DEMAND ANALYSIS TOPICS: 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.

0 LAW OF DEMAND EXCEPTIONS TO THE LAW OF DEMAND ELASTICITY OF DEMAND PRICE ELASTICITY INCOME ELASTICITY OF DEMAND CROSS ELASTICITY OF DEMAND USES OF THE ELASTICITY OF DEMAND FOR MANAGERIAL DECISION MAKING. MEASURMENT OF ELASTICITY OF DEMAND ADVERTISING AND PROMOTIONAL ELASTICITY OF DEMAND.

10.0 DEMAND FORCASTING: MEANING AND SIGNIFICANCE.

DEMAND DETERMINANTS: SEVERAL FACTORS IMPACT THE DEMAND AND THEREFORE THE SALES OF A PRODUCT. NEED TO LIMIT THE NUMBER OF INDEPENDENT VARIABLES PRICE,BUYERS INCOME,AVAILABILITY AND PRICE OF SUBSTITUTES OR COMPETING PRODUCTS GENERAL PRICE LEVEL POPULATION OF POTENTIAL DEMANDERS :NUMBER,REGIONAL DISTRIBUTION,BEHAVIOR,TASTES STOCK OF DURABLE COMMODITIES ON HAND INSTITUTIONAL FACTORS IMPACTING SALES:TERMS OF PAYMENT,SERVICE POLICIES ASSET HOLDING OF POTENTIAL DEMANDERS ANTICIPATED TECHNOLOGICAL CHANGE TIME :CHANGE IN TASTE OTHER FACTORS APPROPRIATE FOR SPECIFIC MARKETS.

DEMAND FUNCTION: Q(x) = f{Px,Y,Pm,E,..} Quantity demanded of X = function of price of X. consumer income (Y),price of substitutes(Pm), advertising expenditure etc. DIFFICULT TO INCLUDE ALL FACTORS IN DEMAND STUDIES

FEW FACTORS UNDERLINE THE DEMAND BEHAVIOR OF SEVERAL PRODUCTS AND THEY INCLUDE: PRICE INCOME PRICE OF RELATED GOODS:SUBSTITUTES AND COMPLEMENTARY GOODS ADVERTISING AND SALES PROMOTION

IMPORTANCE OF THE FACTORS VARIES FROM PRODUCT TO PRODUCT AND DEMAND ANALYSIS TO BE ADAPTED TO SUITE INDIVIDUAL TASTE FACTOR IMPORTANCE VARIES FROM OVER TIME SOME FACTORS ARE CONTROLLABLE AND SOME ARE NOT. PRICE AND DEMAND: MEANING OF DEMAND: DEMAND REFERS TO DESIRE TO BUY BACKED BY PURCHASING POWER DEMAND REFERS TO VARIOUS QUANTITIES CONSUMERS WOULD BUY AT DIFFERENT PRICES.

RELATIONSHIP OF PRICE TO SALES IS RELEVANT TO ECONOMIST AND A BETTER KNOWLEDGE IS OF CONCERN TO MANAGEMENT

A.LAW OF DEMAND: THE RELATION OF PRICE TO SALES IS CALLED THE LAW OF DEMAND STATES; HIGHER THE PRICE, LOWER THE DEMAND, AND VICE VERSA, OTHER THINGS REMAINING THE SAME. DEMAND SCHEDULE;DEMAND CURVE AND DEMAND FUNCTION: DEMAND SCHEDULE Sl.No. Price Qty DD. 1 5 80 2 4 100 3 3 150 4 2 200

DEMAND CURVE: CHART GIVING THE PRICE-QUANTITY-RELATIONSHIP

P R I C E E

QTY

DEMAND CURVE IS DOWNWARD SLOPING LEFT TO RIGHTLESS DEMANDED AT HIGH PRICES AND MORE DEMANDED AT LOW PRICES HAS A NEGATIVE SLOPE PRICE ON Y AXIS AND QUANTITY ON X AXIS. DEMAND CURVE GIVES THE PRICE-QUANTITY RELATIONSHIP

RELATIONSHIP BETWEEN QUANTITY DEMANDED AND OTHER VARIABLES IS NOT SHOWN ON THE DEMAND CURVE. DEMAND CURVE STATES: AT A PRICE WHAT IS THE MAXIMUM DEMANDED FOR A DEMAND /QUANTITY WHAT IS THE MAXIMUM PRICE. ALGEBRAICALLY : Q = f(P) Qty demanded is function of price.

1. 2.

CHIEF CHARACTERISTICS OF DEMAND CURVE:

1. INVERSE RELATIONSHIP: RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED IS INVERSE;PRICE RISES DEMAND FALLS PRICE FALLS DEMAND RISES. 2. PRICE IS INDEPENDENT VARIABLE AND DEMAND A DEPENDANT VARIABLE: UNDER THE LAW OF DEMAND IT THE EFFECT OF PRICE ON DEMAND THAT IS EXAMINED AND NOT THE EFFECT OF DEMAND ON PRICE .THUS WHEN DEMAND RISES, PRICE WILL RISE AND WHEN DEMAND FALLS PRICES FALL. UNDER THE LAW OF DEMAND PRICE IS REGARDED AS AN INDEPENDENT VARIABLE AND DEMAND IS THE DEPENDANT VARIABLE.

3.OTHER THINGS REMAINING THE SAME: INFLUENCE OF OTHER FACTORS ON DEMAND IS NOT CONSIDERED EXCEPT PRICE.POSSIBLE FOR DEMAND TOVARY IF ONE OR MORE OF OTHER FACTORS CHANGE SAY INCOME,SUBSTITUTE S PRICE,CONSUMERS TASTE,ADVERTISING OUTLAYS;DEMAND MAY RISE IN SPITE OF RISE IN PRICES AND DEMAND MAY FALL DESPITE FALL IN PRICES. 4. REASONS UNDERLYING THE LAW OF DEMAND: THE INVERSE RELATIONSHIP BETWEEN PRICE AND DEMAND, IE LAW OF DEMAND CAN BE EXPLAINED INTERMS OF TWO REASONS: a. INCOME EFFECT: o FALL IN THE PRICE OF A COMMODITY LEADS TO AND IS THEREFORE EQUIVALENT TO AN INCREASE IN INCOME OF CONSUMER . How and why? o He has to spend less to purchase the same quantity. o Part of money gained used to purchase more of the same commodity o Vice versa; price increase income is curtained ;expenditure is less on all commodities including whose price has risen b. SUBSTITUTION EFFECT o WHEN PRICE OF COMMODITY FALLS THE CONSUMER WILL SUBSTITUTE THAT COMMODITY FOR OTHER COMMODITIES WHICH HAVE NOT BECOME RELATIVELY DEAR. o IF PRICE OF URAD FALLS,IT WILL BE USED IN PLACE OF ANOTHER PULSES TO SOME EXTENT.IF THE PRICE OF A COMMODITY RISES THER COMMODITIES USED IN ITS PLACE o SO FALL IN PRICE INCREASES DEMAND AND A RISE IN PRICE DECREASES DEMAND.

B. EXCEPTIONS TO THE LAW OF DEMAND: THE LAW OF DEMAND DOES NOT HOLD GOOD IN THE FOLLOWING CASES: 1. SOME GOODS PURCHASED FOR SNOB APPEAL OR OSTENSATION. VEBLEN CALLED THIS CONSPICUOUS CONSUMPTION

WHEN PRICES OF SUCH GOODS RISE, SNOB APPEAL INCREASES PEOPLE BUY MORE AND WHEN PRICES DECREASE PEOPLE BUY LESS.ARTIFACTS; EXCLUSIVE JEWELLERY LIKE DIAMONDS. VEBLEN EFFECT HAS POLICY IMPLICATIONS FOR MANAGEMENT. HIGH PREMIUM PRICES FOR VEBLEN GOODS 2. IN SPECULATIVE MARKETS: RISE IN PRICES FOLLOWED BY LARGER PURCHASES AND FALL IN PRICES BY SMALLER PURCHASES. SHARE MARKETS : PRICE FALLS WAIT FOR FURTHER FALL AND PRICE RISE WAIT FOR FURTHER RISE. 3. THE GIFFEN CASE: GIFFEN OBSERVED IN 19TH CENTURY IRELAND THAT POOR PEOPLE SPENT MAJOR PART OF MONEY ON POTATOES AND A SMALL PORTION ON MEAT. PRICE OF POTATOES ROSE,HAD TO ECONOMIZE CONSUMPTION OF MEAT TO EAT SAME QUANTITY OF POTATOES.TO FILL GAP IN FOOD SUPPLY ADDITIONAL QUANTITY OF POTATOES WOULD BE BOUGHT AS POTATOES WERE STILL THE CHEAPEST FOOD. THUS RISE IN PRICES OF POTATOES LED TO INCREASE IN SALES OF POTATOES.THIS HAPPENS WHEN CONSIDERABLE PART OF INCOME IS SPENT ON AN INFERIOR GOOD. INDIVIDUAL DEMAND AND MARKET DEMAND: QUANTITY DEMANDED OF ALL CONSUMERS AGGREGATED IS MARKET DEMAND. PRICE ELASTICITY OF DEMAND: ACCORDING TO THE LAW OF DEMAND: AS PRICE OF A COMMODITY FALLS,QUANTITY INCREASES AND VICE VERSA. INDICATES THE DIRECTION OF CHANGE DEMANDED

DOES NOT INDICATE HOW MUCH IS THE QUANTITY THAT IS DEMANDED FOR A PRICE CHANGE. NEED TO KNOW THIS THROUGH PRICE ELASTICITY OF DEMAND OR ELASTICITY OF DEMAND. ELASTICITY OF DEMAND: DEGREE OF RESPONSIVENESS OF QUANTITY DEMANDED TO A CHANGE IN PRICE IT REPRESENTS THE RATE OF CHANGE IN QUANTITY DEMANDED DUE TO CHANGE IN PRICE.

PRICE ELASTICITY OF DEMAND CAN BE MEASURED AS: Ep = proportionate change in qty dd Proportionate change in price Change in qty dd / quantity dd Change in price/price (Q2 Q1)/Q1 (P2-P1)/P1

Ep=

Q1: qty dd before price change Q2: qty dd after price change P1: price changed before price change P2: price changed after price change.

Q1 = 2000 P1 = 10 Ep= 2,500-2000/2000 9-10/10 o

Q2 = 2500 P2 =9 = 9-10/10 = -2.5

Price elasticity is negative ; in practice this negative sign is omitted.

MODIFICATION OF FORMULAR: Ep= Q2-Q1/Q2+Q1/2 P2-P1/P2+P1/2 = Q2-Q1/Q2+Q1 P2-P1/P2+P1 = DELTA Q1/Q2 + Q1 /DELTA P2+P1 WITH MODIFIED FORMULA THE ep = 19/9= - 2.11 500/4500/-1/19 =1/9/-1/19=19/-9=-

INTERPRETATION: A 1% REDUCTION IN PRICE WILL RESULT IN A 2.5 PERCENT INCREASE IN QTY DEMANDED AS PER FORMULA 1 AND 2.1 PER CENT INCREASE AS PER FORMULA 2

TYPES OF PRICE ELASTICITY Sl.No. 1. 2. 3. 4. 5. TYPE PERFECTLY ELASTIC PERFECTLY INELASTIC UNITY ELASTICITY RELATIVELY ELASTIC RELATIVELY INELASTIC NUMERICAL EXPRESSION DESCRIPTION SHAPE OF CURVE