Demand and Consumer Analysis.pptx

1. ECONOMICS
Demand and consumer analysis

2. Demand Meaning :
Demand is an economic concept that relates to a consumer's desire to purchase
goods and services and willingness to pay a specific price for them.
An increase in the price of a good or service tends to decrease the quantity demanded.
Likewise, a decrease in the price of a good or service will increase the quantity demanded.
Demand = desire to buy + ability to buy + willingness to pay

3. Definition :
According to Melvin and Boyes, “Demand is a relationship
between two variables, price and quantity
demanded, with all other factors that could affect demand being
held constant”.
According to B.R.Schiller, “Demand is the ability and willingness to
buy specific quantity of a good at alternative prices is a
given time period”.

4. Types of demand :
Assuming other factors as constant, a relationship between the price and demand
of a commodity is known as Price Demand.
Price Demand can be shown as: Dx = f(Px)
Where,
Dx = Demand for the given Commodity
f = Functional Relationship
Px = Price of the given Commodity
1. Price Demand:

5. Assuming other things remaining as constant, a relationship between the demand of
a given commodity and the price of related commodities is known as Cross Demand.
2. Cross Demand:
3. Income Demand:
Assuming other factors as constant, a relationship between the consumer’s income and the
quantity demanded for a commodity is known as Income Demand. Income Demand can be
shown as:
Dx = f(Y)
Where,
Dx = Demand for the given Commodity
f = Functional Relationship
Y = Income of the Consumer

6. When demand for two or more goods arises simultaneously for satisfying a particular want
of the consumer, then such type of demand is known as Joint Demand.
4. Joint Demand:
For example, the demand for milk, coffee beans, and sugar is a joint
demand as all these goods are demanded together to prepare coffee.

7. 5. Composite Demand:
When a commodity can be used for more than one purpose, then such
type of demand is known as Composite Demand.
For example, the demand for water is a composite demand as it can be
used for various purposes like bathing, drinking, cooking, etc.

8. Determinants of demand :
The five determinants of demand are:
1. The price of the good or service
2. The income of buyers
3. The prices of related goods or services—either complementary and
purchased along with a particular item, or substitutes bought instead of a product
4. The tastes or preferences of consumers will drive demand
5. Consumer expectations about whether prices for the product will rise or fall in the
future

9. Demand function :
Demand function is a function that states the relation between two or more variables,
such as prices and quantities demanded
A demand function is defined by p=f(x), p = f ( x ) , where p measures the unit price and
x measures the number of units of the commodity in question, and is generally
characterized as a decreasing function of x; that is, p=f(x) p = f ( x )
decreases as x increases.

10. The law of demand :
The law of demand is one of the most fundamental concepts in economics. It works with
the law of supply to explain how market economies allocate resources and determine
the prices of goods and services that we observe in everyday transactions.
The law of demand states that the quantity purchased varies inversely with price. In
other words, the higher the price, the lower the quantity demanded. This occurs
because of diminishing marginal utility. That is, consumers use the first units of an
economic good they purchase to serve their most urgent needs first, then they use each
additional unit of the good to serve successively lower-valued ends.

11. The law of demand expresses a relationship between the quantity demanded and its price.
It may be defined in Marshall’s words as “the amount demanded increases with a fall in
price, and diminishes with a rise in price”. Thus it expresses an inverse relation between
price and demand. The law refers to the direction in which quantity demanded changes
with a change in price.

12. Shift and movement along demand curve :
Movement in demand curve, occurs along the curve, whereas, the shift in demand curve
changes its position due to the change in the original demand relationship. Movement
along a demand curve takes place when the changes in quantity demanded are associated
with the changes in the price of the commodity.

13. Individual demand and Market demand :
Individual Demand :
The quantity of a commodity a consumer is willing and able to
purchase at every possible price during a specific time period is
known as Individual Demand.
Market Demand :
The quantity of a commodity that all consumers are willing and able to
purchase at every possible price during a specific time period is known
as Market Demand.

14. Elasticity of demand :
The elasticity of demand, or demand elasticity, measures how demand responds to a
change in price or income. It is commonly referred to as price elasticity of demand
because the price of a good or service is the most common economic factor
used to measure it.

15. Determinants of elasticity of demand :
1. Consumer Income:
The income of the consumer also affects the elasticity ofm demand. For high-income
groups, the demand is said to be less elastic as the rise or fall in the price will not have
much effect on the demand for a product. Whereas, in case of the low-income groups,
the demand is said to be elastic and rise and fall in the price have a significant effect
on the quantity demanded. Such as when the price falls the demand increases and
vice-versa.

16. The elasticity of demand for a product is determined by the proportion of income spent by
the individual on that product. In case of certain goods, such as matchbox, salt a consumer
spends a very small amount of his income, let’s say Rs 2, then even if their prices rise the
demand for these products will not be affected to a great extent. Thus, the demand for such
products is said to be inelastic.Whereas foods and clothing are the items where an individual
spends a major proportion of his income and therefore, if there is any change in the price of
these items, the demand will get affected.
2. Amount of Money Spent:

17. 3. Nature of Commodity:
The elasticity of demand also depends on the nature of the commodity. The product can be
categorized as luxury, convenience, necessary goods. The demand for the necessities of life,
such as food and clothing is inelastic as their demand cannot be postponed. The demand for
the Comfort Goods is neither elastic nor inelastic. As with the rise and fall in their prices, the
demand decreases or increases moderately.Whereas the demand for the luxury goods is said to
be highly elastic because even with a slight change in its price the demand changes significantly.
But, however, the demand for the prestige goods is said to be inelastic, because people are
ready to buy these commodities at any price, such as antiques, gems, stones, etc.

18. 4.Existence of Substitutes:
The substitutes are the goods which can be used in place of one another. The goods
which have close substitutes are said to have elastic demand. Such as, tea and coffee are
close substitutes and if the price of tea increases, then people will switch to the coffee
and demand for the tea will decrease significantly. Whereas, if there are no close
substitutes for a product, then its demand is said to be inelastic. Such as salt and sugar
do not have their close substitutes and hence lower is their price elasticity.

19. 5.Range of Prices:
The price range in which the commodities lie also affects the elasticity of demand. Such as the
higher range products are usually bought by the rich people, and they do not care much about the
change in the price and hence the demand for such higher range commodities is said to be
inelastic.Also, the lower range commodities have inelastic demand because these are already low
priced and can be bought by any sections of the society. But the commodities in middle range
prices are said to have an elastic demand because with the fall in the prices the middle class and
the lower middle class are induced to buy that commodity and therefore the demand increases.
But however, if the prices are increased the consumption reduces and as a result demand falls.

20. Price elasticity of demand :
The price elasticity of demand is the percentage change in the quantity demanded of a good or service
divided by the percentage change in the price. The price elasticity of supply is the percentage change in
quantity supplied divided by the percentage change in price.
Price elasticity of demand is a measurement of the change in consumption of a product in relation to a
change in its price.
A good is perfectly elastic if the price elasticity is infinite (if demand changes substantially even with
minimal price change).
If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic.
If a good’s price elasticity is 0 (no amount of price change produces a change in demand), it is
perfectly inelastic.
If price elasticity is exactly 1 (price change leads to an equal percentage change in demand), it is
known as unitary elasticity.
The availability of a substitute for a product affects its elasticity. If there are no good substitutes and
the product is necessary, demand won’t change when the price goes up, making it inelastic.

21. Income elasticity of demand :
Income elasticity of demand is an economic measure of how responsive the quantity demanded for a
good or service is to a change in income. The formula for calculating income elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in income.
Income elasticity of demand denotes the responsiveness to change in consumers’ income with
the change in the demand for a certain good.
For a certain product, the income elasticity of demand can be positive or negative, or non-
responsive.
The larger the income elasticity of demand for a certain product, the greater the shift in demand
there is from a change in consumer income.

22. cross elasticity of demand :
Cross elasticity of demand refers to the way that changes in the price of one good can affect the
quantity demanded of another good. This relationship can vary depending on whether the two goods
are substitutes, complements, or unrelated to each other
The different types of cross elasticity of demand- Positive, Negative, and Zero. Substitute Goods are
associated with Positive Cross Elasticity. Complementary Goods are associated with Negative
Cross Elasticity.