2 - demand analysis-updated

7/31/2019 2 - Demand Analysis-Updated

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Consumer Behaviour

Demand and UtilityAnalysis

Indifference CurveAnalysis

Reveal Preference

Theory

Game Theory


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Be Nice to the Ones who SMOKE..

Every Cigarette might be their last..


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Demand = Desire or Want+ Willingness to Buy+ Ability to Pay

At a specific price andper unit of time


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Case: 1.Which of the following statements depictingdemand are correct. Give reasons

a. In Boregaon village, the total population isone lakh

b. 50 buffaloes give 150 litres of milk every day

which is consumed by an entire village in onedayc. In a bustling part of a city, 100 packets of idlis

are sold within an hour

d. A fruit vendor sell 50 fruits (of differentvarieties) in a daye. A toy shop selling different types of toys, each

priced at Rs. 20 at a hill station makes abusiness of Rs. 3500 each day.


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Demand Functions

Long Run function QDx = f{ Px, Y, Pr, A, T, N, Fe, Tx, O..}

Independent VariableDependant Variable

Short Run Function

QDx = f (Px)


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Demand Determinants

Price of the product demanded.Income of the consumer.

Prices of related goods. Advertising expenditure.Future Expectations of theConsumer about the Price of the product.

Habits.


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Demand Determinants

Growth of Population, Agestructure, Sex ratio etc

Direct TaxesFashion, Tastes, Trends etc

Climatic ConditionsCredit FacilitiesBrand Name


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Income of the ConsumerLuxurygoods

EssentialConsumergoods (ECG)

InferiorGoods

Normal Goods

Quantity Demanded

C o n s u m e r s

I n c o m e

0X

Y


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Advertisement Expenditure

Sales Curve

Advertisement Expenditure (Rs.)0

V o

l u m e o

f S a l e s

X

Y


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Case: 2Following are some instances explain howdemand will be affected for that product inspecific or in general? Why?

a. A firm announces a double bonus for all itsemployees this Diwali.

b. Right next to a busy snack centre, a new onecomes up.c. VAT is announced on all saleable commoditiesd. A vegetable hawker announces that all

customers after 9.30pm to his shop will enjoy a25% off on any good

e. An epidemic in a country kills thousands ofpeople, mostly affecting the older generation

f. Prices of washing machines go down drastically


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Case: 3 Point out the factors

determining the demandfor a

virus- proof laptop .

OrPen-cum- pendrive


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Individual Demand Scheduleof Pizza

Price (Rs) Quantity Demandedby Gautam

(In units)100 6

200 5

300 4400 3

500 2

600 1


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Individual Demand Curve ofPizza

Quantity Demanded

X

Y

DD

P

P

P

Q Q Q O

P R I C E


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Demand Curve

Why does a demand curveslope downwards?

Price Quantity relationshipLaw of Diminishing MarginalUtility

Income EffectSubstitution Effect


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Price(Rs.)

QD byGautam(Smokin

Joes)

QD byGayatri(Pizza

Hut)

QD byJay(Dominos)

MarketdemandOr Total

Demand400 1 3 3

300 2 4 5

200 3 5 7

100 5 9 10

Market Demand Schedule ofPizza


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Price(Rs.)

QD byGautam(Smokin

Joes)

QD byGayatri(Pizza

Hut)

QD byJay(Dominos)

MarketDemandOr Total

Demand400 1 3 3 7

300 2 4 5 11

200 3 5 7 15

100 5 9 10 24

Market Demand Schedule ofPizza


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Market Demand

is a horizontalsummation of individual

demand.


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Law of Demand states that Other things remaining the same

(Ceterius Paribus) the higher theprice the lower will be the demandand vice versa.

QDx = f {Px}


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Other things remaining thesame

No change in consumers incomeNo change in prices of relatedgoodsNo change in advertisingexpenditure

No change in fashion, tastes,preferencesNo expectations about future

change in price


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Other things remaining thesame

No change in age-composition andsex ratio of the population

No change in government policyNo change in climatic conditions

No change in credit facilities, brandname, habits etc


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Exceptions to the Law ofDemand1. Giffen Paradox2. Prestigious goods or conspicuous

consumption or status symbolgoods

3. Speculation4. Consumers ignorance5. Emergency


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Case: 4

1. With news floating about a possibleoutbreak of war in the Gulf, whatwould be the reaction of the peoplein terms of demand (if for anyparticular product) and why?

2. Some people only buy branded

products. Comment3. Some people are addicted to few

products. Discuss.


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Changes In Quantity Demanded

Expansion in quantitydemandedContraction in quantity

demanded.


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Changes In Quantity Demanded

QUANTITY DEMANDED

X

Y

DD

P

R

I

C

E

P

P

P

Q Q Q

b

c

o

a


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Changes in Demand

Increase in demandDecrease in demand


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QUANTITY DEMANDED

X

Y

DD

PR

I

C

E

P

Q

Increase in Demand

DD

Q o


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Increase in Income of Consumer Taste, Fashion in favor of The Products

Increase in Price of SubstituteDecrease in price of ComplementaryConsumers Ignorance

EmergencyFuture Expectations About Rise in PriceIncrease in population

Increase in Demand Can beDue to ------


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QUANTITY DEMANDED

X

Y

DD

PR

I

C

E

P

Q

Decrease in Demand

DD

Qo

d b


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Decrease in Demand Can beDue to ------

Decrease in Income of Consumer Taste, Fashion Against The Products

Decrease in Price of SubstituteIncrease in price of ComplementaryFuture Expectations About Fall in Price

Decrease in Populationetc etc..


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Case: 5

1. A farmer gets a bumper crop thisseason and makes a lot of money.He goes to the market and buys a

lot of things for his family. This isexpansion of demand Justify.

2. Making door-to-door calls for the

product Tide washing power hasbrought in lot of orders for theproduct. How is the demand

behaving? Explain.


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Case: 6Given the following features,describe the effect of each of thefollowing in terms of whether itwould increase or decrease the

quantity demanded or the demandfor housing.a) An increase in housing prices.b) A fall in interest rates on Home loanc) A rise in interest rates on Home

loand) A severe economic recessione) A robust economic ex ansion

MISTAKES ARE NEW LESSONS FOR


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MISTAKES ARE NEW LESSONS FOR

SUCCESS


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The degree of responsiveness of quantity demanded due to change in anyfactor affecting demand.

Percentage change in quantitydemanded

Ep= -------------------------------------------------Percentage change in any factor

affecting demand

Elasticity of Demand


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Price elasticity


Ep= -------------------------------------------------Percentage change in price

QDx = f (Px)


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Income Elasticity

Percentage change in

quantity demandede i=------------------------------------------------------

Percentage change in the

Income of consumer

QD = f (Y)


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Cross Elasticity

Percentage change in Quantity demandedof good X

QD X

Exy =

Percentage change in price of good Y

= f (P Y)


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Price elasticity

The degree of responsiveness of quantity demanded due to change inprice.


Ep= -------------------------------------------------Percentage change in price


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Method of Price Elasticity

e P =Q

P

P

Q

.. .

Q 2 - Q 1

P 2 - P 1

P 1

Q 1

Ratio or Percentage Method

X

Xe P =


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Ratio or Percentage Method

Where, P1 = Initial PriceP2 = New PriceQ1 = Initial QuantityQ2 = New Quantity


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Types of Price Elasticity

1. Perfectly elastic (ep = )2. Perfectly inelastic (ep = 0 )

3. Relatively elastic demand (ep > 1) 4. Relatively inelastic demand

(ep< 1) 5. Unitary elastic demand (ep = 1)


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1. Perfectly elastic (ep= )

X

Y

QUANTITY DEMANDED

PR

I

C

EP DD

Q

Q

=

Q Q Q 0


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2. Perfectly inelastic (ep=0)

X

Y

QUANTITY DEMANDED

PR

I

CE

DD

Q

P

P

P

Q

Q

= 0

0

3 Relatively elastic demand


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3. Relatively elastic demand(ep > 1) Luxury goods

X

Y

QUANTITY DEMANDED

PR

I

C

E

DD

QQ

P

P

Q

Q

>P

P

Q

P

o

4 R l i l i l i d d


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4. Relatively inelastic demand(Ep < 1) Necessary Goods

X

Y

QUANTITY DEMANDED

PR

I

C

E

DD

QQ

P

P

Q

Q1

ep=1

ep


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ep =

Q2 Q1

PP 2 + P 1

Q2 + Q 1

ARC Method

X

Q

Q2 + Q 1 2

2

P 2 P 1P 2 + P 1

ep =


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X

Y

DD

a

b

Arc

Quantity Demanded

P r i c e

0


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Method of Calculating Price Elasticity:Total Revenue or Total Expenditure or

Total Outlay Method

Total Revenue = Price x Quantity

T l R /T l E di /


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Total Revenue/Total Expenditure/Total Outlay Method- More elastic

o

DD

PP

Q Q

ab

P TR P r i c e

Quantity Demanded

P

Q

C

P TR

T t l R /T t l E dit /


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Total Revenue/Total Expenditure/Total Outlay Method- less elastic

o

P

P

Q Q

a

b

P TR P r i c e

Quantity Demanded

DD

P

Q

P TR

T t l R /T t l E dit / T t l


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Total Revenue/Total Expenditure/ TotalOutlay Method- Unitary elastic

PP

Q Q

DD

a

b

Quantity Demanded

P r i c e

0


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Total Revenue MethodType of

Elasticity(Ep)

Price(Rs)

QDD(in units)

TR(in Rs.)

Ep = 1

241

105

20

202020

Ep > 1

2

41

10

424

20

1624

EP < 1

24

1

106

16

2024

16


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Total Revenue Method

Price Total Revenue(TR) Type ofElasticity(Ep)

IncreaseDecrease

ConstantConstant

E = 1(Unitary)

Increase

Decrease

Decrease

Increase

E > 1

(More elastic)

IncreaseDecrease

IncreaseDecrease

E < 1(Less elastic)


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Case: 11The Serpell Report (1983) on

Railway finances in England, forinstances, measured price elasticity ofdemand for rail services on someroutes to be fairly inelastic (-0.15);hence suggested fares rise of 40 percent for London commuters. In thiscase, work out the revenue effect iffare is raised from pound 10 to pound

14 and daily 1000 passengers aretraveling on this route. Should theauthorities accept this suggestion?Give your comment.


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Case: 11 Answer

% Q QEp = _________ = -0.15 = _________

% P 40%

Therefore, Q = 6%

as TR = P X QInitially, TR = 10 X 1000 = Pound 10,000

Q = 6%


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Case: 11 cont.

Therefore, with therise in fare new Q =940

At the new pricePound 14TR = 14 X 940

= pound 13,160

Price Qty TR

10 1000 10,000

14 940 13,160


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Case: 12

Suppose the demand for insulinconsists of two types of consumers,those who must have a dose each

day and those who are able to gowithout the drug for several weeks.Suppose the price elasticity of

demand for the first group is 0.01and that for the second group is 4.0.Explain how the firms producinginsulin might price the insulin.

Factors influencing elasticity of


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Factors influencing elasticity ofdemand-

(1) Nature of the commodity :Necessaries

Comforts and Luxuries

(2) Availability of substitutes :No substitutes Close substitutes



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Factors influencing elasticity ofdemand-(3) Number of Uses :

Single Use Multi Use

(4) Range of Price Change:

Highly Priced Low Priced



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(5)Proportion of Expenditure :Less expenditure

More expenditure

(6)Time Period :Short Period Long Period



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(7) Possibility of Postponement :

Can be Postpone --Cannot be Postpone

(8)Influence by Habits & Customs



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(1) Nature of the commodity :Necessaries Inelastic

Comforts and Luxuries Elastic

(2) Availability of substitutes :No substitutes InelasticClose substitutes Elastic



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Factors influencing elasticity ofdemand-(3) Number of Uses :

Single Use InelasticMulti Use Elastic

(4) Range of Price Change:

Highly Priced ElasticLow Priced Inelastic



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(5)Proportion of Expenditure :Less expenditure Inelastic

More expenditure Elastic

(6)Time Period :Short Period InelasticLong Period elastic



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(7) Possibility of Postponement :

Can be Postpone -- ElasticCannot be Postpone Inelastic

(8)Influence by Habits & Customs Inelastic

Practical Applications of Price


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ppelasticity

1. To a Businessman By knowing the type of elasticity ofdemand it is easy to know whether a pricecut is better or a price rise for increasingthe sales, total revenue and the profits.If the demand is more elastic, a price cutwould lead to an increase in total

revenue.It the demand is inelastic, by raising aprice, no significant decrease in sales willbe effected so the total revenue and theprofit would rise.


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Case : 9

Just think of the product Mangoes. Ita.Is a perishable commodityb.Has no substitutec.Has a high demand in the domestic

as well as the foreign market-- what can you say about its demand

elasticity in each of the aboveaspects?

Practical Applications of Price


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Practical Applications of Priceelasticity 2. To the Finance Minister

Finance minister has to consider theelasticity of demand while selecting

commodities for tax. Tax imposition oncommodities for getting substantialrevenue becomes worthwhile only if thetaxed goods have an inelastic demand.

Taxes are levied on commodities whichhas inelastic demand like cigarettes,wine, sugar etc.

Practical Applications of


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Practical Applications ofPrice elasticity

3. In International Trade Elasticity is important in

formulating export and importpolicies of a country. The relativeelasticities of demand forcommodities in the two countries

are very important. Export thosecommodities which are inelastic inthe international market.



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Practical Applications ofPrice elasticity

4. To Trade Unionists The concept of price elasticity is

useful to trade unions in wage

bargaining. The union leaders,when they find that demands fortheir industrys product is fairlyelastic, will ask for a higher wage toworkers and use the producer tocut the price and increase saleswhich will compensate for his lossin total profit.


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Case: 13

Rainbow Crayons, Inc. as amarketing specialist has just hiredyou. The CEO comes to you for

advice on how to raise revenue. Shewants to know if the companyshould lower product prices or raise

product prices to increase revenue.What information must you know? Ifyou have this information, what doyou advise?

Case: 14 Calculate the price elasticity of


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demand for different years from thefollowing data

Year Percentagechange in price

Percentagechange inquantity

2001 5.0 -3.2

2002 -2.5 5.6

2003 zero 1.2

2004 6.5 -2.5


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Case: 14 Answer

2001 0.64 Relatively inelastic.2002 2.24 Relatively elastic2003 infinity Perfectly elastic.2004 -- 0.38 Relatively inelastic.


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Income Elasticity

the degree ofresponsiveness of thequantity demanded due tothe change in income of theconsumer.

Measurement of Income


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Measurement of IncomeElasticity

Percentage change inquantity demanded

e i=------------------------------------------------------Percentage change in the

Income of consumer



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Measurement of IncomeElasticity Ratio Method

ei =Q

Y

Y

Q

ei =Q2 - Q1

Y2 - Y1

Y1

Q1

X

X

f


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Elasticity

Where, Y1 = Initial IncomeY2 = New IncomeQ1 = Initial QuantityQ2 = New Quantity

Mesurement of Income


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esu e e t o co eElasticity

ei =

Q2 Q1

YY2 + Y1

Q2 + Q 1

ARC Method

X

Q

Q2 + Q 1 2

2

Y2 Y1Y2 + Y1

ei =

T f I l i i


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Types of Income elasticity

(1)Positive income elasticity canbe :

Greater than one ei > 1 -LuxuriesLess than one ei < 1 -Necessaries

P i i I El i i


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Positive Income Elasticity

X

Y

QUANTITY DEMANDED

DD

ei < 1 (necessary goods)

0 Q Q

Y

Y

Y

Q

P i i I El i i


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Positive Income Elasticity

X

Y

QUANTITY DEMANDED

DD

ei > 1 (Luxury goods)

0

Y

Y

Q Q

Y

Q

N i I El i i


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Negative Income Elasticity

X

Y

QUANTITY DEMANDED

I

N

COME

DD

0

ei < 0 (Inferior goods)

Y

Q

Y

Y

QQ


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Case: 15

Paul purchases 10 Kgs per monthon sugar when his income is Rs1500/- per month, when his income

increases to Rs 1800/- per month hespends 12 Kgs on sugar .FindIncome elasticity.

Answer: ei = 1 (sugar is a normalgood)


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Case: 16 Find income elasticity from thefollowing information and interpretthe result.

Initial Income = Rs. 3000Initial Quantity = 1600 unitsNew Income = Rs. 3200

New Quantity = 1300 units

Answer: Ey = -2.81( it is an inferiorgood)

C 17


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Case: 17

There are three income bracketpeople, very poor, middle class andelite class. In one particular monththe prices of each of these rise. Whatwill be the income elasticity?PotatoesDiamondsCottonPaperWheat



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Income elasticity

K. K. Seo points out the income elasticityof demand is applicable to many planningand strategy problems, such as

1. Long term Business Planning In the long run, demand for comfortsand luxury goods may tend to be highlyincome elastic. Hence, prospects for longrun growth in sales for these goods arevery bright. The firm can plan out itsbusiness accordingly.



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Income elasticity

2. Market Strategy Income elasticity of demand is

helpful in developing marketstrategies.

3. Housing Development Strategies On the basis of income elasticity,

housing development requirementcan be predicted and constructionwork can be effectively launched

upon Practical Applications of


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Income elasticity

4. To the Businessman Income elasticity is important to certain

producers in their demand and sales

forecasting and planning businessexpansion. For instance, the demand forTV sets is highly income elastic, so whenper capital income or income levels of a

class of consumers is found to be rising,TV manufacturers can expect a greatersale even at slightly higher prices.

Cross Elasticity


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Cross Elasticity

..is the degree of responsiveness ofquantity demanded of good X due tothe change in Price of good Y( where

good X and Y are either substitutes orcomplementary)

Percentage change in Quantity demandedof good X

Percentage change in price of good YExy =

Measurement of Cross


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Elasticity

ey =QX

PY

P Y

QX

ey =QX2 - Q X1

P Y2 - P Y1

P Y1

QX1

X

X

Ratio Method

Mesurement of Cross


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Elasticity

ey =

QX2 QX1

P YP Y2 + P Y1

QX2 + Q X1

ARC Method

X

QX

QX2 + Q X1 2

2

P Y2 P Y1P Y2 + P Y1

ey =

Cross elasticity in case of


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Substitutes

P r i c e o

f c o

f f e e

Demand for tea

P

P

Q Q

DD Tea

Exy > 0

X

Y

0



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yComplementary goods

P r i c e o

f p e

t r o l

Demand for vehicles

DD Vehicles

P

P

Q Q

Exy < 0

0X

Y



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Unrelated goods

P r i c e o

f I c e c r e a m

Demand for Cloths

DD Cloths

P

P

Q

Exy = 0

0X

Y

P



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Cross elasticity

To determine the competitiveprice strategy and policy in thealternative rivals modes ofservices such as rail-roadservices. Cross elasticity, here istaken, as a measure of the effectof a change in the fares on thedemand for the rail service andvice versa.

Case: 18 Calculate cross


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elasticity and interpret results

Instances Price ofGood X

Qtydemandedof Good Y

Results

01 10 100

20 200

02 15 150

10 150

03 8 10020 0

04 20 100

15 50

Case: 18 Calculate cross


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elasticity and interpret results

Instances Price ofGood X

Qtydemandedof Good Y

Results

01 10 100 Exy = 1

20 200 Substitutes

02 15 150 Exy = 0

10 150 Unrelated

03 8 100 Exy = -0.6620 0 Complementary

04 20 100 Exy = 2

15 50 Substitutes

Case: 19


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There was a sale of 10,000 units of

Acer Laptop in the year 2004 when itsprice was Rs. 40,000. During the sameperiod 10,500 Toshiba Laptop were atthe price of Rs. 45,000. when the priceof Acer was brought down to Rs.38,000 its sales increased to 12,000units and the demand for Toshiba

declined to 9,500 units without thechange in its own price. Calculatecross elasticity and interpret your

result

Case: 19 Answer


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Case: 19 Answer

Exy = 1.90 (Subsitutes)

Case: 20


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Case: 20When the price of bread was Rs. 20,the demand for bread for 80 units.During the same time price of butterwas Rs. 75 and demand for butter

was 30 units. Price of breadremaining same, if the Price for butterreduces to Rs. 60, then its demandincreases to 40 units and demand forbread also increases to 90 units.

Answer: Exy = - 0.625

(Complementary goods) Case: 21 . Weekly demand of the Household isgiven below. Find the price elasticity of


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g p ydemand for rice and cross elasticity of demandbetween rice and wheat.

Originalprice (Rs)

OriginalQuty (Kgs)

NewPrice

(Rs)

New Quty(Kgs)

Wheat 8 50 8 70

Rice 20 50 23 40

Case: 21 Answer


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Case: 21 Answer

Ep= 1.33 ,

Exy = 2.66 (Substitutes)

Case: 22


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Case: 22

The Times of lndia, is one of theleading newspapers in India. InSeptember 1972, it lowered itsprice from 45 paise to 30 paisewhile prices of its rivalsremained unchanged. Thenumber of newspapers sold byTOI and its rivals was as follows:

Case: 22 conti


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Case: 22 conti..

August2005

May2006

Times of India 3,55,000 5,18,000

Statesman 10,24,000 9,93,000

Hindu 3,92,000 4,02,000

Hindustan

Times

3,25,000 2,77,000

Case: 22 conti


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Case: 22 conti..

1. Based on the figures, find theprice elasticity of demand for

TOI.

2. Was the cross elasticity ofdemand between Statesmanand TOI positive or negative ?

Case: 23 Work out the type ofl ti it th f ll i d t


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elasticity the following products

will have:-ElectricitySoaps

Exotic VacationsCigarettesWineACTea

Genius does what it must, and Talent doeswhat it can


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Demand Forecasting


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Demand Forecasting

Isthe method of predictingthe future demand of afirms product.

Demand Forecasting


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Demand Forecasting

Short Run ForecastingSurvey Method

Long Run ForecastingStatistical Method

Survey MethodOpinion Polling MethodCollective opinion MethodPanel of Experts

Correlation & Regression

Time Series MethodBarometric Method

Methods of DemandF ti


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Forecasting

For a Established product :(1) Interview and Survey Approach

(2)Opinion Polling Method(3)Collective Opinion Method(4) Panel of Experts Or Delphi

method.(5) Projection Approach (for Long

Period)

Projection Approach (LongP i d)


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Period)

S A L E S

0 YEAR

Y

X

For a New Product


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Evolutionary MethodSubstitution Method

Growth Pattern MethodOpinion Polling MethodSample Survey Method

C 24


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Case: 24

Mention which method offorecasting will be suitable forthe following products:

a. Toysb. Getz

c. Washing Powderd. Coffee

Case: 25


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A cartel has been entered into by various

firms into the manufacture of kids schoolshoes. Price has been set, which the firmshave to respect. To increase profits, thefirms have to increase the quantitysupplied. Your firm is one of them. It is themonth of April. Just 2 more months to gofor the schools to re-open, the time whenmost parents do shoe-shopping for theirchildren. Certain factors are in yourhands, while some are not. Which ones do

2 - demand analysis-updated

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