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MANAGERIAL ECONOMICS

FACULTY: Prof. Venugopal Naidu

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MODULE:1

DEMAND ANALYSIS

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Meaning of Demand

Demand implies 3 conditions :

Desire for a commodity or service Ability to pay the price of it Willingness to pay the price of it. Further demand has no meaning without

reference to time period such as a week, a month or a year.

The demand for a product can be defined as the “Number of units of an commodity that consumer will purchase at a given price during a specified period of time in the market.”

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Types of Demand

Demand can be broadly classified into 3 types :

They are,Price DemandIncome DemandCross Demand

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Law of Demand

The law of demand expresses the relationship between the price & quantity demanded .It says that demand varies inversely with price.

The Law can be stated in the following: “ Other things being equal, a fall in the price

leads to expansion in demand and a rise in price leads to contraction in demand.”

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Assumptions- Law Of Demand

Consumers Income remains Constant The Tastes & Preferences Of the

Consumers remain the same Prices of other related Commodities remain

Constant No new Substitutes are available for the

Commodity. Consumers do not expect further change in

the price of the commodity.

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Continued…

The Commodity is not of Prestigious value

Eg: DiamondThe size of population is constantThe rate of taxes remain the sameClimate & Weather Conditions do not

change.

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DEMAND SCHEDULE

Individual Demand Schedule Market Demand schedule

1. Individual Demand Schedule: It is a list of various quantities of a

commodity which an individual consumer purchases at different prices at one instant of time.

D= f (P) (or) D(x) = f(Px)

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Individual demand schedule(Hypothetical)

Price per unit (Rs) Quantity demanded for time period (a week)

5 4 3 2 1

10 apples 20 apples 30 apples 40 apples 50 apples

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2. Market Demand Schedule

The market demand Schedule can be obtained by adding all the individual Demand Schedules of Consumers in the market. Hypothetical market demand schedule is as follows:

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Hypothetical market demand schedule

Price per unit (Rs)

Quantity demanded by individuals

Market demand A + B + C

54321

6090120150180

A B C1020304050

2030405060

3040506070

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Market demand curve

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Exceptions to the law of demand

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Continued…

Giffen’s Paradox (Robert Giffen-Irish Economist)

Veblen’s Effect (Thorstein Veblen – USA )Price IllusionFear of Future Rise in PricesEmergencyNecessaries

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Continued…

Conspicious Necessaries (More Noticeable) Eg:- TV, Watch, Scooters, Car etc

Fear of Shortage IgnoranceSpeculation (Stock Market)

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Why does the demand curve slope downwards to right

OR Why does demand curve has a negative slope?

Operation of the Law of Diminishing Marginal Utility Income Effect Substitution Effect Different Uses New Buyers

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CHANGES IN DEMAND

A. Extension & contraction of demand:

When demand changes due to change in the price of the commodity, it is a case of either extension or contraction of demand. The Law of demand relates to the Extension & Contraction of Demand.

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Extension and Contraction of Demand

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2. Increase and decrease in demand:

When demand changes, not due to changes in the price of the commodity or service but due to other factors on which demand depends.

Eg:- Income, Population, Climate, Tastes & Habits etc.

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Increase and Decrease in Demand

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DEMAND DISTINCTIONS

“Demand distinctions may be defined as the difference in the forces acting on the demand for different goods.”

Demand for Producer goods and Consumer Goods

Demand for Durable goods and Non-Durable Goods.

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Continued…

Derived Demand and Autonomous Demand.

Industry Demand and Company DemandShort run Demand And Longrun demandTotal Market demand & Market Segment

Demand

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DETERMINANTS OF DEMAND (OR) FACTORS AFFECTING DEMAND (Refer: Lekhi & Agarwal- Business Economics)

Price of Commodity Price of Related Goods Income of the Consumer Distribution of Wealth Tastes & Habits Population growth

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Continued…

State of Business (Business Cycle) Government Policy Advertisement Level of Taxation