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Demand analysis

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  • Shabaz

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  • 1. Meaning… Refers to the desire, backed by the necessary ability to pay. Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or service. Demand refers to how much (quantity) of a product or service is desired by buyers at various prices. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is known as the demand.
  • 2. Aspects of Demand… Desire for specific commodity. + Sufficient resources to purchase the desired commodity. + Willingness to spend the resources. + a.Availability of the commodity at (i) Certain price (ii) Certain place (iii) Certain time.
  • 3. Willing to purchase: Being willing to purchase simply means that one likes an item enough to want to buy it, and this is usually what people think of when they encounter the concept of demand. However, it's important to remember that, while it's good to want things, desire to purchase is not the only requirement for economic demand.
  • 4. Able to purchase: Wanting to purchase an item doesn't mean a whole lot if one doesn't have the means to make the transaction happen. Therefore, ability to purchase is another important factor of demand. Economists don't specify how an individual must be able to pay for an item- she can pay with cash, check, credit card, money borrowed from friends or taken from the piggy bank, etc.
  • 5. Ready to purchase: Demand is, by its nature, a current quantity, so an individual is only said to demand something if she is willing and able to purchase it now as opposed to some point in the future.
  • 6. Types of DemandTypes of Demand  -Consumer Goods and producer goods  Perishable and durable goods  Autonomous and derived demand  Individual demand and market Demand  Firm and Industry demand  Others: 1. Income demand - Demand for normal goods (price –ve, income +ve) - Demand for inferior goods (eg., coarse grain)  Cross demand - Demand for substitutes or competitive goods (eg.,tea & coffee, bread and rice) - Demand for complementary goods (eg., pen & ink)  Joint demand (same as complementary, eg., pen & ink)  Composite demand (eg., coal & electricity)  Direct demand (eg., ice-creams)  Derived demand (eg., TV & TV mechanics)  Competitive demand (eg., desi ghee and vegetable oils)
  • 7. Demand Schedule and Curve Demand curve: a curve showing the relation between the price of a good and quantity demanded during a given period, other things constant. Suppose we are making pizza. Price of Good Quantity Demand ed 3 200 4 150 5 100 6 75 7 50
  • 8. The geometrical representation of demand schedule is called the demand curve.
  • 9. Determinants of Demand Economic demand- how much of an item one is willing, ready and able to purchase- depends on a number of different factors. For example, people probably care about how much an item costs when deciding how much to purchase. They might also consider how much money they make when making purchasing decisions, and so on.
  • 10. Determinants of Demand Price of Product Income of Consumer Price of Related Good  Complementary Goods  Substitute Goods Tastes and Preferences Advertising Consumer’s expectation of future Income and Price Growth of Economy Seasonal conditions Population
  • 11. Price as a Determinant of Demand Price, in many cases, is likely to be the most fundamental determinant of demand, since it's often the first thing that people think about when deciding how much of an item to buy. The vast majority of goods and services obey what economists call the law of demand- that, all else being equal, the quantity demanded of an item decreases when the price increases and vice versa. (There are some exceptions to this rule, but they are few and far between.)
  • 12. Income as a Determinant of Demand People certainly look at their incomes when deciding how much of an item to buy, but the relationship between income and demand isn't as straightforward as one might think. Do people buy more or less of an item when their incomes increase? As it turns out, that's a more complicated question than it might initially seem. For example, if a person were to win the lottery, he would likely take more rides on private jets than he did before. On the other hand, the lottery winner would probably take fewer rides on the subway than before.
  • 13. Economists categorize items as normal goods or inferior goods on exactly this basis. If a good is a normal good, then the quantity demanded goes up when income increases, and the quantity demanded goes down when income decreases. If a good is an inferior good, then the quantity demanded goes down when income increases and goes up when income decreases.
  • 14. In our example, private jet rides are a normal good and subway rides are an inferior good. There are two things to note about normal and inferior goods: What is a normal good for one person may be an inferior good for another person, and vice versa. For an overall market, a good is normal if market demand increases when income increases, on average, for the people in that market, and a good is inferior if market demand decreases when average income increases. It's possible for a good to be neither normal nor inferior- for example, it's quite possible that the demand for toilet paper neither increases nor decreases when income changes!
  • 15. Prices of Related Goods as Determinants of Demand When deciding how much of a good they want to purchase, people take into account the prices of both substitute goods and complementary goods. Substitute goods, or substitutes, are goods that are used in place of one another. For example, Coke and Pepsi are substitutes because people tend to, well, substitute one for the other. Complementary goods, or complements, on the other hand, are goods that people tend to use together. DVD players and DVDs are examples of complements, as are computers and high-speed internet access.
  • 16. The key feature of substitutes and complements is the fact that a change in price of one of the goods has an impact on the demand for the other good. For substitutes, an increase in the price of one of the goods will increase demand for the substitute good. (It's probably not surprising that an increase in the price of Coke would increase the demand for Pepsi as some consumers switch over from Coke to Pepsi.) It's also the case that a decrease in the price of one of the goods will decrease demand for the substitute good.
  • 17. For complements, an increase in the price of one of the goods will decrease demand for the complementary good. Conversely, a decrease in the price of one of the goods will increase demand for the complementary good. (For example, decreases in the prices of video game consoles serves in part to increase demand for video games.)
  • 18. Goods that don't have either the substitute or complement relationship are called unrelated goods. In addition, sometimes goods can have both a substitute and a complement relationship to some degree- for example, gasoline is a complement to even fuel-efficient cars, but a fuel-efficient car is a substitute for gasoline to some degree.
  • 19. Tastes as a Determinant of Demand How much of a particular good or service also depends on an individual's taste for the item. In general, economists use the term "tastes" as a catchall category for consumers' attitude towards a product. In this sense, if consumers' tastes for a good or service increase, then their quantity demanded increases, and vice versa.
  • 20. Expectations as a Determinant of Demand Today's demand can also depend on consumers' expectations of future prices, incomes, prices of related goods, and so on. For example, consumers demand more of an item today if they expect the price to increase increase in the future. Similarly, people who expect their incomes to increase in the future will often increase their consumption today.
  • 21. Number of Buyers as a Determinant of Market Demand Although not a determinant of individual demand, the number of buyers in a market is clearly an important factor in calculating market demand. Not surprisingly, market demand increases when the number of buyers increases, and market demand decreases when the number of buyers decreases.
  • 22. Law of Demand States that a quantity of a good demanded during a given period relates inversely to its price, other things constant. Price increases  Quantity Demanded decreases Price decreases  Quantity demanded increases Creates a downward sloping demand curve
  • 23. Demand Curve Price Quantity0 3 4 5 6 50 75 100 150 200 Demand Point on the line that matches the schedule Every point on the line matches the schedule. It is a price/quantity demanded that consumers are willing and able to buy. A curve showing the relation between the price of a good and the quantity demanded.
  • 24. Movement Along the Demand Curve Caused by a change in price Only a change in priceOnly a change in price Move from one point to another on the same graph Called a Change in quantity demanded.
  • 25. Quantity Price 0 5 100 Demand 6 75 Movement along the Demand Curve A B
  • 26. Demand Individual demand The demand of an individual consumer Market demand Sum of individual demands of all consumers in the market
  • 27. Aggregate or Market Demand Curve The market demand curve describes the quantity demanded by the entire market for a category of goods or services. An example of this is gasoline prices overall. When the cost of oil goes up, all gas stations must raise their prices to cover their costs. Even if the price drops 50%, drivers aren't going to increase the amount bought by that much. That's why, when the price skyrockets from $3.20 - $4.00 a gallon, people get very upset. They can't cut back their driving to work, school and the grocery store very easily, and so they are forced to pay more for gas.
  • 28. By the way, this lowers their incomes for things other than gas. Income is another determinant of demand, so that means the demand curve for other things they would like to buy, like ice cream, will drop. This is called a demand shift. In this case, the entire demand curve for ice cream shifts to the left. Since buyers have less income, they will purchase a lower quantity of ice cream even at the same price.
  • 29. Change in Demand Shift in demand Curve Movement along with demand curve
  • 30. Shifts in the Demand Curve A demand curve isolates the relation between prices of a good and quantities demanded when other factors that could affect demand remain unchanged. Factors called assumptions or determinants
  • 31. Changes in determinants Results in changes to the RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED. At each and every price a DIFFERENTDIFFERENT quantity is demanded. Results in a shift in the demand curve New curve must be drawn
  • 32. Changes in Demand Increase in demand At each and every price MOREMORE of the good is demanded Shifts to the right P Qd1 Qd2 4 150 200 5 100 150 6 75 100 D1 5 D2 A B Price Quantity 100 150
  • 33. Causes of Increase in Demand Increase in consumer income Causes consumers to buy more of the product at each and every price. Normal goods Inferior goods
  • 34. Change in consumer income Normal goods A good for which demand increases as consumer income rise Inferior goods A good which demand increases as consumer income falls
  • 35. Changes in Price of Related Goods Substitutes Goods that are not consumed jointly Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward. Increase in price of CokeIncrease in price of Coke leads to increase inleads to increase in demand for Pepsidemand for Pepsi
  • 36. Changes in Price of Related Goods Substitutes Suppose that the price of Coke rises from 1 to 1.50, then the demand for Pepsi will decrease from 75 to 100. Price Qty D2 1 100 D1 75
  • 37. Changes in the price of related goods Complements Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward Two goods that are consumed jointly. An decrease in theAn decrease in the price of one willprice of one will increase demandincrease demand for the otherfor the other
  • 38. Changes in Price of Related Goods Complements An decrease in the price of DVD players, increases the demand for DVDs Suppose that DVD players decrease in price from 145 to 100, now the demand for DVDs will decrease from 750 at 20 to 900. D 20 750 900 D2
  • 39. Changes in Consumer Expectations Such as expectations in Prices and income Affect how consumers spend their money and their demand If product cheaper today than tomorrow, then increase in demand
  • 40. Changes in consumer tastes Consumer preferences likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.
  • 41. Changes in taste Consumers prefer platform shoes. At 50, demand increases from 100 to 200. D 50 100 D2 200
  • 42. Change in the number and composition of consumers The market demand curve is the sum of the individual demand curves. If the number of consumers falls then the sum will be smaller thus shifting the demand curve
  • 43. Changes in Demand Decrease in demand At each and every price LessLess of the good is demanded Shifts to the Left P Qd1 Qd2 4 150 110 5 100 90 6 75 60 D2 5 D1 A Price Quantity 90 100
  • 44. Causes of Decrease in Demand Decrease in consumer income Causes consumers to buy less of the product at each and every price.
  • 45. Exceptions to law of demand Some special varieties of inferior goods are termed as Giffen goods. Cheaper varieties of this category like bajra, cheaper vegetable like potato come under this category. A few goods like diamonds etc are purchased by the rich and wealthy sections of the society. The prices of these goods are so high that they are beyond the reach of the common man. Certain things become the necessities of modern life. So we have to purchase them despite their high price. A consumer’s ignorance is another factor that at times induces him to purchase more of the commodity at a higher price. Emergencies like war, famine etc. negate the operation of the law of demand. Households also act speculators. A change in fashion and tastes affects the market for a commodity. When a broad toe shoe replaces a narrow toe, no amount of reduction in the price of the latter is sufficient to clear the stocks. Though as a rule when the prices of normal goods rise, the demand for them decreases but there may be a few cases where the law may not operate.
  • 46. The law of demand does not apply in every case and situation. The circumstances when the law of demand becomes ineffective are known as exceptions of the law. Some of these important exceptions are as under. (1) Prestige goods/Veblen goods. There are certain commodities like diamond, sports, cars etc., . which are purchased as a mark of distinction in society. If the price of these goods rise, the demand for them may increase instead of falling. (2) Price expectations. If people expect a further rise in the price of a particular commodity, they may buy more inspite of rise in price: The violation of the law in this case is only temporary. (3) Ignorance of the consumer. If, the Consumer is ignorant *about the rise in price of goods, he may buy more at a higher price. (4) Giffen goods. If the prices of basic goods, (potatoes, bajra, sugar etc) on which the poor spend a large part of their incomes declines, the poor increase the demand for superior goods, hence when the price of Giffen good falls, its demand also falls. There is a positive price effect in the case of Giffen goods. •
  • 47. Elasticity – the concept The responsiveness of one variable to changes in another When price rises, what happens to demand? Demand falls BUT! How much does demand fall?
  • 48. Types.. Price elasticity of demand Income elasticity of demand Cross elasticity of demand Promotional elasticity of demand Expectations elasticity of demand
  • 49. Kinds Of Price Elasticity Of Demand 1) Perfectly elastic demand (Ed= ∞) 2) Perfectly inelastic demand (Ed=0) 3) Elasticity of demand equal to utility(Ed=1) 4) Relatively inelastic demand (Ed<1) 5) Relatively elastic demand(Ed>1)
  • 50. Measurement Of Price Elasticity Of Demand There are main methods like 1. Percentage method or proportionate method 2. Total outlay method or total revenue method 3. Geometric method or point method 4. Arc elasticity of demand
  • 51. Percentage method or proportionate method Price elasticity of demand (ep) Proportionate change in quantity demanded of good X Proportionate change in price of good X (Q2-Q1) Q1 = (P2-P1) P1 Where Q1 and P1 are original quantity and price respectively, and Q2 and P2 are the new quantity and price respectively
  • 52. Perfectly elastic demand P R I C E y 0 x Perfectly elastic demand curve D D When the demand for a product changes –increases or decreases even when there is no change in price, it is known as perfect elastic demand.
  • 53. demand D D Perfectly inelastic demand curve 0 Y X P R I C E When a change in price, howsover large, change no changes in quality demand, it is known as perfectly inelastic demand
  • 54. Relatively inelastic demand curve XO Y demand D D P R I C E When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand
  • 55. Relatively elastic demand curve P R I C E demand0 x y D D When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.
  • 56. D D1 D2 D3 D4 D5 Y X0 DEMAND P R I C E WHERE D1) Perfectly elastic demand D2)Relatively elastic demand D3)Elasticity of demand equal to utility D4)Relatively inelastic demand D5)Perfectly inelastic demand
  • 57. Factors Affecting Price Elasticity Of Demand Nature of the Commodity Availability of Substitutes Variety of uses of commodity Postponement Influence of habits Proportion of Income spent on a commodity Range of prices
  • 58. Factors Affecting Price Elasticity Of Demand Income Groups Elements of time Pattern of income distribution
  • 59. Practical Importance of the Concept of Price Elasticity Of Demand The concept is helpful in taking Business Decisions Importance of the concept in formatting Tax Policy of the government For determining the rewards of the Factors of Production To determine the Terms of Trades Between the Two Countries
  • 60. Practical Importance of the Concept of Price Elasticity Of Demand Determination of Rates of Foreign Exchange For Nationalization of Certain Industries In economic Analysis ,the concept of price elasticity of demand helps in explaining the irony of poverty in the midst of plenty.
  • 61. Determinants of Price Elasticity of Demand Demand for a commodity will be more elastic if: It has many close substitutes The share of the commodities in buyers’ budget is high Nature of the commodities, luxuries More time is available to adjust to a price change
  • 62. Determinants of Price Elasticity of Demand Demand for a commodity will be less elastic if: It has few substitutes The share of the commodities in buyers’ budget is low Nature of the commodities, Essentials Less time is available to adjust to a price change
  • 63. Types Of Income Elasticity Of Demand Positive Income elasticity of demand Negative Income elasticity of demand Zero Income elasticity of demand
  • 64. Y P A D D B S O XQuantity Demanded Income
  • 65. Positive Income elasticity of demand Income Elasticity Equal to Unity or One (Edy=1) Income Elasticity Greater Than Unity Or One (Edy>1) Income Elasticity Less Than Unity or One (Edy< 1)
  • 66. Price P B A S Total Revenue Quantity Demanded (000s)
  • 67. Y XO D D Quantity Demanded Income
  • 68. Income Elasticity Of Demand = Proportionate change in Demand Proportionate change in Income i.e. Income Elasticity Of Demand = ∆q Q Y ∆ y +
  • 69. Measurement Of Income Elasticity Of Demand Here , ∆q = Change in the quantity demanded. Q = Original quantity demanded. ∆y = Change in income. Y = Original income. For e.g. ,when Income of the consumer = 2,500/- , he purchases 20 units of X, when income = 3,000/- he purchases 25 units of X
  • 70. Measurement Of Income Elasticity Of Demand Thus Income Elasticity of Demand = = (5/20) + (500/2500) = 1.5 therefore here the IED is 1.5 which is more than one. ∆q Q Y ∆ y +
  • 71. Factors Affecting Income Of Demand Income Itself Only. Price Of the Commodity
  • 72. Importance Of the Concept of Income Elasticity Of Demand In production planning and management In forecasting demand when change in consumers income is expected In classifying goods as normal and inferior In expansion and contraction of the firm by the figure of income elasticity of demand Markets situations could be studied with
  • 73. (8) Elasticity Of Substitution The selection between two product or thing is called substitution So Elasticity of Substitution measures the rate at which the particular product is substituted . Thus EOS is the degree to which one product could be substituted in context of price and proportion
  • 74. Elasticity Of Substitution Elasticity of Substitution = Proportionate change in the quantity ratios of goods x & y DIVIDED BY Proportionate change in the price ratios of goods x & y.
  • 75. Types of Elasticity Of Substitution Zero Elasticity of Substitution. Infinite Elasticity Of Substitution Elasticity of Substitution greater than unityor1 Elasticity of Substitution is equal to one Elasticity of Substitution is less than one
  • 76. ChangeinQUANTITIYratioofgoodx &y Change in PRICE ratio of good x & y O X Y E4 E1 E2 E3 E5
  • 77. Relationship Between Price Elasticity, Income Elasticity and Substitution Elasticity As Price is depended on income and substitution effect similarly Price Elasticity is depended on Income Elasticity an Substitution Elasticity . These relationship can be represented by Ep = Kx E1 + ( 1 – Kx ) es
  • 78. Price elasticity of demand depends on: Proportion of income spent on particular good say X. Income elasticity of demand. Elasticity of substitution. Proportion of income spent on product other than X.
  • 79. Cross Elasticity of Demand Cross elasticity of demand express a relationship between the change in the demand for a given product in response to a change in the price of some other product E.g. if the X tea demand reduces tremendously than it effect could be seen in demand of sugar and milk.
  • 80. Types of Cross Elasticity of Demand Cross Elasticity of Demand Equal to Unity or One Cross Elasticity of Demand Greater than Unity or one Cross Elasticity of demand less than unity or one
  • 81. Proportionate change in Demand for product X Proportionate change in Price of product Yi.e. ∆qx Qx Py ∆p y + Cross Elasticity of Demand = Cross Elasticity of Demand =
  • 82. PriceofY Demand for Y O Y X D D
  • 83. PriceofY O Y X D D Demand for Y
  • 84. PriceofY O Y X D Demand for Y
  • 85. Importance of Cross Elasticity Of Demand The concept is of very great importance in changing the price of the products having substitutes and complementary goods . In demand forecasting Helps in measuring interdependence of price of commodity . Multiproduct firms use these concept to measure the effect of change in price of one product on the demand of their other product
  • 86. Advertising Elasticity of Demand Advertising elasticity of demand is the measure of the rate of change in demand due to change in advertising expenditure The amount of change in demand of goods due to advertisement is known as Advertisement Elasticity of Demand .
  • 87. Proportionate change in Demand for product Proportionate change in Advertising expenditurei.e. ∆qx Q A ∆a ÷ Advertising Elasticity of Demand = Advertising Elasticity of Demand =
  • 88. O X Y S S Sales Advertising
  • 89. Factors Affecting Advertising Elasticity Of Demand The stage of the Product’s Market Development . Reaction of market Rival Firms. Cumulative Effect of Past Advertisement. Influence of Other Factors.
  • 90. Importance of the Advertising Elasticity Of Demand in Business Decisions It is useful in competitive industries. Though advertisement shifts the demand curve to right path but it also increases the fixed cost of the firm.
  • 91. Limitation of Advertising Elasticity of the Demand The impact of advertising on sales is different under different conditions, even if other demand determinants are constant. Like wise, it is difficult to establish any co- relationship between advertising expenditure and volume of sales when there counter advertisements by rival firm in the market . The effect on sales depend on what the rivals are doing.
  • 92. Review of Demand A change in quantity demanded is not a change in demand Change in quantity demanded is caused by a change in price Change in quantity demanded is a movement along the demand curve Change is demand is caused by a change in the determinants Change in demand shifts the demand curve