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Demand  Analysis
 

Demand Analysis

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    Demand  Analysis Demand Analysis Presentation Transcript

    • Demand Analysis
    • What is Demand?
      • “ Demand means effective desire or want for a commodity which is backed up by the ability (purchasing power) and willingness to pay for it”.
      • Demand = Desire + Ability to pay + Willingness to spend
      • Demand is a relative concept – not absolute
      • It is related to price , time and place.
      • “ The demand for a commodity refers to the amount of it which will be bought per unit of time at a particular price
      • ( in a particular market)”.
    • Individual and Market demand
      • Individual Demand : Individual demand for a product is the quantity of it a consumer would buy at a given price, during a given period of time.
      • Market demand : Market demand for a product is the total demand of all the buyers in the market taken together at a given price during a given period of time.
      • Demand Schedule: ‘ A tabular statement of price – quantity (demanded) relationship at a given period of time’
      •  Individual demand schedule
      •  Market demand schedule.
    • Types of demand
      • Individual demand & Market demand
      • Demand for capital goods and demand for consumer goods
      • Autonomous demand & Derived demand
      • - Direct & indirect demand
      • Demand for durable & non-durable goods
      • - Replacement demand in case of durable goods
      • Short term demand & Long term demand
    • Determinants of Demand
      • Price of the product
      • Price of the related goods
      • Consumer’s income level
      • Distribution pattern of national income
      • Consumer’s taste and preferences
      • Advertisement of the product
      • Consumer’s expectation about future price and supply position
      • Demonstration effect and Band-Wagon effect
      • Consumer credit facility
      • Demography and growth rate of population
      • General std. of living and spending habits
      • Climatic and weather conditions
      • Customs
      •  Demand Function: It states the (functional/mathematical) relationship between the demand for the product ( dependent variable) and its determinants ( independent variables).
    • Law of demand
      • Statement of Law : “ Other things being equal, the higher the price of a commodity, the smaller is the quantity demanded and lower the price, larger the quantity demanded”.
      • Factors behind Law of demand
      • Substitution effect
      • Income effect
      • Utility Maximising behaviour
      • Exceptions to Law of demand
      • Expectation regarding future prices
      • Giffen goods
      • Articles of snob appeal / Veblen effect
      • Consumer’s psychological bias ( about quality and price relationship)
    • Changes in quantity demanded & Changes in demand
      • Changes in quantity demanded is related to law of demand i.e. due to changes in price .
      • When with a fall in price more of a commodity is demanded, there is EXTENSION of demand & when with a rise in price less of a commodity is purchased, there is CONTRACTION of demand.
      • Changes in demand is caused by changes in various other determinants of demand, the price remaining unchanged.
      • When more of a commodity is bought than before at any given price there is INCREASE in demand & when less of a commodity is bought than before at any given price there is DECREASE in demand.
    • Elasticity of demand
      • Elasticity of demand is the degree of responsiveness of demand to the changes in its determinants.
      • (A) PRICE ELASTICITY O DEMAND
      • The extent of response of demand for a commodity to the changes in its price, other determinants of demand remaining constant is called price elasticity of demand.
      • e p = Proportional changes in quantity demanded
      • Proportional changes in price
      • e p = Q /Q P /P
      • e p = Q / Q X P / P
      • e p = Q / P X P / Q
      •  Types of price elasticity of demand
      • Perfectly elastic demand
      • Perfectly inelastic demand
      • Relatively elastic demand
      • Relatively inelastic demand
      • Unitary elastic demand
      •  Determinants of price elasticity of demand
      • - Nature of commodity - Uses of commodity
      • - Availability of substitutes - Durability of commodity
      • - Possibility of postponement - Income level of consumers
      • - Price range of the product - Complementary relationship
      • - Knowledge level of consumers - Frequency of purchase
      • - Proportion of expenditure on the product - Time period
      •  Practical application
      • Pricing decisions - Factor rewarding
      • Terms of trade - Foreign exchange rates
      • Tax rates - Public utilities
      • (B) INCOME ELASTICITY OF DEMAND
      • The degree of responsiveness of demand for a commodity to the changes in the consumers’ income is known as income elasticity of demand
      • e y = Q / Y X Y / Q
      •  Types of income elasticity
      • 1. Unitary income elasticity 2.Income elasticity grater than one
      • 3. Income elasticity less than one 4.Zero income elasticity
      • 5. Negative income elasticity
      •  Practical application
      • Growth rate of firm - Demand forecasting
      • Production planning - Marketing plan
      • (C) CROSS ELASTICITY OF DEMAND
      • The degree of responsiveness of demand for a commodity to a given change in the price of some other related commodity is known as cross elasticity of demand.
      • e xy = Proportional change in demand for X
      • Proportional change in the price of Y
      • e xy = Qx Py X Py Qx
      • (D) ADVERTISING / PROMOTIONAL ELASTICITY OF DEMAND
      • The degree of responsiveness of demand for a commodity to
      • given change in the advertising or promotional expenses is
      • known as cross elasticity of demand.
      • e a= Proportional change in demand for X
      • Proportional change in the advertisement
      • expenditure
      • e a = Qx ad.exp X ad.exp Qx
      • (E) SUBSTITUTION ELASTICITY OF DEMAND
      • The degree of responsiveness of demand ratio between X & Y
      • to a given change in their price ratio is known as substitution
      • elasticity of demand.
      • e s = Proportional change in the ratio of demand for X & demand for Y
      • Proportional change in the ratio of price of X & price of Y
      • e s = (Qx / Qy) (Px / Py)
      • (Qx / Qy) (Px / Py)
      •  Measuring price elasticity of demand
      • - Total Expenditure Method
      • - Point Method
      • - Arc Method
    • Demand forecasting
      • Demand forecasting is predicting or anticipating the future demand for a product .
      •  Micro level  Industry level  Macro level
      • USES OF DEMAND FORECASTING DATA
      • Short term demand forecasting
        • Evolving production policy
        • Determining price policy
        • Evolving purchase policy
        • Fixation of sales targets
        • Short term financial policy
      • Long term demand forecasting
        • Business planning
        • Man power planning
        • Long term financial planning
    • Individual Demand Analysis
      • Basis of Individual demand
      • Utility
      • - From the commodity point of view
      • - From Consumers’ point of view
      • Approaches to Consumer Demand Analysis
      • Cardinal Utility approach
      • - Total utility
      • - Marginal utility
      •  LAW OF DIMINISHING MARGINALUTILITY
      • Assumptions underlying cardinality approach
      • - Rationality
      • - Limited money income
      • - maximisation of satisfaction
      • - Utility is cardinally measurable
      • - Diminishing marginal utility
      • - Constant marginal utility of money
      • Consumer’s equilibrium
      • - One commodity model
      • - Multiple commodity model – THE LAW OF EQUIMARGINAL
      • UTILITY
      • Ordinal Utility Approach
      •  Assumptions underlying ordinal approach
      • Rationality
      • Ordinal utility
      • Transitivity & consistency in choice
      • Nonsatiety
      • Diminishing marginal rate of substitution
      • Marginal rate of substitution - MRS is the rate at which one commodity can be substituted for another, the level of satisfaction remaining the same.
      • Diminishing MRS – The quantity of a commodity that the quantity of a commodity that a consumer is willing to sacrifice for an additional unit of another goes on decreasing when he goes on substituting one commodity for another.
      • Indifference Curve - Indifference curve is a locus of points, each representing a different combination of two substitute goods, which yield the same level of utility or satisfaction to the consumer.
      • Indifferent Map
      •  Properties of Indifference curve
      • Indifference curves have a negative slope
      • Indifference curves are convex to the origin
      • Indifference curves do not intersect with each other
      • Indifference curves are not tangent to one another
      • Upper indifference curve always indicate a higher level of satisfaction
      •  Budgetary constraint & The Budget Line
      • The limitedness of the income acts as a constraint on how high a consumer can ride on his/her indifference map.
      •  Consumer’s Equilibrium