Demand analysis
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The “Demand” for a commodity, at a given price, is the quantity of it which will be bought per unit of time at that price. In economics, demand refers to the buying behavior of a household. When desire is backed by willingness and ability to pay for a good or service then it becomes Demand for the good or service.
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Demand analysis
- 1. By Harshitha.S and Imran Pasha
- 2. Part 1 Part 2 Part 3 Part 4 Part 5 Part 6 Contents Introduction and Definitions Determinants of Demand Demand Function Law of Demand Shifts in Demand Curve Elasticity of Demand
- 3. Introduction Part 1 Part 2 Part 3 Part 4 Part 5 Utility analysis and “LAW OF DEMAND” are the who concepts that we have to study in connection with each other, which are part and parcel of life. But before we analyze them, it is essential to understand the nature of the term “Demand” in economics. The “Demand” for a commodity, at a given price, is the quantity of it which will be bought per unit of time at that price. In economics, demand refers to the buying behavior of a household. What does this mean? Part 6 Basically, economists try answering the following three phenomenon 1. Why people buy what they buy 2. How much they're willing to pay 3. How much they want to buy
- 4. Introduction Part 1 Part 2 Part 3 Part 4 Part 5 Thus, demand for a commodity or service is dependent upon a. Its utility to satisfy want or desire b. Willingness to pay c. Capability of the prospective consumer to pay for the good or service. In nutshell therefore we can state that - When desire is backed by willingness and ability to pay for a good or service then it becomes Demand for the good or service. Conceptually, demand is nothing but consumer’s readiness or ability to satisfy desire by paying for goods or services. A desire accompanied by ability and willingness to pay makes a real or effective demand.Part 6
- 5. Definitions Part 1 Part 2 Part 3 Part 4 Part 5 "The various quantities of goods that would be purchased per time period at different prices in a given market." – Prof. Hibdon Part 6 The demand for anything, at a given price, is the amount of it, which will be bought per unit of time at that price”. The term has no significance unless a price is stated or implied. – Prof. Lee Benham, Washington University "Demand in Economics means demand backed by enough money to pay for the goods demanded." – Prof. Dauglaus Hague, Manchester Business School.
- 6. Determinants of Demand Part 2 Part 3 Part 4 Part 5 Other factors such as Class, Group, Education, marital status, consumer’s expectations with regards to future price and weather conditions, also play an important role in influencing household demand. Part 6 Priceof the commodity Priceof related commodity Tastes and preferences of consumers Level of incomeof the household Size, Composition & income of the population Demand Part 1
- 7. Demand function Part 4 Part 5 The theory of consumption deals with concepts and functions. A function expresses the relationship between two or more variables, such as, prices and the physical quantities demanded. In a given market, in a given period of time, the demand function for a commodity is the relation between the various quantities of the commodity that might be bought and the determinants of those quantities. D= f (P, Y, Pr, T, A, U) Where, D= demand P = price Y= income Pr= prices of related goods T= tastes and preferences A= advertisements U= unknown factorsPart 6 Part 1 Part 3 Part 2
- 8. Law of demand Part 2 Part 3 Part 1 Part 5 The Law of demand is also known as the “FIRST LAW OF PURCHASE”. It indicates the relationship between the price of the commodity and the quantity demanded in the market. This law is directly deduced from the law of diminishing marginal utility, as the demand side of the price is governed by the utility of the commodity to the consumer. The law of demand is widely used and it is a common concept while purchasing a commodity in the market. This law is inversely related to price and the quantity demanded. The people everywhere would purchases more quantity of a commodity at lower price and less quantity at higher price. The founder of this law is Prof. Alfred Marshall.Part 6 Part 4
- 9. Law of demand Part 2 Part 3 Part 1 Part 5 Part 6 Part 4 Assumptions: 1. People’s income being unchanged 2. People’s tastes remain unchanged 3. Prices of other related goods remain the sam 4. No substitutes for the commodity 5.No expectations of further changes in the price of the commodity
- 10. Demand Schedule Part 2 Part 3 Part 5 Part 6 0 2 4 6 8 10 12 1 2 3 4 5 QuantitydemandedinUnits Price per Unit Demand Schedule A demand schedule is a list of various quantities of a commodity demanded at different prices. Demand schedule may be the ‘Individual demand schedule or a Market demand schedule. The graphical representation of the demand schedule is known as a demand curve. According to the demand schedule and graph More units are demanded at lower prices and less units at higher price. Thus, this demand schedule shows an inverse relation between the price and quantity demanded. Part 1 Part 4
- 11. Types of Demand Part 2 Part 3 Part 5 Part 6 1. Price demand: The various quantities of a commodity that consumers demand per unit of time at different prices, assuming that their incomes, tastes, fashions and prices of related commodities remain unchanged. X 0 Price Demand Quantity demandedPrice Y D D 10 8 6 4 2 1 2 3 4 5 6 Part 1 Part 4
- 12. Types of Demand Part 2 Part 3 Part 5 Part 6 2. Income demand: The different quantities of a commodity which consumers will buy at different levels of income, while other things such as tastes and preferences, remaining the same. The income- demand curve represents the income-quantity relationship in the same manner in which the price- demand curve shows the price- quantity relationship. As the consumer’s income increases, they buy greater quantity of the commodity and vice-versa. Part 1 Part 4
- 13. Types of Demand Part 2 Part 3 Part 5 Part 6 X 0 Quantity demanded Income Income Demand (Demand for Inferior Good) R1 R M1 M Y D D Part 1 Part 4 2. Income demand a. Giffen goods or Inferior goods: Consumer tend to buy these in large quantity when their income is less whereas small quantity when their income is more. It has negative slope. for example, more demand for plastic when income is less and when there is an increase in income, demand shifts towards Tupperware rather than plastic.
- 14. Types of Demand Part 2 Part 3 Part 5 Part 6 2. Income demand b. Normal or Superior goods: It has positive slope. Demand increases proportional as there is a rise in income, Stating income elasticity of demand is always greater than one. Superior goods are always expensive, and often are relatively scarce or harder to come by. X 0 Quantity demanded Income Income Demand (Demand for Superior Good) R1 R M M1 D D Y Part 1 Part 4
- 15. Types of Demand Part 2 Part 3 Part 5 3. Cross demand: The different quantities of a commodity that consumers purchase per unit of time at different prices of a related commodity, while tastes and preferences remain the same. The correlation between the demand of one commodity and the price of another may be positive or negative according to the manner in which the two commodities are related to each other. Commodities may either be 1) Substitutes or 2) ComplementsPart 6 Part 1 Part 4
- 16. Types of Demand Part 2 Part 3 Part 5 Part 6 3. Cross demand: a) Substitutes have positive slope where complements have negative slope. A product or service that satisfies the need of a consumer, that another product or service fulfils. A substitute can be perfect or imperfect depending on whether the substitute completely or partially satisfies the consumer. Ex: A consumer might consider Tea to be a perfect substitute for Coffee. X 0 Quantity demanded of Coffee PriceofTea Cross Demand (Demand for Substitute Good) P1 P Q Q1 D D Y Part 1 Part 4
- 17. Types of Demand Part 2 Part 3 Part 5 Part 6 3. Cross demand: b) Complement good can be considered a complement when it shares a beneficial relationship with another product offering. In an economic sense, when the price of a good rises, the demand for its complement will fall because consumers don't want to use the complement alone. Ex: coffee with sugar, Bread with Butter, DVD player with DVD Part 1 Part 4 X 0 Quantity demanded of Butter PriceofBread Cross Demand (Demand for Complement Good) P1 P Q1 Q Y D D
- 18. Shifts in Demand Curve Part 5 Part 2 Part 3 Part 4 When more is demanded at each price can be caused by a rise in income, a rise in the price of a substitute, a fall in the price of a complement, a change in tastes in flavors of this commodity, an increase in population, and redistribution of income to groups who favor this commodityPart 6 0 Quantity Price P1 P Q Q1 S S D D1 D1 D © TheYoungIndianEconomists.com 1. A rightward shift in the demand curve:Part 1
- 19. Part 2 Part 3 Part 4 When less is demanded at each price can be caused by a fall in income, a fall in the price of a substitute, a rise in the price of a complement, a change in tastes against this commodity, a decrease in population, and a redistribution of income away from groups who favor this commodity.Part 6 2. A leftward shift in the demand curve: Quantity Price P P1 Q1 Q S S D D1 D1 D © TheYoungIndianEconomists.com Shifts in Demand Curve Part 5 Part 1
- 20. Elasticity of Demand Part 2 Part 3 Part 4 Part 5 The concept of elasticity of demand is generally associated with the name of Alfred Marshall. The quantity demanded for some commodities are more responsive to a given change in price than the quantity demanded of other goods. In other words, the demand for certain goods are more elastic than demands of other goods. “The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in the price and diminishes much or little for a given rise in price”. – Prof. Alfred Marshall Today, we have concepts of price elasticity, income elasticity, cross elasticity and substitution elasticity. Part 1 Part 6
- 21. Part 2 Part 3 Part 4 Part 5 1. Price elasticity: It is the ratio of proportionate changes in the quantity demanded of a commodity to a given proportionate change in its prices. It is the ratio of a relative change in quantity to a relative change in price. Elasticity of Demand RelativeChangeInQuantity RelativeChangeInPrice ChangeInQuantity 100 OriginalQuantity ( ) Ep Ep dq q e p dp p Quantity Demanded Price D © TheYoungIndianEconomists.com Perfectly Elastic (PED= ∞) Elastic (PED=>1) Unit Elastic (PED=1) Inelastic (PED<1) Perfectly Inelastic (PED=0) D / (p) / dQ Q e dP P Part 1 Part 6
- 22. Part 2 Part 3 Part 4 Part 5 Numerical measure Description Terminology Zero Quantity demanded does not change as price changes Perfectly inelastic Greater than Zero, but less than one Quantity demanded changes by a smaller percentage than low price Inelastic One Quantity demanded changed by exactly the same percentage as low price Unit elastic Greater than one but less than infinity Quantity demanded changes by a larger percentage than low price Elastic Infinity Purchases are prepared to buy all they can obtain at some price and none at all an even slightly higher price. Perfectly elastic Classification of Price elasticity of Demand Part 1 Part 6
- 23. Part 2 Part 3 Part 4 Part 5 2. Income elasticity: Elasticity of demand is a general concept. It determines the relationship between two variables. Income elasticity of demand shows the extent to which a consumer’s demand for that commodity changes as a result of changes in his income. The ratio of proportionate change in the quantity demanded of the commodity to a given proportionate change in the income of the consumer. Elasticity of Demand 1 / * / n i dQ Q dQ Y Ey dy Y dY Q % Change in the Quantity Demanded of a Commodity Income Elasticity % Change in the Level of Income of a Consumer % Change in the Quantity Demanded of a Commod Income Elasticity % Change in the Level of Income of a Consume % Change in the Quantity Demanded of a Commodity Income Elasticity % Change in the Level of Income of a Consumer Part 1 Part 6
- 24. Part 2 Part 3 Part 4 Part 5 1 / * / n i dQ Q dQ Y Ey dy Y dY Q Elasticity of Demand Income elasticityPart 1 Part 6 Quantity Demanded Income © TheYoungIndianEconomists.com Less than unity (Ei<1) Negatice (Ei<0) Zero (Ei=0) Unitary Elastic (Ei=1) Greater than unity (Ei=>1) Perfectly Elastic (Ei= ∞) 450
- 25. Part 2 Part 3 Part 4 Part 5 The relationship between income elasticity for a good and proportion of income spent on it is described in the following three propositions: 1. If the proportion of income spent on good remains the same as income increases, then income elasticity for the good is equal to one. 2. If the proportion of income spent on good increases as income increases, then income elasticity for the good is greater than one. 3. If the proportion of income spent on good decreases as income increases, then income elasticity for the good is less than one. Elasticity of Demand Part 1 Part 6
- 26. Part 2 Part 3 Part 4 Part 5 Numerical measure Description Terminology Zero The quantity bought of the commodity remains constant with increase in consumer’s income Ei=0 Negative Increase in the consumer’s money-income by fall in the quantity demanded of the commodity; Inferior goods. Ei<0 Unitary The consumer’s income spent on the commodity is exactly same both before and after the increase in income. Ei=1 Greater than unity Consumer spends a greater proportion of his money-income on the commodity; Luxury goods. Ei>1 Less than unity Consumer spends a smaller proportion of his money-income on the commodity; Necessities. Ei<1 Classification of Income elasticity of Demand Part 1 Part 6
- 27. Part 2 Part 3 Part 4 Part 5 3. Cross elasticity: The two goods can either be substitutes of each other, or complementary to each other, or completely independent of each other. The ratio of proportionate change in the quantity demanded of a commodity to a given proportionate change in the price of the related commodity. Percentage Change in the Quantity Demanded of a Commodi Cross Elasticity Proportionate Change in the Price of Related Comodity 1 2 * 2 1 Q P Ec P Q Percentage Change in the Quantity Demanded of a Co Cross Elasticity Proportionate Change in the Price of Related Com 1 2 * 2 1 Q P Ec P Q Elasticity of Demand Part 1 Part 6 Q1 P2 * P2 Q1 Ec % Change in the Quantity Demanded of a Commodity % Change in the Price of Related Comodity
- 28. Part 2 Part 3 Part 4 Part 5 Thus, cross elasticity can be Positive, Zero and Negative. 1. If the cross elasticity is positive, when the two goods are good substitutes and infinity; Perfect substitutes. 2. If the cross elasticity is negative, when the two goods are complements. 3. If the cross elasticity of demand is Zero, when the goods are not related to each other. Elasticity of Demand Cross Elasticity of Demand Quantity Demanded Income © TheYoungIndianEconomists.com Y1 Y Q3 Q Q1 Q2 Normal good Luxury Inferior good Part 1 Part 6 Quantity Demanded Income © TheYoungIndianEconomists.com Y1 Y Q3 Q Q1 Q2 Normal good Luxury Inferior good