Demand Analysis

Dr. Utpal Chattopadhyay

Asst. Professor,
NITIE, Mumbai
1
 Meaning of Demand

Effective Demand has to fulfill

three basic characteristics

• Desire to buy
• Willingness to pay
• Ability to pay
Demand for a commodity has
always reference to:
•A Price
•A Period of time
•A Place

2
Types of Demand

 Demand for Consumers’ &

Producers’ Goods
 Demand for Perishable &
Durable Goods
 Autonomous & Derived Demand
 Individual & Market Demand
 Firm & Industry Demand
 Short-term & long-term
Demand
 Domestic & Overseas Demand

3
 Factors affecting
Demand

 Price of goods:
o Own Price
o Prices of related products
 Prices of substitute goods
 Prices of complementary goods
 Income of consumers
 Consumers’ tastes & preferences
 Future Expectations
o Income
o Price
 No. of consumers
 Distribution of consumers

4
Demand Function

A Typical demand function:

Dx= f (Px,Py, I, T,E,C,u)

Dx= Demand for good X

Px= Price of good X
Py= Price of other goods
I= Income
T= Tastes & preferences
E= Future expectations
C= No. of consumers & their distribution
u=residual factors

A simplified version:
Dx= f (Px)
with ceteris paribus assumption

5
 Demand Curve

A Demand curve shows the amount of the

commodity buyers would like to purchase at
different prices. It depends on prices (own
as well as related commodities), income,
tastes and no. of consumers.
D = F (P) with tastes, incomes, prices
of other goods and no. of consumers etc.
Price held constant.

Law of Demand says ‘More (less) will

D
bought at lower (higher) price.’
P1

P2 Demand

P3

D
Quantity
Q1 Q2 Q3

6
 Supply Curve

A Supply curve shows the amount of the

commodity sellers would like to offer at
various prices. It depends on product price,
input prices and technology.
S = F (P) with input prices and
technology held constant.

Price S
Supply
P1

P2 ‘Quantity supplied
increases as the
price increases ‘
P3

Quantity
Q1 Q2 Q3

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 Equilibrium Price

Equilibrium price is that price where the quantity

demanded equals the quantity supplied (market
clearing price). In the short run market price may not
equal equilibrium price. But in the long run market
price approximates the equilibrium price

Price

S
D

Pe Equilibrium Price

S D
Quantity
Qe

8
 Market Mechanism

When market price (Pm1) is above equilibrium price

(Pe) there is Excess Supply (or Surplus). Producers
reduce price. Quantity demanded increases and
quantity supplied decreases. Market continues to
adjust until Pe is reached.

Price When Pm2 < Pe,

S there is Excess
Demand (or
D Excess Supply shortages) in the
Pm1
market. This puts
upward pressure
Pe on price and it
continues to rise
Pm2 till price reaches
to Pe.
Excess Demand
S D
Quantity
Qe

9
 Stability of Equilibrium

Walarasian Vs. Marshallian Stability

Stability of a market based on price adjustment
is called Walrasian Stability, while the one based
on quantity adjustment is called Marshallian
Stability

Price

D S At Q1, demand price

(Pd) exceeds supply
Pd price (Ps). Thus more
of the commodity will
Pe Market Equilibrium be made available in
the market until Q
reaches Qe. This is
Ps ‘Marshallian Stability’.

S D
Quantity
Q1 Qe

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Change in Demand

 Extension/contraction in
demand (movement along
a demand curve)
 caused by changes in
own price
 Increase/ decrease in
demand (shift in demand
curve)
 caused by changes in
other determinants of
demand

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 Movement along a
Demand Curve

Impact of change in own price

Price on demand

Dx

P3

P1
P2

Dx

Quantity
D3 D1 D2

Income and Substitution Effects of a

(own) price change

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 Shifts in Demand Curve

An rightward/upward (leftward/downward)
shift in demand curve results in an increase
(decrease) in equilibrium price.

Factors affecting shifts in

Demand
Price •Income
D2 •Price of related goods
D1 S
•Consumers’ tastes &
preferences
D3
P2
•Expectations
P1
•Others (bandwagon effect )
P3
D2
D1
S D3
Quantity
Q3 Q1 Q2

13
Change in Income &
Demand

 For normal (superior) goods, if

income increases demand also
increases

 For inferior goods, demand falls

when income increases (why?)

 What is a Giffen good?

• An inferior good for which a rise in its
price makes people buy even more of that
good
• This is because for such goods a strong
income effect outweighs the substitution
effect of a price change
• Law of Demand does not hold good in
case of Giffen goods (Other exceptions to
the Law include: luxury/ status goods,
expectations on future prices etc.)

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Engel Curve

 Named after the 19th century German

Statistician Ernst Engel
 It shows how the quantity demanded of a
good changes with change in consumers’
income level
 It states that the lower a family’s
income, the greater is the proportion of it
spent on food
 The conclusion was based on a budget
study of 153 Belgian families
 For normal goods, the Engel curve has a
positive slope. That is, as income
increases, the quantity demanded
increases. For inferior goods , the Engel
curve has a negative slope, meaning that
as a consumer earns more income,
he/she will be able to buy better goods
and thus stop buying the inferior goods

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Change in Prices of
Related Goods & Demand

 For substitute goods, if

price of one good (say X)
increases demand for the
other (say Y) also increases

 In case of complementary
goods, if price of one good
(say A) increases demand
for the other (say B) falls

16
 Shifts in Supply

An rightward (leftward) shift in supply curve

results in an decrease (increase) in
equilibrium price.
Factors affecting shifts in
supply
•Input Prices
Price •Technology
S3
•Price of substitutes
D1 S1
•Taxes
S2
P3 •Market speculation

P1 •No. of firms
P2 •Others (e.g. weather for
agricultural products)
S3
D1
S1
S2 Quantity
Q3 Q1 Q2

17
 Simultaneous Shifts in
Demand and Supply

A hypothetical case where both

demand and supply shift rightward.

D2
S1
D1 S2

P1’
E1
P1 E2
P1”

D2
S1
D1
S2
Q1 Q1’ Q1” Q2

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