Chapter -3

Demand Analysis

Demand in Economics

is the desire to possess something

and the willingness and ability

to pay a certain price

in order to possess it.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis

A complete statement of Demand

must state

► market dimension – whose demand

► price dimension – at what price

► time dimension – for how long.

Gopal demands 30 litres of milk, at Rs 20/- per litre,
per month.

Chapter Three Managerial Economics

 DEMAND TYPES

INDIVIDUAL MARKET
• Individual’s demand for • Summation of Individual
Footwear, clothes,food etc demands.
Individual households
demand
For-furniture,refigerator, fan.
Individual firm’s demand for
Steel,power,transport etc
DETERMINANTS OF DEMAND
 General factors- P,Y,T,Pr.
 Luxurious/Durable products- Fe(P,Y)
 Market demand- N,A,S,C.
 Nature of the product.
 Mathematical relation
Variable Demand Product type

Price (Px) Inversely related Normal ( Law

of demand)
Income (Y) Directly related Normal good
Price of related Directly related Substitutes
products (Pr)
Price of other Inversely related Complementary
good goods
Utility Directly related Normal
 Mathematical relation
Variable Demand Product type

Quality Directly related Normal

Tastes & Fashion Directly related Normal good
Population Size Directly related Normal goods
Future price Directly related Long term
expectations liabilities &
assets
Climatic Directly related Seasonal
conditions products
 Chapter -3
Demand Analysis

Determinants of Demand

Psychology of the consumers

- if more and more are purchasing

product X, others are influenced to buy
more of X – a band wagon effect

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis

Determinants of Demand

Psychology of the consumers

- if no one or a few are purchasing

product X, others are influenced to buy
more of X to feel different– a snob effect

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis

Determinants of Demand

Advertisements and salesmanship.

- in modern markets demand for product

X, can be created through
advertisements and sales promotion

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis

Demand Function
We have seen that demand depends on or is a
function of so many variables.
Hence this function is expressed as
Qxd = f(Px,P1, Yd, U,Q,T,A . . . . etc)
As this is a very complicated relationship, we
assume that all the other variables are constant,
and study relation between price of X & quantity
demanded; expressed as under.
Qxd = f(Px) where P1 = P0; Yd = Yd0; U = U0; etc.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis

The Law of Demand

Other things remaining the same , quantity

demanded of a commodity is inversely related
to its price.

when the price rises the quantity demanded falls

when the price falls the quantity demanded rises

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis

The Law of Demand - demand curve.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
The Law of Demand
exceptions- (1)

Expectations of further changes in price and

speculation

The law does not hold good when people expect

prices to rise further.
Even though prices have risen today, consumers
buy more in anticipation of further price
increases.
A typical observation on Stock
Exchanges.
Chapter Three Managerial Economics
 Chapter -3
Demand Analysis
The Law of Demand
exceptions- (2)

Giffen’s paradox

Incase of low priced essentials like bread, when

price falls consumers use money saved,
increase in their real income, to buy other
products, instead of buying more bread.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
The Law of Demand
exceptions- (3)

Qualitative changes

if the price is taken as yardstick for quality of

commodity, mere rise in price may increase
demand for it.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
The Law of Demand
exceptions- (4)

Price illusions

consumer in the modern world is governed

more by the price illusions that higher the price,
better the product.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
The Law of Demand
exceptions- (5)

Display of standard of living

consumer is governed by the demonstration

effect.
expensive jewellery, cars are purchased not
because they are needed but to show
consumer’s wealth.

Chapter Three Managerial Economics

 Expansion & Contraction of
demand
• Price of one packet of Almond cookies is
Rs 50 and quantity demanded is only two
packets by Reeta. As the price per packet
falls to Rs 20 , she prefers to buy 5
packets, and when the price per packet
rises to Rs 80 she buys only 1 packet.
• So quantity has moved from 2 to 5
• Also it has moved from 5 to 1
Chapter Three
 MOVEMENT vs SHIFT OF
DEMAND GRAPH
• If we consider the price of commodity
alone-its either expansion/contraction of
demand.

• If we consider any other factor except

price-its either increase/decrease in
demand.
Increase & Decrease in demand
Many health conscious consumers have
started the consumption of lemon and honey
tea, thereby rising demand for lemons and
honey bottles.
You arecalso one of them. Would you still
buy lemon if their prices rise from Rs 2 per
lemon to Rs 5

Chapter Three
 Chapter -3
Demand Analysis
Movement by shift of curves.
More is demanded at the same price, or same
quantity is demanded at higher price.
original demand
increased demand

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Movement by shift of curves.
Less is demanded at the same price, or same
quantity is demanded at lower price.
original demand
decreased demand

Chapter Three Managerial Economics

 TYPES OF DEMAND
• Direct & Derived Demand.
• Joint & Cross Demand (compl,subst)
• Composite Demand.
• Industry & Firm Demand.
• Market & Segment Demand
 Chapter -3
Demand Analysis
Demand analysis - for durable & non-durable
goods

Durable goods – can be stored

- used over a period of time
- have maintenance & operating costs
Demand depends on
expected availability or shortages
rate of obsolescence
economy – in recession demand for
durables is postponed

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Demand analysis - for durable & non-durable
goods

Non- Durable goods –

cannot be stored, are perishable

Demand depends on
prevailing conditions & style
incomes
convenience

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Demand analysis - Long run & Short run demand

Short run Demand

exists at a point of time. With its
immediate reaction to change in price
and income.
Long run Demand
exists over a period of time
as a result of price changes,
competition, product improvement etc.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Demand analysis - Direct and Derived demand

Direct Demand
exists when the good is required for
direct consumption to satisfy human
want
Derived Demand
exists to meet demand for other
product. Like demand for cement to
meet demand for houses or roads

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Demand analysis - Joint or Complimentary Demand

Tea & sugar

Tyre & Tube
Houses & Cement

These goods have to be consumed together to

satisfy the want of the consumer.

Hence they are demanded jointly.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Demand analysis - Cross Demand

Demand for substitutes takes form of cross demand.

Consumer may demand more of Coffee not as

its price has fallen, but because price of Tea has
increased.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Demand analysis - Composite Demand

Composite demand implies that a commodity

under consideration can be put to several uses.

e.g. electricity ca be used for lighting, cooking,

or ironing; computers or TV.

same can be said of Steel or Coal.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Demand analysis - Industry Demand and Firm
Demand
demand for medicines of Glaxo is a firm demand
but that for all medicines and drugs is industry
demand.

In a monopoly both are identical & in perfect

competition both are absolutely different.

In perfect competition, a firm is a price taker &

not price maker.

Chapter Three Managerial Economics

 Chapter -3
Demand Analysis
Demand analysis - market demand and segment
demand

overall demand for a product in the total market

is market demand.

while demand for that product in villages, or

through mail order, or for shopping complexes
is market segment demand for these three
segments.

Chapter Three Managerial Economics