Demand Analysis

Demand in Economics

is the desire to possess something

and the willingness and ability

to pay a certain price

in order to possess it.

 Demand Analysis

A complete statement of Demand

must state

► market dimension – whose demand

► price dimension – at what price

► time dimension – for how long.

 Demand Analysis

A complete statement of Demand

must state

► market dimension – whose demand

► price dimension – at what price

► time dimension – for how long.

Gopal demands 30 litres of milk, at Rs 20/- per litre,
per month.
 Demand Analysis

Determinants of Demand

The price of commodity X.

- higher the price less of it is demanded.

- lower the price more of it is demanded.

 Demand Analysis

Determinants of Demand

The price of substitutes of X.

while buying commodity X, consumer

considers price of substitutes for X
available in the market.
 Demand Analysis

Determinants of Demand

Income of the consumer.

- disposable income of a consumer has

direct influence on demand for X that
consumer wants to buy.
 Demand Analysis

Determinants of Demand

Utility of the commodity.

- demand arises because product X has

utility for the consumer,
 Demand Analysis

Determinants of Demand

Quality of the commodity.

- better the quality of product X more will

be the demand for it.
 Demand Analysis

Determinants of Demand

Taste & Fashion.

- if product X is favored over other

products more of it will be demanded in
the market.
 Demand Analysis

Determinants of Demand

Size of population

- more the number of buyers for product

X more of it will be demanded in the
market.
 Demand Analysis

Determinants of Demand

Expectations about future prices.

- if price of product X is expected to rise

in near future, more of it will be
demanded in the market. ( see deals on the
Stock Exchange)
 Demand Analysis

Determinants of Demand

Climatic conditions

- Demand for product X is influenced by

changes in seasons.
 Demand Analysis

Determinants of Demand

Psychology of the consumers

- if more and more are purchasing

product X, others are influenced to buy
more of X – a band wagon effect
 Demand Analysis

Determinants of Demand

Psychology of the consumers

- if no one or a few are purchasing

product X, others are influenced to buy
more of X to feel different– a snob effect
 Demand Analysis

Determinants of Demand

Advertisements and salesmanship.

- in modern markets demand for

product X, can be created through
advertisements and sales promotion
 Demand Analysis

Determinants of Demand
1. The price of commodity X.
2. The price of substitutes of X.
3. Income of the consumer.
4. Utility of the commodity.
5. Quality of the commodity.
6. Taste & Fashion.
7. Size of population.
8. Expectations about future prices.
9. Climatic conditions.
10. Psychology of the consumers.
11. Advertisements and salesmanship.
 Demand Analysis

Demand Function

We have seen that demand depends on or is a

function of so many variables.
Hence this function is expressed as

Qxd = f(Px,P1, Yd, U,Q,T,A . . . . etc)

Where Px is price of X,P1 is price of substitute of X

Yd,is disposable income of consumer, U is utility
etc.
 Demand Analysis

Demand Function
We have seen that demand depends on or is a
function of so many variables.
Hence this function is expressed as
Qxd = f(Px,P1, Yd, U,Q,T,A . . . . etc)
As this is a very complicated relationship, we
assume that all the other variables are constant,
and study relation between price of X & quantity
demanded; expressed as under.
Qxd = f(Px) where P1 = P0; Yd = Yd0; U = U0; etc.
 Demand Analysis

The Law of Demand

Other things remaining the same , quantity

demanded of a commodity is inversely related
to its price.

when the price rises the quantity demanded falls

when the price falls the quantity demanded rises

 Demand Analysis

The Law of Demand - demand curve.

14
12
10
8
Price

6
4
2
0
12 30 55 80 124 140 Units
Demand
 Demand Analysis

The Law of Demand

exceptions- (1)

Expectations of further changes in price and

speculation

The law does not hold good when people expect

prices to rise further.
Even though prices have risen today, consumers
buy more in anticipation of further price
increases.
A typical observation on Stock Exchanges.
 Demand Analysis

The Law of Demand

exceptions- (2)

Giffen’s paradox

Incase of low priced essentials like bread, when

price falls consumers use money saved,
increase in their real income, to buy other
products, instead of buying more bread.
 Demand Analysis

The Law of Demand

exceptions- (3)

Qualitative changes

if the price is taken as yardstick for quality of

commodity, mere rise in price may increase
demand for it.
 Demand Analysis

The Law of Demand

exceptions- (4)

Price illusions

consumer in the modern world is governed

more by the price illusions that higher the price,
better the product.
 Demand Analysis

The Law of Demand

exceptions- (5)

Display of standard of living

consumer is governed by the demonstration

effect.
expensive jewellery, cars are purchased not
because they are needed but to show
consumer’s wealth.
 Demand Analysis

The Law of Demand

exceptions- (5)
• Expectations of further changes in price and speculation

• Giffen’s paradox

• Qualitative changes

• Price illusions

• Display of standard of living

 Demand Analysis

The Law of Demand

Movement along the demand curve
vs. shift of curves.

If we consider the price of the commodity the

only factor influencing demand, demand moves
along the curve.

But when factors other than price are

considered . Then we have either increase or
decrease in demand at the same price.
 Demand Analysis

Movement by shift of curves.

Moreis demanded at the same price, or same
quantity is demanded at higher price.
original demand
increased demand
Demand Curve

14

12

10

8
Price

0
Quantity Demanded
 Demand Analysis

Movement by shift of curves.

Less is demanded at the same price, or same
quantity is demanded at lower price.
original demand
decreased demand
Demand Curve

14

12

10

8
Price

0
Quantity Demanded
 Demand Analysis

Demand analysis - for durable & non-durable goods

Durable goods – can be stored

- used over a period of time
- have maintenance & operating costs
Demand depends on
expected availability or shortages
rate of obsolescence
economy – in recession demand for
durables is postponed
 Demand Analysis

Demand analysis - for durable & non-durable goods

Non- Durable goods –

cannot be stored, are perishable

Demand depends on
prevailing conditions & style
incomes
convenience
 Demand Analysis

Demand analysis - Long run & Short run demand

Short run Demand

exists at a point of time. With its
immediate reaction to change in price
and income.
Long run Demand
exists over a period of time
as a result of price changes,
competition, product improvement etc.
 Demand Analysis

Demand analysis - Direct and Derived demand

Direct Demand
exists when the good is required for
direct consumption to satisfy human
want
Derived Demand
exists to meet demand for other
product. Like demand for cement to
meet demand for houses or roads
 Demand Analysis

Demand analysis - Joint or Complimentary Demand

Tea & sugar

Tyre & Tube
Houses & Cement

These goods have to be consumed together to

satisfy the want of the consumer.

Hence they are demanded jointly.

 Demand Analysis

Demand analysis - Cross Demand

Demand for substitutes takes form of cross demand.

Consumer may demand more of Coffee not as

its price has fallen, but because price of Tea has
increased.
 Demand Analysis

Demand analysis - Composite Demand

Composite demand implies that a commodity

under consideration can be put to several uses.

e.g. electricity ca be used for lighting, cooking,

or ironing; computers or TV.

same can be said of Steel or Coal.

 Demand Analysis

Demand analysis - Industry Demand and Firm

Demand

demand for medicines of Glaxo is a firm demand

but that for all medicines and drugs is industry

demand.

Same can we say for demand for Maruti cars &

all cars.
 Demand Analysis

Demand analysis - Industry Demand and Firm

Demand
demand for medicines of Glaxo is a firm demand
but that for all medicines and drugs is industry
demand.

In a monopoly both are identical & in perfect

competition both are absolutely different.

In perfect competition, a firm is a price taker &

not price maker.
 Demand Analysis

Demand analysis - market demand and segment

demand

overall demand for a product in the total market

is market demand.

while demand for that product in villages, or

through mail order, or for shopping complexes
is market segment demand for these three
segments.