ex pieces
  of furniture at household
Demand for producers’ goods
   and consumers’ goods
• The difference in these two types of
  demand are that consumers’ goods
  (soft drinks, milk, bread) are needed
  for direct consumption, while the
  producers’ goods (Various types of
  machines, steel, tools) are needed
  for producing other goods.
Demand for durable and
     non-durable goods
• Non-durable goods are the ones which
  cannot be used more than once. Eatables,
  photographic film, soaps. These meet the
  current need. (Perishable and non-
  perishable)
• Durable goods, on the other hand, are the
  ones which have repeated uses. Shoes,
  readymade garments, residential house,
  electronic domestic appliances. These are
  the ones which can be stored and whose
  replacement can be postponed. These
  meet both the current as well as future
  need.
Industry demand and firm
          demand
• Firm demand denotes demand for a
  particular product of a particular firm.
  Demand for ITC wills branded shirts
• Industry demand refers to the total
  demand for the product of a particular
  industry. Demand for shirts for all the
  brands available like, Arrow, Peter
  England, Provogue, Oxemberg, Louis
  Pilips, Van-Heusen, Zodiac, Pan America
  etc.,
Total demand and market
      segment demand
• Demand for market segments is to be
  studied by breaking the total demand into
  different segments like geographical
  areas, sub-products, product use,
  distribution channels, size of customer
  group etc., Demand for T-Shirts in India is
  market demand, which can be based on
  the segment market like, for kids, youth
  and old people.

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Demand 110223202936-phpapp01

  • 1. Demand & Supply • What is demand? • Law of demand • Exceptions to law of demand • Demand function • Individual and Market demand curves • Types of demand Price, Income & Cross demand • Elasticity of demand • Demand forecasting techniques • Law of Supply, Supply curve & Elasticity of Supply
  • 3. MEANING OF DEMAND • Demand for a commodity refers to the quantity of the commodity which an individual consumer household is willing to purchase per unit of time at a particular price. • Individual Demand • Household Demand
  • 4. MEANING OF DEMAND Demand for a commodity implies Desire of the consumer to buy the product His willingness to buy the product Sufficient purchasing power in his possession to buy the product.
  • 5. Law of Demand • A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good. • An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good. • Note: refer notes for all other things held constant.
  • 6. • QDx = f(Px) • This the mathematical relationship between the quantity demanded and the price of the product X. • There is a inverse relationship between the quantity demanded and the price of the product.
  • 7. DEMAND FUNCTION The demand function can be written in a simple mathematical language as: Q = f(Px, Py , Pz ,…..Pn ; I; T; A)
  • 8. DEMAND FUNCTION The amount demanded (per unit of time) of a commodity X by a consumer (denoted by Qx ) depends upon: • Price of the commodity (Px) • Price of substitutes (Ps) and complements (Pc) • Income of the household (I) • Tastes and preferences of the household (T) and, • The amount annually spent on advertisement of the product (A)
  • 9. DEMAND FUNCTION In case we are analyzing the demand for goods which are durable, storable and are expensive, we have to add these variables also: • Consumers’ expectations of future prices (Ep) and, • Consumers’ expectations future income (Ey)
  • 10. DETERMINANTS OF DEMAND The determinants of demand are: • Price of the commodity • Prices of related commodities • Income of the household • Tastes and preferences • Expectations • Advertisements
  • 11. Prices of related commodities • The demand for a commodity depends also on the prices of its substitutes and complementary goods. Tea and coffee, pizza and burger, these are the substitutes for which the change in the price will affect the demand of the other in the same direction.
  • 12. • By definition, the relationship between demand of a product (tea) and the price of its substitute (coffee) is positive is nature. When price of the substitute (coffee) of a product (tea) falls ( or increases), demand for the product falls (or increases).
  • 13. • A Commodity is deemed to be a complement of another when it complements the use of the other. • When the use of any two goods goes together so that their demand changes (increases or decreases) simultaneously, they are treated s complements. • Example: Milk and sugar, Petrol and car, Tea, razor and blade printer and cartridge, Camera and film
  • 14. Income of the household • Income is the basic determinant of the quantity demanded of a product as it determines the purchasing power of the consumer. That is why the people with higher current disposable income spend a larger amount on normal goods and services than those wit lower incomes.
  • 15. Income of the household • For the purpose of income-demand analysis, goods and services may be grouped under four broad categories, viz., (a) essential consumer goods; (b) inferior goods; (c) normal goods and (d) prestige or luxury goods
  • 16. Income of the household • Essential consumer goods (ECG) Example: food grains, salt, vegetables oils, matches, cooking fuel, a minimum clothing and housing, etc. • Quantity demanded of such goods increases with increase in consumer’s income only upto a certain limit, other factors remaining the same.
  • 17. • Inferior Goods: bajra is inferior to wheat and rice, Bidi is inferior to cigarette, kerosene stove is inferior to gas-stove, traveling by bus is inferior to traveling by taxi. • The demand for inferior goods increases upto a certain level with the increase in the income and then starts decreasing with further increase in the income beyond a point of income.
  • 18. • Normal Goods: Technically, normal goods are those which are demanded in increasing quantities as consumers’ income rises. Clothing is the most important example of this. • Demand for such goods increases with the increase in income of the consumer, but at different rates at different levels of income. • Demand for normal goods initially increases rapidly, and later, at a lower rate.
  • 19. • Prestige or Luxury Goods: These are consumed mostly by the rich section of the society, e.g., luxury cars, stone studded jewellery, costly cosmetics, antiques. • Demand for such goods arises only beyond a certain level of consumer’s income.
  • 20. Tastes and preferences • These depend on the social customs, religious values attached to a commodity, habits of the people, the general life-style of the society.
  • 21. Change in Quantity Demanded Price An increase in price causes a decrease in quantity demanded. P1 P0 Quantity Q1 Q0
  • 22. Change in Quantity Demanded Price A decrease in price causes an increase in quantity demanded. P0 P1 Quantity Q0 Q1
  • 23. Law of Supply • A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good. • An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.
  • 24. Change in Quantity Supplied A decrease in price Price causes a decrease in quantity supplied. P0 P1 Quantity Q1 Q0
  • 25. Change in Quantity Supplied An increase in price Price causes an increase in quantity supplied. P1 P0 Quantity Q0 Q1
  • 26. Market Equilibrium Price D0 D1 S0 An increase in demand will cause the market P1 equilibrium price and P0 quantity to increase. Quantity Q0 Q1
  • 27. Market Equilibrium Price D1 D0 S0 A decrease in demand will cause the market P0 equilibrium price and P1 quantity to decrease. Quantity Q1 Q0
  • 28. Market Equilibrium Price An increase in supply D0 S0 S1 will cause the market equilibrium price to P0 decrease and P1 quantity to increase. Quantity Q0 Q1
  • 29. Market Equilibrium Price A decrease in supply D0 S1 S0 will cause the market equilibrium price to P1 increase and P0 quantity to decrease. Quantity Q1 Q0
  • 30. THE LAW OF DEMAND The law of demand states that the amount demanded of a commodity and its price are inversely related, other things remaining constant. Exceptions to the Law of Demand: (i) Griffin goods (ii) Commodities which are used as status symbols (snob effect) (iii) Expectations of change in the price of the commodity
  • 31. INDIVIDUAL AND MARKET DEMAND SCHEDULES A demand schedule at any particular time refers to the series of quantities the consumer is prepared to buy at its different prices. The demand schedule for an individual consumer is called an individual demand schedule. Likewise, if we have similar demand schedules for all consumers in the market, we can add up the quantities demanded of the commodity by these consumers at each price and get a summed-up schedule called the market demand schedule.
  • 32. INDIVIDUAL DEMAND SCHEDULE FOR ORANGES Price of oranges Quantity demanded (Rs. Per dozen) of oranges (dozens) 5 1 4 2 3 3 2 4 1 5
  • 33. MARKET DEMAND SCHEDULE FOR ORANGES Price of Quantity demanded of Market oranges oranges by consumers demand of (dozens) oranges (dozens) A B C D 10 1 0 3 0 4 9 3 1 6 4 14 8 7 2 9 7 25 7 11 4 12 10 37 6 13 6 14 12 45
  • 34. INDIVIDUAL DEMAND CURVE The demand schedule when D represented diagrammatically Price of good X Individual is known as the demand curve. Demand When this diagram is based on Curve an individual demand schedule, we get an individual demand curve. D O Units of good X
  • 35. Why do Demand Curves Slope Downwards? • Reasons • More uses when the price falls • Raise in real income of consumer • Substitution effect
  • 36. MARKET DEMAND CURVE Y MAR KET DE PRICE OF GOOD X MAN D CUR VE 10 ∑D 9 8 DC 7 6 DA DD DB O X 4 UNITS OF GOOD X
  • 37. TYPES OF DEMAND • Derived demand and autonomous demand • Demand for producers’ goods and consumers’ goods • Demand for durable and non-durable goods • Industry demand and firm demand • Total demand and market segment demand • Short-run demand and long-run demand
  • 38. Derived and Autonomous Demand • Those inputs or commodities which are demanded to help in further production of commodities are said to have Derived demand. Ex raw materials, machines • Autonomous demand, is the one where a commodity is demanded because it is needed for direct consumption. Ex pieces of furniture at household
  • 39. Demand for producers’ goods and consumers’ goods • The difference in these two types of demand are that consumers’ goods (soft drinks, milk, bread) are needed for direct consumption, while the producers’ goods (Various types of machines, steel, tools) are needed for producing other goods.
  • 40. Demand for durable and non-durable goods • Non-durable goods are the ones which cannot be used more than once. Eatables, photographic film, soaps. These meet the current need. (Perishable and non- perishable) • Durable goods, on the other hand, are the ones which have repeated uses. Shoes, readymade garments, residential house, electronic domestic appliances. These are the ones which can be stored and whose replacement can be postponed. These meet both the current as well as future need.
  • 41. Industry demand and firm demand • Firm demand denotes demand for a particular product of a particular firm. Demand for ITC wills branded shirts • Industry demand refers to the total demand for the product of a particular industry. Demand for shirts for all the brands available like, Arrow, Peter England, Provogue, Oxemberg, Louis Pilips, Van-Heusen, Zodiac, Pan America etc.,
  • 42. Total demand and market segment demand • Demand for market segments is to be studied by breaking the total demand into different segments like geographical areas, sub-products, product use, distribution channels, size of customer group etc., Demand for T-Shirts in India is market demand, which can be based on the segment market like, for kids, youth and old people.