Unit 4 Demand analysis_TT.pptx

CHAPTER 4
Demand analysis
ABVM 521
Instructor: Tewodros Tefera (PhD)

MEANING OF DEMAND
• The term ‘demand’ refers to a ‘desire’ for a commodity backed by ability and willingness
to pay for it. Unless a person has an adequate purchasing power or resources and the
preparedness to spend his resources, his desire for a commodity would not be
considered as his demand.
• For example, if a man wants to buy a car but he does not have sufficient money to pay
for, his want is not his demand for the car. A want with three attributes - desire to buy,
willingness to pay and ability to pay - becomes effective demand. Only an effective
demand figures in economic analysis and business decisions.

MEANING OF DEMAND
• The term ‘demand’ for a commodity (i.e., quantity demanded) has always a
reference to ‘a price’, ‘a period of time’ and ‘a place’.
• Any statement regarding the demand for a commodity without reference to
its price, time of purchase and place is meaningless and is of no practical
use. For instance, to say ‘demand for TV sets is 50,000' carries no meaning
for a business decision, nor it has any use in any kind of economic analysis.

Objectives of Demand Analysis:
• According to Dean, demand analysis has four managerial purposes:
1) Forecasting sales,
2) Manipulating demand,
3) Appraising salesmen’s performance for setting their sales quotas, and
4) Watching the trend of the company’s competitive position.
• Of these the first two are most important and the last two are ancillary to the
main economic problem of planning for profit.

i. Forecasting sales
• Forecasting refers to predicting the future level of sales on the basis of
current and past trends. This is perhaps the most important use of
demand studies.
• True, sales forecast is the foundation for planning all phases of the firm’s
operations. Therefore, purchasing and capital budget (expenditure)
programmes are all based on the sales forecast.

ii. Manipulating demand
• Sales forecasting is most passive. Very few firms take full advantage of it
as a technique for formulating business plans and policies.
• However, “management must recognize the degree to which sales are a
result only of the external economic environment but also of the action of
the firms itself.

ii. Manipulating demand
• Sales volumes do differ, “depending upon how much money is spent on
advertising, what price policy is adopted, what product improvements are
made, how accurately salesmen and sales efforts are matched with
potential sales in the various territories, and so forth”.
• Often advertising is intended to change consumer tastes in a manner
favorable to the advertiser’s product. The efforts of so-called ‘hidden
persuaders’ are directed to manipulate people’s ‘true’ wants. Thus sales
forecasts should be used for estimating the consequences of other plans
for adjusting prices, promotion and/or products.

THE LAW OF DEMAND
• The law of demand states that the demand for a commodity increases when its price
decreases and it falls when its price rises, other things remaining constant.
• This is an empirical law, i.e., this law is based on observed facts and can be verified with
new empirical data. As the law reveals, there is an inverse relationship between the
price and quantity demanded. The law holds under the condition that “other things
remain constant”.
• “Other things” include other determinants of demand, viz., consumers’ income, price of
the substitutes and complements, taste and preferences of the consumer, etc. These
factors remain constant only in the short run. In the long run they tend to change. The
law of demand, therefore, hold only in the short run.

Factors behind the Law of Demand
• The downward slope of the demand curve depicts the law of demand,
i.e., the quantity of a commodity demanded per unit of time increases as
its price falls, and vice verse. The factors that make the law of demand
operate are following.
• Substitution Effect When price of a commodity falls, prices of all other
related goods (particularly of substitutes) remaining constant, the goods
of latter category become relatively costlier. Or, in other words, the
commodity whose price has fallen becomes relatively cheaper. Since
utility maximising consumers substitute cheaper goods for costlier ones,
demand for the cheaper commodity increases. The increase in demand
on account of this factor is known a substitution effect.

• Income Effect As a result of fall in the price of a commodity, the real income of the
consumer increases. Consequently, his purchasing power increases since he is required
to pay less for the same quantity.
• The increase in real income encourages the consumer to demand more of goods and
services. The increase in demand on account of increase in real income is known as
income effect.
• It should however be noted that the income effect is negative in case of inferior goods.
In case the price of an inferior goods accounting for a considerable proportion of the
total consumption expenditure falls substantially, consumers’ real income increases and
they become relatively richer: Consequently, they substitute the superior goods for the
inferior ones.
• As a result, the consumption of inferior goods falls. Thus, the income effect on the
demand for inferior goods becomes negative

• Utility-Maximising Behavior. The utility-maximising behavior of the consumer under
the condition of diminishing marginal utility is also responsible for increase in demand
for a commodity when its price falls.
• When a person buys a commodity, he exchanges his money income for the
commodity in order to maximise his satisfaction. He continues to buy goods and
services so long as marginal utility of his money (MUm) is less than the marginal
utility of the commodity (MUo). Given the price of a commodity, the consumer
adjusts his purchases. so that.
MUm = Po = Muo
• When price of the commodity falls, (MUm = Po) < MUo, and equilibrium is disturbed.
In order to regain his equilibrium, the consumer will have to reduce the MUo to the
level of MUm. This he can do only by purchasing more of the commodity. Therefore,
the consumer purchases the commodity till MUm = Po = MUo. This is another reason
why demand for a commodity increases when its price decreases.

Exceptions to the Law of Demand
• (a) Expectations regarding further prices. When consumers expect a continuous increase
in the price of a durable commodity, they buy more of it despite increase in its price with
a view to avoiding the pinch of a much higher price in future. For instance, in pre-budget
months, prices generally tend to rise. Yet, people buy more of storable goods in
anticipation of further rise in prices due to new levies.
• (b) Status Goods. The law does not apply to the commodities which are used as a status
symbol’s of enhancing social prestige or for displaying wealth and riches, e.g., gold,’
precious stones, rare paintings, antiques, etc. Rich people buy such goods mainly because
their prices are high and buy more of them when their prices move up.
• (c) Giffen Goods. Another exception to the law of demand is the classic case of Giffen
goods . A Giffen good may be any inferior commodity much cheaper than its superior
substitutes, consumed by the poor households as an essential commodity. If price of such
goods increases (price of its substitute remaining constant), its demand increases instead
of decreasing. The reason is, when price of, an inferior good increases, income remaining
the same, poor people cut the consumption of the superior substitute so that they may
buy more of the inferior good in order to meet their basic need.

DETERMINANTS OF MARKET DEMAND
(1) Price of the Product
(2) Price of the Related Goods
• Substitutes
• Complements
(3) Consumer’s Income
• Essential consumer goods (ECG)
• Inferior goods
• Normal goods
• Prestige and luxury goods
(4) Consumer’s taste and preference
(5) Advertisement Expenditure
(6) Consumers’ Expectations
(7) Consumer-Credit Facility
(8) Population of the Country
(9) Distribution of National Income

(1) Price of the Product
• The price of product is one of the most important determinants of its
demand in the long run, and the only determinant in the short run.
• The price and quantity demand are inversely related. The law of demand
states that the quantity demanded of a product which its consumers/users
would like to buy per unit of time, increases when its price falls, and
decreases when its price increases, other factors remaining constant.

• The demand for a commodity is also affected by the changes in the price of
its related goods. Related gods may be substitutes or complementary goods.
• Substitutes. Two commodities are deemed to be substitutes for each other if
change in the price of one affects the demand for the other in the same
direction. For instance, commodities X and Y are considered as substitutes
for each other if a rise in the price of X increases demand for Y and vice
versa. Tea and coffee, hamburgers and hot-dog, alcohol and drugs are some
examples of substitutes in case of consumer goods.
• By definition, the relation between demand for a product and price of its
substitute is of positive nature. When price of the substitute (say, coffee) of a
product (tea) falls (or increases), the demand for the product falls (or
increases).

• Complements. A commodity is deemed to be a complement for another when
it complements the use of the other or when the use of the two goods goes
together so that their demand changes (increases or decreases) simultaneously.
• For example, petrol is a complement to car and bajaj, butter and jam to bread,
milk and sugar to tea and coffee, etc. Two goods are termed as complementary
to each other if an increase in the price of one causes a decrease in demand for
the other.
• By definition, there is an inverse relation between the demand for a good and
the price of its complement. For instance, an increase (or decrease) in the price
of petrol causes a decrease (or an increase) in the demand for car and other
petrol-run vehicles, other things remaining the same.

• Income is the basic determinant of quantity of a product demanded since it
determines the purchasing power of the consumer. That is why the people
with higher current disposable income spend a larger amount on goods and
services than those with lower income.
• Income-demand relationship is of more varied nature than that between
demand and its other determinants. While other determinants of demand,
e.g., product’s own price and the price of its substitutes are more significant
in the short-run, income as a determinant of demand is equally important in
both short run and long run.

(a) Essential consumer goods (ECG).
• The goods and services of this category are called ‘basic needs’ and are
consumed by all persons of a society, e.g., food grains, salt, vegetable oils,
matches, cooking fuel, a minimum clothing and housing.
• Quantity demanded of this category of goods increases with increase in
consumer’s income but only up to certain limit, even though the total
expenditure may increase in accordance with the quality of goods consumed,
other factors remaining the same.
• The relationship between goods of this category and consumer’s income is
shown by the curve ECG in Fig. 4.5 As the curve shows, consumer’s demand for
essential goods increases only until his income rises to OY2. It tends to saturate
beyond this level of income.

(b) Inferior goods.
• Inferior and superior goods are widely, know to both the consumers and the
sellers. For instance, every consumer knows that millet is inferior to wheat
and rice; kerosene is inferior to cooking gas; travelling by bus is inferior to
travelling by taxi, so on and so forth. In economic sense, however, a
commodity is deemed to be inferior if its demand decreases with the
increase in consumer’s income.
• The relation between income and demand for an inferior goods is worked out
under the assumption that other determinants of demand remain the same.
Demand for such goods rises only up to a certain level of income and declines
as income increases beyond this level.

(c) Normal goods.
• Technically, normal are those which are demanded in increasing quantities as
consumers’ income rises. Clothing’s, household furniture and, automobiles
are some of the important examples of this category of goods.
• Demand for normal goods increases rapidly with the increase in the
consumer’s income but slows down with further increase in income.

(d) Prestige and luxury goods.
• Prestige goods are those which are consumed mostly by rich section of the society,
e.g., precious stones, antiques, rare, paintings, luxury cars and such other items of
show-off. Though it may look controversial, luxury items include jewelry, costly
brands of cosmetics, TV sets, refrigerators, electrical gadgets, cad, etc.
• Demand for such goods arises beyond a certain level of consumer’s income i.e.
consumption enters the area of luxury goods. Producers of such items, while
assessing the demand for their product, should consider the income changes in the
richer section of the society, not only the per capita income.

(4) Consumer’s taste and preference
• Consumer’s taste and preference play an important role in determining
demand for a product, Taste and preference depend, generally, on the changing
lifestyle, social customs, religious values attached to a commodity, habit of the
people, the general levels of living of the society, and age and sex of the
consumers.
• Change in these factors changes consumers’ taste and preferences. As a result,
consumer reduce or give up the consumption of some goods and add new ones
to their consumption pattern. For example, following the change in fashion,
people switch their consumption pattern from cheaper, old fashioned goods
over to costlier ‘mod’ goods, so long as price differentials are commensurate
with their preferences.

(5) Advertisement Expenditure
• Advertisement costs are incurred with the objective of promoting sale of the
product. Advertisement helps in increasing demand for the product in at
least four ways:
• by informing the potential consumers, about the availability of the
product;
• by showing its superiority to the rival product;
• by influencing consumers’ choice against the rival products; and
• by setting fashions and changing tastes.
• The impact of such effects shifts the demand upward to the right. IN other
words, other factors remaining the same, as expenditure on advertisement
increases, volume of sale increases to an extent.

(7) Consumer-Credit Facility
• Availability of credit to the consumers from the sellers, banks, relations and
friends or from any other source encourages the consumers to buy more
than what they would buy in the absence of credit availability.
• That is why, the consumers who can borrow more can consume more than
those who cannot borrow Credit facility affects mostly the demand for
durable goods, particularly those which require bulk payment at the time of
purchase. The car-loan facility may be one reason why some car company
arrange with banks to boost their sale.

(6) Consumers’ Expectations
• Consumers’ expectations regarding the future prices, income, and supply
position of goods, etc. play important role in determining the demand for
goods and services in the short run. If consumers expect a rise in the price
of a storable commodity, they would buy more of it at its current price with
a view to avoiding the pinch of price-rise in future.
• On the contrary, if consumers expect a fall in the price of certain goods,
they postpone their purchase of such goods with a view to taking
advantage of lower prices in future, mainly in case of non-essential goods.
This behaviour of consumers reduces the current demand for the goods
whose prices are expected to decrease in future.

(8) Population of the Country
• The total domestic demand for a product of mass consumption depends also on the
size of the population. Given the price, per capita income, taste and preference etc., the
larger the population, the larger the demand for a product with an increase (or
decrease) in the size of population, employment percentage remaining the same,
demand for the product will increase (or decrease).
(9) Distribution of National Income
• The distribution pattern of the national income is also an important determinant of a
product. If national income is evenly distributed, market demand for normal goods will
be the largest. If national income is evenly distributed, market demand for normal
goods will be the largest. If national income is unevenly distributed, i.e., if majority of
population belongs to the lower income groups, market demand for essential goods,
including inferior ones, will be the largest whereas the demand for other kinds of goods
will be relatively less

Demand Distinctions: Types Of Demand
• Demand may be defined as the quantity of goods or services desired by
an individual, backed by the ability and willingness to pay.
Types Of Demand:
1. Direct and indirect demand: (or) Producers’ goods and consumers’
goods: demand for goods that are directly used for consumption by the
ultimate consumer is known as direct demand (example: Demand for
T-shirts). On the other hand demand for goods that are used by
producers for producing goods and services. (example: Demand for
cotton by a textile mill).

2. Derived demand and autonomous demand: when a produce derives its
usage from the use of some primary product it is known as derived
demand. (example: demand for tyres derived from demand for car)
Autonomous demand is the demand for a product that can be
independently used. (example: demand for a washing machine)
3. Durable and non durable goods demand: durable goods are those that
can be used more than once, over a period of time (example: Microwave
oven) Non durable goods can be used only once (example: Band-Aid or
plaster)

4. Firm and industry demand: firm demand is the demand for the product of a particular
firm. (example: Dove soap) The demand for the product of a particular industry is industry
demand (example: demand for steel in Ethiopia)
5. Total market and market segment demand: a particular segment of the markets demand
is called as segment demand (example: demand for laptops by engineering students) the
sum total of the demand for laptops by various segments in Ethiopia is the total market
demand.
6. Short run and long run demand: short run demand refers to demand with its immediate
reaction to price changes and income fluctuations. Long run demand is that which will
ultimately exist as a result of the changes in pricing, promotion or product improvement
after market adjustment with sufficient time.

7. Joint demand and Composite demand: when two goods are demanded in
conjunction with one another at the same time to satisfy a single want, it is called as
joint or complementary demand. (example: demand for petrol and two wheelers) A
composite demand is one in which a good is wanted for several different uses.
(example: demand for iron rods for various purposes)
8. Price demand, income demand and cross demand: demand for commodities by
the consumers at alternative prices are called as price demand. Quantity demanded by
the consumers at alternative levels of income is income demand. Cross demand refers
to the quantity demanded of commodity ‘X’ at a price of a related commodity ‘Y’
which may be a substitute or complementary to X.

Elasticity Of Demand
• In economics, the term elasticity means a proportionate (percentage) change in one
variable relative to a proportionate (percentage) change in another variable. The
quantity demanded of a good is affected by changes in the price of the good, changes
in price of other goods, changes in income and changes in other factors. Elasticity is a
measure of just how much of the quantity demanded will be affected due to a
change in price or income.
• Elasticity of Demand is a technical term used by economists to describe the degree of
responsiveness of the demand for a commodity due to a fall in its price. A fall in price
leads to an increase in quantity demanded and vice versa.
• The elasticity of demand may be categorized as follows:
• Price Elasticity
• Income Elasticity and
• Cross Elasticity

Price Elasticity
• The response of the consumers to a change in the price of a commodity is measured
by the price elasticity of the commodity demand. The responsiveness of changes in
quantity demanded due to changes in price is referred to as price elasticity of demand.
The price elasticity of demand is measured by dividing the percentage change in
quantity demanded by the percentage change in price.
• Price Elasticity = Proportionate change in the Quantity Demanded /Proportionate
change in price
Price elasticity= Percent change in qt. demanded =
Percent change in price

• For example: Quantity demanded is 20 units at a price of ETB 500. When
there is a fall in price to ETB 400 it results in a rise in demand to 32 units.
Therefore the change in quantity demanded is 12 units resulting from the
change in price of ETB 100.
Price elasticity= Percent change in qt. demanded=
Percent change in price
• The Price Elasticity of Demand is = 500 / 20 x 12/100 = 3

PRICE ELASTICITY OF DEMAND
34
When the price rises, . . . the
quantity demanded does not
change.
There is no change in the quantity
demanded when price changes.
Therefore, demand is perfectly
inelastic.
Perfectly Inelastic Demand

Perfectly Elastic Demand
35
For even a very small change in the price
of spring water, . . .
the quantity demanded of spring water
changes by a very large amount.
The change in the quantity demanded is
much (infinitely) larger than the change
in price. Therefore, the demand for
spring water is perfectly elastic.

Elasticity
Price (£)
Quantity Demanded
The demand curve can be a
range of shapes each of
which is associated with a
different relationship between
price and the quantity
demanded.

• Total Revenue and Price Elasticity of Demand
o Relationship between price elasticity of demand and total revenue
o There is a unique relationship between the price elasticity of
demand, a change in the price of the good, and sellers’ total revenue
from (or buyers’ total expenditure on) the good.
o This relationship is valid for the price elasticity of demand only. It is
not valid for any other elasticity (that is, income elasticity of demand,
price elasticity of supply, or cross-elasticities).
37

TOTAL REVENUE AND PRICE ELASTICITY OF DEMAND
• Elastic demand
o If demand is elastic, a price change results in a change in total
revenue (or total expenditure) in the opposite direction.
o According to the law of demand, a price change causes a change in
quantity demanded in the opposite direction. Because demand is
elastic, the quantity change is bigger than the price change. So the
quantity change determines what happens to total revenue.
P increase  TR decrease
P decrease  TR increase
38

• Inelastic demand
•If demand is inelastic, a price change results in a change in total
revenue (or total expenditure) in the same direction.
P increase  TR increase
P decrease  TR decrease
•According to the law of demand, a price change causes a change in
inelastic, the price change is bigger than the quantity change. So the
price change determines what happens to total revenue.
39

• Unit elastic demand
•If demand is unit elastic, a price change results in no change in total
revenue (or total expenditure).
P increase  TR unchanged
P decrease  TR unchanged
•According to the law of demand, a price change causes a change in
unit elastic, the quantity change equals the price change. So the
quantity change and the price change offset each other and total
revenue doesn’t change.
40

Elasticity
Price
Quantity Demanded (000s)
D
The importance of elasticity is the
information it provides on the effect
on total revenue of changes in price.
£5
100
Total revenue is price x quantity sold.
In this example, TR = £5 x 100,000 =
£500,000.
This value is represented by the grey
shaded rectangle.
Total Revenue

Elasticity
Price
Quantity Demanded (000s)
D
If the firm decides to decrease price to (say)
£3, the degree of price elasticity of the
demand curve would determine the extent of
the increase in demand and the change
therefore in total revenue.
£5
100
£3
140
Total Revenue

Elasticity
Price (£)
Quantity Demanded
10
D
5
5
6
% Δ Price = -50%
% Δ Quantity Demanded = +20%
Ped = -0.4 (Inelastic)
Total Revenue would fall
Producer decides to lower price to
attract sales
Not a good move!

Elasticity
Price (£)
Quantity Demanded
D
10
5 20
Producer decides to reduce price to increase sales
7
% Δ in Price = - 30%
% Δ in Demand = + 300%
Ped = - 10 (Elastic)
Total Revenue rises
Good Move!

Income Elasticity
• YED measures the responsiveness of quantity demanded to a change in income
• it is the mathematical relationship between ∆Y & ∆Qd
YED = %ΔQd
% ΔY
• If a change in income significantly alters the Qd, then YED is said to be “relatively
elastic.”
• If a change in income does not have much affect on Qd, then YED is said to be
“relatively inelastic.”

Y
Q
YED Tells us about the type of
good:
o for all ‘normal’ goods, YED
will be positive
(as we earn more, we buy
more)
o for ‘inferior’ goods, YED will
be negative
(as we earn more, we buy
less)
Income Elasticity
Normal good
Inferior good

Y
Q
D
Y0
Y1
Q0 Q1
Income Inelastic Demand
o a large income change results in
only a small change in Qd
o 0<YED <1
o found on ‘necessities’ (we buy the
same amount regardless of income
changes)
Income Inelastic Demand

Y
Q
D
Y0
Y1
Q0 Q1
Income Elastic Demand
o a small income change results in a
large change in Qd
o 1 < YED
o found on ‘optional’ products (a little
boost in income suddenly adds
these items to our basket)
Income Elastic Demand

Income Elasticity – Types of Goods
Elasticity Positive / Negative
Normal, Necessity Inelastic Positive
Inferior, Necessity Inelastic Negative
Normal, Optional Elastic Positive
Inferior, Optional Elastic Negative

Effect Income elasticity
coefficient
Classification of good
A proportionately larger change in
the quantity demanded
>1 Luxury good
A proportionately smaller change in
the quantity demanded
<1 Normal
A negative change in the quantity
demanded
<0 Inferior good

Cross Elasticity of Demand
Definition:
Cross elasticity (Exy) tells us the relationship between two products. it measures the
sensitivity of quantity demand change of product X to a change in the price of product Y.
Formula: Exy = percentage change in Quantity demanded of X
percentage change in Price of Y.
Characteristics:
Exy > 0, Qd of X and Price of Y are directly related. X and Y are substitutes.
Exy approaches 0, Qd of X stays the same as the Price of Y changes. X and Y are not
related.
Exy < 0, Qd of X and Price of Y are inversely related. X and Y are complements.

Cross Elasticity of Demand
Examples:
1. If the price of Product A increased by 10%, the quantity demanded of B
increases by 15 %. Then the coefficient for the cross elasticity of the A and
B is :
Exy = percentage change in Qx / percentage change in Py = (15%) / (10%) =
1.5 > 0, indicating A and B are substitutes.
2. If the price of Product A increased by 10%, the quantity demanded of B
decreases by 15 %. Then the coefficient for the cross elasticity of the A and
B is :
Exy = percentage change in Qx / percentage change in Py = (- 15%) / (10%) =
- 1.5 < 0, indicating A and B are complements.

DEMAND FUNCTION
• In mathematical language, a function is a symbolic statement of relationship between
the dependent and the independent variables. Demand function states the relationship
between the demand for a product (the dependent variable) and its determinants (the
independent variables).
• Let us consider a very simple case of demand function. Suppose all the determinants of
demand for commodity X, other than its price, remain constant. This is a case of short-
run demand function. In case of a short-run demand function quantity demanded of X,
(Dx) depends only on its price (Px).
• The same statement may be symbolically written as:
Dx = f (Px)
• Where in this function. Dx is a dependent and Px is an independent variable. It reads
‘demand for commodity X (i.e., Dx) is the function of its price (i.e., Px)’.

Linear Demand Function
• A demand function is said to be linear when it results in a linear demand curve. It
represents a linear form of demand function. Assuming that in an estimated demand
function a = 100 and b =.5, function can be written as:
Dx = 100 – 5Px
P Dx= 100- 5Px Dx
0 D 100 5*0 100
5 D 100 5*5 75
10 D 100 5*10 50
15 D 100 5*15 25
20 D 100 5*20 0

Graphic description of demand function
0
5
10
15
20
25
0 20 40 60 80 100 120
P
Dx
This demand schedule when
plotted gives a linear demand
curve as shown in figure below.
Not that the linear demand
curve has a constant slope
(DPx/DDx).

Simple regression

Simple regression
Selling expense Sales
1 4
2 6
4 8
8 14
6 12
5 10
8 16
9 16
7 12

Graphical representation of linear relationship
0
2
4
6
8
10
12
14
16
18
0 2 4 6 8 10
Sale
volume
Sale expenses

Regression estimate
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.985
R Square 0.971
Adjusted R Square 0.967
Standard Error 0.777
Observations 9
ANOVA
df SS MS F
Significan
ce F
Regression 1 140.67 140.67 233.26 0.00
Residual 7 4.22 0.60
Total 8 144.89
Coefficients
Standard
Error t Stat P-value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 2.5357 0.6051 4.1906 0.0041 1.1049 3.9665 1.1049 3.9665
Selling expense 1.5036 0.0984 15.2727 0.0000 1.2708 1.7364 1.2708 1.7364

0
2
4
6
8
10
12
14
16
18
0 2 4 6 8 10
Sales
Selling expense
Selling expense Line Fit Plot
Sales Predicted Sales

Multiple linear function
• A change in demand occurs when one or more of the determinants of demand change
and it is expressed in the following equation.

Multiple Regression analysis
• Suppose that a firm’s demand function is

Sale volume (ml) Sale expense (ml) Price (10$)
6 2 0
4 1 1
16 8 2
10 5 3
12 6 4
8 4 5
12 7 6
16 9 7
14 8 8

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.997
R Square 0.994
Adjusted R2 0.992
Standard Error 0.370
Observations 9
ANOVA
df SS MS F F
Regression 2 144.07 72.03 525.72 0.00
Residual 6 0.82 0.14
Total 8 144.89
Coefficients
Standard
Error t Stat P-value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 2.529 0.288 8.770 0.000 1.824 3.235 1.824 3.235
Sale expense (ml) 1.758 0.069 25.343 0.000 1.588 1.928 1.588 1.928
Price (10$) -0.352 0.071 -4.981 0.002 -0.525 -0.179 -0.525 -0.179

Engel Condition
The consumer’s budget can be written as:
assuming all income is spent on commodities
The effects of changes in income on consumption can
be obtained by differentiating the above equation
with respect to I :

Engel Condition
Multiply each component by

Engel Condition
Recall that:
and
This states that the weighted sum of the income elasticities
for all items in the consumer’s budget should sum to 1.

Unit 4 Demand analysis_TT.pptx

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Unit 4 Demand analysis_TT.pptx