Demand part one


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Demand part one

  1. 1. DEMAND
  2. 2. DEMANDThe success of a business largely depends onsales. Sales depend on market demandbehavior. Market demand analysis is a coretopic in managerial economics, for it seeks tosearch out and measures the determinants ofdemand, thus, forces governing sales of aproduct.
  3. 3. Market Demand analysis serves the following managerial purposes :• It is an important technique for sales forecasting with a sound base and greater accuracy.• It provides a guideline for demand manipulation through advertising and sales promotion programmes.• It shows direction to product planning and product improvement
  4. 4. CONTD.• It is useful in determining the sales quotas and appraisal of performance of the personnel in Sales Department.• It is an anchor for the pricing policy.• It indicates the size of the market for given product and the market share of the concerned firm.• It thus, reflects the scope of business expansion and competitive position of the firm in market trend.
  5. 5. MEANING OF DEMANDThe economics meaning of demand refers theeffective demand, i.e., the amount the buyersare willing to purchase at a given price andover a given period of time.From managerial economics point of view,thus, the concept of demand may be lookedupon as follows :
  6. 6. 1. Demand is the Desire or Want Backed up by Money. Demand means effective desire or want for a commodity, which is backed up by the ability (i.e., money or purchasing power) and willingness to pay for it.
  7. 7. 2. Demand is Always Related to Price and Time. Demand is not an absolute term. It is a relative concept. Demand for a commodity should always have a reference to price and time. For instance, and economist would say that the demand for grapes by a household, at a price of Rs.40 per kg, is 10 kilograms per week.
  8. 8. 3. Demand may be Viewed Ex-Ante or Ex-Post. Demand for a commodity may be viewed as ex-ante, i.e., intended demand or ex-post, i.e., what is already purchased. The former denotes potential demand, while the latter refers to the actual amount purchased.
  9. 9. INDIVIDUAL DEMAND AND MARKET DEMANDConsumer demand for a product may be viewed attwo levels :(i) Individual demand, and(ii) Market demand
  10. 10. Individual demand refers to the demand for acommodity from the individual point of view. Thequantity of a product consumer would buy at a givenprice over a given period of time is his individualdemand for that particular product. Individual demandis considered from one person’s point of view or fromthat of a family or household’s point of view.Individual demand is a single consuming entity’sdemand.
  11. 11. Market demand for a product, on the other hand, refersto the total demand for all the buyers, taken together.Market demand is an aggregate of the quantities of aproduct demanded by all the individual buyers at agiven price over a given period of time.Market demand function is the sum total of individualdemand function. It is derived by aggregating allindividual buyer’s demand function in the market.
  12. 12. Market demand is more important from the businesspoint of view. Sales depend on the market demand.Business policy and planning are based on the marketdemand. Prices are determined on the basis of marketdemand for the product. In a competitive market,interaction between total or market demand andmarket supply determine the equilibrium price.
  13. 13. Under monopoly also the seller has to determine theprice of his product with due consideration to theposition of market demand. He simply cannotdetermine any high price, disregarding the marketdemand for product.
  14. 14. Usually, under market mechanism, resources would beautomatically channeled in producing those goodswhich has a greater intensity of market demand andconsequently, higher prices and more profitability.Market demand, thus, serves as a guidepost toproducers in adjusting their supplies in a marketeconomy.
  15. 15. DETERMINANTS OF DEMANDDemand for a commodity depends on a number offactors. Several factors may affect the individualdemand for a product. Likewise, the market demandfor a product is influenced by many factors. We shallidentify some of the major determinants of demand asunder :
  16. 16. Factors Influencing Individual DemandAll individual’s demand for a commodity is generallydetermined by such factors as :Price of the Product. Usually, price is a basicconsideration in determining the demand for acommodity. Normally, a larger quantity is demandedat a lower price than at a higher price.
  17. 17. Income. A buyer’s income determines his/herpurchasing capacity. Income is, therefore, andimportant determinant of demand. Obviously, with theincrease in income one can buy more goods. Richconsumers usually demand more and more goodsthan poor customers. Demand for luxuries andexpensive goods is related to income.
  18. 18. Tastes, Habits and Preference. Demand for manygoods depends on the person’s tastes, habits andpreferences. Demand for several products like ice-cream, chocolates, beverages and so on depends onindividual’s tastes. Demand for tea, betel, cigarettes,tobacco, a matter of habits.
  19. 19. People with different tastes and habits have differentpreference for different goods. A strict vegetarian willhave no demand for meat at any price, whereas a non-vegetarian who has liking for chicken may demand iteven at a high price. Similar is the case with demandfor cigarettes by non-smokers and smokers.
  20. 20. Relative Prices of Other Goods – Substitute andComplementary Products. How much the consumerwould like to buy of a given commodity, however, alsodepends on the relative prices of other related goodssuch as substitute or complementary goods to acommodity.When a want can be satisfied by alternative similargoods, they are called substitutes. For example, peasand beans, groundnut oil and til oil, tea and coffee,jowar and bajra, etc. are substitutes of each other.
  21. 21. The demand for a commodity depends on the relativeprice of its substitutes. If the substitutes are relativelycostly, then there will be more demand for thiscommodity at a given price than in case its substitutesare relatively cheaper.Similarly, the demand for a commodity is also affectedby its complementary product. When in order tosatisfy a given want, two or more goods are need incombination, these goods are referred to ascomplementary goods.
  22. 22. For example, car and petrol, pen and ink, tea and sugar,shoes and socks, sarees and blouses, gun and bullets, etc.are complementary to each other. Complementary goodsare always in joint demand. If a given commodity is acomplementary product its demand will be relatively highwhen its related commodity’s price is lower than otherwise.Or, when the price of one commodity decreases, thedemand for its complementary product will tend to increaseand vice versa. For example, a fall in the price of cars willlead to an increase in the market demand for petrol.
  23. 23. Consumer’s Expectation. A consumer’s expectationabout the future changes in the price of a givencommodity also may affect its demand. When heexpects its prices to fall in future, he will tend to buyless at the present prevailing low price. Similarly, if heexpects it price to rise in future, he will tend to buymore at present.
  24. 24. Advertisement Effect.In modern times, the preferences of a consumer canbe altered by advertisement and sales propaganda,albeit to a certain extent only. In fact, demand formany products like toothpaste, toilet soap, washingpowder, processed foods, etc. is partially caused bythe advertisement effect in a modern man’s life.
  25. 25. Factors Influencing Market DemandThe market demand for a commodity originates and isaffected by the form and change in the general demandpattern of the community of the people at large. Thefollowing factors affect the common demand pattern fora product in the market.• Price of the Product.At a low market price, market demand for the producttends to be high and vice versa.
  26. 26. Distribution of Income and Wealth in theCommunity.If there is equal distribution of income and wealth, themarket demand for many products of commonconsumption tends to be greater than in the case ofunequal distribution.
  27. 27. Community’s Common Habits and Scale ofPreferences.The market demand for a product is greatly influencedby the scale of preferences of the buyers in general.For example, when a large section of population shiftsits preferences from vegetarian foods to non-vegetarianfoods, the demand for the former will tend to decreaseand that for the latter will increase.
  28. 28. General Standards of Living and Spending Habitsof the People.When people in general adopt a high standard of livingand are ready to spend more, demand for manycomforts and luxury items will tend to be higher thanotherwise.
  29. 29. Number of Buyers in the Market and the Growth ofPopulation.The size of market demand for a product obviouslydepends on the number of buyers in the market. Alarge number of buyers will usually constitute a largedemand and vice versa. As such, growth ofpopulation over a period of time tends to imply a risingdemand for essential goods and services in general.
  30. 30. Age Structure and Sex Ratio of the population.Age structure of population determines marketdemand for many products in a relative sense. If thepopulation pyramid of a country is broad based with alarge proportion of juvenile population, then themarket demand for toys, school bags, etc. goods andservices required by children will be much higher thanhe market demand for goods needed by the elderlypeople.
  31. 31. Similarly, sex-ratio has its impact on demand for manygoods. An adverse sex ratio, i.e.females exceedingmales in number (or, males exceeding females as inMumbai) would means a greater demand for goodsrequired by the female population than by the malepopulation (or the reverse).
  32. 32. Future Expectations. If buyers in general expect thatprices of a commodity will rise in future, then presentmarket demand would be more as most of them wouldlike to hoard the commodity. The reverse happens if afall in the future prices is expected.
  33. 33. Level of Taxation and Tax Structure. Aprogressively high tax rate would generally mean alow demand for goods in general and vice versa. But,a highly taxed commodity will have a relatively lowerdemand than an untaxed commodity-if that happensto be a remote substitute.
  34. 34. • Inventions and Innovations. Introduction of new goods or substitutes as a result of inventions and innovations in a dynamic modern economy tends to adversely affect the demand for the existing products, which as a result of innovations, definitely become obsolete. For example, the advent of electronic calculators has made adding machine obsolete.
  35. 35. • Fashions. Market demand for many products is affected by changing fashions. For example, demand for commodities like jeans, salwar-kameej, etc. is based on current fashions.
  36. 36. Climate or Weather Conditions. Demand for certainproducts is determined by climatic or weatherconditions. For example, in summer, there is a greaterdemand for cold drinks, fans, coolers,e tc. Similarly,demand for umbrellas and rain coats is seasonal.Customs. Demand for certain goods is determined bysocial customs, festivals, etc. For example, duringDipawali days, there is a greater demand for sweetsand crackers and during Christmas, cakes are more indemand.
  37. 37. Advertisement and Sales Propaganda. Market demandfor many products in the present day is influenced bythe sellers’ efforts through advertisements and salespropaganda. Demand is manipulated through salespromotion. When these factors change, the generaldemand patterns will be affected, causing a change inthe market demand as a whole. Of course, there isalways a limit. 
  38. 38. DEMAND FUNCTIONA demand function in mathematical terms expressesthe functional relationship between the demand for theproduct and its various determining variables. Dx = f(Px,Ps,Pc,Yd, T, A, N, u)
  39. 39. THE DEMAND CURVEA demand curve is a graphical presentation of ademand schedule. When price quantity information of ademand schedule is plotted on the graph, a demandcurve is drawn. Demand curve thus depicts the pictureof the data contained in the demand schedule. Itrelates the amount the consumer is willing to buy ateach alternative conceivable price for the commodityover a given period of time.
  40. 40. THE LAW OF DEMANDThe law of demand describes the general tendency ofconsumers’ behavior in determining a commodity inrelation to the changes in its price. The law of demandexpresses the nature of functional relationship betweentwo variable of the demand relation, viz, the price andthe quantity demanded. It simply states that demandvaries inversely to changes in price. The nature of thisinverse relationship stressed by the law of demandwhich forms one of the best known and most significantlaws in economics.
  41. 41. THE LAW OF DEMANDStatement of the Law of Demand. Ceteris Paribus, thehigher the price of a commodity, the smaller is thequantity demanded and lower the price, larger thequantity demanded.In other words, the demand for a commodity extends(i.e., the demand rises) as the price falls and contracts(i.e. demand falls) as the price rises. Or briefly stated,the law of demand stresses that, other things remainingunchanged, demand varies inversely with price.
  42. 42. The conventional law of demand, however, relates tothe much simplified demand function : D = f (P)Where,D represents demand,P the price and f,connotesa functional relationship. It, however, assumes thatother determinants of demand are constant, and onlyprice is the variable and influencing factor.
  43. 43. The relation between price and quantity of demand isusually an inverse or negative relation, indicating alarger quantity demanded at a lower price and smallerquanity demanded at a higher price.
  44. 44. Assumptions Underlying the Law of DemandThe law of demand is conditional. It is based on certainconditions as given. It is, therefore, always stated withthe ‘other things being equal.’ It relates to the changein price variable only, assuming other determinants ofdemand to be constant. The law of demand is, thus,based on the following ceteris paribus assumptions :
  45. 45. Assumptions Underlying the Law of DemandThe law of demand is conditional. It is based on certainconditions as given. It is, therefore, always stated withthe ‘other things being equal.’ It relates to the changein price variable only, assuming other determinants ofdemand to be constant. The law of demand is, thus,based on the following ceteris paribus assumptions :
  46. 46. Assumptions Underlying the Law of DemandNo Change in Consumer’s Income. Throughout theoperation of the law, the consumer’s income shouldremain the same. If the level of a buyer’s incomechanges, he may buy more even at a higher price,invalidating the law of demand.No Change in Consumer’s Preferences. Theconsumer’s taste, habits and preference should remainconstant.
  47. 47. No Change in the Fashion. If the commodityconcerned goes out the fashion, a buyer may not buymore of it even at a substantial price of reduction.No Change in the Price of Related Goods. Price ofother goods like substitutes and supportive, i.e.complementary or jointly demanded products remainunchanged. If the prices of other related goodschange, the consumer’s preferences would changewhich may invalidate the law of demand.
  48. 48. No Expectation of Future Price Changes orShortages.The law requires that the given price change for thecommodity is a normal one and has no speculativeconsideration. That is to say, the buyers do not expectany shortages in the supply of the commodity in themarket and consequent future changes in the prices.The given price change is assumed to be final at atime.
  49. 49. No Change in Size, Age Composition and Sex Ratioof the Population. For the operation of the law inrespect of total market demand, it is essential that thenumber of buyers and their preferences should remainconstant. This necessitates that the size of population aswell as the age structure and sex ratio of the populationshould remain the same throughout the operation of thelaw. Otherwise, if population changes, there will beadditional buyers in the market, so the total marketdemand may not contract with a rise in price.
  50. 50. No Change in the Range of Goods Available to theConsumers.This implies that there is no innovation and arrival ofnew varieties of product in the market which may distortconsumer’s preferences.No Change in the Distribution of Income and Wealthof Community.There is no redistribution of incomes either, so that thelevels of income of the consumers remain the same.
  51. 51. No Change in Government Policy. The level oftaxation and fiscal policy of the government remains thesame throughout the operation of the law. Otherwise,changes in income-tax, for instance, may causechanges in consumer’s income or commodity taxes(sales tax or excise duties) and may lead to distortion inconsumer’s preferences.
  52. 52. No Change in Weather Conditions.It is assumed that the climatic and weather conditionsare unchanged in affecting the demand for certain goodslike woolen clothes, umbrellas,etc.