DEMAND ANALYSIS MEANING OF DEMAND Demand for a

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 v. Desire of the consumer to buy the product v. His willingness to buy the product v. 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. P 1 P 0 Q 1 Q 0 Quantity

Change in Quantity Demanded Price A decrease in price causes an increase in quantity demanded. P 0 P 1 Q 0 Q 1 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 P 0 P 1 Q 0 Quantity

Change in Quantity Supplied An increase in price causes an increase in quantity supplied. Price P 1 P 0 Q 1 Quantity

Market Equilibrium Price D 0 D 1 S 0 An increase in demand will cause the market equilibrium price and quantity to increase. P 1 P 0 Q 1 Quantity

Market Equilibrium Price D 1 D 0 S 0 A decrease in demand will cause the market equilibrium price and quantity to decrease. P 0 P 1 Q 0 Quantity

Market Equilibrium Price D 0 S 0 P 1 Q 0 Q 1 S 1 An increase in supply will cause the market equilibrium price to decrease and quantity to increase. Quantity

Market Equilibrium Price D 0 S 1 P 0 Q 1 Q 0 S 0 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. Quantity demanded Per dozen) of oranges (dozens) 5 1 4 3 2 1 2 3 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

Price of good X INDIVIDUAL DEMAND CURVE O 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 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 PRICE OF GOOD X Y MAR KET DEM AND CUR VE 10 D 9 8 7 6 DC DA DB O DD X 4 UNITS OF GOOD X

TYPES OF DEMAND • Derived demand autonomous demand • Demand for producers’ goods and consumers’ goods • Demand for durable and non-durable goods • Industry demand firm demand • Total demand market segment demand • Short-run demand 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 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 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.