Demand analysis

What is demand?
-demand is desire backed by the ability

to pay & the willingness to pay at a certain time and a certain price

Determinants of demand
1. 2. 3. 4. 5. 6. 7.

Price of the commodity Price of related goods Income of the consumer Tastes & preferences of the consumer Expectation of price changes in future Size of population Distribution of income

Demand function
Dx={ Px,Pr,Y,T,E,P,Yd}
Dx= demand for the commodity Px= price of the commodity Pr=price of related goods Y= income of the consumer T = tastes & preferences E= expectations of future price changes P= composition of population Yd= distribution of income

States of demand

Negative demand No demand Latent demand Declining demand Irregular demand Full demand Overfull demand Unwholesome demand

Law of demand
-other things being equal , the demand for a commodity goes up when the price goes down and goes down when the price goes up.
i.e. Demand is inversely proportional to price

Assumptions to the law of demand

1. 2. 3. 4.

No change in price of related goods No change in income No change in taste & preferences No expectations of future change in prices

Demand schedule & demand curves

Individual

demand schedule Market demand schedule

Individual demand schedule

Price per unit 1 2 3 4 5 Quantity demanded 35 30 25 20 15

Market demand schedule

Price per Qty. dem. Qty. dem. Qty. dem. Market unit demand A B C

10 12 14 17 20

50 45 40 35 30

25 22 20 18 15

100 83 70 57 45

175 150 130 110 90

Why does demand curve slope downwards?

1. 2. 3. 4. 5.

Law of diminishing marginal utilty Income effect Substitution effect Diverse uses of commodity Size of consumer groups

Exceptions to the law of demand

Giffen goods Distinct or conspicuous goods ( veblen effect) Ignorance Goods of low value Speculative goods

Change in quantity demanded

Movement

along the demand curve (extension & contraction of demand)

Shift

of the demand curve (increase & decrease in demand)

Elasticity of demand
The elasticity of demand measures the responsiveness of the quantity demanded of a good , to change in its price, price of other goods and changes in consumers income

Types of elasticity of demand

Price

elasticity Income elasticity Cross elasticity of demand Advertising elasticity of demand

Price elasticity of demand

Degrees of Price Ed Unit elasticity of demand {Ed=1} Perfectly elastic demand {Ed=} Perfectly inelastic demand {Ed=0} More than unit elastic {Ed>1} Less than elastic {Ed<1}

Measurement of price elasticity of demand

Proportionate method Point method

Factors determining price Ed

Nature of commodity Availability of substitutes Goods with multiple uses Postponement of use Income Habits, tastes Proportion of income spent Price level Joint demand

Income elasticity of demand

Degrees Positive income elasticity unit elasticity less than unity more than unity Negative income elasticity Zero income elasticity

Cross elasticity of demand

Degrees Positive Negative Zero

Advertising elasticity of demand

Importance of elasticity of demand

Price determination under monopoly Price discrimination Taxation policies International trade Wage determination