MANAGERIAL ECONOMICS

-R.L. VARSHNEY K.L. MAHESHWARI-DR. D. M. MITHANI- M.GIRIJA R. MEENAKHI

Demand Analysis & Business Forecasting

Demand Function:-– Factors Influencing Demands

Determinants of demand Demand Analysis for various products, situations

and market structures :-– Durable and non-durable goods– Long run and Short run demand– Autonomous and derived demand– Industry and firm demand

Elasticities & demand levels

Demand Analysis

Demand FunctionDemand determinantsLaw of Demand Demand ScheduleDemand CurveDemand EquationFactors affecting Demand

Demand Function

Demand for a product is the amount of it that will be bought per unit of time at a particular price.

Individual Demand -The quantity demanded by an individual purchaser at a given price

Market Demand -Total quantity demanded by all the purchasers together at a given price

Demand Function- Mathematical term expresses the functional relationship between demand for the product and its various determining variables

Demand Function

Dx = f ( Px, Ps, Pc, yd, T, A, N , u )

Here we assume commodity X, so

Dx = Amount demanded for the commodity X

Px = Price of X

Ps = Price of substitutes of good X

Pc = Price of complimentary goods of X

Yd = Level of disposable Income of buyers

T = Change in buyer’s Taste & Preferences

A = Advertisement expenditure

N = Number of Buyers

u = other unspecified determinant

Demand Schedule

Demand for a product is the function of its own price, keeping all other factors constant

Dx = f ( Px) Demand Schedule-A Tabular statement of price

quantity relationship It shows the inverse relationship between price

and quantity demanded Two types of demand schedule:

– Individual Demand Schedule– Market Demand Schedule

Individual Demand Schedule

Price Qty Demanded

4 4

3 8

2 12

1 16

•Table showing the various quantity purchased by an individual purchaser at alternative price over a given time period (day, week, month or year)•It shows the variation in demand at various prices.

Market Demand Schedule

•Table narrating the quantities of a commodity purchased in aggregate by all the purchasers in the market at different prices over a given period of time•It shows the total market demand at various prices.•It serve as the basis for knowing the revenue consequences of alternative output and pricing policies of the firm

Price A B C Mkt. Demand

4 1 1 3 5

3 2 3 5 10

2 3 5 7 15

1 5 9 10 24

Demand Equation

A linear Demand function Dx = A – B(Px)

Dx = Amount demanded for the commodity XPx = Price of XA = constant parameter signify initial demand

irrespective of priceB = implies negative relation between price and

quantity demandedEg. D = 20-2pAt p = 5, quantity demanded will be 20-2x5=10

Demand Curve

Graphical presentation of a demand schedule It relates the amount the consumer is willing to buy at

each alternative price over a period of time. It has a negative slope It slopes downwards from left to right representing an

inverse relation between price and demand

Price

Determinants Of Demand

Factor affecting Individual Demand Price of commodity Income of customer Taste, habit and Preference of Customer Relative price of Substitute and Complementary

goods Customer expectation Advertisement Effect

Determinants Of Demand

Factor affecting Market Demand Price of commodity Distribution of Income & Wealth of Community Community common habits & scale of

Preference General Standard of living & Spending habits of

people Number of buyers in market & Growth population Age, Structure, sex ratio of population

Determinants Of Demand

Factor affecting Market Demand Future expectation about Price Level of taxation and tax structure Inventions and innovations Fashions Climate and weather conditions Advertisement and sales promotions Customs

Law of Demand

It expresses the nature of functional relationship between two variables of demand relation i.e. Price and quantity demanded

Ceteris paribus, the higher the price of the commodity, the smaller is the quantity

demanded and lower the price, larger is the quantity demanded.

The demand for the commodity extends as the price falls, and contracts as the price rises.

Chief characteristics ofLaw of Demand

Inverse relationshipPrice an independent variable, and

demand a dependent variableAssumption of other things remaining the

sameReasons underlying the law of demand

– Income Effect– Substitution Effect

Exception to the law of demand• Veblen Effect / Conspicuous

consumption• Giffen Goods• Speculation

Types of Demand

1. Producers’ Goods2. Durable Goods3. Derived Demand4. Short run Demand5. Firm Demand

1. Consumers’ Goods

2. Non Durable Goods

3. Autonomous Demand

4. Long run Demand

5. Industry Demand

Demand Distinctions

Producers’ Goods1. Used for the production

of other goods2. Demand is derived3. Depends on marginal

productivity4. Classified into

consumable and durable

5. Motivated by buyer’s income

6. Example: cloth, food . house

Consumers’ Goods 1. Used for the direct

consumption2. Demand is direct and

autonomous3. Depends on marginal utility4. Classified into non durable

and durable5. Motivated by business

profits6. Example: machines,

equipment, raw materials,building

Demand Distinctions

Non Durable Goods1. Used for the current

demand of goods2. Can not be stored for a

long time3. Give one time service4. Demand is immediate5. Demand is more elastic

in short run6. Influenced by income

and convenience7. Example: vegetable,

fish . house

Durable Goods 1. Used for adding stock of

existing goods2. Can be stored for a long

time3. Give repeated services 4. Demand is postponable5. Demand is less elastic in

short run6. Influenced by lifetime of

product and obsolescence7. Example: furniture, cycle,

house

Demand Distinctions

Derived Demand1. Demand is tied to

purchase of parent good2. Less price elastic3. Facilitate demand

forecasting4. Demand for all

producers’ goods5. Influenced by demand of

parent good6. Example: cement,

petrol ,ink, antenna, sugar

Autonomous Demand 1. Demand is based on the

urge of satisfy some wants directly

2. more price elastic3. Facilitate demand analysis4. Demand for all consumers’

goods5. Influenced by taste, trends

and preference6. Example: building, car,

pen, television, tea

Demand Distinctions

Short run Demand1. demand of goods in a

period of one year or less

2. No threat of substitute and competitors

3. Demand is immediate4. Demand is less elastic

in short run5. Influenced by price and

income 6. Example: raw material,

bidi

Long run Demand1. demand of goods in a

period of one year to ten year

2. Big threat of substitute and competitors

3. Demand is permanent4. Demand is more elastic in

long run5. Influenced by promotion,

product change6. Example: building,

cigarette

Demand Distinctions

Firm Demand1. Market demand for the

commodity produced by a particular firm

2. Represent the relation of the price of the product to the quantity bought from a single firm

3. Demand is general and can not be classified.

4. Demand is more elastic in short run

5. Influenced by industry demand schedule

6. Example: total production of Ambuja cement : 30 cr tons

7. Demand os steel produced by TISCO

Industry Demand 1. Total demand for the commodity

produced by a particular industry2. Represent the relation of the price of

the product to the quantity bought from all the firms

3. Demand can be classified customer group-wise, like, steel demand for construction and manufacture, airline tickets for business and pleasure

4. Demand is less elastic in short run5. Influenced by market structure like

monopoly or oligopoly6. Example: total production of

cement : 100 cr tons7. total production of steel industry

Elasticity of Demand

Change in quantity demanded due to change in price of the commodity

Def: the elasticity of demand in the market is great or small according as the demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price.

Types of elasticities Price Elasticity of Demand Income Elasticity of Demand Cross Elasticity of Demand

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