Demand Analysis

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Demand Analysis

  1. 1. Demand Analysis
  2. 2. What is Demand? <ul><li>“ Demand means effective desire or want for a commodity which is backed up by the ability (purchasing power) and willingness to pay for it”. </li></ul><ul><li>Demand = Desire + Ability to pay + Willingness to spend </li></ul><ul><li>Demand is a relative concept – not absolute </li></ul><ul><li>It is related to price , time and place. </li></ul><ul><li>“ The demand for a commodity refers to the amount of it which will be bought per unit of time at a particular price </li></ul><ul><li>( in a particular market)”. </li></ul>
  3. 3. Individual and Market demand <ul><li>Individual Demand : Individual demand for a product is the quantity of it a consumer would buy at a given price, during a given period of time. </li></ul><ul><li>Market demand : Market demand for a product is the total demand of all the buyers in the market taken together at a given price during a given period of time. </li></ul><ul><li>Demand Schedule: ‘ A tabular statement of price – quantity (demanded) relationship at a given period of time’ </li></ul><ul><li> Individual demand schedule </li></ul><ul><li> Market demand schedule. </li></ul>
  4. 4. Types of demand <ul><li>Individual demand & Market demand </li></ul><ul><li>Demand for capital goods and demand for consumer goods </li></ul><ul><li>Autonomous demand & Derived demand </li></ul><ul><li>- Direct & indirect demand </li></ul><ul><li>Demand for durable & non-durable goods </li></ul><ul><li>- Replacement demand in case of durable goods </li></ul><ul><li>Short term demand & Long term demand </li></ul>
  5. 5. Determinants of Demand <ul><li>Price of the product </li></ul><ul><li>Price of the related goods </li></ul><ul><li>Consumer’s income level </li></ul><ul><li>Distribution pattern of national income </li></ul><ul><li>Consumer’s taste and preferences </li></ul><ul><li>Advertisement of the product </li></ul><ul><li>Consumer’s expectation about future price and supply position </li></ul><ul><li>Demonstration effect and Band-Wagon effect </li></ul><ul><li>Consumer credit facility </li></ul><ul><li>Demography and growth rate of population </li></ul><ul><li>General std. of living and spending habits </li></ul><ul><li>Climatic and weather conditions </li></ul><ul><li>Customs </li></ul><ul><li> Demand Function: It states the (functional/mathematical) relationship between the demand for the product ( dependent variable) and its determinants ( independent variables). </li></ul>
  6. 6. Law of demand <ul><li>Statement of Law : “ Other things being equal, the higher the price of a commodity, the smaller is the quantity demanded and lower the price, larger the quantity demanded”. </li></ul><ul><li>Factors behind Law of demand </li></ul><ul><li>Substitution effect </li></ul><ul><li>Income effect </li></ul><ul><li>Utility Maximising behaviour </li></ul><ul><li>Exceptions to Law of demand </li></ul><ul><li>Expectation regarding future prices </li></ul><ul><li>Giffen goods </li></ul><ul><li>Articles of snob appeal / Veblen effect </li></ul><ul><li>Consumer’s psychological bias ( about quality and price relationship) </li></ul>
  7. 7. Changes in quantity demanded & Changes in demand <ul><li>Changes in quantity demanded is related to law of demand i.e. due to changes in price . </li></ul><ul><li>When with a fall in price more of a commodity is demanded, there is EXTENSION of demand & when with a rise in price less of a commodity is purchased, there is CONTRACTION of demand. </li></ul><ul><li>Changes in demand is caused by changes in various other determinants of demand, the price remaining unchanged. </li></ul><ul><li>When more of a commodity is bought than before at any given price there is INCREASE in demand & when less of a commodity is bought than before at any given price there is DECREASE in demand. </li></ul>
  8. 8. Elasticity of demand <ul><li>Elasticity of demand is the degree of responsiveness of demand to the changes in its determinants. </li></ul><ul><li>(A) PRICE ELASTICITY O DEMAND </li></ul><ul><li>The extent of response of demand for a commodity to the changes in its price, other determinants of demand remaining constant is called price elasticity of demand. </li></ul><ul><li>e p = Proportional changes in quantity demanded </li></ul><ul><li>Proportional changes in price </li></ul><ul><li>e p = Q /Q P /P </li></ul><ul><li>e p = Q / Q X P / P </li></ul><ul><li>e p = Q / P X P / Q </li></ul>
  9. 9. <ul><li> Types of price elasticity of demand </li></ul><ul><li>Perfectly elastic demand </li></ul><ul><li>Perfectly inelastic demand </li></ul><ul><li>Relatively elastic demand </li></ul><ul><li>Relatively inelastic demand </li></ul><ul><li>Unitary elastic demand </li></ul><ul><li> Determinants of price elasticity of demand </li></ul><ul><li>- Nature of commodity - Uses of commodity </li></ul><ul><li>- Availability of substitutes - Durability of commodity </li></ul><ul><li>- Possibility of postponement - Income level of consumers </li></ul><ul><li>- Price range of the product - Complementary relationship </li></ul><ul><li>- Knowledge level of consumers - Frequency of purchase </li></ul><ul><li>- Proportion of expenditure on the product - Time period </li></ul>
  10. 10. <ul><li> Practical application </li></ul><ul><li>Pricing decisions - Factor rewarding </li></ul><ul><li>Terms of trade - Foreign exchange rates </li></ul><ul><li>Tax rates - Public utilities </li></ul><ul><li>(B) INCOME ELASTICITY OF DEMAND </li></ul><ul><li>The degree of responsiveness of demand for a commodity to the changes in the consumers’ income is known as income elasticity of demand </li></ul><ul><li>e y = Q / Y X Y / Q </li></ul><ul><li> Types of income elasticity </li></ul><ul><li>1. Unitary income elasticity 2.Income elasticity grater than one </li></ul><ul><li>3. Income elasticity less than one 4.Zero income elasticity </li></ul><ul><li>5. Negative income elasticity </li></ul>
  11. 11. <ul><li> Practical application </li></ul><ul><li>Growth rate of firm - Demand forecasting </li></ul><ul><li>Production planning - Marketing plan </li></ul><ul><li>(C) CROSS ELASTICITY OF DEMAND </li></ul><ul><li>The degree of responsiveness of demand for a commodity to a given change in the price of some other related commodity is known as cross elasticity of demand. </li></ul><ul><li>e xy = Proportional change in demand for X </li></ul><ul><li>Proportional change in the price of Y </li></ul><ul><li>e xy = Qx Py X Py Qx </li></ul>
  12. 12. <ul><li>(D) ADVERTISING / PROMOTIONAL ELASTICITY OF DEMAND </li></ul><ul><li>The degree of responsiveness of demand for a commodity to </li></ul><ul><li>given change in the advertising or promotional expenses is </li></ul><ul><li>known as cross elasticity of demand. </li></ul><ul><li>e a= Proportional change in demand for X </li></ul><ul><li>Proportional change in the advertisement </li></ul><ul><li>expenditure </li></ul><ul><li>e a = Qx ad.exp X ad.exp Qx </li></ul><ul><li>(E) SUBSTITUTION ELASTICITY OF DEMAND </li></ul><ul><li>The degree of responsiveness of demand ratio between X & Y </li></ul><ul><li>to a given change in their price ratio is known as substitution </li></ul><ul><li>elasticity of demand. </li></ul><ul><li>e s = Proportional change in the ratio of demand for X & demand for Y </li></ul><ul><li>Proportional change in the ratio of price of X & price of Y </li></ul><ul><li>e s = (Qx / Qy) (Px / Py) </li></ul><ul><li>(Qx / Qy) (Px / Py) </li></ul>
  13. 13. <ul><li> Measuring price elasticity of demand </li></ul><ul><li>- Total Expenditure Method </li></ul><ul><li>- Point Method </li></ul><ul><li>- Arc Method </li></ul>
  14. 14. Demand forecasting <ul><li>Demand forecasting is predicting or anticipating the future demand for a product . </li></ul><ul><li> Micro level  Industry level  Macro level </li></ul><ul><li>USES OF DEMAND FORECASTING DATA </li></ul><ul><li>Short term demand forecasting </li></ul><ul><ul><li>Evolving production policy </li></ul></ul><ul><ul><li>Determining price policy </li></ul></ul><ul><ul><li>Evolving purchase policy </li></ul></ul><ul><ul><li>Fixation of sales targets </li></ul></ul><ul><ul><li>Short term financial policy </li></ul></ul><ul><li>Long term demand forecasting </li></ul><ul><ul><li>Business planning </li></ul></ul><ul><ul><li>Man power planning </li></ul></ul><ul><ul><li>Long term financial planning </li></ul></ul>
  15. 15. Individual Demand Analysis
  16. 16. <ul><li>Basis of Individual demand </li></ul><ul><li>Utility </li></ul><ul><li>- From the commodity point of view </li></ul><ul><li>- From Consumers’ point of view </li></ul><ul><li>Approaches to Consumer Demand Analysis </li></ul><ul><li>Cardinal Utility approach </li></ul><ul><li>- Total utility </li></ul><ul><li>- Marginal utility </li></ul><ul><li> LAW OF DIMINISHING MARGINALUTILITY </li></ul><ul><li>Assumptions underlying cardinality approach </li></ul><ul><li>- Rationality </li></ul><ul><li>- Limited money income </li></ul><ul><li>- maximisation of satisfaction </li></ul><ul><li>- Utility is cardinally measurable </li></ul><ul><li>- Diminishing marginal utility </li></ul><ul><li>- Constant marginal utility of money </li></ul>
  17. 17. <ul><li>Consumer’s equilibrium </li></ul><ul><li>- One commodity model </li></ul><ul><li>- Multiple commodity model – THE LAW OF EQUIMARGINAL </li></ul><ul><li>UTILITY </li></ul><ul><li>Ordinal Utility Approach </li></ul><ul><li> Assumptions underlying ordinal approach </li></ul><ul><li>Rationality </li></ul><ul><li>Ordinal utility </li></ul><ul><li>Transitivity & consistency in choice </li></ul><ul><li>Nonsatiety </li></ul><ul><li>Diminishing marginal rate of substitution </li></ul><ul><li>Marginal rate of substitution - MRS is the rate at which one commodity can be substituted for another, the level of satisfaction remaining the same. </li></ul><ul><li>Diminishing MRS – The quantity of a commodity that the quantity of a commodity that a consumer is willing to sacrifice for an additional unit of another goes on decreasing when he goes on substituting one commodity for another. </li></ul><ul><li>Indifference Curve - Indifference curve is a locus of points, each representing a different combination of two substitute goods, which yield the same level of utility or satisfaction to the consumer. </li></ul><ul><li>Indifferent Map </li></ul>
  18. 18. <ul><li> Properties of Indifference curve </li></ul><ul><li>Indifference curves have a negative slope </li></ul><ul><li>Indifference curves are convex to the origin </li></ul><ul><li>Indifference curves do not intersect with each other </li></ul><ul><li>Indifference curves are not tangent to one another </li></ul><ul><li>Upper indifference curve always indicate a higher level of satisfaction </li></ul><ul><li> Budgetary constraint & The Budget Line </li></ul><ul><li>The limitedness of the income acts as a constraint on how high a consumer can ride on his/her indifference map. </li></ul><ul><li> Consumer’s Equilibrium </li></ul>

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