DEMAND ANALYSIS

Definition: Demand is a combination of: 1) Desire to purchase 2)Willingness to pay 3)Ability to pay

Determinant of Demand
Price of own Commodity

Price of related commodity

Income of the consumer Taste and Preferences Distribution of Income Price Expectation Promotional Expenditure Growth of Population

Law of Demand
According to Alfred Marshall, demand for a

commodity is inversely related with price of the commodity and cetaris-paribus, i.e., other things remainning same.

Demand Function and Demand Curve

Dx=f(Px,Py,M,T,Pe,.)

Demand Curve is

negatively sloped or downward sloping measuring price & output in two axes.

Shift and movement in demand

Incase of shift in demand other factors of

demand will change and own price remains unchanged. Incase of movement along the same demand curve only own price will change.

SUPPLY CURVE
Supply of a commodity and its price is directly

related and supply curve is upward sloping.

Equilibrium Situation
Equilibrium price and output is determined

through intersection between demand and supply curves. Equilibrium situation is represented by equality between demand and supply. The increase in demand and decrease in supply will leads to increase in price due to excess demand. The decrease in demand and increase in supply will leads to decrease in price.

DEMAND ELASTICITY
It denotes the relative responsiveness of

change in determinants(e.g. price of the commodity, price related commodity, income of the consumer) of demand on demand for a commodity. Demand elasticity can be divided into A)price elasticity B)cross price elasticity C)income elasticity

PRICE ELASTICITY
It is defined as percentage change in

quantity demand due to percentage change in price of the commodity. Ep=dq/dp*p/q Price elasticity can be divided into: A)Perfectly elastic-Ep=infinity B)Completely inelastic-Ep=0 C)Elastic-Ep>1 D)Inelastic-Ep<1 E)Unitary elastic-Ep=1

CROSS PRICE ELASTICITY

It is defined as percentage change in quantity

demanded for a commodity due to percentage change in price of another commodity. Ec=dQx/dPy*Py/Qx According to Cross price elasticity commodity can be divided into: A)Substitute commodity:Ec>0,e.g.tea & coffee B)Complementary commodity:Ec<0,e.g.car & petrol

INCOME ELASTICITY
It is defined as percentage change in quantity

demanded due to percentage change in income of the consumer. Em=dq/dm*m/q According to income elasticity commodity can be devided into: A)Normal commodity-Em>0 1)Luxary commodity-Em>1 2)Necessary commodity-Em<1 B)Inferior commodity-Em<0

MEASUREMENT OF PRICE ELASTICITY

The price elasticity can be measured on a

point on a straight line demand curve through graphical measure. Let AB be the straight line demand curve/ with A&B are the two extreme points. Let E be a point on demand curve from where a consumer shifted to another point F. Here percentage change of demand is QfQe/OQe*100 Here percentage change of price is PfPe/Ope*100

MEASUREMENT OF PRICE ELASTICITY

=TF/TE*OPe/OQe =QeB/EQe*OPe/OQe =QeB/OPe*OPe/OQe =QeB/OQe =BE/AE =lower segment/upper segment

DETERMINANT OF ELASTICITY
PRICE OF COMMODITY

PRICE OF RELATED COMMODITY

INCOME NATURE OF GOODS TIME USE OF THE COMMODITY INCOME SPEND ON THE COMMODITY AVAILABILTY OF SUBSTITUTE

IMPORTANCE OF ELASTICITY
IMPOSITION OF TAX

TAX REVENUE
INTERNATIONAL TRADE SHIFT OF TAX BURDEN PRICE DISCREMINATION