demand determinants eem

DEMAND DETERMINANTSDEMAND DETERMINANTS

Demand FunctionDemand Function

What is Demand?What is Demand?

Demand for a commodity refers to the desire Demand for a commodity refers to the desire backed by willingness and ability to buy a backed by willingness and ability to buy a particular commodity, in a given period of particular commodity, in a given period of time.time.

Meaning of DemandMeaning of Demand

The amount the buyers are willing to The amount the buyers are willing to purchase at a given price and over a given purchase at a given price and over a given period of time.period of time.

It means effective desire or want for a It means effective desire or want for a commodity, which is backed up by the ability commodity, which is backed up by the ability (i.e., money or purchasing power) and (i.e., money or purchasing power) and willingness to pay for it.willingness to pay for it.

In short, Demand= Ability to pay (Money or In short, Demand= Ability to pay (Money or Purchasing power) + will to spendPurchasing power) + will to spend

Factors Influencing Demand:Factors Influencing Demand:

Price of the Product:Price of the Product: Demand = ability to pay+willingness to payDemand = ability to pay+willingness to pay Price has a negative effect on demand.Price has a negative effect on demand. If the price of the product increases, its If the price of the product increases, its

quantity demanded will fall. quantity demanded will fall. Alternatively, if the price of the product Alternatively, if the price of the product

increases, its quantity demanded will fall.increases, its quantity demanded will fall.

Factors contd..,Factors contd..,

Income of the ConsumersIncome of the Consumers:: Demand is depending upon the paying Demand is depending upon the paying

capacity of the consumer.capacity of the consumer. Income bears the positive relationship with Income bears the positive relationship with

demand,demand, When income increases demand also When income increases demand also

increases due to paying capacity of the increases due to paying capacity of the consumer.consumer.


Price of related goods:Price of related goods: Demand for a commodity not only depends Demand for a commodity not only depends

on the price of that particular commodity, on the price of that particular commodity, but also on the price of other related but also on the price of other related commodities.commodities.

Eg: car & petrol, Tea & coffeeEg: car & petrol, Tea & coffee


Tastes & preferences:Tastes & preferences: Age, gender, education, profession, social Age, gender, education, profession, social

cultural norms, advertising etc., play a role cultural norms, advertising etc., play a role in developing tastes & preferences.in developing tastes & preferences.

For example, cars & gifts industry has For example, cars & gifts industry has gained significantly due to gained significantly due to internationalization of events like Valentine internationalization of events like Valentine day, Friendship day etc..,day, Friendship day etc..,


Advertising:Advertising: Firms incur heavy expenditure on Firms incur heavy expenditure on

advertising to general awareness about the advertising to general awareness about the features, price, and uniqueness of their features, price, and uniqueness of their products.products.

The primary motive behind advertising is to The primary motive behind advertising is to stimulate demand for own brand.stimulate demand for own brand.

For Eg., vodafoneFor Eg., vodafone


Consumer’s Expectation of Future Income Consumer’s Expectation of Future Income and Price:and Price:

Consumers do not make purchases only on Consumers do not make purchases only on the basis of current income & current price the basis of current income & current price structure.structure.

In case of durables, when demand can be In case of durables, when demand can be postponed, customers decide their purchase postponed, customers decide their purchase on the basis of future price & incomeon the basis of future price & income


Population:Population: If the population of a country is constantly If the population of a country is constantly

increasing, more food items and other increasing, more food items and other goods and services will be needed to satisfy goods and services will be needed to satisfy the needs of the peoplethe needs of the people


Growth of EconomyGrowth of Economy:: If an economy is growing, it will have If an economy is growing, it will have

increased demand for goods of better increased demand for goods of better quality.quality.

Consumers will have higher paying Consumers will have higher paying capacity and greater willingness to pay capacity and greater willingness to pay higher price for quality.higher price for quality.

Law of DemandLaw of Demand The Law of Demand indicates the The Law of Demand indicates the

relationship between the price of a relationship between the price of a commodity and the quantity demanded in commodity and the quantity demanded in the market.the market.

It means that a person will purchase more It means that a person will purchase more of a commodity when its price falls and he of a commodity when its price falls and he will purchase less of it when its price rises.will purchase less of it when its price rises.

Definition of Law of DemandDefinition of Law of Demand

Marshall defined, Marshall defined, the amount demanded increases with a fall the amount demanded increases with a fall

in price and diminishes with a rise in price.in price and diminishes with a rise in price.

© OnlineTexts.com p. 14

The Law of DemandThe Law of Demand

The The law of demand law of demand holds that other things holds that other things equal, as the price of a good or service rises, its equal, as the price of a good or service rises, its quantity demanded falls.quantity demanded falls.– The reverse is also true: as the price of a good or The reverse is also true: as the price of a good or

service falls, its quantity demanded increases. service falls, its quantity demanded increases.


Demand CurveDemand Curve

The demand curve has a negative slope, consistent with The demand curve has a negative slope, consistent with the law of demand.the law of demand.

SUPPLYSUPPLY

Supply means the quantity of goods offered Supply means the quantity of goods offered for sale at a particular price at a certain for sale at a particular price at a certain point of time.point of time.

Supply always relates to a price.Supply always relates to a price.

Determinants of SupplyDeterminants of Supply

Production technologyProduction technology Price factors of productionPrice factors of production Prices of other productsPrices of other products Future price expectationsFuture price expectations

Definition of supplyDefinition of supply

Supply has been defined as “other things Supply has been defined as “other things equal, the quantity supplied of a commodity equal, the quantity supplied of a commodity increases when the price increases and the increases when the price increases and the quantity supplied of a commodity decreases quantity supplied of a commodity decreases when the price decreases”.when the price decreases”.


The Law of SupplyThe Law of Supply

The The law of supplylaw of supply holds that other things equal, holds that other things equal, as the price of a good rises, its quantity as the price of a good rises, its quantity supplied will rise, and vice versa.supplied will rise, and vice versa.

Why do producers produce more output when Why do producers produce more output when prices rise?prices rise?– They seek higher profitsThey seek higher profits– They can cover higher marginal costs of productionThey can cover higher marginal costs of production


Supply CurveSupply Curve

The supply curve has a positive slope, consistent with The supply curve has a positive slope, consistent with the law of supply.the law of supply.


EquilibriumEquilibrium

In economics, an In economics, an equilibriumequilibrium is a situation in is a situation in which: which: – quantity demanded equals quantity supplied, and quantity demanded equals quantity supplied, and – the market just clears.the market just clears.


EquilibriumEquilibrium

Equilibrium occurs at a price of $3 and a quantity of 30 Equilibrium occurs at a price of $3 and a quantity of 30 units.units.

demand determinants eem

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