CONSUMER BEHAVIOUR

DEMAND DETERMINANTS
# PRICE
# BUYERS INCOME
# AVAILABILITY & PRICE OF SUBSITUTES OR COMPETING
PRODUCTS
# ADVERTISING & SALES PROMOTION
# POPULATION
#AVAILABILITY OF CREDIT
# ONES STATUS

DEMAND DETERMINANTS Contd.

# GEOGRAPHIC LOCATION OF BUYERS
# CHANGES IN CONSUMER TASTES
# NEEDS & PREFERENCES
# CHANGES IN CONSUMER CREDIT FACILITIES
# SEASON OF THE YEAR

Q = f(P, A, C, D, E F, ---------- )
D

SOME FACTORS DESERVE A DISCUSSION:

# PRICE
# INCOME
# PRICE OF SUBSITUTE AND COMPLEMENTARY
GOODS
# ADVERTISING AND SALES PROMOTION

#THESE FACTORS HAVE A GREAT INFLUENCE ON SALES

# CAN BE EXPRESSED AND MEASURED IN VARIOUS
WAYS
# IMPORTANCE OF THESE FACTORS VARY FROM
PRODUCT TO PRODUCT
# SOME ARE WITHIN A FIRMS CONTROL AND
SOME ARE NOT

Consumer Goods vs Producer Goods

Consumer Goods
Consumer goods are those which are available for ultimate
consumption.These give direct and immediate satisfaction.
Ex: Bread, Apples, Rice etc.

Producer Goods
Producer goods are those which are used for further processing or
production of goods/services to earn income.
Ex: Steel, Cement, Machinery, Tractors etc.

Autonomous Demand vs Derived Demand

Autonomous Demand
Autonomous demand refers to the demand for products
and services directly.
Ex: Mobile Phones, Houses, Shoes etc.

Derived Demand
Derived demand is the demand of products/services arising
out purchase of a parent product.
Ex: Steel, Cement, Bricks etc.

Durable vs Perishable Goods

Durable Goods
Durable goods are those goods which give service relatively
for a longer period.
Ex: TVs, Fridge, Washing M/Cs, Rice etc.

Perishable Goods
Perishable goods are those goods whose life is very less, may
be in hours or days.
Ex: Milk, Flowers, Vegetables etc.

Firm demand vs Industry Demand

New Demand vs Replacement Demand

NEW DEMAND
New demand refers to the demand for the new products.

REPLACEMENT DEMAND
Replacement demand refers to the demand resulting out
Of replacing the existing assets with new ones.

Total Market and Segment Market demand

DEMAND & PRICE

# DEMAND (ECONOMICS) =
DESIRE TO BUY BACKED BY ADEQUATE PURCHASING
POWER
# DEMAND FOR GOODS:
SOMEONE IS ABLE AND WILLING TO BUY
VARIOUS QUANTATIES THAT A CONSUMER WILL TAKE OFF
THE MARKET DURING A TIME UNIT AT DIFFERENT PRICES.

LAW OF DEMAND
HIGHER THE PRICE, LOWER THE
DEMAND AND VICE VERSA
other things remaining the same.

DEMAND IN PRODUCT/OUTPUT MARKETS

demand curve A graph illustrating how
much of a given product a household
would be willing to buy at different
prices.

18 of 46

DEMAND IN PRODUCT/OUTPUT MARKETS

Other Properties of Demand Curves
Two additional things are notable about
demand curve.
As long as households have limited incomes and wealth, all demand curves will intersect
the price axis. For any commodity, there is always a price above which a household
will not, or cannot, pay. Even if the good or service is very important, all households
are ultimately constrained, or limited, by income and wealth.

That demand curves intersect the quantity axis is a matter of common sense. Demand
in a given period of time is limited, if only by time, even at a zero price.

19 of 46

CHIEF CHARACTERISTICS OF LAW OF

DEMAND
# INVERSE RELATIONSHIP
# PRICE AN INDEPENDENT VARIABLE & DEMAND A
DEPENDENT VARIABLE
# OTHER THINGS REMAIN THE SAME
# REASONS UNDERLYING THE LAW OF DEMAND:
- INCOME EFFECT
- SUBSTITUUTION EFFECT

SHIFT OF DEMAND VERSUS MOVEMENT ALONG A

DEMAND CURVE
TABLE 3.2 Shift of Annas Demand Schedule
Due to increase in Income
SCHEDULE D0

SCHEDULE D1

Price
(Per Call)
$
0

Quantity
Demanded
(Calls Per Month
at an Income of
$300 Per Month)
30

Quantity
Demanded
(Calls Per Month
at an Income of
$600 Per Month)
35

.50

25

33

3.50

18

7.00

12

10.00

15.00

20.00

FIGURE 3.3

Shift of a Demand Curve

Following a Rise in Income
21 of 46

FIGURE 3.4

Shifts versus Movement

along a Demand Curve

22 of 46

EXCEPTIONS TO LAW OF DEMAND

# SNOB APPEAL
# SPECULATIVE MARKET
# THE GIFFEN Paradox

Mktg. Research & law of demand

-LOD is not the last word on Consumer Behaviour
- Sales Persons have often found the LOD irrelevant
-Market Researches were asked to develop more
viable theory of Consumer Behaviour
-Market Research has proposed certain Propositions
and Hypotheses based on empirical investigation

Propositions & Hypotheses

# A person who has confidence in price
information as a predictor of Quality the
chances are that he will go for high
priced goods
# Persons experienced in Purchasing a product
will choose a low priced item or vice versa

Hypotheses & Propositions (contd)

People who purchase high priced items:
# believe that it is difficult to judge product Qly.
# will perceive large Qly. Differentials
# will feel risky and uncertain to go for low priced items
# has attachment towards Prestige & Social significance

Hypotheses & Propositions (contd)

# Business executives also disbelieve that a consumer
is rational
# They are baffled at the behavior
# Typical case of irrationality: Yale Locks
# According to one American researcher Purchasing
behavior of a consumer is repetitive

Inference:
# To know about Consumer Behaviors
is not so simple
# Buyers do not necessarily behave according
to Law of Demand in actual practice

The Concept of Elasticity

Elasticity is a measure of the responsiveness
of one variable to another.
The greater the elasticity, the greater the
responsiveness.

Price Elasticity of Demand

-LOD does not state how much the Qty. demanded
increases as a result of certain fall in the price or
Vice versa
-LOD tell us only about the direction of change
-It does not tell us the rate at which the change takes
place
-To know about the same a knowledge and understanding
of Price Elasticity of Demand or Elasticity of Demand
is required.
- EOD is different from LOD though it is based on LOD

EOD
The degree of responsiveness of Qty. demanded
to a change in Price
-Thus : it represents the rate of change in the
Qty. demanded due to change in price

e(p)

e(p) =

Proportionate change in Qty. demanded

= ------------------------------------------------Proportionate change in price
Change in Qty. demanded
-------------------------------Qty. Demanded
_____________________________
Change in Price
------------------Price

Q2 Q1
--------------Q1
= ____________________________
P2 P1
-----------P1

Where:
Q1 = Qty. demanded before price change
Q2 = Qty. demanded after price change
P1 = Price charged before price change
P2 = Price charged after price change

A modification: Mid Point

Q2 Q1
-------Q2 + Q1
---------2
= _______________________
P2- P1
----------P2 + P1
-----------2

Q2 Q1
-----------Q2 + Q1
= _____________
P2- P1
----------P2 + P1

Price Elasticity
The price elasticity of demand is the percentage
change in quantity demanded divided by the
percentage change in price.

Sign of Price Elasticity

According to the law of demand, whenever the
price rises, the quantity demanded falls. Thus the
price elasticity of demand is always negative.
Because it is always negative, economists
usually state the value without the sign.

Question:
The accompanying table gives part of the supply schedule for
personal computers in the United States.
Price of computer
$900
$1,100

Quantity of computers supplied

12,000
8,000

Calculate the price elasticity of supply when the price

increases from $900 to $1,100 using the
midpoint method.

Solution:
Q1 = 12000

P1 = 900,

8000 12000
------------------20000
e(p) = ------------------------1100 900
---------------2000
= (-) 2

Q2 = 8000

P2 = 1100

Problem :
If Neil's elasticity of demand
for hot dogs is constantly 0.9,
and he buys 4 hot dogs when the
price is $1.50 per hot dog, how
many will he buy when the
price is $1.00 per hot dog?

e(p) =

0.9 =

Q2

Q2 Q1
-----------Q1
------------------------------P2 P1
-----------P1
Q2 4
----------4
------------------------1 1.5
---------1.5
5.2

Say 5 Hotdogs

Problem
Katherine advertises to sell cookies for $4
a dozen. She sells 50 dozen, and decides
that she can charge more. She raises
the price to $6 a dozen and sells 40
dozen. What is the elasticity of demand?
Assuming that the elasticity of demand is
constant, how many would she sell if the
price were $10 a dozen?

Solution:
1)
Q1 = 50
Q2 = 40

e(p)

2)
P1 = 4
P2 = 6

40 50
----------50
= -----------------64
---------4
= - 0.4

Q1 = 50
P1 = 4
Q2 = ?
P 2 = 10
e(p) = -0.4
Q2 50
----------50
- 0.4 = -------------10 4
--------4
Q2 = 20 dozens

Types of Price Elasticity

1.Perfectly Elastic No reduction in price is needed to
cause an increase in demand
2. Perfectly Inelastic A change in price however large
causes no change in demand
3. Unity Elasticity Proportionate change in price causes
an equal proportionate change in
demand
4. Relatively elastic demand a reduction in price leads
to more than proportionate
change in demand
5.Relatively inelastic demand - a reduction in price leads
to less than proportionate
change in demand

Type

Numerical Expression

Perfectly Elastic

Shape of Curve
Horizontal

Perfectly inelastic

Vertical

Unit Elasticity

Rect. Hyperbola

Relatively Elastic

>1

Flat

Relatively Inelastic

<1

Steep

PED can also be:

less than one, which means PED is inelastic.
Greater than one, which is elastic.
Zero (0), which is perfectly inelastic.
Infinite (), which is perfectly elastic.

IN real life, we generally meet

2, 4 & 5 cases

Factors Determining Price Elasticity of Demand

# Nature of Demand
# Extent of Use
# Range of Substitutes
# Income Level
# Urgency of Demand
# Durability of a commodity

1.Nature of Commodity:
Demand of necessities is inelastic, Ex: Salt, wheat etc.
Demand of luxuries is elastic.
2. Extent of Use:
Items having many uses, demand is elastic, : Steel
Items having limited use, demand is inelastic.
3. Range of Substitutes:
A commodity having a number of substitutes has relatively
elastic demand.
A commodity without or with weak substitutes has relatively
Inelastic demand.
4. Income level:
Demand for fruits or milk is inelastic for a rich person,
elastic for a poor person.

Examples:
Goods / Services

e(p)

Brinjals

3.5

Cabbage

2.8

Health insurance

1.9

Public Transport

1.0

Electricity

0.5

Revenue Relationships
-Average revenue
-Marginal revenue
-Incremental revenue
- Total revenue

Marginal Revenue:
It is the additional revenue which would be earned by
Selling one additional unit of a firms product

MR =

R2 R1
---------Q2 Q1

Problem:
Price
9
8
7
6
5
4
3
2
1

Qty. Demanded
1
2
3
4
5
6
7
8
9

TR

AR

MR

Revenue relationship:
Qty.Demanded
1
2
3
4
5
6
7
8
9

TR

AR

9
16
21
24
25
24
21
16
9

9
8
7
6
5
4
3
2
1

MR
7
5
3
1
-1
-3
-5
-7

Revenue relationship:
Qty.Demanded
1
2
3
4
5
6
7
8
9

AR

TR

MR

9
8
7
6
5
4
3
2
1

9
16
21
24
25
24
21
16
9

7
5
3
1
-1
-3
-5
-7

Incremental Revenue
IR simply measures the difference
between the new total revenue and
the existing total revenue

Problem:
Suppose the price of a commodity decreases
from Rs.10/- to Rs.9/- and as a result, sales
increase from 1000 units to 1500 units.
Calculate IR and MR

Relationship between Price Elasticity of demand,

Marginal Revenue and Total Revenue
1.When the price elasticity of demand is greater
than one, the MR is positive and TR rises as
price falls.
2. When the price elasticity of demand is unity,
the MR is zero and a change in price will not
change TR
3. When the price elasticity of demand is less
than one, the MR is negative and TR falls as
price falls.

Elasticity of Demand and Total Revenue

Change in
Price

EOD
e = >1

EOD
e= 1

EOD
E = <1

Price Rises

TR Falls

TR
No change

TR Rises

Price Falls

TR Rises

TR
No change

TR Falls

Difference between change in demand & EOD

# Change in demand occurs when prices do not change but
demand changes due to some other factors
# EOD of demand refers to that change in demand which
occurs due to change in the price, other factors remaining
same

INCOME AND DEMAND

# Income of buyers a basic demand

determinant
# Income along with price accounts
for most of the variations in sales
of many commodities

To know the relationship between Income

Sales/ Demand four aspects have to be
considered
# Consumption Function
# Product Consumption Function
# Difference in regional income
# Income expectations and demand

Consumption Function
CF refers to the relationship of total expenditure on
consumption to total income

Consumption Function
Y=C+S+T
C=YS-T
Gross income (Y) can be either
consumed (C), saved/
invested (S), or given to the
government in taxes (T)

Findings:
# In the long run this is fairly stable
# It is 85 to 90% of the income
# In the short run highly instable
can not be predicted by any
mathematical formula

Findings ( Contd)
During periods of economic prosperity:
Expenditure on consumption tends to increase absolutely
but decreases as a percentage of income

In periods of depression:
Consumption declines absolutely but increases as a
Percentage of income

Limitations of Consumption Function

# Sales of individual products and income is determined
by a number of factors relative prices, durable and
non durable nature of products etc. etc.
# Consumption function is concerned only with how much
to spend and how much to save, without being affected
by the decision on what to buy

II Product Consumption function

It is the relationship between total
Income and sales of a particular
product
P
e
r.
C
o
n.

Product consumption curve

Disposable personal income

Engel Curve
An Engel curve is a function relating the
quantity purchased Of a commodity to
the level of income.

Engel Curve - Necessities

Qty

Income

Engel Curve - Inferior goods

Qty.

Income

Demand for the three goods, shown here, all respond very differently
to the same change in income, Y to Y1. Demand for the normal good
increases from Q to Q1, demand for the luxury good rises much more,
to Q2, and demand for the inferior good falls from Q to Q3.

Income Elasticity of Demand

Income elasticity of demand is used to see
how sensitive the demand for a good is to
an income change.

Income Elasticity of demand

ey :

Proportionate change in Qtys. Demanded

----------------------------------------------------Proportionate change in incomes
Q2 Q1
-----------Q2+Q1
-------------------------Y2 Y1
-----------Y2+Y1

Types of Income Elasticity

1. Zero Income Elasticity: Here a change in income will
have no effect on the quantities demanded.
e.g., Salt
2. Negative income elasticity: An increase in income may
lead to reduction in the quantities demanded. Such goods
goods are called inferior goods.
3. Positive income elasticity: An increase in income may lead
to an increase in quantities demanded.

Related Products
# The demand for certain commodities may
be influenced by changes in the prices of
related goods

Related Goods:
# Substitutes
# Complements

Substitutes:
Commodities - when one can be replaced by another
Here a change in the price of a commodity would lead to
a change in the demand for another commodity at the cost
of some other commodity

Complements:
A change in the demand for one commodity leads to a change
in the demand for some other commodity, in the same direction.

Cross Elasticity of Demand

The proportionate change in the Qty. demanded of a
Particular commodity in response to a change in the
price of another related commodity

Ep / XED

Qx2 - Qx1
---------------Qx2 + Qx1
--------------------------Pz2 - Pz1
--------------Pz2 + Pz1

Cross-Price Elasticity of Demand

The Cross-Price Elasticity of Demand measures the
rate of response of quantity demanded of one good,
due to a price change of another good.

Cross Elasticity
Problem: The quantity demanded or
product A has increased by 12% in
response to a 15% increase in price of
product B. Calculate the cross elasticity of
demand and tell whether the product pair
is (a) apples and oranges, or (b) cars and
gas

Cross Elasticity

Problem: If the price of Coca Cola

increases from 50p to 60p per can,
and the demand for Pepsi Cola increa
from 1m to 2m per year.
Calculate XED between the two produc

Cross Elasticity
Problem: If the price of Cinema Tickets
Increases from 5.00 to 7.50, and the
demand for Popcorn decreases from 1000
tubs to 700.
Calculate XED between the two products.

If the cross elasticity is positive - goods

are substitutes
If negative goods are complements

If two goods are substitutes, we should expect to see

consumers purchase more of one good when the
price of its substitute increases.
Similarly if the two goods are complements, we
should see a price rise in one good cause the
demand for both goods to fall

Advertising & Sales Promotion

Advertising consists of those activities by which Visual
or Oral messages are addressed to selected respondents
for the purpose of informing and influencing them to buy
Products or Services

Important Functions
# Shift the demand curve to the right
# Reduce the elasticity of demand

Advertising Elasticity of Demand

ea =

Q2 - Q1
------------Q2 + Q1
-------------------A2 - A1
-------------A2 + A1

Factors determining advertising elasticity of demand

# Type of commodity
# Market share
# Rivals actions
# State of economy

Economic implications of advertising;

# Informing consumers
# Broadening Market
# Lowering selling cost
# Encouraging competition

DEMAND FORECASTING
# Accurate Demand Forecasting is essential
# It enables to produce the required Qtys.
at the right time make available at the right
place
# Enables a firm to arrange various factors of
production

Factors to be considered in Demand

Forecasting

# How far ahead?

*Short run
* Long run

# At what level DF to be done

# General DF or Specific DF?
# Types of products
# Factors peculiar to a market or product

Purposes Of Demand Forecasting

Short Term
# Helps in production scheduling to avoid excess / short supplies
# Helps in reducing/ controlling input factors & Inventory
# Helps in deciding Price Policy
# Helps in setting targets, establishing controls & incentives
# Helps in formulating advertising & promotional strategies
# Helps in forecasting financial requirements

Long Term
# Helps when planning new unit or expansion
# Helps in planning long term financial requirements
# Helps in planning man power requirements

Criteria of a Good Forecasting Method

# It should produce accurate results
# It should be simple to understand
# It should easy to comprehend
# It should be economical
# It should ensure availability

Passive Vs Active Forecasting

METHODS OF DEMAND FORECASTING

1.Survey of Buyers Intentions
2.Delphi Method
3.Expert Opinion
4.Collective Opinion
5.Nave Models
6.Smoothing Techniques
7.Analysis of Time Series and Trend Projections
8.Use of Economic Indicators
9.Judgmental Approach

Nave Model

1)Ft+1 = At
2)Ft+1 = At + ( At At-1)
3)Ft+1 = At At/At-1

NAVE MODLES

Problem:

Consider the following sales data:

Month

10

11

12

Sales
(in
000
Rs)

3050

2980

3670

2910

3340

4060

4750

5510

5280

5504

5810

6100

Nave Model
1)F = A
t+1

1)F

13 =

Rs.61,00,000

Nave Model
2)

F =A +(A A )
t+1

t-1

2) = 6100 + (6100 5810) = 6100 + 290

= Rs.63,90,000

Nave Model
3)F = A A /A
t+1

t-1

3) F 13 = 6100 x (6100/ 5810)

= Rs.64,05,000

SMOOOTHING TECHINQUES
(Higher Form of Nave Model)
Two Techniques
1.Moving Averages
2.Exponential Smoothing

Problem
Date

Sales(Rs.)

1-1-15
2-1-15
3-1-15
4-1-15
5-1-15
6-1-15
7-1-15

46,000
54,000
53,000
46,000
58,000
49,000
54,000

Forecast sales for 8-1-15 and 9-1-15 by moving

Averages method, taking six days data.

Moving Averages
8-1-15

54 + 53 + 46 + 58 + 49 + 54
--------------------------------6

= Rs.52,333
9-1-15

=
=

53 + 46 + 58 + 49 + 54 + 52
----------------------------------6
Rs.52,000

Exponential Smoothing
New Forecast = Last Period forecast
+ a ( Last periods act. Demand last periods forecast)
Where :
a = Smoothing Constant (0 < a < 1)

Ft = Ft 1 + a(At 1 - Ft 1)

Time Period (t)

1
2
3
4
5
6
7
8
9
10

Actual sales ( At)

Rs
60
64
58
66
70
60

Predicted Sales
(F t)

Solution:
64 + 58 + 66 + 70 + 60
F(7) = ---------------------------------5
= 318 / 5
= 63.6
F( 8) = 63.6 + 0.2(70 63) =64.88
F(9) = 66.70 + 0.2(74 64.88) = 66.70
F(10) = 65.76 + 0.2(62 66.70) = 65.76

Time Period (t)

1
2
3
4
5
6
7
8
9
10

Actual sales ( At)

Rs
60
64
58
66
70
60
70
74
62
74

Predicted Sales
(F t)

63.6
64.88
66.70
65.76

Use Of Economic Indicators

This approach bases demand forecasting on certain
economic indicators.
e.g.,
# Construction contracts sanctioned for demand of building materials
# Personal income for the demand of consumer goods.
# Automobile registrations for the demand of car accessories, petrol etc.
This economic indicators are published by specialised agencies like
C.S.O

Analysis of Time Series and Trend Projections

SALES

Least Squares Method

It is assumed that there is a proportional change (linear) in sales
over a period of time. In such a case, the trend line equation
is in linear form. Where this assumption does not hold good,
the equation can be non linear
Certain statistical formulae are used to find the trend line which
best fits the available data. The trend line is the basis to
extrapolate the line for future demand.

Problem: Analysis of Time Series and Trend Projections

Year

1992

Sales(Rs 75
Lakhs)

1994

1996

1998

2000

84

92

98

88

Estimate the sales for the years 2002 and 2004

Estimating linear trend equation

S = x + y(T)
To find the values of x and y, the following normal equations
have to be solved.
S = nx + yT
ST = xT + y T2
S= Sales, T = year number, n = number of years

Year

Year no.
(T)

Sales(S)
ST
Rs. Lakhs

1992

75

1994

84

1996

92

1998

98

2000

88

Sum(T) =

Sum(S)=

Sum(ST)=

T2

Sum(T2 )=

Year

Year no.
(T)

Sales(S)
ST
Rs. Lakhs

T2

1992

75

75

1994

84

252

1996

92

460

25

1998

98

686

49

2000

88

792

81

Sum(T) =25

Sum(S)=437

Sum(ST)=
2265

Sum(T2 )=
165

Solution:
437 = 5X + 25Y ------------ (1)
2265 = 25x +165Y ------------ (2)
2185 = 25X + 125Y -----------(3)
2265 = 25X + 165Y -----------(4)
-80 = -40Y
Y=2
X = 77.4

Trend Values:
T (1) = 77.4 + 2x1 = 79.4
T(3) = 77.4 + 2x3 = 83.4
T(5) = 77.4 + 2x5 = 87.4
T(7) = 77.4 + 2x7 = 91.4
T(9) = 77.4 + 2x9 = 95.4
T(11) = 77.4 +2x11 = 99.4
T(13) = 77.4 + 2x13 = 103.4

YEAR

SALES

Trend

1992

75

79.4

1994

84

83.4

1996

92

87.4

1998

98

91.4

2000

88

95.4

2002

99.4

2004

103.4