“ 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
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
Utility Maximising behaviour
Exceptions to Law of demand
Expectation regarding future prices
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
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
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
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 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
Man power planning
Long term financial planning
Individual Demand Analysis
Basis of Individual demand
- 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
- Limited money income
- maximisation of satisfaction
- Utility is cardinally measurable
- Diminishing marginal utility
- Constant marginal utility of money
- One commodity model
- Multiple commodity model – THE LAW OF EQUIMARGINAL
Ordinal Utility Approach
Assumptions underlying ordinal approach
Transitivity & consistency in choice
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.
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.