This document provides an overview of demand, including definitions of demand and its key determinants. It discusses the demand function and how quantity demanded relates to factors like price, income, and prices of substitutes. The document also covers the law of demand and diminishing marginal utility, different types of demand curves, demand elasticity, and methods for demand forecasting that are useful for businesses. In summary, it is a comprehensive review of the basic economic concept of demand.

1. Demand Function
Raju Indukoori

2. Content
1. Demand
2. Demand determinants
3. Demand Function
4. Law of Demand
5. Law of diminishing marginal utility
6. Types of demand
7. Demand curve shift
8. Elasticity of demand
9. Demand Forecasting
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3. Demand
It is the quantity of a good purchased by consumer/s which
comes out of desire with willingness and ability for a given
price and at a given point of time. This makes the following
important ingredients of demand.
1. Desire through need or want
2. Ability to pay
3. Willingness to pay
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4. DEMAND
Quantity
Price
Plotting the combination of quantity demanded at a given
price.
Q
P
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5. Demand Determinants
Five major factors that determine demand are as follows.
1. Price of the product or service (Px).
2. Price of the related product or service (Py).
3. Income of the consumer (I).
4. Advertisement and other promotional efforts for product
(A).
5. Taste, Preference, Expectations, Demonstration Effect of
the consumer (T).
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6. Demand Function
The quantity demanded for a product depends on
various factors which make demand function. It can
expressed as follows.
D = f(Px, Py, I, A, T)
Where
Px = Price of the product or service X.
Py = Price of the substitute product or service Y.
I = Income of the consumer.
A = Advertisement and other promotional efforts for product x.
T = Taste, Preference, Demonstration Effect.
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7. Law of Demand
Law of demand was stated and documented by Alfred Marshall in 1892
and accepted by other economists
 Other things remaining the same, the amount demanded increases
with a fall in price and diminishes with a rise in price – Alfred
Marshall.
 Law of demand states that people will buy more at lower prices
and buy less at higher – Samuelson.
 Quantity demanded varies inversely with price – Ferguson.
Law of demand states that, for a given change in price of a product
there is a change in the quantity demanded for the same product in
proportion to the change in the price. Usually for a given decrease in
price quantity demanded would increase, vice versa which is know as
Law of demand. Change in price and change in quantity purchased are
inversely proportional.
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8. Law of diminishing marginal utility
 The law of diminishing marginal utility that, as the
consumer consumes more products the utility that he
derives from each additional or marginal product
diminishes. It diminishes to an extent that it becomes
zero or even negative.
 This is base for the law of demand.
 Utility is measured in cardinals or ordinal units.
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9. Utility Measure
No of Chocolates Marginal Utility Total Utility
1 50 50
2 30 80
3 10 90
4 5 95
5 0 95
6 -5 90
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10. Exceptions for law of demand
1) Giffen’s Paradox
1) Inferior and superior goods
2) Daily needs which cannot be avoidable
2) Veblen goods : Prestigious goods like diamonds, Premium
cars, footwear, smart phones, food items, etc.
3) Speculation: Anticipate future price rise and accumulate
now.
4) Consumer’s quality perception: High price is considered
as qualitative product and low priced product as of low
quality.
5) Irrational consumer: Basis to value a product and arrive at
a price is ignored.
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11. Types of Demand
Based on the demanding unit
1) Individual demand: Demand by an individual buyer.
2) Firm demand: It is the demand of an individual
company or firm which is determined by economic
conditions and competition.
3) Market demand /Total demand /industry demand:
It is the demand of all buyers or players in a market
including individuals, companies and government, which is
subject to general economic conditions.
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12. Types of Demand
Based on demand determinants
1) Price demand : Demand influenced buy changes in the
prices level of the product
2) Income demand: Change in income influences the
demand level. Even product switch from inferior products
to superior products happens.
3) Cross demand : Demand influenced by the changes in
the substitute or complementary product.
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13. 1. PRICE DEMAND
1) It is the demand influenced buy changes in the prices
level.
 As the price increases, demand decreases
 As the price decreases, demand increase
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14. Price Demand Schedule
 It is the schedule of the changes in quantity of a product
demanded at different prices. Below is the demand schedule
of bananas.
# Quantity in
dozen
Price per
dozen
1 ½ 200
2 1 160
3 2 125
4 3 100
5 4 75
6 5 50
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15. Demand Curve
Demand curve shows the relationship between price
and quantity demanded at a given point of time
holding everything else constant. The movements
along demand curve are as follows.
 A rise in price causes upward movement along a
given demand curve.
 A price decline causes downward movement
along a given demand curve.
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16. Change in demand with price rise
Quantity
Price
P0
Q0
P1
Q1
Negative Slope: An increase in price causes a
decrease in quantity demanded.
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17. Change in Demand with Price Fall
Quantity
Price
P0
Q0
P1
Q1
Negative Slope: A decrease in price
causes an increase in quantity demanded.
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18. 2. INCOME DEMAND
1) Change in income levels influences the demand level for a
product in two different ways as follows
2) 1) Increase in demand
3) 2) Decrease in demand
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19. Income increases – Demand increases
1) Change in income levels influences the demand level for a
product in two different ways as follows
2) 1) Increase in demand
3) 2) Decrease in demand
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20. Income increases – Demand increases
Quantity
Income
I0
Q0
I1
Q1
Positive Slope: An increase in
income causes an increase in
quantity demanded.
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21. Income increases – Demand Decreases
Quantity
Income
I0
Q0
I1
Q1
Negative Slope: An increase in income
causes a decrease in quantity demanded
due to the reason that the product becomes
inferior and the buyer partially or wholly
shifts to another product
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22. 3. CROSS DEMAND
1) The quantity demanded is influenced by the price of other
goods related to the product demanded. They can be
classified as
2) 1) Supplementary goods : Substitute or alternative
consumables like tea – coffee.
3) 2) Complementary goods : Related consumables like
milk and tea.
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23. Cross Demand – Substitute goods
Tea Quantity
Price of Coffee
P0
Q0
P1
Q1
Positive Slope: An increase in
coffee price made coffee
consumers to switch wholly or
partially to tea consumption
leading to an increase in demand
for tea.
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24. Cross Demand – Complementary goods
Quantity of 2 wheelers
Fuel Price
P0
Q0
P1
Q1
Negative Slope: An increase in fuel price
causes a decrease in quantity demanded.
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25. DEMAND CURVE SHIFT
 Change in non-price variables will define a new demand
curve
 Demand increase: If a non-price change allows more
to be sold at every price.
 Demand decrease : If a non-price change causes less
to be sold at every price.
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26. Quantity
Price
P0
Q0 Q1
Increase in demand without change in the price.
This is known as rightward demand shift.
Change in Demand without Price Change
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27. Quantity
Price
P0
Q1 Q0
Decrease in demand without change in the
price. This is known as leftward demand
shift.
Change in Demand without Price Change
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28. Factors contributing to Shift in demand
1. Change in Buyers’ Tastes
2. Change in Buyers’ Incomes
1. Normal Goods
2. Inferior Goods
3. Change in the Number of Buyers
4. Change in the Price of Related Goods
1. Substitute Goods
2. Complementary Goods
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29. ELASTICITY OF DEMAND
 It is the measure of the degree of change in the demand for
a product, in response to a give change in the price, income
and change in price of other related products.
 Law of demand shows the direction of the demand in
response to price change whereas, elasticity of demand
gives the extent of change in demand for the given change
in the influencing factor.
 Elasticity of demand is measured by comparing
proportionate change in demand and Proportionate change
in price.
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30. Types of elasticity based on demand determinants
1. Price Elasticity (EP)
EP = Proportionate change in quantity demanded
Proportionate change in price
2. Income Elasticity (EI)
EI = Proportionate change in quantity demand
Proportionate change in Income
3. Cross Elasticity (EC)
EC = Proportionate change in quantity demanded
Proportionate change in other products’ price
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31. Types of elasticity based on the size of elasticity
1. Relatively Elastic : E>1
2. Relatively Inelastic: E<1
3. Unitary Elastic : E=1
4. Perfectly Elastic : E=∞
5. Perfectly Inelastic : E=0
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32. Business and demand
 All business entities rely on preparing demand schedules
and demand curves for their own products as well as their
competitors products to know where they stand in business
 Historic demand analysis is the base for future sales.
 Demand forecasting is done by all business houses to
accommodate themselves in terms of future product
readiness and distribution of the same.
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33. Demand Forecasting Methods
 Survey methods
 Consumer Survey
 Market Survey
 Experts’ Opinion
 Collective Opinion
 Statistical methods
 Economic Indicators
 Econometrics
 Extrapolation
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34. Popular forecasting approaches for a new product
 Evolutionary: The product is assumed to be new to the
market.
 Substitute: The product as a substitute for the existing
products in the market.
 Growth curve: Higher the growth of the market, more is
the demand expected.
 Opinion polling: Consumer polling with samples and
designing the product as per the feed back.
 Sales experience: Test the market in one distribution
channel or market.
 Vicarious: Indirect survey of consumers through dealers.
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35. Thank You
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36. Raju Indukoori
Questions?
36