Demand analysis

What is demand?

-demand is desire backed by the ability

to pay & the willingness to pay at a
certain time and a certain price
 Determinants of demand
1. Price of the commodity
2. Price of related goods
3. Income of the consumer
4. Tastes & preferences of the consumer
5. Expectation of price changes in future
6. Size of population
7. Distribution of income
 Demand function
Dx={ Px,Pr,Y,T,E,P,Yd}
Dx= demand for the commodity
Px= price of the commodity
Pr=price of related goods
Y= income of the consumer
T = tastes & preferences
E= expectations of future price changes
P= composition of population
Yd= distribution of income
 States of demand
 Negative demand
 No demand
 Latent demand
 Declining demand
 Irregular demand
 Full demand
 Overfull demand
 Unwholesome demand
 Law of demand
-other things being equal , the demand for a
commodity goes up when the price goes
down and goes down when the price
goes up.

i.e. Demand is inversely proportional to

price
 Assumptions to the law of
demand
1. No change in price of related goods
2. No change in income
3. No change in taste & preferences
4. No expectations of future change in
prices
 Demand schedule &
demand curves
 Individual
demand schedule
 Market demand schedule
Individual demand schedule

Price per unit Quantity demanded

1 35
2 30
3 25
4 20
5 15
 Market demand schedule
Price per Qty. Qty. Qty. Market
unit dem. dem. dem. demand
A B C

10 50 25 100 175
12 45 22 83 150
14 40 20 70 130
17 35 18 57 110
20 30 15 45 90
 Why does demand curve
slope downwards?
1. Law of diminishing marginal utilty
2. Income effect
3. Substitution effect
4. Diverse uses of commodity
5. Size of consumer groups
 Exceptions to the law of
demand
 Giffen goods
 Distinct or conspicuous goods ( veblen
effect)
 Ignorance
 Goods of low value
 Speculative goods
 Change in quantity
demanded
Movement along the demand curve
(extension & contraction of demand)

Shiftof the demand curve

(increase & decrease in demand)
 Elasticity of demand

The elasticity of demand measures the

responsiveness of the quantity
demanded of a good , to change in
its price, price of other goods and
changes in consumers income
Types of elasticity of demand

 Priceelasticity
 Income elasticity

 Cross elasticity of demand

 Advertising elasticity of demand

 Price elasticity of demand

Degrees of Price Ed
 Unit elasticity of demand {Ed=1}
 Perfectly elastic demand {Ed=∞}
 Perfectly inelastic demand {Ed=0}
 More than unit elastic {Ed>1}
 Less than elastic {Ed<1}
 Measurement of price
elasticity of demand
 Proportionate method

 Revenue method Ed= A__

A -M
 Point method
Factors determining price Ed
 Nature of commodity
 Availability of substitutes
 Goods with multiple uses
 Postponement of use
 Income
 Habits, tastes
 Proportion of income spent
 Price level
 Joint demand
 Income elasticity of demand
Degrees
 Positive income elasticity

unit elasticity
less than unity
more than unity
 Negative income elasticity

 Zero income elasticity

Cross elasticity of demand
Degrees
 Positive

 Negative

 Zero

Advertising elasticity of
demand
 Importance of elasticity of
demand
 Price determination under monopoly
 Price discrimination
 Taxation policies
 International trade
 Wage determination