Transcript MANAGERIAL ECONOMICS MODULE 2

DEMAND
Demand Analysis
Meaning of Demand:
 Demand for a particular commodity refers to
the
commodity which an individual consumer or household is
willing to purchase per unit of time at a particular price.
 Demand for a particular commodity implies:
Desire of the customer to buy the product;
The customers willingness to buy the product;
Sufficient purchasing power in the customers possession to buy the
product.
 The demand for a particular commodity by an individual
consumer or household is known as Individual demand for
the commodity and Summation of the individual demand is
known as the Market demand.
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Demand Analysis
Law of Demand:
 Law of demand expresses the relationship
between the Quantity demanded and the
Price of the commodity.
 The law of demands states that,
“Ceteris Paribus, (other things remaining
constant) the lower the price of a
commodity the larger the quantity
demanded of it and vice versa.”
 In simple terms other things remain
constant, if the price of the commodity
increases, the demand will decrease and if
the price of the commodity decreases, the
demand will increase.
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P
Qd
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60
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50
3
40
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Demand Analysis
Assumptions:
 No change in taste and preference.
 Income of the consumer is constant.
 No change in customs, habit, quality of goods.
 No change in substitute products, related
products and the price of the product.
 No complementary goods.
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Demand Analysis
Demand Schedule:
 A demand schedule is a numerical
tabulation that shows the quantity of
demeaned commodity at different prices.
 The demand schedule may be of 2 types :
 Individual demand Schedule
 Market demand Schedule.
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Demand Analysis
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Table Showing the IDC & MDC :
Price
(Per Kg)
6
7
8
9
Quantity demanded by
Individual Customers
A
B
C
D
4
3
2
0
3
2
1
0
5
4
3
1
Market Demand
6
5
4
2
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14
10
03
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Demand Analysis
 Graphical Representation of IDC & MDC
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Demand Analysis
Demand Function:
 A
Mathematical relationship between quantity
demanded of the commodity and its determinants is
known as Demand Function.
 When this relationship relates to the demand by an
individual consumer it is known as Individual demand
function and while it relates to the market its known as
market demand function.
 Individual Demand Function :
Qdx = f (Px,Y, P1……. Pn-1, T, A, Ey. Ep, U)
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Demand Analysis
Qdx
= Quantity demanded for product X.
Px
= Price of product X
Y
= Level of Income
P1..Pn-1 = Prices of all other products
T
= Taste of the consumer
A
= Advertisement
Ey
= Expected future income
Ep
= Expected future price
U
= Other determinants not covered in
the list of determinants.
Market Demand Function:
Qdx = f (Px,Y, P1……. Pn-1, T, A, Ey, Ep, P, D, U, P)
P
D
= Population
= Distribution of consumers.
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Demand Analysis
Causes of downward sloping of Demand Curve:
 According to the law of demand there exists a opposite relationship
between the PRICE and the QUANTITY DEMANDED, and that is why
demand curve is downward sloping.
 Let the linear form of demand curve :
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.
 The various reasons for this downwards sloping of demand curves are as
follows:
 Law of Diminishing Marginal Utility and Equi-Marginal utility.
 Price Effect.
 Income Effect.
 Substitution Effect.
 Different Use ( Electricity).
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Demand Analysis
Exceptions of Law of Demand:
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In certain cases the slope of Demand Curve is upward i.e.
positively sloped, it is known as the exceptions of Law of
Demand.
These exceptions are as follows:
Giffen Goods (Giffen Paradox)
Emergency (War etc…)
Conspicuous necessities (Car, Fancy Cloths etc…) and
Conspicuous Consumption (Fancy Diamonds, High price
shoes, pens etc…)
Depression ( Price and quantity demand is low)
Ignorance Effect (High priced commodity is better in quality)
Speculation (Future change in price)
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Demand Analysis
The situations given below are the cases where Individual’s demand
depends on the demands of the other people.
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Bandwagon Effect (Positive Network Externality) : Flatter or more
elastic
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Snob Effect: (Negative Network Externality): Steeper or Less elastic
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Veblen Effect : Steeper or Less elastic
Shift (Contraction & Expansion) and Change in Demand:
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Demand Analysis
Factors Determining Demand:
 General Factors:
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Price of the product
Taste and Preference
Income
Prices of the related goods
 Additional Factors: (Luxury Goods & Durables)
 Consumer’s Expectation of future price.
 Consumer’s Expectation of future income.
 Additional Factors:( Market Demand)
 Population
 Social, Economic & Demographic distribution of Consumer’s.
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Demand Analysis
Demand Distinctions:
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Producer’s Good and Consumer’s Good.
Durable and Perishable Good.
Derived Demand Autonomous Demand.
Industry Demand and Firm (Company) Demand.
Total Demand and Market segment Demand
Short Run Demand and Long Run Demand.
Short Run Demand Fluctuations and Long Run Demand
Trends.
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Demand Analysis
Problems:
1.
The demand equation is Q = 90 – 3P. At what price would no one be
willing to buy any of the commodity? If the commodity is given free,
what is the quantity demanded? If the price is reduced by 1 unit how
much the quantity demanded change?
2.
The demand equation is Q = 25 – 5P. What is the quantity demanded if
the price is Rs 3? Assume the demand is 18 units, then what is the
corresponding price? What would be the demand if the commodity in
question were a free good? What is the highest price anybody will pay
for the commodity?
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Elasticity of Demand
Elasticity of Demand:
 Elasticity of demand is defined as the percentage change in
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quantity demanded caused one percent change in each of the
determinants under consideration while the other
determinants are held constant.
Ed = % change in quantity demanded / % change in the
determinant.
There are mainly five types of Elasticity of Demand :
Price Elasticity of demand
Income Elasticity of demand
Cross Elasticity of demand
Promotional Elasticity of demand
Expectation Elasticity of demand
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Elasticity of Demand
Price Elasticity of Demand :
 Price Elasticity of Demand measures the degree of responsive ness
of the quantity demanded of a commodity due to a change in its
own price.
 Ep = - (% change in quantity demanded) /
( % change in the Price).
 Here we ignore the – ve sign as the relation between price and the
quantity demanded is opposite.
 Price Elasticity of Demand are of 5 types :
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Perfectly elastic demand
Perfectly / Absolutely inelastic demand
Relatively Elastic demand
Relatively inelastic demand
Unit Elastic demand
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Elasticity of Demand
Income Elasticity of Demand:
 Income Elasticity of Demand measures the degree of responsive
ness of the quantity demanded of a commodity due to a change
in money income of the consumer.
 Em = - (% change in quantity demanded) /
( % change in the Money Income).
Cross Elasticity of Demand:
 Income Elasticity of Demand measures the degree of responsive
ness of the quantity demanded of one commodity due to a
change in price of some related goods.
 Exy = - (% change in quantity demand of goods Y) /
( % change in the price of goods X).
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Elasticity of Demand
Factors affecting the Elasticity of Demand :
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Nature of the product
Availability of the substitute product
Uses of the commodity
Income Levels
Proportion of Income spent
Postpone consumption
Price levels
Time period
Durability
Taste & Preference
Demonstration Effect
Advertisement
Special Demand (Medicine)
Complementary Goods
Expectation of the future price etc…
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Elasticity of Demand
Advertising or Promotional Elasticity of Demand:
 Advertising or Promotional Elasticity of Demand
measures the degree of responsive ness of the
quantity demanded of a commodity due to a change
in expenditure on advertising and other sales
promotion activities.
 Ea = (% change in quantity demanded) /
( % change in the Expenditure on
Advertisement).
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Elasticity of Demand
Importance or Significance of Elasticity of Demand:
Practical Importance:
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Production Planning
Theory of Pricing
Theory of distribution
Theory of Foreign exchange
Theory of International Trade
Theory of Public Finance
Declaration of Public Utilities
 Theory of Forecasting of Demand
 Plenty of Paradox
Theoretical Importance:
 MR = AR ( 1 – 1/ e)
 Monopoly Market and limits of monopoly power
 Determinants of the status of the commodity, complementary or
substitute.
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Elasticity of Demand
 If the demand function is Q = 225 – 15p.
Find the elasticity of demand, when P = 5.
 Given the demand function p = 1 – q, find
the expression of Ed and the value of Ed
when q = ¼.
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Demand Forecasting
Meaning:
 Forecasting is defined as a study with scientific
prediction in regard to an event which may have
future demand for goods, services either at the
micro level or at the macro level.
 Demand forecasting is a prediction or estimation of
a future situation, under given condition.
 Demand forecasting is all about prediction rather
than estimation as the former one predicts about
future trends where as later one tries to find out
expected present sales level, given the sales
determinant.
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Demand Forecasting
Steps in Demand Forecasting:
 Identification of the objectives.
Estimation of quantity and composition of demand
Estimation of price.
Inventory Control etc…
 Determination of the nature of the goods.
Capital Goods
Consumer durables
Non consumer durables
 Selection of the proper method of forecasting.
 Interpretation of results.
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Demand Forecasting
Factors involved in Demand Forecasting:
 Time period
 Levels of forecasting
International level
Macro level
Industry level
Firm level
 Purpose of forecasting
 Methods of forecasting
 Nature of the commodity
 Nature of the competition
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Demand Forecasting
Objectives:
 Helping for continuous production
 Regular supply for the commodities
 Formulation of the price theory
 Effective sales performance
 Arrangement of finance
 Determination of the production capacity
 Labour requirement.
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Demand Forecasting
Criteria of a good Forecasting Method:
 Accuracy
 Plausibility (Mgt must have confidence and
understanding)
 Durability
 Availability
 Economy (Cost Effectiveness)
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Demand Forecasting
Methods of Demand Forecasting:
Opinion polling method
 Consumer’s Survey Methods
 Complete enumeration survey
 Sample Survey
 End User (Input – Output) Method
 Sales force Opinion or Collective Opinion or
Reaction Survey Method
 Expert’s Opinion
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Demand Forecasting
Mechanical Extrapolation / Trend Projection
Method:
 Graphical ( Fitting trend line by observation)
 Statistical (Semi average)
 Algebraic
/ Least Square (Straight Line, Parabolic &
Logarithmic or Exponential)
 Smoothing Techniques (Moving Average & Exponential
Smoothing)
 ARIMA (Auto regressive integrated moving average or Box –
Jenkin Technique)
Econometric Models:
Simultaneous Equation Model:
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Demand Forecasting
Barometric / Leading Indicator Technique:
 Coincident Indicators and Lagging Indicators.
 Leading Indicators
 Index Nos (Diffusion & Composite Indicators)
Statistical Methods:
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Naïve Method
Correlation
Regression Method
Simple Linear Equation
 Graphical Method
 Least Square Method
 Non Linear Equation
 Parabolic Regression Model
 Logarithmic Regression Model
 Multiple Regression Model
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Demand Forecasting
Methods of Demand Forecasting:
Opinion polling method
 Consumer’s Survey Methods
 Complete enumeration survey
 Sample Survey
 End User (Input – Output) Method
 Sales force Opinion or Collective Opinion or
Reaction Survey Method
 Expert’s Opinion
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