PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc.

University Press, Inc. (Adapted by OUP India, 2008) Slide 1

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 2
Demand Analysis
Meaning of Demand:
Demand for a particular commodity refers to the
commodity which an individual consumer or
household is willing to purchase per unit of time at a
particular price.
Demand for a particular commodity implies:
Desire of the customer to buy the product;
The customers willingness to buy the product;
Sufficient purchasing power in the customers possession to buy
the product.
The demand for a particular commodity by an
individual consumer or household is known as
Individual demand for the commodity and Summation
of the individual demand is known as the Market
demand.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 3
Law of Demand
Holding all other things constant (ceteris
paribus), there is an inverse relationship
between the price of a good and the
quantity of the good demanded per time
period.
Substitution Effect
Income Effect
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 4
Demand Analysis
Law of Demand:
Law of demand expresses the
relationship between the Quantity
demanded and the Price of the
commodity.
The law of demands states that,
Ceteris Paribus, (other things
remaining constant) the lower the price
of a commodity the larger the quantity
demanded of it and vice versa.
In simple terms other things remain
constant, if the price of the commodity
increases, the demand will decrease
and if the price of the commodity
decreases, the demand will increase.

P Qd
1 60
2 50
3 40
4 30
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 5
Components of Demand:
The Substitution Effect
Assuming that real income is constant:
If the relative price of a good rises, then
consumers will try to substitute away from
the good. Less will be purchased.
If the relative price of a good falls, then
consumers will try to substitute away from
other goods. More will be purchased.
The substitution effect is consistent with
the law of demand.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 6
Components of Demand:
The Income Effect
The real value of income is inversely
related to the prices of goods.
A change in the real value of income:
will have a direct effect on quantity
demanded if a good is normal.
will have an inverse effect on quantity
demanded if a good is inferior.
The income effect is consistent with the
law of demand only if a good is normal.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 7
Individual Consumers Demand
Qd
X
= f(P
X
, I, P
Y
, T)
quantity demanded of commodity X
by an individual per time period
price per unit of commodity X
consumers income
price of related (substitute or
complementary) commodity
tastes of the consumer
Qd
X
=

P
X
=
I =
P
Y
=

T =
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 8
Qd
X
= f(P
X
, I, P
Y
, T)
AQd
X
/AP
X
< 0
AQd
X
/AI > 0 if a good is normal
AQd
X
/AI < 0 if a good is inferior
AQd
X
/AP
Y
> 0 if X and Y are substitutes
AQd
X
/AP
Y
< 0 if X and Y are complements
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 9
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 10
Market Demand Curve
Horizontal summation
of demand curves of
individual consumers
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 11
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 12
Market Demand Function
QD
X
= f(P
X
, N, I, P
Y
, T)
quantity demanded of commodity X
price per unit of commodity X
number of consumers on the market
consumer income
price of related (substitute or
complementary) commodity
consumer tastes
QD
X
=
P
X
=
N =
I =
P
Y
=

T =
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 13
Demand Curve Faced by a Firm
Depends on Market Structure
Market demand curve
Imperfect competition
Firms demand curve has a negative slope
Monopoly - same as market demand
Oligopoly
Monopolistic Competition
Perfect Competition
Firm is a price taker
Firms demand curve is horizontal
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 14
Demand Curve Faced by a Firm Depends
on the Type of Product
Durable Goods
Provide a stream of services over time
Demand is volatile
Nondurable Goods and Services
Producers Goods
Used in the production of other goods
Demand is derived from demand for final
goods or services
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 15
Elasticity of Demand
Elasticity of Demand:
Elasticity of demand is defined as the percentage
change in quantity demanded caused one percent
change in each of the determinants under consideration
while the other determinants are held constant.
Ed = % change in quantity demanded / % change in
the determinant.
There are mainly five types of Elasticity of Demand :
Price Elasticity of demand
Income Elasticity of demand
Cross Elasticity of demand
Promotional Elasticity of demand
Expectation Elasticity of demand


PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 16
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 17
Income Elasticity of Demand:
Income Elasticity of Demand measures the degree of
responsiveness of the quantity demanded of a commodity
due to a change in money income of the consumer.
Em = - (% change in quantity demanded) /
( % change in the Money Income).
Cross Elasticity of Demand:
Income Elasticity of Demand measures the degree of
responsiveness of the quantity demanded of one
commodity due to a change in price of some related
goods.
Exy = - (% change in quantity demand of goods Y) /
( % change in the price of goods X).
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 18
Factors affecting the Elasticity of Demand :
Nature of the product
Availability of the substitute product
Uses of the commodity
Income Levels
Proportion of Income spent
Postpone consumption
Price levels
Time period
Durability
Taste & Preference
Demonstration Effect
Advertisement
Special Demand (Medicine)
Complementary Goods
Expectation of the future price etc
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 19
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 20
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 21
Price Elasticity of Demand
/
/
P
Q Q Q P
E
P P P Q
A A
= =
A A
Linear Function
Point Definition
1 P
P
E a
Q
=
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 22
Price Elasticity of Demand
Arc Definition
2 1 2 1
2 1 2 1
P
Q Q P P
E
P P Q Q
+
=
+
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 23
Marginal Revenue and Price
Elasticity of Demand
1
1
P
MR P
E
| |
= +
|
\ .
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 24
Marginal Revenue and Price
Elasticity of Demand
P
X
Q
X
MR
X
1
P
E >
1
P
E <
1
P
E =
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 25
Marginal Revenue, Total
Revenue, and Price Elasticity
TR

Q
X
1
P
E <
MR<0

MR>0

1
P
E >
1
P
E =
MR=0

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 26
Determinants of Price
Elasticity of Demand
The demand for a commodity will be
more price elastic if:
It has more close substitutes
It is more narrowly defined
More time is available for buyers to
adjust to a price change
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 27
Determinants of Price
Elasticity of Demand
The demand for a commodity will be
less price elastic if:
It has fewer substitutes
It is more broadly defined
Less time is available for buyers to
adjust to a price change
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 28
Income Elasticity of Demand
Linear Function
Point Definition
/
/
I
Q Q Q I
E
I I I Q
A A
= =
A A
3 I
I
E a
Q
=
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 29
Income Elasticity of Demand
Arc Definition
2 1 2 1
2 1 2 1
I
Q Q I I
E
I I Q Q
+
=
+
Normal Good Inferior Good
0
I
E > 0
I
E <
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 30
Cross-Price Elasticity of Demand
Linear Function
Point Definition
/
/
X X X Y
XY
Y Y Y X
Q Q Q P
E
P P P Q
A A
= =
A A
4
Y
XY
X
P
E a
Q
=
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 31
Cross-Price Elasticity of Demand
Arc Definition
Substitutes Complements
2 1 2 1
2 1 2 1
X X Y Y
XY
Y Y X X
Q Q P P
E
P P Q Q
+
=
+
0
XY
E >
0
XY
E <
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 32
Example: Using Elasticities in
Managerial Decision Making
A firm with the demand function defined
below expects a 5% increase in income
(M) during the coming year. If the firm
cannot change its rate of production, what
price should it charge?
Demand: Q = 3P + 100M
P = Current Real Price = 1,000
M = Current Income = 40
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 33
Solution
Elasticities
Q = Current rate of production = 1,000
P = Price = - 3(1,000/1,000) = - 3
I = Income = 100(40/1,000) = 4
Price
%Q = - 3%P + 4%I
0 = -3%P+ (4)(5) so %P = 20/3 = 6.67%
P = (1 + 0.0667)(1,000) = 1,066.67
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright 2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 34
Other Factors Related to
Demand Theory
International Convergence of Tastes
Globalization of Markets
Influence of International Preferences on
Market Demand
Growth of Electronic Commerce
Cost of Sales
Supply Chains and Logistics
Customer Relationship Management