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Demand Analysis
 

Demand Analysis

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    Demand Analysis Demand Analysis Presentation Transcript

      • Managerial Economics
      • Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization.”
      • Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”
      • Positive Economics:-
      • Derives useful theories with testable propositions about WHAT IS.
      • Normative Economics:-
      • Provides the basis for value judgements on economic outcomes.WHAT SHOULD BE
    • Scope of Managerial Economics
      • Utility analysis
      • Demand and supply analysis
      • Production and cost analysis
      • Market analysis
      • Pricing
      • Investment decisions
      • Game theory
    • Basic problems of an economy
      • What to produce( Choice)
      • How to produce ( Technology)
      • Whom to produce ( Distribution)
    • Fundamental Concepts Managerial Economics
      • Marginal Principle
      • Opportunity cost principle
      • Incremental Principle
      • Discount Principle
      • Time Perspective
    • Demand Analysis
      • Demand –
      • Desire + ability to pay + willingness to pay
      • Demand is relative term –
      • Price
      • Time
      • Place
    • Determinants of demand
      • Price
      • Income
      • Taste, preference and fashion
      • Prices of related goods
      • Government policy
      • Custom and tradition
      • Advertisement
    • Law of demand
      • If other things remain constant, when price increases demand contracts and when price decreases demand expands. Price and demand are inversely proportionate.
      • D = a - bP
    • Why demand curve slopes downwards
      • Law of diminishing marginal utility
      • Income effect
      • Substitution effect
      • Multiplicity of uses
    • Market Demand Curve
      • Shows the amount of a good that will be purchased at alternative prices.
      • Law of Demand
        • The demand curve is downward sloping.
      D Price Quantity
    • Exception to the law of demand
      • Giffen Goods
      • Prestigious goods
      • Buyers illusions
      • Necessary goods
      • Brand loyalty
    • Elasticity
      • Elasticity is a measure of responsiveness of one variable to another variable.
      • Can involve any two variables.
      • An elastic relationship is responsive.
      • An inelastic relationship is unresponsive.
    • Types of Elasticity of demand
      • Price Elasticity of demand
      • Income elasticity of demand
      • Cross Elasticity of demand
      • Promotional Elasticity of demand
    • Price elasticity:  p =%  Q/%  P
      • Causality: denominator numerator!
      • An elastic response is one where numerator is greater than denominator.
      • i.e., %  Q>%  P so E p 
        • Imagine extreme example.
      • An inelastic response is one where numerator is smaller than denominator.
      • i.e., %  Q<%  P so E p 
        • Again, imagine extreme example.
    • Look at the Extremes
      • Perfectly Elastic D
      • E p  infinite
      • Perfectly Inelastic D
      P Q P Q E p  0 D D
    • Relatively Elastic vs. Inelastic Demand Curves Q 1 Q 2 Q 2 ’ P 1 P 2 D’ D D’ is relatively more elastic than D P Q
    • Point Elasticity Formula
      • Point elasticity
        • Point elasticity is responsiveness at a point along the demand function
      • E p  Q/Q 1
      •  P/P 1
      • simplifying:
      • E p  Q/  P)* P 1 /Q 1
      • Price (Rs.)
      Q Q 1 P 1 D
    • Point Elasticity Formula
      • Point elasticity
        • Point elasticity is responsiveness at a point along the demand function
      • E p  Q/Q 1
      •  P/P 1
      • simplifying:
      • E p  Q/  P)* P 1 /Q 1
      • Price (Rs.)
      Q Q 1 P 1 D
    • Example: Q=56-0.002*P
      • Point elasticity
      • E p  Q/  P)* P 1 /Q 1
      • Suppose P=17000
      • Q=56-0.002*17000
      • Q=56-34=22
      • Plug into equation gives:
        • E p  -0.002)* 17000 /22
        • E p =-34/22=-1.54
      • Price (Rs)
      Q 22 17k D
    • Arc Elasticity Briefly, arc elasticity is simply an average elasticity along a range of the demand curve.
    • Arc Elasticity Formula
      • Arc elasticity:
        • Responsiveness along a range of D. function
      • E p  Q/((Q 1 + Q 2 )/2)
      •  P/((P 1 + P 2 )/2)
      • simplifying:
      • E p  Q/  P)*((P 1 +P 2 )/(Q 1 +Q 2 ))
      • Price ($)
      Q Q 2 P 2 P 1 Q 1 Avg. responsiveness D
    • Example Q=56-0.002*P
      • Arc elasticity
      • E p  Q/  P)*((P 1 +P 2 )/(Q 1 +Q 2 ))
      • Look at P range 16k - 17k
      • Q=56-0.002*17000
      • Q=56-34=22
      • Plug into equation gives:
        • E p  -0.002)*(33000/46)
        • E p =-66/46=-1.43
      • Price ($)
      Q 22 17k D 24 16k
    • Factors influence Price elasticity of demand
      • Nature of commodity
      • Availability of substitute
      • Multiplicity of uses
      • Habit
      • Proportion of income spent
      • Price range
    • Managerial Applications of Price elasticity of demand
      • Pricing Decision
      • Fiscal policy
      • Labour market
      • International trade
    • Income Elasticity of Demand
      • Recall demand function is:
        • Q=f(P, I,P related ,Tastes,Buyers,Expectations ... )
      • Change in I causes shift in demand.
      • Size of shift depends on income elasticity.
      • E I  Q/  I
      • Focus again on point formula.
      • Value of E I determines type of good.
    • Values for Income Elasticity (   )
      • Sign indicates normal or inferior
      •  E I  >0 implies normal good.
      • E I <0 implies inferior good.
      • Normal goods may be necessity or luxury .
        • If E I >1 then this is luxury (responsive to income).
        • If 0<E I <1 then this is necessity (unresponsive to income).
    • Cross Price Elasticity (E XY )
        • Q X =f(P X , I,P Y ,Tastes, Buyers,Expectations ... )
      • Change in P Y causes shift in demand for X.
      • Size of shift depends on cross-price elasticity.
      • E XY  Q X /  P Y
      • Sign indicates relationship between two goods
      •  E XY >0 implies goods are substitutes.
      • E XY <0 implies goods are complements.
    • OBJECTIVES OF SHORT TERM DEMAND FORECASTING
      • Production planning
      • Evolving sales policy
      • Fixing sales targets
      • Determining price policy
      • Inventory control
      • Determining short-term financial planning
    • OBJECTIVES OF LONG-TERM DEMAND FORECASTING
      • BUSINESS PLANNING
      • MANPOWER PLANNING
      • LONG-TERM FINANCIAL PLANNING
    • METHODS OF DEMAND FORECASTING
      • Survey methods :
      • Consumer interviews
      • Opinion poll
      • Experts opinion
      • End-use method
      • Statistical methods:
      • Trend Analysis
      • Regression Analysis
    • Market Supply Curve
      • The supply curve shows the amount of a good that will be produced at alternative prices.
      • Law of Supply
        • The supply curve is upward sloping
      Price Quantity S 0
    • Supply Shifters
      • Input prices
      • Technology or government regulations
      • Number of firms
      • Substitutes in production
      • Taxes
      • Producer expectations
    • The Supply Function
      • An equation representing the supply curve:
      • Q x S = f(P x , P R ,W, H,)
        • Q x S = quantity supplied of good X.
        • P x = price of good X.
        • P R = price of a related good
        • W = price of inputs (e.g., wages)
        • H = other variable affecting supply
    • Change in Quantity Supplied 20 10 B A 5 10 A to B : Increase in quantity supplied Price Quantity S 0
    • Change in Supply S 1 8 7 S 0 to S 1 : Increase in supply 6 Price Quantity S 0 5
    • Producer Surplus
      • The amount producers receive in excess of the amount necessary to induce them to produce the good.
      Price Quantity S 0 Producer Surplus Q * P *
    • Market Equilibrium
      • Balancing supply and demand
        • Q x S = Q x d
      • Steady-state
    • Equilibrium Price and quantity Price Quantity S D 8 7
    • If price is too low... Price Quantity S D 5 6 12 Shortage 12 - 6 = 6 6 7
    • If price is too high… Price Quantity S D 9 14 Surplus 14 - 6 = 8 6 8 8 7