MANAGERIAL ECONOMICS

INDORE MANAGEMENT INSTITUTE

MBA I SEM.

Session 2:
Demand Analysis
Objectives:To understand 1. Meaning of Demand 2. Law of Demand. 3. Determinants of Demand

4. Exception to Law of Demand

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What is Demand?
Demand for a commodity refers to the quantity of the commodity which an individual consumer or a household is willing to purchase per unit of time at a particular price. Demand = a) Desire to purchase + b) Ability to Pay i.e.purchasing power + c) Willingness to Spend. Demand : A relative concept backed by Time and Price like per kg per week.
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Types of Demand?
1 Individual or Household Demand

2 Market Demand
Are reflected in the form of Demand Schedule and demand curve

Determinants of Demand
1 Price of the commodity: Inverse Relationship (Law of Demand ) 2 Income of the Consumer : a) Necessaries Independent

b) Comforts and Luxuries- Direct Relationship

c) Inferior Goods Inverse Relationship 3 Price of Related Goods: a) Complementary Goods- Inverse Relationship

b) Substitutes Goods Direct Relationship

4 Tastes and Preferences : As per Business ,Age, Family composition etc. 5 Consumers Expectation: Related to Future Income and Prices

6 Advertisement Effect
7 Population Composition 8 Fashion , Climatic condition, Inventions etc.
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Law of Demand
Law states that: Ceteris Paribus, the higher the price of a Commodity ,the smaller is the quantity demanded and Lower the price ,larger the quantity demanded.

Points to be remembered: 1 Assumption: Other things being Equal. 2 Negative or Inverse Relationship between Price and Quantity. 3 Downward Slopping Demand Curve

Why Demand Curve Slopes Downwards ?

Traditional Approach:
1 THE LAW OF DIMINISHING MARGINAL UTILITY: As you consume more and more ,utility goes on diminishing .A consumer tries to maximize his satisfaction by equalising the marginal utility of the commodity with its price and attained sooner at Higher price. 2 CHANGE IN THE NUMBER OF CONSUMERS: If a commodity becomes cheaper consumers increases and vice versa. 3 DIVERSE USES OF A COMMODITY: Ex. Electricity

Modern Approach:
1 Income Effect : Any change in the price of a commodity affects purchasing power of a household.
2 Substitution Effect: Ex. Tea and Coffee. 7

CHANGE IN QUANTITY DEMANDED VS CHANGE IN DEMAND

CHANGE IN QUNATITYDE MANDED CHANGE IN DEMAND

1 Expansion and Contraction of Demand 2 Movement along Demand Curve 3 Due to Change in Price

1 Increase (towards right) and decrease in demand ( towards left) 2 Shift in Demand Curve 3 Due to Change in Other Factors

Demand function (equation):

Quantity of X demanded, QdX = f (PX; PY, I, preference, and others)
Factor effecting quantity demanded Factor effecting demand

Exceptions to the Law of Demand Exceptions denotes direct relationship between Price and Goods.

1 Giffen Goods: Named after Sir Robert Giffen , also called INFERIOR Goods. Ex. Potato
Reason: Due to Income Effect.

2 Conspicuous Consumption: Ex. Diamond, Expensive Articles

Reason: Due to Aristocratic Desire 3 Speculation: Ex. Stock Market

Reason: Due to Expectation of future change in the Price

4 Conspicuous Necessities: Ex. TV , Cars, Refrigerators etc. Reason: Due to Expectation of Fashion and Status symbol

5 Emergencies: Ex. War , Famine etc.

6 Ignorance: Due to impression that a high priced goods is better than a 9 low priced one.