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Demand Analysis
9/7/11 Prof. Prasad Joshi
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Demand
• Refers to the desire, backed by the necessary ability to pay.
• “The demand for a good at a given price is the quanEty of it that can be bought per unit of Eme at the given price.”
9/7/11 Prof. Prasad Joshi
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3 aspects of Demand
1. It is the quan%ty desired at a given price. 2. It is the demand at a price during a given Eme. 3. It is the quanEty demanded per unit of
%me.
9/7/11 Prof. Prasad Joshi
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Determinants of Demand • FuncEon of Demand – The term "func%on" is employed to show "determined" and “determinant" relaEonship.
Example -‐ we say that the quanEty of a good demanded is a funcEon of its price Q = f(p) Where Q represents quanEty demanded f means funcEon, and p represents price of the good.
9/7/11 Prof. Prasad Joshi
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Important Determinants
• Price of the goods • Income of the buyer • Prices of Related Goods • Tastes of the buyer • Seasons prevailing at the Eme of purchase • Fashion • AdverEsement and Sales promoEon
9/7/11 Prof. Prasad Joshi
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Law of Demand
• “Other things being equal the greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers, or
• In other words, the amount demanded increases with a fall in price and diminishes with a rise in price“ -‐ Alfred Marshall
9/7/11 Prof. Prasad Joshi
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Demand Schedule • It refers to the series of quanEEes an individual is ready to buy at different prices.
• Assuming the individual to be raEonal in his purchasing behaviour.
9/7/11 Prof. Prasad Joshi
Price of Apple Per Unit (Rs) Quan%ty demanded of apples (in dozens)
5 1
4 2
3 3
2 4
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Demand Curve
• The demand schedule is translated into a diagram known as the demand curve.
9/7/11 Prof. Prasad Joshi
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Market Demand
• It is derived by adding the quanEEes demanded by each consumer for the product in the market at a parEcular price.
• Market Demand Schedule.
• Market Demand Curve
9/7/11 Prof. Prasad Joshi
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Reasons for the Law of Demand
• Law of Diminishing Marginal UElity • SubsEtuEon Effect • Income Effect – Real Income • New Consumers • Several Uses • Psychological Effects
9/7/11 Prof. Prasad Joshi
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ExcepEons to the Law of Demand
• Conspicuous goods – Esteem goods • Giffen goods – Inferior Goods • Future expectaEons about prices • IrraEonal Consumers • Ignorance or Unawareness of Price
9/7/11 Prof. Prasad Joshi
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Types of demand
• Price Demand • Income Demand and • Cross Demand – SubsEtute goods – Complimentary goods
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Price Demand
• It refers to the various quanEEes of the good which consumers will purchase at a given Eme and at certain hypotheEcal prices assuming that other condiEons remain the same.
• We are generally concerned with price demand only.
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Income demand:
• Income demand refers to the various quanEEes of a commodity that a consumer would buy at a given Eme at various levels of income. Generally, when the income increases, demand increases and vice versa.
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Cross Demand
• When the demand of one commodity is related with the price of other commodity is called cross demand.
• The commodity may be subsEtute or complementary
9/7/11 Prof. Prasad Joshi
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SubsEtute goods
• SubsEtute goods are those goods which can be used in case of each other. For example, tea and coffee, Coca-‐cola and Pepsi • In such case demand and price are posiEvely related
9/7/11 Prof. Prasad Joshi
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Complementary goods
• Complementary goods are those goods which are jointly used to saEsfy a want.
• Complementary goods are those which are incomplete without each other.
• These are things that go together, ocen used simultaneously.
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Other types of demand
• Joint demand • Composite demand • Direct and Derived demand
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Importance of the Law of Demand
• Price determinaEon • Useful to government • Useful to farmers • In the field of planning
9/7/11 Prof. Prasad Joshi
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Defini%ons of Price Elas%city of Demand
• According to Alfred Marshall: "Elas%city of demand may be defined as the percentage change in quanEty demanded to the percentage change in price."
• According to A.K. Cairncross : "The elas%city of demand for a commodity is the rate at which quanEty bought changes as the price changes."
• According to J.M. Keynes : "The elas%city of demand is a measure of the rela%ve change in quanEty to a relaEve change in price."
• According to Kenneth Boulding : "ElasEcity of demand measures the responsiveness of demand to changes in price."
9/7/11 Prof. Prasad Joshi
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Perfectly Elas%c Demand
• Perfectly elasEc demand is said to happen when a liele change in price leads to an infinite change in quanEty demanded
9/7/11 Prof. Prasad Joshi
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Perfectly inelas%c Demand
• Perfectly inelasEc demand is opposite to perfectly elasEc demand.
• Under the perfectly inelasEc demand, irrespecEve of any rise or fall in price of a commodity, the quanEty demanded remains the same.
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Unitary Elas%c Demand
The demand is said to be unitary elasEc when a given proporEonate change in the price level brings about an equal proporEonate change in quanEty demanded, The numerical value of unitary elasEc demand is exactly one i.e., ed = 1. Marshall calls it unit elasEcity
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Rela%vely Elas%c Demand
• RelaEvely elasEc demand refers to a situaEon in which a small change in price leads to a big change in quanEty demanded.
• In such a case elasEcity of demand is said to be more than one.
9/7/11 Prof. Prasad Joshi
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Rela%vely Inelas%c Demand
• Under the relaEvely inelasEc demand a given percentage change in price produces
• a relaEvely less percentage change in quanEty demanded. In such a case elasEcity of
• demand is said to be less than one
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9/7/11 Prof. Prasad Joshi
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• 1. AB — Perfectly InelasEc Demand • 2. CD — Perfectly ElasEc Demand • 3. EQ — Less Than Unitary ElasEc Demand • 4. EF — Greater Than Unitary ElasEc Demand • 5. MN — Unitary ElasEc Demand.
9/7/11 Prof. Prasad Joshi