S

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S

Y
L

A
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D
N

M
E

DEMAND ANALYSIS
Meaning of Demand:
Demand for a particular commodity refers to
the
commodity which an individual consumer or
household is willing to purchase per unit of time at a
particular price.
Demand for a particular commodity implies:
Desire of the customer to buy the product;
The customers willingness to buy the product;
Sufficient purchasing power in the customers possession to buy
the product.

The demand for a particular commodity by an individual

consumer or household is known as Individual
demand for the commodity and Summation of the
individual demand is known as the Market demand.
2

DETERMINANTS OF DEMAND
1. Price of that commodity (Higher the price
lower is the Demand)
2. Income of the consumer ( Directly related)
3. Price of related goods
1.
2.

Substitutes
Complements

4. Taste and preferences

5. Future expectations
1.
2.

Related to future income

Related to future price of the goods and its
related goods

DEMAND ANALYSIS
Law of Demand:
Law of demand expresses the relationship between
the Quantity demanded and the Price of the
commodity.
The law of demands states that,
if other things remaining constant the lower the
price of a commodity the larger the quantity
demanded of it and vice versa.
In simple terms other things remain constant, if
the price of the commodity increases, the demand
will decrease and if the price of the commodity
decreases, the demand will increase.

DEMAND ANALYSIS
Assumptions:
No change in taste and preference.
Income of the consumer is constant.
No change in customs, habit, quality of
goods.
No change in substitute products, related
products and the price of the product.
No complementary goods.

EXPLANATION OF THE LAW:

1. Demand Schedule
2. Demand Curve

Demand Schedule:
A demand schedule is a numerical tabulation that shows the
quantity of demeaned commodity at different prices.
The demand schedule may be of 2 types :
1. Individual demand Schedule
2. Market demand Schedule.

Table Showing the IDS & MDS :

DEMAND ANALYSIS
Graphical Representation of IDC & MDC

Price/
Quantity

Product

Total/
Market

10

30

40

70

20

15

20

35

DEMAND ANALYSIS
Demand Distinctions:
1. Individual and market demand
2. Producers Good and Consumers Good.
3. Derived Demand and Autonomous Demand.
4. Industry Demand and Firm (Company) Demand.
5. Short Run Demand and Long Run Demand.
6. Joint demand and rival demand

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DEMAND ANALYSIS
Demand Function:
A Mathematical relationship between quantity demanded
of the commodity and its determinants is known as
Demand Function.
When this relationship relates to the demand by an
individual consumer it is known as Individual demand
function and while it relates to the market its known as
market demand function.

Individual Demand Function :

Qdx = f (Px, Y, P1. Pn-1, T, A, Ey. Ep, U)
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WHERE
Qdx
Px
Y
P1..Pn-1
T
A
Ey
Ep
U

= Quantity demanded for product X.

= Price of product X
= Level of Income
= Prices of all other products
= Taste of the consumer
= Advertisement
= Expected future income
= Expected future price
= Other determinants not covered in
the list of determinants.

Market Demand Function:

Qdx = f (Px, Y, P1. Pn-1, T, A, Ey, Ep, U, D, P)
P
D

= Population
= Distribution of consumers.
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Exceptions of Law of Demand:

In certain cases the slope of Demand Curve is
upward i.e. positively sloped, it is known as the
exceptions of Law of Demand.
These exceptions are as follows:
1. Giffen Goods (Giffen Paradox)
2. Emergency (War etc)
3. (Car, Fancy Cloths etc) and (Fancy Diamonds,
High price shoes, etc)
4. Depression ( Price and quantity demand is low)
5. Ignorance Effect (High priced commodity is better
in quality)
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6. Speculation (Future change in price)

Shift of a demand curve:

1. The shift of a demand curve takes place when
there is a change in any non-price determinant of
demand, resulting in a new demand curve. Non-price
determinants of demand are those things that will
cause demand to change even if prices remain the
same.
2. Some of the more important factors are the prices of
related goods (both substitutes and complements),
income, population, and expectations.
3. Upward and downward demand curve

SHIFT IN DEMAND CURVE:

THE SHIFT FROM D1 TO D2 MEANS AN INCREASE IN
DEMAND WITH CONSEQUENCES FOR THE OTHER
VARIABLES

ELASTICITY OF DEMAND
Elasticity of demand is defined as the percentage change in
quantity demanded caused one percent change in each
of the determinants under consideration while the other
determinants are held constant.
Ed = % change in quantity demanded / % change in the
determinant.

There are mainly five types of Elasticity of Demand :

Price Elasticity of demand

Income Elasticity of demand
Cross Elasticity of demand
Promotional Elasticity of demand
Expectation Elasticity of demand

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Price Elasticity of Demand :

Price Elasticity of Demand measures the degree of
responsiveness of the quantity demanded of a commodity due
to a change in its own price.
Ep = - (% change in quantity demanded) /
( % change in the Price).
Here we ignore the ve sign as the relation between price and
the quantity demanded is opposite.
Price Elasticity of Demand are of 5 types :
1. Perfectly elastic demand
2. Perfectly / Absolutely inelastic demand
3. Relatively Elastic demand
4. Relatively inelastic demand

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1) Elastic:
The % change in quantity > % change in price.
From the diagram below we see a small change in price
brings about a large change in the quantity demanded.
This happens when there are many substitutes in the
marketplace.
Ex: Luxuries goods

2) Inelastic:

It is the reverse of elastic.

The % change in quantity < % change in price.
Examples of this are necessities like food and fuel
Consumers will not reduce their food purchases if
food prices rise, although there may be shifts in the
types of food they purchase.

3) Unit elasticity:
The % change in quantity = % change in price.
From the diagram below we see a change in price
brings about an exact change in the quantity
demanded.
A 2% change in price brings about a 2% change in
quantity demanded

4) Perfectly elastic:
The % change in price is zero.
At the market going price P*, the quantity demanded
is infinite.
So by the formula of elasticity:
Ed (perfectly elastic) = (% change in Qd) (%
change in price)
=0
=
Imaginary Situation

5) Perfectly inelastic: The % change in quantity is zero.

At any price, the quantity demanded is the same.
The consumption of this commodity is fixed, and not
dependent on price.
Ed (perfectly inelastic) = (% change in Qd) (% change in
price)
=0
=0
Ex: Life saving Drug

Income Elasticity of Demand:

Income Elasticity of Demand measures the degree of
responsiveness of the quantity demanded of a commodity due
to a change in money income of the consumer.
Ey = (% change in quantity demanded) /
( % change in the Money Income).

Cross Elasticity of Demand:

Cross Elasticity of Demand measures the degree of
responsiveness of the quantity demanded of one commodity
due to a change in price of some related goods.
Exy = (% change in quantity demand of goods Y) /
( % change in the price of goods X).

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INCOME ELASTICITY OF DEMAND

Income elasticity of demand can be used
as an indicator of industry health, future
consumption patterns and as a guide to
firms investment decisions.

income elasticity of demand measures the responsiveness

of the demand for a good to a change in the income of the
people demanding the good .
For example, if, in response to a 10% increase in income, the
demand for a good increased by 20%, the income elasticity
of demand would be 20%/10% = 2.
A negative income elasticity of demand is associated with
inferior goods; an increase in income will lead to a fall in
the demand and may lead to changes to more luxurious
substitutes.
A positive income elasticity of demand is associated with
normal goods; an increase in income will lead to a rise in
demand.
If income elasticity of demand of a commodity is less than 1,
it is a necessity good.
If the elasticity of demand is greater than 1, it is a luxury good
or a superior good.
A zero income elasticity (or inelastic) demand occurs when
an increase in income is not associated with a change in
the demand of a good. These would be sticky goods.

1. High income elasticity of demand:

In this case increase in income is accompanied by relatively larger
increase in quantity demanded. Here the value of coefficient
Ey is greater than unity (Ey>1). E.g.: 20% increase in quantity
demanded due to 10% increase in income.
2. Unitary income elasticity of demand:
3. Low income elasticity of demand:
4. Zero income elasticity of demand:
(Ey=0). E.g.: No change in quantity demanded even 10% increase in
income.
5. Negative income elasticity of demand:
In this case increase in income is accompanied by decrease in
quantity demanded. Here the value of coefficient Ey is less than
zero/negative (Ey<0). E.g.: 5% decrease in quantity demanded
due to 10% increase in income.

TYPES OF CROSS ELASTICITY OF

DEMAND
1.
2.
3.
4.

Zero cross elasticity of demand (when

Goods are not related to each other)
Negative cross elasticity of demand (In
Complementary goods)
Positive cross elasticity of demand
(Substitute)
Infinite cross elasticity of demand
(Imaginary situation)

Advertising or Promotional Elasticity of Demand:

Advertising or Promotional Elasticity of Demand
measures the degree of responsiveness of the
quantity demanded of a commodity due to a change
in expenditure on advertising and other sales
promotion activities.
Ea = (% change in quantity demanded) /
( % change in the Expenditure on
Advertisement).

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Factors affecting the Elasticity of Demand :

1. Nature of the product
2. Availability of the substitute product
3. Uses of the commodity
4. Income Levels
5. Proportion of Income spent
6. Postpone consumption
7. Price levels
8. Time period
9. Durability
10. Taste & Preference
11. Demonstration Effect
12. Advertisement
13. Special Demand (Medicine)
14. Complementary Goods
15. Expectation of the future price etc

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Importance or Significance of Elasticity of Demand:

Practical Importance:

1.
2.
3.
4.
5.
6.
7.
8.

Production Planning
Theory of Pricing
Theory of distribution
Theory of Foreign exchange
Theory of International Trade
Theory of Public Finance
Theory of Forecasting of Demand
Monopoly Market and limits of monopoly power
9.Determinants of the status of the commodity,
complementary or substitute.

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IMPORTANCE OR SIGNIFICANCE OF
ELASTICITY OF DEMAND:
1.

Useful in price determination

2.

Fixation of rewards for factors of production

3.

Helpful in taxation policy

4.

Use in international trade

5.

Demand forecasting

6.

Decision about advertising and promotional

activities

7.

Decision about investment

RELATION BETWEEN TR,MR,AR AND

PRICE ELASTICITY OF DEMAND
Revenue is the income generated from the output produced by
firms and then sold in goods markets.
It is also known as sales turnover.
TOTAL REVENUE = Price per unit x Quantity sold ( TR = p x
q)
AVERAGE REVENUE = PRICE = Total revenue divided by
output - the average revenue curve for a business is the
same as their demand curve.
MARGINAL REVENUE = the change in total revenue as a
result of selling one extra unit of output.
TOTAL REVENUE is maximised when marginal revenue =

RELATION BETWEEN TR,MR,AR AND

PRICE ELASTICITY OF DEMAND
(EXAMPLE)
Price

Quan.

TR

MR

AR

10

10

10

18

24

28

30

30

28

-2

24

-4

18

-6