Transcript File

DEMAND ANALYSIS
MEANING OF DEMAND
• Demand for a commodity refers to
the quantity of the commodity which
an individual consumer household is
willing to purchase per unit of time
at a particular price.
• Individual Demand
• Household Demand
MEANING OF DEMAND
Demand for a commodity implies
Desire of the consumer to buy the
product
His willingness to buy the product
Sufficient purchasing power in his
possession to buy the product.
Law of Demand
• A decrease in the price of a good, all other
things held constant, will cause an
increase in the quantity demanded of the
good.
• An increase in the price of a good, all
other things held constant, will cause a
decrease in the quantity demanded of the
good.
• Note: refer notes for all other things held
constant.
• QDx = f(Px)
• This the mathematical relationship
between the quantity demanded and
the price of the product X.
• There is a inverse relationship
between the quantity demanded and
the price of the product.
DEMAND FUNCTION
The demand function can be written
in a simple mathematical language
as:
Q = f(Px, Py , Pz ,…..Pn ; I; T; A)
DEMAND FUNCTION
•
•
•
•
•
The amount demanded (per unit of time)
of a commodity X by a consumer (denoted
by Qx ) depends upon:
Price of the commodity (Px)
Price of substitutes (Ps) and complements
(Pc)
Income of the household (I)
Tastes and preferences of the household
(T) and,
The amount annually spent on
advertisement of the product (A)
DEMAND FUNCTION
In case we are analyzing the
demand for goods which are durable,
storable and are expensive, we have
to add these variables also:
• Consumers’ expectations of future
prices (Ep) and,
• Consumers’ expectations future
income (Ey)
DETERMINANTS OF
DEMAND
The determinants of demand are:
• Price of the commodity
• Prices of related commodities
• Income of the household
• Tastes and preferences
• Expectations
• Advertisements
Prices of related
commodities
• The demand for a commodity
depends also on the prices of its
substitutes
and
complementary
goods.
Tea and coffee, pizza and burger, these
are the substitutes for which the
change in the price will affect the
demand of the other in the same
direction.
• By
definition,
the
relationship
between demand of a product (tea)
and the price of its substitute
(coffee) is positive is nature. When
price of the substitute (coffee) of a
product (tea) falls ( or increases),
demand for the product falls (or
increases).
• A Commodity is deemed to be a
complement of another when it
complements the use of the other.
• When the use of any two goods goes
together so that their demand changes
(increases or decreases) simultaneously,
they are treated s complements.
• Example: Milk and sugar, Petrol and car,
Tea, razor and blade printer and
cartridge, Camera and film
Income of the household
• Income is the basic determinant of
the quantity demanded of a product
as it determines the purchasing
power of the consumer. That is why
the people with higher current
disposable income spend a larger
amount on normal goods and
services than those wit lower
incomes.
Income of the household
• For the purpose of income-demand
analysis, goods and services may be
grouped under four broad categories,
viz., (a) essential consumer goods;
(b) inferior goods; (c) normal goods
and (d) prestige or luxury goods
Income of the household
• Essential consumer goods (ECG) Example:
food grains, salt, vegetables oils, matches,
cooking fuel, a minimum clothing and
housing, etc.
• Quantity demanded of such goods
increases with increase in consumer’s
income only upto a certain limit, other
factors remaining the same.
• Inferior Goods: bajra is inferior to
wheat and rice, Bidi is inferior to
cigarette, kerosene stove is inferior
to gas-stove, travelling by bus is
inferior to travelling by taxi.
• The demand for inferior goods
increases upto a certain level with
the increase in the income and then
starts
decreasing
with
further
increase in the income beyond a
point of income.
• Normal Goods: Technically, normal
goods are those which are demanded
in
increasing
quantities
as
consumers’ income rises. Clothing is
the most important example of this.
• Demand for such goods increases
with the increase in income of the
consumer, but at different rates at
different levels of income.
• Demand for normal goods initially
increases rapidly, and later, at a
lower rate.
• Prestige or Luxury Goods: These are
consumed mostly by the rich section
of the society, e.g., luxury cars,
stone studded jewellery, costly
cosmetics, antiques.
• Demand for such goods arises only
beyond a certain level of consumer’s
income.
Tastes and preferences
• These depend
on the social
customs, religious values attached to
a commodity, habits of the people,
the general life-style of the society.
Change in Quantity
Demanded
Price
An increase in price
causes a decrease in
quantity demanded.
P1
P0
Q1
Q0
Quantity
Change in Quantity
Demanded
Price
A decrease in price
causes an increase in
quantity demanded.
P0
P1
Q0
Q1
Quantity
Law of Supply
• A decrease in the price of a good, all
other things held constant, will cause
a decrease in the quantity supplied
of the good.
• An increase in the price of a good, all
other things held constant, will cause
an increase in the quantity supplied
of the good.
Change in Quantity Supplied
A decrease in price
causes a decrease in
quantity supplied.
Price
P0
P1
Q1
Q0
Quantity
Change in Quantity Supplied
An increase in price
causes an increase in
quantity supplied.
Price
P1
P0
Q0
Q1
Quantity
Market Equilibrium
Price
D0
D1
S0
An increase in demand
will cause the market
equilibrium price and
quantity to increase.
P1
P0
Q0 Q1
Quantity
Market Equilibrium
Price
D1
D0
S0
A decrease in demand
will cause the market
equilibrium price and
quantity to decrease.
P0
P1
Q1 Q0
Quantity
Market Equilibrium
Price
D0
S0
P0
P1
Q0 Q1
S1
An increase
in supply
will cause
the market
equilibrium
price to
decrease and
quantity to
increase.
Quantity
Market Equilibrium
Price
D0
S1
P1
P0
Q1 Q0
S0
A decrease in
supply will
cause the
market
equilibrium
price to
increase and
quantity to
decrease.
Quantity
THE LAW OF DEMAND
The law of demand states that the
amount demanded of a commodity and
its price are inversely related, other
things remaining constant.
Exceptions to the Law of Demand:
(i) Giffen goods
(ii) Commodities which are used as
status symbols (snob effect)
(iii) Expectations of change in the price
of the commodity
INDIVIDUAL AND MARKET
DEMAND SCHEDULES
A demand schedule at any particular time
refers to the series of quantities the
consumer is prepared to buy at its
different prices.
The demand schedule for an individual
consumer is called an individual demand
schedule. Likewise, if we have similar
demand schedules for all consumers in the
market, we can add up the quantities
demanded of the commodity by these
consumers at each price and get a
summed-up schedule called the market
demand schedule.
INDIVIDUAL DEMAND
SCHEDULE FOR ORANGES
Price of oranges
(Rs. Per dozen)
5
Quantity demanded
of oranges (dozens)
1
4
2
3
3
2
1
4
5
MARKET DEMAND
SCHEDULE FOR ORANGES
Price of
oranges
Quantity demanded of
oranges by consumers
(dozens)
Market
demand of
oranges
(dozens)
A
B
C
D
10
1
0
3
0
4
9
3
1
6
4
14
8
7
2
9
7
25
7
11
4
12
10
37
6
13
6
14
12
45
INDIVIDUAL DEMAND CURVE
The demand schedule when
represented diagrammatically
is known as the demand curve.
When this diagram is based on
an individual demand schedule,
we get an individual demand curve.
D
Individual
Demand
Curve
D
O
Units of good X
Why do Demand Curves Slope
Downwards?
• Reasons
• More uses when the price falls
• Raise in real income of consumer
• Substitution effect
MARKET DEMAND CURVE
Y
10
D
9
8
7
6
DC
DA
DB
O
DD
X
4
UNITS OF GOOD X
TYPES OF DEMAND
• Derived demand and autonomous demand
• Demand for producers’ goods and
consumers’ goods
• Demand for durable and non-durable
goods
• Industry demand and firm demand
• Total demand and market segment
demand
• Short-run demand and long-run demand
Derived and Autonomous
Demand
• Those inputs or commodities which are
demanded to help in further production of
commodities are said to have Derived
demand. Ex raw materials, machines
• Autonomous demand, is the one where a
commodity is demanded because it is
needed for direct consumption. Ex pieces
of furniture at household
Demand for producers’ goods
and consumers’ goods
• The difference in these two types of
demand are that consumers’ goods
(soft drinks, milk, bread) are needed
for direct consumption, while the
producers’ goods (Various types of
machines, steel, tools) are needed
for producing other goods.
Demand for durable and
non-durable goods
• Non-durable goods are the ones which
cannot be used more than once. Eatables,
photographic film, soaps. These meet the
current need. (Perishable and nonperishable)
• Durable goods, on the other hand, are the
ones which have repeated uses. Shoes,
readymade garments, residential house,
electronic domestic appliances. These are
the ones which can be stored and whose
replacement can be postponed. These
meet both the current as well as future
need.
Industry demand and firm
demand
• Firm demand denotes demand for a
particular product of a particular firm.
Demand for ITC wills branded shirts
• Industry demand refers to the total
demand for the product of a particular
industry. Demand for shirts for all the
brands available like, Arrow, Peter
England, Provogue, Oxemberg, Louis
Pilips, Vanhuesen, Zodiac, Pan America
etc.,
Total demand and market
segment demand
• Demand for market segments is to be
studied by breaking the total demand into
different segments like geographical
areas, sub-products, product use,
distribution channels, size of customer
group etc., Demand for T.Shirts in India is
market demand, which can be based on
the segment market like, for kids, youth
and old people.