The document discusses demand analysis and the key concepts related to demand including: - Demand is the quantity of a good consumers are willing and able to purchase at a given price in a given time period. - Demand depends on factors like price, income, tastes, number of consumers, and expectations about future prices and income. - The demand curve shows the inverse relationship between price and quantity demanded - as price increases, quantity demanded decreases. - Supply is the quantity of a good producers are willing and able to sell at a given price based on factors like production costs, technology, and number of firms. The law of supply states that quantity supplied increases as price increases.

1. Demand Analysis
By
DEVEGOWDA S R

2. The Concept of Demand. . .
� Market refers to the interaction between seller and buyers of a good or
services at a mutually agreed upon price.
� Demand is defined as that want, need or desire which is backed by
willingness and ability to buy a particular commodity, in a given period
of time.
� Demand is the quantity of a commodity which consumers are willing to
buy at a given price for a particular unit of time.

3. The Concept of Demand. . .
◆Quantity Demanded refers to the
amount (quantity) of a good that
buyers are willing to purchase at
alternative prices for a given period.
P
Q
Unwilling to
buy
Willing
to buy

4. Definition of Demand
� The demand for a product refers to the amount of it which will be
bought per unit of time at a particular price
� Demand = Desire + Ability to pay (i.e., Money or Purchasing Power)
+ Will to spend
� Demand is an effective desire, as it is backed by willingness to pay
and ability to pay.

5. Types of Demand
1. Demand for consumers’ goods and producers’ goods
2. Demand for perishable and durable goods
3. Autonomous (direct) and derived (indirect) demand
4. Normal/superior and inferior goods
5. Necessary, comforts and luxury goods
6. Related goods: Substitutes and complementary goods
7. Individual buyer’s demand and all buyers’ (aggregate / market)
demand.
8. Firm and Industry demand
9. Demand by market segments and by total market

6. Consumers’ Goods and Producers’ Goods
� Goods and Services used for final consumption are called
consumers’ goods.
� These include those consumed by human-beings (e.g. food items,
clothes, kitchen tools, residential houses, medicines, and services of
teachers, doctors, lawyers, washer men and shoe-makers), animals
(e.g. dog food and fish food), birds (e.g. grains), etc.

7. � Producers’ goods refer to the goods used for production of other
goods.
� Thus, producers’ goods consist of plant and machines, factory
buildings, services of business employees, raw-materials, etc.
� The distinction is somewhat arbitrary. This is because, whether a
good is consumers’ or producers’ depends on its use.
� For ex., if a sofa set is used in the drawing room of a house - it is a
consumers’ good; while if is a used in the reception room of a
business house – it is a producers’ good.

8. � But, the distinction is useful for a proper demand analysis for while
the demand for consumers’ goods depends on households’ income,
that for producers’ goods varies with the production level, among
other things.

9. Perishable and durable goods
� Both consumers’ and producers’ goods are further classified into
perishable (non-durable) and durable goods.
� In laymen’s language, perishable goods are those which perish or
become unusable after sometime, the rest are durable goods.
� In economics, perishable goods refer to those goods which can be
consumed only once while in case of durable goods, their services
only are consumed.

10. � Perishable goods include all services (e.g. services of teachers
and doctors), food items, raw-materials, coal, and electricity,
while durable goods include plant and machinery, buildings,
furniture, automobiles, refrigerators, and fans.
� Durable goods pose more complicated problems for demand
analysis than do non-durables.
� Sales of non-durables are made largely to meet current demands
which depends on current conditions.

11. � In contrast, sales of durable goods go partly to satisfy new
demand and partly to replace old items.
� Further, the letter set of goods are generally more expensive than
the former set, and their demand alone is subject to preponement
and postponement, depending on current market conditions vis-à-
vis expected market conditions in future.

12. Autonomous (direct) and
Derived (Indirect) Demand
� The goods whose demand is not tied with the demand for some other
goods are said to have autonomous demand, while the rest have
derived demand.
� Thus, the demands for all producers’ goods are derived demands, for
they are needed in order to obtain consumers or producers goods.

13. � Thus, the demand for goods which fulfill our basic Physiological
requirements, are generally included in autonomous demand.
� For example; Demand for soap, clothing etc
� While the demand for goods for the production of other goods
and services are included in derived.
� For example; Demand for raw material like steel, cement, plant
and machinery etc,

14. � Demand for money which is needed not for its own sake but for its
purchasing power, which can buy goods and services.
� Similarly, demand for car’s battery or petrol is a derived demand,
for it is linked to the demand for a car.
� There is hardly anything whose demand is totally independent of
any other demand.
� But the degree of this dependence varies widely from product to
product.

15. � For ex: Demand for petrol is totally linked to the demand for petrol
driven vehicles, while the demand for sugar is only loosely linked
with the demand for milk.
� Goods that are demanded for their own sake have direct demand
while goods that are needed in order to obtain some other goods
possess indirect demand.
� In this sense, all consumers’ goods have direct demands while all
producers’ goods, including money, have indirect demand.

16. Normal/Superior and Inferior Goods
� Normal goods, also called as superior goods.
� The former are those whose demand increases as income increases,
and the latter are those whose demand falls as income goes up, and
vice versa.
� For example, milk, refrigerator, television, education, and the good
quality of food grains and clothes are superior goods while the poor
quality of food grains and clothes are inferior goods.

17. � In other words, the superior goods are the ones which the rich people
consume while the inferior goods are for the poor people’s
consumption.
� Further, these are relative concepts.
� Thus, for example, scooter/bike is a superior good in relation to a
cycle, while it is an inferior good relative to a car.

18. Necessary, comforts and Luxury
Goods
� In common sense, the necessary goods are essential for existence,
comforts goods make the life comfortable and luxury goods are
luxuries of life.
� However, in economics they have special meanings.
� These all are considered as superior goods but of different degrees.
� Thus, as the consumers income rise, more of each of these three kinds
of goods is consumed but the proportion of the consumption budgets
differ.

19. � In case of necessary goods, as income increases, while the
consumption expenditure on them increases, the percentage of
total expenditure/income spent on each of them goes down.
� In case of comforts, the said percentage remains the same, while in
case of luxuries, it goes up.
� In general, ordinary foods, drinks, clothing, some education and
medical aids are considered as necessary.

20. � Some means of transport, good quality of food, drinks and clothing,
tourism, etc. are taken as comforts.
� Luxuries include foods in high end hotels, designers clothing,
specious residences, foreign touruism, and so on.

21. Substitute and Complementary
Goods
� Goods which crated joint demand are complementary goods.
� Therefore demand for one commodity is dependent upon demand
for the other one.
� For ex: pen and ink, printer and ink cartridge, computer and
software, car and petrol(diesel) etc.
� Goods that complete with each other to satisfy any particular want
are called substitute.
� Also, note that the degree of substitution might vary form product to
product.

22. Substitute and Complementary
Goods
� Example of Close substitutes: Coke and Pepsi, WagonR and
Santro, petrol driven car or diesel driven car, saving a/c with SBI
or ICICI bank, investing in govt bonds or company deposits, and
so on.
� On the other hand, there are products which are not so good
substitutes of each other, for example, car and bike, airways and
railways.
� This categorization of goods helps producers in taking decisions
related to price, output, advertising, etc.

23. Individual’s Demand and Market
Demand
� The demand for a good by an individual buyer is called
individual’s demand while the demand for a good by all
buyers in a market is called market demand.
� For ex, if the milk market consisted of, say, only three
buyers, then individuals and market demand (monthly)
could be as follows.

24. Individual firm Demand
Amul’s Demand: Ice Cream Cones
Price/cones Daily quantity
_________________________________
Rs10.00 12
Rs15.00 10
Rs20.00 8
Rs25.00 6
Rs30.00 4

25. Market Demand
◆Market demand is the sum of all individual demands at each
possible price.
◆Assume the ice cream market has two buyers as follows:
Price Per Cone Amul Vadilal Market
� Rs10.00 12 + 7 = 19
� Rs15.00 10 + 6 = 16
� Rs20.00 8 + 5 = 13
� Rs25.00 6 + 4 = 10
� Rs30.00 4 + 3 = 7

26. Firm and Industry Demand
� Most goods today are produced by more than one firm and so there
is a difference between the demand facing an individual firm and
that facing an industry (all firms producing a particular good
constitute an industry engaged in the production of that good).
� For ex: Cars in India are manufactured by Maruti Suzuki, TATA
motors, Hindustan Motors, Premier Automobiles, and Standard
Motor Products of India.

27. � Demand for Maruti car alone is a firm’s (company) demand where
as demand for all kinds of cars is industry’s demand.
� Similarly, demand for Godrej refrigerators is a firm’s demand while
that for all brands of refrigerators is the industry’s demand.

28. Demand by Market Segments and by
Total Market
� The market demand is the total demand for the product in the
market. It is the sum (total) of the demand of a product by all the
consumers in the market.
� In managerial economic the total market demand concept is having
very less importance.

29. � On the other hand demand by segment is the entire market is
divided into different groups on the basic of location, demography,
life style and behavior of the consumers in the classification is more
meaningful in managerial economics.
� The demand condition in each segment is different from other,
which provides better guidance for the manager in understanding
the different class of consumers.

30. Recurring and Replacement Demand
� Consumer goods can be further divided into consumable goods
and durable goods. Consumable goods have recurring demand, i.e.
they are consumed at frequent intervals, like eat food twice a day,
take tea and snacks three to four times a day, read newspaper
everyday, fill petrol in your vehicle every week, etc.

31. � Durable consumer goods are purchased to be used for a long time
but they need replacement.
� For ex : car, mobile, furniture, house etc.

32. Why Demand Analysis is needed?
� Demand analysis is needed basically for three purpose:
1. To provide the basis for analyzing market influences on the
demand
2. To provide the guidance for manipulating the demand
3. To guide in production planning through forecasting the demand

33. Demand Function
� A function is that which describes the relationship between a
variable (dependent variable) and its determinants (independent
variables).
� Thus, the demand function for a good relates the quantities of a
goods which consumers demand during some specific period to the
factors which influence that demand.
� Mathematically, the demand function for a goods x can be
expressed as follows:

34. Demand function
Dx= f (Y, Px, Ps, Pc, T; Ep, Ey, N, D)
✔ Dx =Demand of goods x
✔ Y =Income of consumers
✔ Px =Price of x
✔ Ps =Price of substitute of x
✔ Pc =Price of complements of x
✔ T =Taste of consumers
✔ Ep =Consumers’ expectations about future price
✔ Ey = Consumers’ expectations about future income
✔ N =No. of consumers
✔ D =Distribution of consumers

35. � The first five determinants affect the demand for all goods, the next
two are influence mainly on the demand for durable and expensive
goods, and the next tow are arguments only in the demand functions
for a group of consumers.
� The impact of these determinants on Demand is
1) Price effect on demand: Demand for x is inversely related to its
own price.

36. 2) Substitution effect on demand: If y is a substitute of x, then
as price of y increases, demand for x also increases.
3) Complementary effect on demand: If z is a complement of x,
then as the price of z falls, the demand for z goes up and thus
the demand for x also tends to rise.
4)Price expectation effect on demand: Here the relation may not
be definite as the psychology of the consumer comes into play.

37. 5) Income effect on demand: As income rises, consumers buy
more of normal goods (positive effect) and less of inferior goods
(negative effect).
6) Promotional effect on demand: Advertisement increases the
sale of a firm up to a point.
Socio-psychological determinants of demand like tastes and
preferences, custom, habits, etc.

38. Demand Curve
� Demand curve considers only the price demand relation, other
factors remaining the same.
An individual’s demand schedule for commodity x
� Price x (per unit) Quantity of x demanded (in units)
2.0 1.0
1.5 2.0
1.0 3.0
0.5 4.5

39. � The demand curve is negatively sloped, indicating that the
individual purchases more of the commodity per time period at
lower prices.
� The inverse relationship between the price of the commodity and
the quantity demanded per time period is referred to as the law
of demand.
� A fall in Px leads to an increase in Dx because of the
substitution effect and income effect.

40. Determinants of Demand
①Product’s Own Price
②Consumer Income
③Prices of Related Goods
④Tastes & preferences
⑤Expectations about future price & income
⑥Number of Consumers & their Distribution

41. Law of Demand
� Law of demand states that, ceteris paribus, demand for a product is
inversely proportional to its price.
� Price of the product is the most important variable of a product’s
demand. i.e. Dx = f(Px)
� Law of Diminishing Marginal Utility:
According to this law, the consumer consumes successive units of
a commodity, the utility derived from each additional unit
(marginal unit) goes on falling. Hence, the consumer would
purchase only as many units of the commodity, where the marginal
utility of the commodity is equal to its price.

42. Demand Schedule and Demand
Curve
� Demand Schedule is the list or tabular statement of the different
combinations of price and quantity demanded of a commodity.
� Demand curve shows the relationship between price of a good and
the quantity demanded by consumers.

43. Demand Schedule and Individual
Demand Curve
Point on
Demand
Curve
Price (Rs
per cup)
Demand
(‘000
cups)
a 15 50
b 20 40
c 25 30
d 30 20
e 35 10
e
b
a
c
10 20 30
15
20
30
35
50
40
25
Quantity of coffee
O
d
43

44. Law of Supply
� Any discussion on demand cannot be complete without
understanding supply.
� Demand and Supply are like two sides of a coin or two blades of
scissors.
� Demand indicates the willingness of a purchaser to buy a particular
commodity, supply means the willingness of the firms to sell a
particular commodity.
� Supply refers to the quantities of a good or service that the seller is
willing and able to provide at a price, at a given point of time, ceteris
paribus.

45. � The Law of supply states that other things remaining the same, the
higher the price of a commodity, the grater is the quantity supplied.
� Supply Function:
Sx = f(Px, C, T, G, N)
Where C= Cost of Production(wages, interest, rent and price of raw
materials)
T = State of technology
G = Govt. policy regarding taxes and subsidies
N = No. of firms

46. Determinants of Supply
� Supply is positively related to price of the commodity.
� Supply is reduced if the cost of production rises.
� Technology bears a positive relationship with supply. An improved
techology reduces cost of production per unit of output, enhances
productivity and thus increases the supply of the product.
� Government policies related to taxes and subsidies on certain
products also have an effect on supply as they increase or decrease
the cost. Such effects may be either negative (in case of taxes) or
positive (in case of subsidies).

47. � No of firms: With increase in the number of producers of a
particular product, the supply of the product in the market will
increase.
� If entry is unrestricted, new firms will continue to enter the market,
thus increasing supply and degree of competition. (Perfectly
Competitive market, in the long run, as more firms enter into the
industry, the aggregate supply curve of the product shifts to the
right (or left) due to an increase in the supply of the product.)

48. Shift in Demand Curve
� Shift of demand curve due to a change in any of the factors other
than price is a change in demand.
� When demand increases without any change in price, the demand
curve will shift to the right, and with a reduction in demand, the
curve will shift to the left.
� Demand curve shifts to the right if income rises and shifts to the left
if income falls, ceteris paribus.

49. Change in Demand
D1
D2
D0
Price
Quantity
0
■ Shift in demand curve from D0 to
D1
■ More is demanded at same price
(Q1>Q)
■ Increase in demand caused by:
■ A rise in the price of a
substitute
■ A fall in the price of a
complement
■ A rise in income
■ A redistribution of income
towards those who favour the
commodity
■ A change in tastes that
favours the commodity
■ Shift in demand curve from D0 to
D2
■ Less is demanded at each price
(Q2<Q)
P
Q1
Q
Q2
49

50. Concept of Elasticity
� Elasticity can be defined as “the proportionate change in demand of product in response to the
proportionate change in any of the factors affecting demand”. The benefit of concept of elasticity that it
shows the amount of change in the demand.
� When the law of demand only shows the direction of change in demand, the elasticity of demand shows
the direction as well as the % change in demand. So, Elasticity of demand is more useful concept than
price.

51. Concept of Elasticity
� Elasticity is a measure of the sensitiveness of one variable to changes
in some other variable.
� It is expressed in terms of a percentage and is devoid of any unit of
measurement.
� Elasticity of a variable x with respect to variable y is expressed as
ex,y.
� ex,y = % change in x
% change in y

52. Demand Elasticities
� Demand elasticities refer to elasticities of demand for a good with respect to each of the determinants of its
demand.
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Promotional elasticity of demand

53. Price elasticity of demand
� Price elasticity can be defined as “the proportionate change in
demand of product in response to the proportionate change in price
of a product.’
� Ep= % change in demand of X
% change in price of X
� Price Elasticity of Demand is negative since there is an inverse
[negative] relationship between price and the demand of the
product. If price increase, demand decrease, if price decrease,
demand increases.

54. � Types of price elasticity
1. Perfectly elastic demand ( e = α)
� When an insignificant or minor change in the price will result in an
extra ordinary large change in demand, the demand is said to be a
perfectly elastic. A slight change means a slight decrease in the
price will result in the increase in demand to infinity and a slight
increase in the price will lead to the decrease in demand to ‘0’. But
in actual situation the demand cannot be perfectly elastic.

55. 2. Perfectly inelastic demand: (e = 0)
� When the demand for the commodity remains constant
irrespective of the change in the price of commodity.
� There is hardly any commodity in the world for which this is true.
� For ex: salt. Salt is an inexpensive and yet an essential
consumption item and its consumption can vary only within a
small range.
� For this reason alone, its consumption hardly varies with
variations in its price.

56. 3. Unitary elastic demand: (e = 1)
� When the percentage change in the price of a commodity brings
about the same percentage change in the demand of the commodity,
the demand is said to be unitary elastic. For, e.g., 5% increase or
decrease in the price will result in 5% decrease or increase in
demand for the commodity.

57. 4. Elastic demand [ e > l ]
� In this case changes in price leads to a more than
proportionate change in demand. For, e.g., if the price of
commodity X changes by 2 %, the demand for X will
change by more than 2%.
� Most luxury items have elastic demands.

58. 5. Inelastic demand [ e < l ]
� In this case changes in price leads to a less than proportionate
change in demand. For, e.g., if the price changes 2% the demand
changes by less than 2%.
� A large number of goods and services, which include all the
essential items, have inelastic demand.

59. Income Elasticity of Demand
� We know the income of the consumer is an important determinant
of demand.
� Although income does not vary in the short run, its impact on long
term demand analysis in very crucial.
� Therefore it is useful to learn income elasticity of demand (ey).
� Income elasticity of demand measures the degree of
responsiveness of demand for a commodity to a given change in
consumer’s income.
� Assume that all other variables are ceteris paribus.

60. Income elasticity of demand
� The Income Elasticity expresses the relationship between the
% change in income and corresponding % change in demand
for a particular commodity.
� It measure the % change in demand due to % change in the
income of consumers
� ey = % change in demand of X
% change in income of consumer
� ey = Q2 – Q1/Q1
Y2 – Y1/ Y1

61. Degrees of Income Elasticity
� Income elasticity of demand also has similar degrees of price
elasticity of demand, namely perfectly elastic, perfectly
inelastic, relatively elastic, relatively inelastic and unitary
elastic.
� Hence, when the proportionate change in demand is more
than that in income, demand is highly elastic; when the
proportionate change in demand is less than that of income,
demand is highly inelastic.

62. � Normally the demand for commodity has a tendency to increase
as income increases, so income Elasticity is generally positive,
but this may not be saw in case of inferior goods.
� The demand for inferior goods reduces as the income of the
consumer increases because higher income leads to the use of
superior quality of goods.
� Hence the value of income elasticity can be either negative or
positive, depending upon nature of product.

63. Degrees of Income Elasticity
1. Positive Income Elasticity
2. Zero Income Elasticity
3. Negative Income Elasticity

64. Positive Income Elasticity
�A good that has positive income elasticity is regarded as
normal good.
�A normal good is one which a consumer buys in more
quantities when his income increases.
�Ex : Clothes, fruits, jewellery, etc.

65. Zero Income Elasticity
� Zero income elasticity implies that there is no change in
the demand for a commodity when there is a change in
income. Such goods are called neutral goods.
� Ex: match box, salt, needles, postcard etc.

66. Negative Income Elasticity
� It implies that demand for a commodity decreases as the income
of the consumer increases.
� A good that has negative income elasticity of demand is regarded
as an inferior good. i.e. The consumer buys less of such a good
when his income increases and consumer would switch over
consumption to superior quality of good with increase in income.
� Ex : Poor quality of food, clothes etc.

67. Income Elasticity of demand is-
� Positive for superior /normal goods
� Negative for interior good
� Positive and More than 1 for all luxuries goods
� Positive and around unity for all comforts goods.
� Positive and Less than 1 for all superior and necesssary goods
� May be 0 for the products like salt, match box, needle, etc

68. Cross Elasticity of Demand
� Demand for commodity is influents not only by price commodity
and income, but also by the price of other commodity. It expresses
the relationship between a change in demand for a commodity due to
change in the price of some other commodity. It measures the
proportionate change in demand due to proportionate change in price
of some other commodity. Ec of product is negative. For, e.g., tea &
coffee in case of substitute goods.
� Ey = % change in demand of X
% change in Price of Y
� It is positive if goods x and y are substitutes in the consumption
basket, negative if they are complements, and zero if the two goods
are unrelated.
� The greater the magnitude of this elasticity, the stornger is the
relationship between two goods.

69. �Positive Cross Elasticity:-
�Substitute goods are those which compact with each other.
For, e.g., tea, coffee etc. For substitutes goods the cross
elasticity is positive.
�Generally if the price of tea falls, the demand of tea rise and
at the same, time tea become cheaper than coffee. So, some
of the customer currently consuming coffee will start
consuming tea instead of coffee. So the demand of coffee
reduces.
�For substitutes quantity demanded of one good moves in
the same direction as the price of the other.
�Ex : coke and pepsi, zen and santro, etc.

70. � Negative Cross Elasticity:
�Complementary goods are those goods which have to be
consumed simultaneously it means if a consumer wants to
consume one product he has to consume other product.
�For complements, quantity demanded of one good moves
in the opposite direction as the price of the other.
�For, e.g., car & petrol. Elasticity for complementary goods
is negative. If the price of car reduces, the demand for it
increases and at the same time the requirement of petrol
also increases, which will increases the demand for it.
�Ex: bread and butter, tea and sugar, pen and ink, etc.

71. �Zero Cross elasticity:
�Ec for unrelated goods is zero because one commodity does
not affect the other commodity if the price of one
commodity changes it will not affect the demand for other
commodity. If the price of tea changes by 2% it will not
create any affect on the demand of clothes.

72. Promotional Elasticity of Demand
�Advertising and promotion are vital tools in the competitive
market to generate awareness about its products.
�Promotional elasticity of demand measures the degree of
responsiveness of demand to a given change in advertising
expenditure.
�It must obviously be positive, for advertisement
expenditures are supposed to boost up the market.
�Some goods (like consumer goods) are more responsive to
advertising than others (like heavy capital equipments)

73. �When Ea > 1, a firm should go for heavy expenditure on
advertisement.
�When Ea < 1, a firm should not spent too much on
advertisement because the product is not sensitive to
promotion.
�For Ex: we find the advertisement for lubricants,
generators, inverters, etc. but would not find
advertisements for electricity, petrol or diesel.

74. THANK YOU