Pgdm - Demand Analysis

8/3/2019 Pgdm - Demand Analysis

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Demand Analysis Demand means the quantity purchased at a price in a period of

time.

Demand must always be stated with reference to a time period.

Demand for a good exist only when there is desire for it.Further, the buyer should have the ability to purchase itand the willingness to pay for it.

Demand in economics implies three things:

Desire for the Commodity;

Willingness to pay its price;

Ability to pay, that is, the person should have the necessary andadequate money to purchase it.


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Factors of Demand This is also called as Determinants of Demand:-

Price of the Good. (Pn)

Price of the other Goods. (Substitutes andComplementary). ( Pn-1)

Income of the Consumer. (Y)

Taste of the Consumer. (T)

Population. (D) Expectations about the future price. (E)

Income Distribution (equality /inequality). (ID)


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Demand Function: Demand function states the factors that govern the demand for a

good.

Function tells us the relationship between the differentvariables. For example., prices and quantities.

Demand function can be as:

Dn = f (Pn, Pn-1, Y, T, D, E, ID) Whereas,

Dn = Dependent Variable.

In Brackets are the Independent Variables.


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Demand Schedule: Demand Schedule for a good means which shows

the different quantities purchased at different prices.

Demand schedule is of two types:

Individual Demand schedule and Market Demand

schedule (total demand).


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Individual Demand Schedule:

Individual Demand schedule

shows the quantities of acommodity (or) good that aperson will buy at differentprices.

Example:

The Individual DemandCurve slopes down from leftto right.

Prices QtyDemand of

Individual

5 5 Units

4 7 Units

3 10 Units

2 13 Units


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Market Demand Schedule:

Market demand scheduleshows a schedule indicating

various amounts ofcommodity that would bepurchased by all the buyers atvarious prices during a periodof time.

The sum of all the individualdemand schedule is the Total

Market demand schedule. Market Demand Curve also

slopes down from left toRight.

Price

A B C TotalMarket

Demand

3 0 2 4 6

2 2 4 6 12

1 4 6 8 18


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Law of Demand Dr. Alfred Marshall is the Builder of the Demand theory.

Law of Demand means:

Other factors remaining constant, with a fall in price, the

demand expands; and with a rise in price, the demandcontracts. This is Law of Demand.

It states the relationship between the price of the good and thequantity demanded.

This is of inverse relationship.

If one rises, the other falls. If all other factors remain unchanged, thislaw will operate.

It has certain Assumptions.


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Assumptions of Law of Demand: Conditions of Law of Demand:

Income of consumers must remain Constant.

Tastes of Consumers must remain Constant.

Price of other goods must remain Constant.

There must be no expectations about future changein price in the same direction.


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Reasons for Law of Demand:

(Why is an inverse relationship?)

There are two important reasons for the operation of

the law of demand.

Income Effect.

Substitution Effect.


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Income Effect: A fall in the price of a commodity results in a rise in the

consumers real income. An individual can thereforepurchase more of it.

On the other hand, if a rise in price of the commodityamounts to a fall in his real income. Consumer is forcedto purchase less of it.

In general, Income Effect is stronger for the consumeronly when he buys large quantities of a particular goodinstead of other goods. Otherwise he may prefer for

superior good incase if real income increases. (a rarephenomenon).


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Substitution Effect: Suppose the price of a commodity falls down, while

other goods prices do not change (substitute goods),then this good appears to be cheaper for the consumer.

Therefore, demand increases for that good. If not, vice versa.

Substitution Effect is stronger and easily observedeverywhere in the world.

Intensity of desire operates the demand to a certainextent.


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Exceptions to Law of Demand: Law of demand does not apply to following

circumstances:

1. Giffens Paradox: (Sir Robert Giffen)

Giffen paradox explains us that the demand increaseswith a rise in price and on the other hand, demanddecreases with a fall in price. - Consumption patternadjustment.

Though market demand curve will be downward sloping,the individual demand curve will be upward sloping.


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2. Veblen Effect/Snob appeal:

(Veblen, American Economist)

As the price raises for such goods, who does not have an

other utility other than show off-prestige (diamond,precious stones, etc) demand may increase at higherprices.

On the other hand, if prices falls, their demanddecreases. (prestige value decreases).

In rare cases, due to rapid price fall - new customers demand curve takes the shape.


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3. Speculation:

If consumer speculates price rise in near future demand more(or) in case speculates price fall in near future demand less.

4. High-Priced goods:

Brand differences in goods does not make any differences inthe purchases.

5. Price changes in a business cycle:

In a period of depression, price falls demand falls.

In period of Prosperity, prices rise demand rises.

Upward sloping demand curve.


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TYPES OF DEMAND Price demand cause and effect of price and

demand.

Income demand

cause and effect of income anddemand. (Different goods)

Cross demand cause and effect of other goods(different goods)


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PPTs By

Dr. Thirumagal Pillai.

Pgdm - Demand Analysis

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