demand

MANAGERIAL ECONOMICSMANAGERIAL ECONOMICSMODULE 3MODULE 3

BY BY

Mr. AnirbanMr. Anirban

Christ College Institute of Christ College Institute of ManagementManagement

BangaloreBangalore

Anirban / Micro Economics / Module 3 / CCIAnirban / Micro Economics / Module 3 / CCIMM

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Demand AnalysisDemand Analysis

Meaning of Demand:Meaning of Demand: Demand for a particular commodity refers to Demand for a particular commodity refers to

the commodity which an individual consumer the commodity which an individual consumer or household is willing to purchase per unit or household is willing to purchase per unit of time at a particular price.of time at a particular price.

Demand for a particular commodity implies:Demand for a particular commodity implies:DesireDesire of the customer to buy the product; of the customer to buy the product;The customers The customers willingnesswillingness to buy the product; to buy the product;Sufficient Sufficient purchasing powerpurchasing power in the customers in the customers possession to buy the product.possession to buy the product.

The demand for a particular commodity by an The demand for a particular commodity by an individual consumer or household is known individual consumer or household is known as Individual demand for the commodity and as Individual demand for the commodity and Summation of the individual demand is Summation of the individual demand is known as the Market demand.known as the Market demand.


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Demand AnalysisDemand AnalysisLaw of Demand:Law of Demand: Law of demand expresses the Law of demand expresses the

relationship between the relationship between the Quantity demanded and the Price Quantity demanded and the Price of the commodity.of the commodity.

The law of demands states that,The law of demands states that,““Ceteris Paribus, (other things Ceteris Paribus, (other things remaining constant) the lower remaining constant) the lower the price of a commodity the the price of a commodity the larger the quantity demanded of larger the quantity demanded of it and vice versa.”it and vice versa.”

In simple terms other things In simple terms other things remain constant, if the price of remain constant, if the price of the commodity increases, the the commodity increases, the demand will decrease and if the demand will decrease and if the price of the commodity price of the commodity decreases, the demand will decreases, the demand will increase.increase.

PP QdQd

11 6060

22 5050

33 4040

44 3030


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Assumptions:Assumptions:No change in taste and preference.No change in taste and preference.Income of the consumer is Income of the consumer is

constant.constant.No change in customs, habit, No change in customs, habit,

quality of goods.quality of goods.No change in substitute products, No change in substitute products,

related products and the price of related products and the price of the product.the product.

No complementary goods.No complementary goods.


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Demand Schedule:Demand Schedule:A demand schedule is a A demand schedule is a

numerical tabulation that shows numerical tabulation that shows the quantity of demeaned the quantity of demeaned commodity at different prices.commodity at different prices.

The demand schedule may be of The demand schedule may be of 2 types :2 types :

Individual demand Schedule Individual demand Schedule Market demand Schedule.Market demand Schedule.


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Demand AnalysisDemand Analysis Table Showing the Table Showing the IDC & MDCIDC & MDC : :

PricePrice

(Per Kg)(Per Kg)Quantity demanded Quantity demanded

by Individual by Individual CustomersCustomers

Market Market DemandDemand

AA BB CC DD

66 44 33 55 66 1919

77 33 22 44 55 1414

88 22 11 33 44 1010

99 00 00 11 22 0303


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Demand AnalysisDemand AnalysisGraphical Representation of IDC & Graphical Representation of IDC &

MDCMDC


88

Demand AnalysisDemand AnalysisDemand Function:Demand Function: A Mathematical relationship between A Mathematical relationship between

quantity demanded of the commodity and its quantity demanded of the commodity and its determinants is known as Demand Function.determinants is known as Demand Function.

When this relationship relates to the When this relationship relates to the demand by an individual consumer it is demand by an individual consumer it is known as Individual demand function and known as Individual demand function and while it relates to the market its known as while it relates to the market its known as market demand function.market demand function.

Individual Demand Function :Individual Demand Function :Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey. Ep, U)Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey. Ep, U)


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Demand AnalysisDemand AnalysisQdxQdx = Quantity demanded for product X.= Quantity demanded for product X.PxPx = Price of product X= Price of product XY Y = Level of Income = Level of Income P1..Pn-1P1..Pn-1 = Prices of all other products= Prices of all other productsT T = Taste of the consumer= Taste of the consumerA A = Advertisement= AdvertisementEyEy = Expected future income= Expected future incomeEpEp = Expected future price= Expected future priceU U = Other determinants not covered in = Other determinants not covered in

the list of determinants. the list of determinants.Market Demand Function:Market Demand Function:

Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey, Ep, P, D, Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey, Ep, P, D, U, P)U, P)

PP = Population= PopulationDD = Distribution of consumers.= Distribution of consumers.


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Demand AnalysisDemand AnalysisCauses of downward sloping of Demand Curve:Causes of downward sloping of Demand Curve: According to the law of demand there exists a opposite According to the law of demand there exists a opposite

relationship between the PRICE and the QUANTITY relationship between the PRICE and the QUANTITY DEMANDED, and that is why demand curve is downward DEMANDED, and that is why demand curve is downward sloping.sloping.

Let the linear form of demand curve :Let the linear form of demand curve :

P = a + bq, where a, q constant and b < 0, i.e. dp/dq = b < P = a + bq, where a, q constant and b < 0, i.e. dp/dq = b < 0 (Assumption), so slope of the demand curve is negative.0 (Assumption), so slope of the demand curve is negative.

The various reasons for this downwards sloping of The various reasons for this downwards sloping of demand curves are as follows:demand curves are as follows:

Law of Diminishing Marginal Utility and Equi-Marginal Law of Diminishing Marginal Utility and Equi-Marginal utility.utility.

Price Effect.Price Effect. Income Effect.Income Effect. Substitution Effect.Substitution Effect. Different Use ( Electricity).Different Use ( Electricity).


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Demand AnalysisDemand AnalysisExceptions of Law of Demand:Exceptions of Law of Demand:

In certain cases the slope of Demand Curve is In certain cases the slope of Demand Curve is upward i.e. positively sloped, it is known as upward i.e. positively sloped, it is known as the exceptions of Law of Demand.the exceptions of Law of Demand.These exceptions are as follows:These exceptions are as follows:

Giffen Goods (Giffen Paradox)Giffen Goods (Giffen Paradox) Emergency (War etc…)Emergency (War etc…) Conspicuous necessities (Car, Fancy Cloths Conspicuous necessities (Car, Fancy Cloths

etc…) and Conspicuous Consumption (Fancy etc…) and Conspicuous Consumption (Fancy Diamonds, High price shoes, pens etc…)Diamonds, High price shoes, pens etc…)

Depression ( Price and quantity demand is Depression ( Price and quantity demand is low)low)

Ignorance Effect (High priced commodity is Ignorance Effect (High priced commodity is better in quality)better in quality)

Speculation (Future change in price)Speculation (Future change in price)


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The situations given below are the cases where The situations given below are the cases where Individual’s demand depends on the demands of Individual’s demand depends on the demands of the other people.the other people.

Bandwagon Effect (Positive Network Externality) : Bandwagon Effect (Positive Network Externality) : Flatter or more elasticFlatter or more elastic

Snob Effect: (Negative Network Externality): Snob Effect: (Negative Network Externality): Steeper or Less elasticSteeper or Less elastic

Veblen Effect : Steeper or Less elasticVeblen Effect : Steeper or Less elastic

Shift (Contraction & Expansion) and Change in Shift (Contraction & Expansion) and Change in Demand:Demand:


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Demand AnalysisDemand AnalysisFactors Determining Demand:Factors Determining Demand: General Factors:General Factors:

Price of the productPrice of the product Taste and PreferenceTaste and Preference IncomeIncome Prices of the related goodsPrices of the related goods

Additional Factors: (Luxury Goods & Durables)Additional Factors: (Luxury Goods & Durables) Consumer’s Expectation of future price.Consumer’s Expectation of future price. Consumer’s Expectation of future income.Consumer’s Expectation of future income.

Additional Factors:( Market Demand)Additional Factors:( Market Demand) PopulationPopulation Social, Economic & Demographic distribution of Social, Economic & Demographic distribution of

Consumer’s.Consumer’s.


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Demand AnalysisDemand AnalysisDemand Distinctions:Demand Distinctions:

Producer’s Good and Consumer’s Good.Producer’s Good and Consumer’s Good. Durable and Perishable Good.Durable and Perishable Good. Derived Demand Autonomous Demand.Derived Demand Autonomous Demand. Industry Demand and Firm (Company) Industry Demand and Firm (Company)

Demand.Demand. Total Demand and Market segment Total Demand and Market segment

DemandDemand Short Run Demand and Long Run Demand.Short Run Demand and Long Run Demand. Short Run Demand Fluctuations and Long Short Run Demand Fluctuations and Long

Run Demand Trends.Run Demand Trends.


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Problems:Problems:1.1. The demand equation is Q = 90 – 3P. At what price The demand equation is Q = 90 – 3P. At what price

would no one be willing to buy any of the commodity? would no one be willing to buy any of the commodity? If the commodity is given free, what is the quantity If the commodity is given free, what is the quantity demanded? If the price is reduced by 1 unit how much demanded? If the price is reduced by 1 unit how much the quantity demanded change?the quantity demanded change?

2.2. The demand equation is Q = 25 – 5P. What is the The demand equation is Q = 25 – 5P. What is the quantity demanded if the price is Rs 3? Assume the quantity demanded if the price is Rs 3? Assume the demand is 18 units, then what is the corresponding demand is 18 units, then what is the corresponding price? What would be the demand if the commodity in price? What would be the demand if the commodity in question were a free good? What is the highest price question were a free good? What is the highest price anybody will pay for the commodity?anybody will pay for the commodity?


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Elasticity of DemandElasticity of DemandElasticity of Demand:Elasticity of Demand: Elasticity of demand is defined as the Elasticity of demand is defined as the

percentage change in quantity demanded percentage change in quantity demanded caused one percent change in each of the caused one percent change in each of the determinants under consideration while the determinants under consideration while the other determinants are held constant.other determinants are held constant.

Ed = % change in quantity demanded / % change Ed = % change in quantity demanded / % change in in the determinant. the determinant.

There are mainly five types of Elasticity of There are mainly five types of Elasticity of Demand :Demand :

Price Elasticity of demandPrice Elasticity of demand Income Elasticity of demandIncome Elasticity of demand Cross Elasticity of demandCross Elasticity of demand Promotional Elasticity of demandPromotional Elasticity of demand Expectation Elasticity of demandExpectation Elasticity of demand


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Elasticity of DemandElasticity of Demand

Price Elasticity of Demand :Price Elasticity of Demand : Price Elasticity of Demand measures the degree of Price Elasticity of Demand measures the degree of

responsive ness of the quantity demanded of a responsive ness of the quantity demanded of a commodity due to a change in its own price.commodity due to a change in its own price.

Ep = - (Ep = - (% change in quantity demanded) / % change in quantity demanded) / ( % change in the Price).( % change in the Price).

Here we ignore the – ve sign as the relation between Here we ignore the – ve sign as the relation between price and the quantity demanded is opposite.price and the quantity demanded is opposite.

Price Price Elasticity of Demand are of 5 types :Elasticity of Demand are of 5 types : Perfectly elastic demandPerfectly elastic demand Perfectly / Absolutely inelastic demandPerfectly / Absolutely inelastic demand Relatively Elastic demandRelatively Elastic demand Relatively inelastic demandRelatively inelastic demand Unit Elastic demandUnit Elastic demand


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Elasticity of DemandElasticity of DemandIncome Elasticity of Demand:Income Elasticity of Demand: Income Elasticity of Demand measures the Income Elasticity of Demand measures the

degree of responsive ness of the quantity degree of responsive ness of the quantity demanded of a commodity due to a change in demanded of a commodity due to a change in money income of the consumer.money income of the consumer.

Em = - (Em = - (% change in quantity demanded) / % change in quantity demanded) / ( % change in the Money Income).( % change in the Money Income).

Cross Elasticity of Demand:Cross Elasticity of Demand: Income Elasticity of Demand measures the Income Elasticity of Demand measures the

degree of responsive ness of the quantity degree of responsive ness of the quantity demanded of one commodity due to a change in demanded of one commodity due to a change in price of some related goods.price of some related goods.

Exy = - (Exy = - (% change in quantity demand of goods Y) / % change in quantity demand of goods Y) / ( % change in the price of goods X).( % change in the price of goods X).


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Elasticity of DemandElasticity of DemandFactors affecting the Elasticity of Demand :Factors affecting the Elasticity of Demand : Nature of the productNature of the product Availability of the substitute productAvailability of the substitute product Uses of the commodityUses of the commodity Income LevelsIncome Levels Proportion of Income spentProportion of Income spent Postpone consumptionPostpone consumption Price levelsPrice levels Time periodTime period DurabilityDurability Taste & PreferenceTaste & Preference Demonstration EffectDemonstration Effect AdvertisementAdvertisement Special Demand (Medicine)Special Demand (Medicine) Complementary GoodsComplementary Goods Expectation of the future price etc…Expectation of the future price etc…


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Elasticity of DemandElasticity of Demand

Advertising or Promotional Elasticity Advertising or Promotional Elasticity of Demand:of Demand:

Advertising or PromotionalAdvertising or Promotional Elasticity of Elasticity of Demand measures the degree of Demand measures the degree of responsive ness of the quantity responsive ness of the quantity demanded of a commodity due to a demanded of a commodity due to a change in expenditure on advertising and change in expenditure on advertising and other sales promotion activities.other sales promotion activities.

Ea = (% change in quantity demanded) / Ea = (% change in quantity demanded) /

( % change in the Expenditure on ( % change in the Expenditure on Advertisement). Advertisement).


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Elasticity of DemandElasticity of DemandImportance or Significance of Elasticity of Importance or Significance of Elasticity of

Demand:Demand:Practical Importance:Practical Importance:

Production PlanningProduction Planning Theory of PricingTheory of Pricing Theory of distributionTheory of distribution Theory of Foreign exchangeTheory of Foreign exchange Theory of International TradeTheory of International Trade Theory of Public FinanceTheory of Public Finance Declaration of Public UtilitiesDeclaration of Public Utilities Theory of Forecasting of DemandTheory of Forecasting of Demand Plenty of ParadoxPlenty of Paradox

Theoretical Importance:Theoretical Importance: MR = AR ( 1 – 1/ e)MR = AR ( 1 – 1/ e) Monopoly Market and limits of monopoly powerMonopoly Market and limits of monopoly power Determinants of the status of the commodity, Determinants of the status of the commodity,

complementary or substitute.complementary or substitute.


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Elasticity of DemandElasticity of DemandIf the demand function is Q = If the demand function is Q =

225 – 15p. Find the elasticity of 225 – 15p. Find the elasticity of demand, when P = 5.demand, when P = 5.

Given the demand function p = Given the demand function p = 1 – q, find the expression of Ed 1 – q, find the expression of Ed and the value of Ed when q = and the value of Ed when q = ¼.¼.


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Demand ForecastingDemand ForecastingMeaning:Meaning: Forecasting is defined as a study with Forecasting is defined as a study with

scientific prediction in regard to an event scientific prediction in regard to an event which may have future demand for which may have future demand for goods, services either at the micro level goods, services either at the micro level or at the macro level.or at the macro level.

Demand forecasting is a prediction or Demand forecasting is a prediction or estimation of a future situation, under estimation of a future situation, under given condition.given condition.

Demand forecasting is all about Demand forecasting is all about prediction rather than estimation as the prediction rather than estimation as the former one predicts about future trends former one predicts about future trends where as later one tries to find out where as later one tries to find out expected present sales level, given the expected present sales level, given the sales determinant.sales determinant.


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Demand ForecastingDemand Forecasting

Steps in Steps in Demand Forecasting:Demand Forecasting: Identification of the objectives.Identification of the objectives.Estimation of quantity and composition of demandEstimation of quantity and composition of demand

Estimation of price.Estimation of price.

Inventory Control etc…Inventory Control etc… Determination of the nature of the goods.Determination of the nature of the goods.Capital GoodsCapital Goods

Consumer durablesConsumer durables

Non consumer durablesNon consumer durables Selection of the proper method of Selection of the proper method of

forecasting.forecasting. Interpretation of results.Interpretation of results.


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Factors involved in Demand Factors involved in Demand Forecasting:Forecasting:

Time periodTime period Levels of forecastingLevels of forecastingInternational levelInternational level

Macro levelMacro level

Industry levelIndustry level

Firm levelFirm level Purpose of forecastingPurpose of forecasting Methods of forecastingMethods of forecasting Nature of the commodityNature of the commodity Nature of the competitionNature of the competition


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Objectives:Objectives: Helping for continuous productionHelping for continuous production Regular supply for the commoditiesRegular supply for the commodities Formulation of the price theoryFormulation of the price theory Effective sales performanceEffective sales performance Arrangement of financeArrangement of finance Determination of the production Determination of the production

capacitycapacity Labour requirement.Labour requirement.


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Criteria of a good Forecasting Criteria of a good Forecasting Method:Method:

AccuracyAccuracyPlausibility (Mgt must have Plausibility (Mgt must have

confidence and understanding)confidence and understanding)DurabilityDurabilityAvailabilityAvailabilityEconomy (Cost Effectiveness)Economy (Cost Effectiveness)


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Methods of Demand Forecasting:Methods of Demand Forecasting:Opinion polling methodOpinion polling methodConsumer’s Survey MethodsConsumer’s Survey Methods Complete enumeration surveyComplete enumeration survey Sample SurveySample Survey End User (Input – Output) MethodEnd User (Input – Output) Method

Sales force Opinion or Collective Sales force Opinion or Collective Opinion or Reaction Survey MethodOpinion or Reaction Survey Method

Expert’s OpinionExpert’s Opinion


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Demand ForecastingDemand ForecastingMechanical Extrapolation / Trend Mechanical Extrapolation / Trend

Projection Projection

Method:Method: Graphical ( Fitting trend line by observation)Graphical ( Fitting trend line by observation) Statistical (Semi average)Statistical (Semi average) Algebraic / Least Square (Straight Line, Parabolic & Algebraic / Least Square (Straight Line, Parabolic &

Logarithmic or Exponential)Logarithmic or Exponential) Smoothing Techniques (Moving Average & Smoothing Techniques (Moving Average &

Exponential Smoothing)Exponential Smoothing) ARIMA (Auto regressive integrated moving average ARIMA (Auto regressive integrated moving average

or Box – Jenkin Technique)or Box – Jenkin Technique)

Econometric Models:Econometric Models:

Simultaneous Equation Model:Simultaneous Equation Model:


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Demand ForecastingDemand ForecastingBarometric / Leading Indicator Technique:Barometric / Leading Indicator Technique: Coincident Indicators and Lagging Indicators.Coincident Indicators and Lagging Indicators. Leading IndicatorsLeading Indicators Index Nos (Diffusion & Composite Indicators)Index Nos (Diffusion & Composite Indicators)

Statistical Methods:Statistical Methods: Naïve MethodNaïve Method Correlation Correlation Regression MethodRegression Method Simple Linear EquationSimple Linear Equation

Graphical MethodGraphical Method Least Square MethodLeast Square Method

Non Linear EquationNon Linear Equation Parabolic Regression ModelParabolic Regression Model Logarithmic Regression ModelLogarithmic Regression Model Multiple Regression ModelMultiple Regression Model


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Methods of Demand Forecasting:Methods of Demand Forecasting:Opinion polling methodOpinion polling methodConsumer’s Survey MethodsConsumer’s Survey Methods Complete enumeration surveyComplete enumeration survey Sample SurveySample Survey End User (Input – Output) MethodEnd User (Input – Output) Method

Sales force Opinion or Collective Sales force Opinion or Collective Opinion or Reaction Survey MethodOpinion or Reaction Survey Method

Expert’s OpinionExpert’s Opinion

demand

Business

demand analysis law

quantity demand

total demand

demand equation

individuals demand

demand curves

market demand quantity

demand analysis factors