DEMAND ANALYSIS

DEMAND

ANALYSIS

Meaning of Demand

Demand= Desire or Want or Need + Willingness to Buy + Ability to Pay

Individual Demand and Market Demand

Demand Determinants ( Individual Demand )

Price of the product demanded Income of the consumer Prices of related goods Consumers Expectations Tastes and Habits cigrates par tax always increase Advertising expenditure

Price of the product Distribution of income and wealth Communitys common habits (bargaining , tea and scale of preferences General standards of living and spending habits of the people Number of Buyers and growth of population Age structure and sex ratio of the population If youth more so ipod related to yuthh more nd if women are more so pink lpi demand more

Demand Determinants (Market Demand )

Demand Determinants (Market Demand )

Level of Taxation and Tax structure If tax more ppl dnt have disposible money D dec Inventions and innovations Fashions Climatic or weather conditions Customs(diwali in india n christmas in west) Advertisement

Individual Demand Schedule of Pizza

Price (Rs) 1 2 Quantity Demanded by Mr.Iyer (In units) 6 5

3
4 5 6

4
3 2 1

Market Demand Schedule

of Pizza
Price (Rs.) 4 3 2 QD by Mr.Iyer 1 2 3 QD by Mr.Raman 3 4 5 QD by Mr.Nayar 3 5 7 Market demand 7 11 15

10

24

Law of Demand

.States that, Other things remaining the same (Ceteris Paribus) the higher the price the lower will be the demand and vice versa. QDx = f{Px}

Individual Demand Curve

Y
P R I C E

of Pizza

P P P D
Q Q Q

Quantity Demanded

Exceptions or Limitations to the Law of demand

Giffen goods pd! Prestigious goods or conspicuous consumption or status symbol goods pd^ Speculation pd^ Consumers bias, ignorance, illusion etc pd! Future Expectations pd^ Credit Facilities pd^ Brand Name pd^ Taste, Fashions, Habitspd^ Emergencypd^

Changes In Quantity Demanded

Expansion in quantity demanded Contraction in quantity demanded.

Changes In Quantity Demanded

Y
P R I C E

P P P

a b

D
Q Q Q

Quantity Demanded

Changes in Demand

Increase in demand Decrease in demand

Increase in Demand
D

Y
P R I C E

P
D

D
Q Q

Quantity Demanded

Decrease in Demand
D

Y
P R I C E

P D D Q

Quantity Demanded

Elasticity of Demand

Price Elasticity Income Elasticity Cross Elasticity

Price elasticity

The degree of responsiveness of quantity demanded due to change in price.

Net change in quantity demanded Ep= ----------------------------------------------------Net change in price

Formula of Price Elasticity

Q P Q2 - Q1 P Q

Ep =

Ep =

P1

P2 - P1

Q1

Price Elasticity Measurement-Arc Elasticity method

Q2 - Q1 Q2+Q1

Ep =

P2+ P1 P2- P1

Example

When the price of Tea is Rs 20, Mr. Nayar purchases 10 Kgs.When the price of Tea increases to Rs 22 now he purchases 9 Kgs . Find elasticity.

Types of Price Elasticity

(Check by applying both methods. Answers should be :Point Method-1; Arc Method-1.1

Perfectly elastic (Ep = infinity) Perfectly inelastic (Ep = 0 ) Relatively elastic demand (Ep > 1) Relatively inelastic demand (Ep < 1) Unitary elastic demand (Ep = 1)

Perfectly elastic(Ep=) Y
Q
P R I C P E

= Q
DD

QUANTITY DEMANDED

Perfectly inelastic (Ep=0) Y

P P R I P C E P

DD

Q
= Q

Q QUANTITY DEMANDED

Relatively elastic demand (Ep > 1)

Y
D
P R I P C P E

Q
Q

>
D

P
P

Q QUANTITY DEMANDED

Relatively inelastic demand (Ep < 1)

Y
D
P R I P C P E

Q
Q

<

P
P

D
Q Q QUANTITY DEMANDED

Unitary elastic demand (Ep = 1)

Y
P R I P C E P

Q
Q

P
P

D
Q Q QUANTITY DEMANDED

Factors influencing elasticity of demand

(1) Nature of the Commodity : Necessities Inelastic Comforts and Luxuries Elastic

Factors influencing elasticity of demand

(2)Availability of Substitutes : No substitutes Inelastic Close substitutes Elastic

Factors influencing elasticity of demand

(3)Number of Uses : Single Use Inelastic Multi Use Elastic

Factors influencing elasticity of demand

(4)Range of Price Change: Highly Priced Elastic Low Priced Inelastic

Factors influencing elasticity of demand

(5)Proportion of Expenditure : Less expenditure Inelastic More expenditure Elastic

Factors influencing elasticity of demand

(6)Influence by Habits & Customs Inelastic

Factors influencing elasticity of demand

(7)Complementary goods Inelastic

Factors influencing elasticity of demand

(8)Time Period : Short Period Inelastic Long Period elastic

Factors influencing elasticity of demand

(9) Possibility of Postponement : Can be Postponed -- Elastic Cannot be Postponed Inelastic

Factors influencing elasticity of demand

(10)Recurrence of demand: Recurrent demand -Elastic Non- Recurrent demand-Inelastic

Factors influencing elasticity of demand

(11)Durability of the Commodity Perishable goods-Elastic Durable-Inelastic

Price Elasticity
Practical importance of price elasticity? Work out the type of elasticity the following products will have: Electricity Soaps Exotic Vacations Cigarettes Wine AC Tea

Income Elasticity

Income Elasticity of Demand, the degree of responsiveness of the quantity demanded to the change in income of the consumer.

Formula of Income Elasticity

Proportionate change in quantity demanded Ey=------------------------------------------------------------Proportionate change in the Income of consumer

Formula of Income Elasticity

Q Y Q2 - Q1 Y Q

Ey =

Ey =

Y1

Y2 - Y1

Q1

Example

A consumer spends Rs 60/- per month on sugar when his income is Rs 1500/- per month, when his income increases to Rs 1800/- per month he spends Rs 84 on sugar .Find Income elasticity.

Types of Income elasticity

(Is your answer 1.8?)

(1)Positive income elasticity : Greater than one Ey > 1 - Luxuries Less than one Ey < 1 - Necessaries (2) Negative income elasticity : Inferior goods

Positive income elasticity

Y
I N C O M E

D Ey < 1 D Ey > 1 D

QUANTITY DEMANDED

Negative income elasticity

Y
I N C O M E

QUANTITY DEMANDED

Cross Elasticity

..is the degree of responsiveness of quantity demanded of good X due to the change in price of good Y( where good X and Y are either substitutes or complementary)

Proportionate change in Quantity demanded of good X Exy = Proportionate change in price of good Y

Cross Elasticity
Formula:-Qx Exy=
Py

Py Qx

Exy= Qx2 - Qx1 Py2 - Py1

Py1 Qx1

Electronic Commerce
E-commerce:Refers to the production,advertising,sale,and distribution of products and services from business to business and from business to consumers through the internet. Reduced time,distance,cost ,increased sales,reorganization of sales chains etc 90% business to business(1999-U.S) click-and-mortar retailing frictionless capitalism-online comparison Direct selling,new selling methods-eg auctions,infomediaries.