Demand analysis involves studying how the quantity demanded of a product responds to changes in its price, income levels, and prices of related goods. There are several concepts studied including: 1. The law of demand which states that quantity demanded is inversely related to price. Elasticity of demand measures the responsiveness of quantity demanded to price changes. 2. Demand is classified as consumer vs producer goods, autonomous vs derived demand, durable vs perishable goods and more. 3. Elasticity of demand is influenced by factors like availability of substitutes, income levels, necessity of the good. It is important in output and price determination. 4. Different types of elasticity include income elasticity, measuring

1. Demand Analysis
UNIT-2

2. • Demand analysis
Meaning of demand
Price demand relationship
Law of demand
• Movement along demand curve
• Shift in demand curve
• Demand classifications
• Elasticity of demand
• Measurement of elasticity of demand (Percentage Method),
• Factors affecting elasticity of demand,
• Importance of elasticity of demand,
• different concepts of elasticity of demand – Income elasticity,
Cross elasticity, Advertising elasticity.
• Supply –Meaning and determinants.

5. DEMAND
PRICE
DEMAND
INCOME
DEMAND
CROSS
DEMAND
Demand changes with the change in prices
When the consumer’s income goes up, the demand
for superior quality goods goes up. when it falls the
demand for inferior goods tend to rise
Eg: Income increases QD of meat Increases.
If income decreases QD of vegetables increases
Meat a superior product compared to vegetables.
Change in the quantity demanded for one product as
a result of change in the price of another commodity
Eg: QD of Tea increases when Price of Coffee
increases.

6. Demand Analysis: Objectives
• Forecasting sales,
• Manipulating demand,
• Assess salesmen’s performance for setting
their sales goals.
• Watching the trend of the company’s
competitive position

7. TYPES OF DEMAND/DEMAND
CLASSIFICATIONS

8. Consumer goods v/s Producer goods
Consumer Goods:
• Consumer goods refers to such products and services which are
satisfying consumer need.
• Consumer goods are needed for direct consumption and gives
direct and immediate satisfaction.
• Example: Bread, Apple, Rice and so on
Producer Goods:
• Producer goods are those which are used for producing other
goods.
• Producer goods are those which are used for further processing
or production of goods services to cash income.
• These goods gives satisfaction indirectly.
• Example: Machines, Steel, Tools, etc.

9. Autonomous Demand v/s Derived Demand
Autonomous Demand:
• Autonomous demand refers to the demand for
products and services which arises directly and
independently.
• Example: Demand for two wheelers is autonomous
demand.
Derived Demand:
• In case of derived demand, the demand for a product
arises due to purchase of another product.
• Examples:
(1) Demand for petrol increases because of increased
demand for two wheelers

10. Durable Goods v/s Perishable Goods
Durable Goods:
• Durable Goods are those which give service
relatively for a long period.
• Example: T.V., Washing Machine, table, chair,
etc.
Perishable Goods:
• Perishable Goods are those which give
service relatively for a short period.
• Examples: Milk, vegetables, fish, etc.

11. Firm Demand v/s Industry Demand
Firm Demand:
• The firm is a single business unit (single company).
The term “Firm Demand” denotes demand for a
particular product of a particular firm (company).
• Example: The demand of LG TVs is referred as Firm
Demand Or Company Demand.
Industry Demand:
• Industry refers to the group of companies producing
same type of product. Industry Demand refers to the
total demand for the product of a particular industry.
• Examples: Demand for TVs produced by all
companies(LG,SONY, ONIDA etc) together is Referred
as Industry Demand.

12. New Demand v/s Replacement
New Demand:
• New Demand refers to the demand for the
new products and it is addition to the existing
Product.
Replacement Demand:
• Replacement demand may also refer to the
demand resulting out of replacing the existing
asset with the new ones.
• Examples: Purchasing a new TV and replacing
with old is Referred as replacement demand.

13. Total market and segment market demand
Total Market Demand:
• Total market demand means the total demand
for a product in a given total market.
Segment Market Demand:
• Segment market demand refers to the demand
of product in particular market segment of a
total market.
• Examples: If a product selling in TamilNadu, total
demand means that total demand to that
product in TN. Market segment demand means
the demand in a particular area (Coimbatore
district).

14. PRICE DEMAND RELATIONSHIP

25. Exceptions of law of demand
In certain cases the demand curve is upward
i.e positively sloped, it is known as the
exceptions of law of demand.
These exceptions are as follows
• Giffen Paradox
• Ignorance Effect (high priced commodity is
better in quality)
• Emergency (War etc…)
• Speculation (Future change in price)

26. Movement along Demand Curve
A change in price causes a movement
along the demand curve.

27. • An increase in price from $12 to $16
causes a movement along the demand
curve, and quantity demand falls
from 80 to 60.
• A change in price doesn’t shift the
demand curve – we merely move
from one point of the demand curve
to another.

28. Shift in the Demand Curve
A shift in the demand curve occurs when the whole
demand curve moves to the right or left

29. .
The demand curve could shift to the right for the
following reasons:
• The Product became more popular (e.g. fashion
changes or successful advertising campaign)
• The price of a substitute good increased.
• The price of a complement good decreased.
• A rise in incomes (assuming the good is a normal
good)
• Seasonal factors.
Eg: After this pandemic demand for hand sanitizers and
face mask obtained shift in demand curve..

30. 7.Prices of Related Goods:
• Refer to fact that the prices of substitutes and
complementary goods also affect the supply of a
product.
• For example, if the price of wheat increases, then
farmers would tend to grow more wheat than rice.
This would decrease the supply of rice in the market.
8. Transport Conditions
• Better transport facilities increase the supply of
products.
• Therefore even if the price of a product increases, the
supply would not increase with out proper
transportation.

31. Elasticity of Demand
 The Law of demand states that if price of
commodity increases quantity demanded will falls
and if price of commodity falls quantity demanded
will increases.
 Law of demand indicates only direction of change
in quantity demanded in response to change in
price but ELASTICITY OF DEMAND states
with how much or to what extent the quantity
demanded will change in response to change in
price.

32. Elastic
A slight fall in the price of a product may cause
a considerable extension in their demand. Said
as Elastic demand
Inelastic
Take the case of salt. Even a big fall in its price
may not induce an appreciable extension in its
demand. said as inelastic demand.

35. Factors affecting elasticity of demand
1. Nature of commodity
• When a commodity is a necessity like food grains,
vegetables, medicines its demand does not fluctuate
much with change in price.
• When a commodity is a comfort like fan,
refrigerator its demand is generally elastic as
consumer can postpone its consumption.

36. 2. Availability of substitutes:
• Demand for a commodity with large number of substitutes will
be more elastic.
• For example, a rise in the price of Pepsi encourages buyers
to buy Coke and vice-versa.
• On the other hand, commodities with few or no substitutes like
wheat and salt have less price elasticity of demand.
3. Income Level:
• Rich people are not influenced much by changes in the price of
goods.
• But, poor people are highly affected by increase or decrease in
the price of goods. As a result, demand for lower income
group is highly elastic.

37. 4. Level of price:
• Level of price also affects the price elasticity of
demand. Costly goods like laptop, smart TV have
highly elastic demand
• demand for inexpensive goods like needle, match box
is inelastic
5. Postponement of Consumption:
• Commodities like biscuits, soft drinks whose demand
is not urgent, have highly elastic demand as their
consumption can be postponed in case of an increase
in their prices.
• commodities with urgent demand like life saving
drugs, have inelastic demand.

38. 6. Number of Uses:
• If the commodity under consideration has several
uses,
For example, electricity is a multiple-use
commodity.
Fall in its price will result in substantial increase in
its demand, particularly in those uses (like AC, Heat
convector )
• On the other hand, a commodity with no or few
alternative uses has less elastic demand.

39. 7. Share in Total Expenditure
• Proportion of consumer’s income spent on a particular
commodity also influences the elasticity of demand .
Greater the proportion of more is the elasticity of
demand for it and vice-versa.
• Demand for goods like salt, needle, soap, match box,
etc. tends to be inelastic as consumers spend a small
proportion of their income on such goods.
8. Habits
• Commodities, which have become habitual necessities
for the consumers, have less elastic demand.
• Alcohol, tobacco, cigarettes, are some examples of
habit forming commodities.

40. 8. Habits:
• Commodities, which have become habitual
necessities for the consumers, have less elastic
demand. It happens because such a commodity
becomes a necessity for the consumer and he
continues to purchase it even if its price rises.
Alcohol, tobacco, cigarettes, etc. are some examples
of habit forming commodities.

41. Importance of elasticity of demand
1. In the Determination of Output Level
2. In the Determination of Price
3. In Price Discrimination by Monopolist
4. In Price Determination of Factors of Production
5. In Demand Forecasting
6. In Dumping
7. In the Determination of Prices of Joint Products
8. In the Determination of Government Policies
9. Helpful in Adopting the Policy of Protection

42. 1. In the Determination of Output Level:
• For making production profitable, it is essential that the quantity
of goods should be produced corresponding to its demand.
• knowledge of elasticity of demand is necessary for determining
the output level.
2. In the Determination of Price:
• The elasticity of demand for a product is the basis of its price
determination to earn maximum profit.
• If the demand for a product is inelastic, the producer can charge
high price for it, whereas for an elastic demand product he will
charge low price.

43. 3. In Price Discrimination by Monopolist:
• Monopoly discrimination refers to different pricing
of the same commodity in two different markets.
• In the market with elastic demand for his
commodity, the discriminating monopolist fixes a low
price and in the market with less elastic demand, he
charges a high price.

44. 4. In Price Determination of Factors of Production:
• Factors of production are paid according to their
elasticity of demand. In other words, if the demand of a
factor is inelastic, its price will be high and if it is
elastic, its price will be low.
• 5. In Demand Forecasting:
• The elasticity of demand is the basis of demand
forecasting.
• Long- term production planning and management depend
more on the elasticity of demand.

45. 6. In the Determination of Prices of Joint Products:
• The concept of the elasticity of demand is of much
use in the pricing of joint products, like wool and
mutton, wheat and straw, cotton and cotton seeds, etc.
• In such cases, separate cost of production of each
product is not known.
• Therefore, the price of each is fixed on the basis of its
elasticity of demand.

46. 7. In the Determination of Government Policies:
• The knowledge of elasticity of demand is also
helpful for the government in determining its
policies.
• Before imposing statutory price control on a
product, the government must consider the
elasticity of demand for that product.

47. SUPPLY
• Supply refers to the quantity of a commodity
which producers or sellers are willing to produce
and offer for sale at particular price’, in a given
market, at a particular period of time.
• Quantity Supplied refers to the amount
(quantity) of a good that sellers are willing to
make available for sale at alternative prices for
a given period.

48. Mankiw et al.: Principles of
Microeconomics, 2nd Canadian edition.
Chapter 4: Page 48

49. Table 4-4: Individuals Supply Schedule
5
3.00
4
2.50
3
2.00
2
1.50
1
1.00
0
0.50
0
0.00
Quantity of cones Supplied
Price of Ice-cream Cone (Rs)

50. Price of Ice-
Cream Cone
Quantity of Ice-
Cream Cones
6 8 10 12
0 2
1.50
1.00
1
2.00
3 4
Rs.3.00
2.50
5
0.50
Figure 4-5: Ben’s Supply Curve

51. Determinants of Supply
1.Price of the commodity
• Direct relationship between the price of a
product and its supply.
• price of a product increases, then the supply of the
product also increases and vice versa.
2. Price of factors of production
• The inputs, such as raw material, man, money and
machines, required at the time of production are
termed as factors.
• If the factors are available in sufficient quantity and
at lower price, then there would be increase in
production and supply.

52. 3. Government’s Policies:
• Implies that the different policies of government, such
as fiscal policy and industrial policy, has a greater
impact on the supply of a product.
• For example, increase in tax on excise duties would
decrease the supply of a product.
4. Technology:
• Refers to one of the important determinant of supply. A
better and advanced technology increases the
production of a product, which results in the increase
in the supply of the product.
• For example, the production of fertilizers and good
quality seeds increases the production of crops. This
further increase the supply of food grains in the market.

53. 5. Natural Conditions:
• Implies that climatic conditions directly affect the
supply of certain products.
• For example, the supply of agricultural products
increases when monsoon comes on time. However,
the supply of these products decreases at the time of
drought.
• 6. Cost of Production:
• supply of a product would decrease with increase in
the cost of production and vice versa.
• cost of production rises due to loss of fertility of land,
high wage rates of labor, and increase in the prices of
raw material, transport cost, and tax rate.

54. Different concepts of elasticity of
demand in economics
1) Income Elasticity of Demand
2) Cross Elasticity of Demand
3) Advertising Elasticity of Demand

55. Income Elasticity of Demand
• “Income elasticity of demand refers to the
ratio of the percentage change in the
quantity demanded to the percentage in
income”-Watson
• The demand for a product and consumer’s
income are directly related to each other.

56. Example:
• Suppose the monthly income of an individual increases from Rs.
6,000 (Y) to Rs. 12,000 (Y1). Now, his demand for clothes
increases from 30 units (Q) to 60 units (Q1).
• The income elasticity of demand can be calculated as follows:
• ey = ∆Q (% change in quantity demanded) Y
______________________________ * ___
∆Y (% change in income) Q
• ∆Q(% change in quantity demanded) = Q1 – Q = 60 – 30 = 30
units
• ∆Y (% change in income) = Y1 – Y = 12000 – 6000 = Rs. 6000
• ey = 30/6000 * 6000/30 = 1

57. Types of income elasticity of demand
1. High income elasticity of demand:
Increase in income is accompanied by relatively
larger increase in quantity demanded.
2. Unitary income elasticity of demand:
Increase in income is accompanied by same
proportionate increase in quantity
demanded.

58. 3. Low income elasticity of demand:
Increase in income is accompanied by less than
proportionate increase in quantity demanded.
4. Zero income elasticity of demand:
Quantity Demanded is constant regardless of
changes in income.
5. Negative income elasticity of demand:
Increase in income is accompanied by decrease
in quantity demanded.

60. 2. Cross elasticity
• Cross elasticity of demand (XED) measures
the percentage change in quantity demand for
a good after a change in the price of another
good.
• Cross elasticity of demand =
% change in quantity demanded of A
% change in price of B

61. For example: if there is an increase in the price
of tea by 10%. and the quantity demanded for
coffee increases by 2%, then the cross
elasticity of demand = 2/10 =+ 0.2
• Substitute goods will have a positive cross-
elasticity of demand.
• Weak substitutes like tea and coffee will have
a low cross elasticity of demand.
• Close substitutes like sunrise coffee and Bru
coffee will have a high cross elasticity of
demand.

63. 3. Advertising Elasticity of Demand (AED)

64. For example,
• Inexpensive good, such as a burger, may result in a
quick increase in sales.
• But advertising a piece of jewelry may not have a
quick increase in sales because the good is expensive.
• External factors, such as the state of the economy and
consumer tastes, may also result in a change in the
quantity of a good demanded,
• Advertising elasticity of demand is not the most
accurate predictor of advertising's effect on sales.

65. 2 Types of AED

67. Measuring elasticity of demand
(Percentage method)
• According to this method.