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# Demand Analysis

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### Demand Analysis

1. 1. Demand Analysis SSIMS-3
2. 2. <ul><li>Demand Curve </li></ul><ul><li>Linear </li></ul><ul><li>Non-linear – very minute changes </li></ul><ul><li>Usually downward slope / -ve slope : represents inverse relationship </li></ul>
3. 4. Slope of DD Curve <ul><li>Q= 100-4P </li></ul><ul><li>Y=mx+c </li></ul><ul><li>Q= -4P +100 </li></ul><ul><li>dq/dp = -4 </li></ul>
4. 5. Complete the table if Q=100-0.25P <ul><li>Price (Rs.) Qtd.(Units) </li></ul><ul><li>90 </li></ul><ul><li>70 </li></ul><ul><li>50 </li></ul><ul><li>30 </li></ul><ul><li>10 </li></ul>
5. 6. Individual & Market DD <ul><li>C1 : Q1=12-P </li></ul><ul><li>C2: Q2= 5-0.5P </li></ul><ul><li>C3: Q3= 10-P </li></ul><ul><li>(Market DD) Qm= C1+C2+C3 = 27-2.5P </li></ul><ul><li>Hence P= 10.8 -0.4Qm </li></ul>
6. 7. Market DD Schedule <ul><li>P Q1 Q2 Q3 Qm </li></ul><ul><li>10 </li></ul><ul><li>8 </li></ul><ul><li>6 </li></ul><ul><li>4 </li></ul><ul><li>2 </li></ul>
7. 8. Why study Demand <ul><li>No demand implies production is unwarranted. </li></ul><ul><li>If demand is lagging behind production, create new demand through better advertisement, improvement in quality and so on. </li></ul><ul><li>Necessitates Identification and analysis of the factors affecting demand (consumer needs & Preferences). </li></ul><ul><li>Facilitates Setting up the price, forecasting future demand for product, adoption of suitable marketing strategy to maximize profit (short run & long run). </li></ul>
8. 9. Exceptional DD Curve <ul><li>Bandwagon Effect : Demand for a commodity is determined by the number of people opting for it. You demand for a commodity as others also buy it. </li></ul><ul><li> Read Shiv Khera’s ‘You can Win’ as others are reading the same book </li></ul><ul><li>Goods with SNOB Appeal : </li></ul><ul><li>Demand for a commodity falls when more people consume it. </li></ul><ul><li>Demand for Membership of an organization or CLUB </li></ul>
9. 10. Uncertain Product Quality <ul><li>On account of asymmetry of information, quality can be judged based on the prevailing price of the commodity. </li></ul><ul><li>Higher the price, better the quality- People Perceive. </li></ul><ul><li>Increase in price over a period implies improvement in quality-A perception </li></ul><ul><li>Opt for the product (increase in demand when price is high) </li></ul>
10. 11. <ul><li>Giffen Good : </li></ul><ul><li>English Economist Robert Giffen coined the term Giffen Good . </li></ul><ul><li>Demand curve for some inferior goods can slope upward for theoretical reason. </li></ul><ul><li>No empirical evidence accumulated so far! </li></ul><ul><li>Exceptions to Law of Supply : </li></ul><ul><li>Quantity supplied can be high at lower price and low when price is high on account of information asymmetry. </li></ul><ul><li>Used cars, Medical Insurance </li></ul>
11. 12. Supply <ul><li>Qs= f( P,Ip,T, Ps,……..) </li></ul><ul><li>P: Price of the product </li></ul><ul><li>Ip: Input prices </li></ul><ul><li>T: Technology </li></ul><ul><li>Ps: Price of substitutes </li></ul><ul><li>Direct relationship : P & QS </li></ul>
12. 13. Slope of SS Curve <ul><li>Qs= -40+20P </li></ul><ul><li>Slope = 20 </li></ul>
13. 14. Calculate Qs for the following prices if Qs= - 40+20P <ul><li>Price (Rs.) Qs. (Units) </li></ul><ul><li>6 </li></ul><ul><li>5 </li></ul><ul><li>4 </li></ul><ul><li>3 </li></ul><ul><li>2 </li></ul><ul><li>1 </li></ul>
14. 15. ELASTICITY OF DEMAND
15. 16. PRICE ELASTICITY OF DEMAND OR ELASTICITY OF DEMAND <ul><li>Own price elasticity is: </li></ul><ul><ul><li>percentage change in quantity demanded, divided by percentage change in price : </li></ul></ul><ul><li>If demand is price-elastic , revenue increases with lower prices. </li></ul><ul><li>If demand is price-inelastic , revenue decreases with lower prices </li></ul>July20. 2006
16. 17. <ul><li>Ed=% change in quantity dd of x / % change in the price of the product x </li></ul><ul><li>Five different values / types </li></ul><ul><li>0 to  </li></ul><ul><li>Ped =dq/dp x P/Q </li></ul>July20. 2006
17. 18. Calculate PED at point P=10 Q=360. If P=100-0.25Q <ul><li>Q=400-4P </li></ul><ul><li>Dq/dp=-4 </li></ul><ul><li>-4 X 10/360 = -1/9 = .11 Inelastic </li></ul><ul><li>P=70 Q=120 </li></ul><ul><li>=2.33 elastic </li></ul>July20. 2006
18. 19. PERFECTLY INELASTIC <ul><li>Zero-elasticity at all prices </li></ul>July20. 2006 Price Quantity E d = 0
19. 20. PERFECTLY ELASTIC <ul><li>Infinite elasticity at all prices </li></ul>July20. 2006 Price Quantity E d = 
20. 21. UNITARY ELASTIC <ul><li>Unitary elasticity at all prices </li></ul>July20. 2006 Price Quantity E d = -1 This curve is a ‘rectangular hyperbola ’
21. 22. MEASUREMENT OF PED <ul><li>RATIO METHOD </li></ul><ul><li>ARC METHOD </li></ul><ul><li>GEOMETRIC/ POINT ELASTICITY METHOD </li></ul><ul><ul><li>LOWER SEGMENT / UPPER SEGMENT </li></ul></ul>July20. 2006
22. 23. The Demand-Curve:Examples <ul><li>A Linear Demand Curve </li></ul>July20. 2006 Price Quantity E d = -1 E d = 0 E d = - 
23. 24. DETERMINANTS OF OWN-PRICE ELASTICITY <ul><li>SUBSTITUTES : how close and at what prices? </li></ul><ul><ul><li>How narrowly defined is the product? The more narrowly defined the more close substitutes </li></ul></ul><ul><li>PROPORTION OF CONSUMERS’ INCOME spent on the product </li></ul><ul><li>TIME . Demand is more elastic over longer periods of time </li></ul>July20. 2006
24. 25. <ul><li>NO: OF USES </li></ul><ul><li>CONSUMER’S INCOME </li></ul><ul><li>POSSIBILITY OF POSTPONEMENT </li></ul><ul><li>HABITS & CUSTOMS </li></ul><ul><li>NATURE OF THE PRODUCT </li></ul><ul><ul><li>LUXURY / NECESSARY </li></ul></ul>July20. 2006
25. 26. MANAGERIAL USES <ul><li>DEVALUATION </li></ul><ul><li>TAXATION POLICY </li></ul><ul><li>PRICING </li></ul><ul><li>DDs OF TRADE UNIONS </li></ul>July20. 2006
26. 27. INCOME ELASTICITY OF DD <ul><ul><li>percentage change in quantity demanded, divided by percentage change in the income of the consumer </li></ul></ul><ul><ul><li>THREE TYPES </li></ul></ul><ul><ul><li>POSITIVE : >1, <1 & =1 </li></ul></ul><ul><ul><li>ZERO : no change </li></ul></ul><ul><ul><li>NEGATIVE: Inverse relationship </li></ul></ul>July20. 2006
27. 28. Determinants <ul><li>Income Elasticity </li></ul><ul><ul><li>Type of good </li></ul></ul><ul><ul><ul><li>necessities - salt, drinking water, zero elasticity </li></ul></ul></ul><ul><ul><ul><li>luxuries , zero at low levels of income then high when income thresholds exceeded </li></ul></ul></ul><ul><ul><ul><li>inferior goods - negative, purchase less as income rises - bus travel, low-grade bread </li></ul></ul></ul><ul><ul><ul><li>Giffen’s goods </li></ul></ul></ul>July20. 2006
28. 29. CROSS PRICE ELASTICITY <ul><li>% CHANGE IN QUT. DD OF x TO % CHANGE IN PRICE OF y </li></ul><ul><li>Influence of Py on Qdx </li></ul><ul><li>Px constant </li></ul>July20. 2006
29. 30. <ul><li>SUBSTITUTES </li></ul><ul><li>X & Y </li></ul><ul><li>Py – Qdx :Positive </li></ul><ul><li>Py reduces – Qdy increases –Qdx reduces </li></ul>July20. 2006
30. 31. <ul><li>COMPLEMENTARY GOODS </li></ul><ul><li>X & Y </li></ul><ul><li>Py – Qdx: Negative </li></ul><ul><li>Py reduces – Qdy increases –Qdx increases </li></ul>July20. 2006
31. 32. <ul><li>UNRELATED GOODS </li></ul><ul><li>X & Y </li></ul><ul><li>Py – Qdx : zero slope </li></ul>July20. 2006
32. 33. Determinants <ul><li>Cross-price elasticity </li></ul><ul><ul><li>substitutes or complements,and how close? </li></ul></ul><ul><ul><li>An industry is a group of firms producing products with high positive cross-elasticities </li></ul></ul>July20. 2006
33. 34. PROMOTIONAL ELASTICITY OF DD <ul><li>Rate of change in qut. dd due to changes in sales promotion expenditure </li></ul><ul><li>+ve </li></ul><ul><li>-ve </li></ul><ul><li>zero </li></ul>July20. 2006
34. 35. Demand & Marginal Revenue <ul><li>A Linear Demand Curve </li></ul>July20. 2006 RS. Quantity E d = 1 E d = 0 E d =  Marginal Revenue
35. 36. <ul><li>TR is Maximum </li></ul><ul><li>PED =1 </li></ul><ul><li>MR= 0 </li></ul><ul><li>TR= PQ </li></ul><ul><li>P=100-.25Q </li></ul><ul><li>TR =(100-.25P)Q </li></ul>July20. 2006
36. 37. <ul><li>TR =100Q –.25Q 2 </li></ul><ul><li>X n = nx n-1 </li></ul><ul><li>dTR/ dQ = 100-0.5Q </li></ul><ul><li>MR= 100-0.5Q </li></ul><ul><li>If MR =0 </li></ul>July20. 2006
37. 38. <ul><li>0=100-0.5Q </li></ul><ul><li>.5Q=100 </li></ul><ul><li>Q=200 </li></ul>July20. 2006
38. 39. Price, MR & TR <ul><li>TR=PQ </li></ul><ul><li>MR=dTR/dQ </li></ul><ul><li>=dPQ/dQ </li></ul><ul><li>1 st Variable x derivative of 2 nd </li></ul><ul><li>Plus </li></ul><ul><li>2 nd Variable x Derivative of first </li></ul>July20. 2006
39. 40. <ul><li>P x dQ/dQ +Q x dP/dQ </li></ul><ul><li>P + Q ( dP/dQ) </li></ul><ul><li>P/P +Q/P(dP/dQ) </li></ul><ul><li>P {1+Q/P (dP/dQ)} </li></ul><ul><li>MR= P( 1+ 1/ep) </li></ul>July20. 2006
40. 41. July20. 2006 D MR Rs . TR Max. Rev Output