1. DEMAND

2. 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.
Anirban / Micro Economics / Module 3 / CCIM

3. 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,
“Ceteris Paribus, (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. P Qd 1 60 2 50 3 40 4 30
Anirban / Micro Economics / Module 3 / CCIM

4. 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.
Anirban / Micro Economics / Module 3 / CCIM

5. Demand Analysis 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 :
Individual demand Schedule
Market demand Schedule.
Anirban / Micro Economics / Module 3 / CCIM

6. Quantity demanded by Individual Customers
Demand Analysis
Table Showing the IDC & MDC :
Price
(Per Kg)
Quantity demanded by Individual Customers
Market Demand A B C D 6 4 3 5 19 7 2 14 8 1 10 9 03
Anirban / Micro Economics / Module 3 / CCIM

7. Demand Analysis Graphical Representation of IDC & MDC
Anirban / Micro Economics / Module 3 / CCIM

8. Demand Analysis Demand Function: Individual 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)
Anirban / Micro Economics / Module 3 / CCIM

9. Demand Analysis Market Demand Function:
Qdx = Quantity demanded for product X.
Px = Price of product X
Y = Level of Income
P1..Pn-1 = Prices of all other products
T = Taste of the consumer
A = Advertisement
Ey = Expected future income
Ep = Expected future price
U = Other determinants not covered in the list of determinants.
Market Demand Function:
Qdx = f (Px, Y, P1……. Pn-1, T, A, Ey, Ep, P, D, U, P)
P = Population
D = Distribution of consumers.
Anirban / Micro Economics / Module 3 / CCIM

10. Demand Analysis Causes of downward sloping of Demand Curve:
According to the law of demand there exists a opposite relationship between the PRICE and the QUANTITY DEMANDED, and that is why demand curve is downward sloping.
Let the linear form of demand curve :
P = a + bq, where a, q constant and b < 0, i.e. dp/dq = b < 0 (Assumption), so slope of the demand curve is negative.
The various reasons for this downwards sloping of demand curves are as follows:
Law of Diminishing Marginal Utility and Equi-Marginal utility.
Price Effect.
Income Effect.
Substitution Effect.
Different Use ( Electricity).
Anirban / Micro Economics / Module 3 / CCIM

11. Demand Analysis 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:
Giffen Goods (Giffen Paradox)
Emergency (War etc…)
Conspicuous necessities (Car, Fancy Cloths etc…) and Conspicuous Consumption (Fancy Diamonds, High price shoes, pens etc…)
Depression ( Price and quantity demand is low)
Ignorance Effect (High priced commodity is better in quality)
Speculation (Future change in price)
Anirban / Micro Economics / Module 3 / CCIM

12. Demand Analysis
The situations given below are the cases where Individual’s demand depends on the demands of the other people.
Bandwagon Effect (Positive Network Externality) : Flatter or more elastic
Snob Effect: (Negative Network Externality): Steeper or Less elastic
Veblen Effect : Steeper or Less elastic
Shift (Contraction & Expansion) and Change in Demand:
Anirban / Micro Economics / Module 3 / CCIM

13. Demand Analysis Factors Determining Demand: General Factors:
Price of the product
Taste and Preference
Income
Prices of the related goods
Additional Factors: (Luxury Goods & Durables)
Consumer’s Expectation of future price.
Consumer’s Expectation of future income.
Additional Factors:( Market Demand)
Population
Social, Economic & Demographic distribution of Consumer’s.
Anirban / Micro Economics / Module 3 / CCIM

14. Demand Analysis Demand Distinctions:
Producer’s Good and Consumer’s Good.
Durable and Perishable Good.
Derived Demand Autonomous Demand.
Industry Demand and Firm (Company) Demand.
Total Demand and Market segment Demand
Short Run Demand and Long Run Demand.
Short Run Demand Fluctuations and Long Run Demand Trends.
Anirban / Micro Economics / Module 3 / CCIM

15. Demand Analysis Problems:
The demand equation is Q = 90 – 3P. At what price would no one be willing to buy any of the commodity? If the commodity is given free, what is the quantity demanded? If the price is reduced by 1 unit how much the quantity demanded change?
The demand equation is Q = 25 – 5P. What is the quantity demanded if the price is Rs 3? Assume the demand is 18 units, then what is the corresponding price? What would be the demand if the commodity in question were a free good? What is the highest price anybody will pay for the commodity?
Anirban / Micro Economics / Module 3 / CCIM

16. Elasticity of Demand 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
Anirban / Micro Economics / Module 3 / CCIM

17. Price Elasticity of Demand :
Price Elasticity of Demand measures the degree of responsive ness 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 :
Perfectly elastic demand
Perfectly / Absolutely inelastic demand
Relatively Elastic demand
Relatively inelastic demand
Unit Elastic demand
Anirban / Micro Economics / Module 3 / CCIM

18. Elasticity of Demand Income Elasticity of Demand:
Income Elasticity of Demand measures the degree of responsive ness of the quantity demanded of a commodity due to a change in money income of the consumer.
Em = - (% change in quantity demanded) /
( % change in the Money Income).
Cross Elasticity of Demand:
Income Elasticity of Demand measures the degree of responsive ness 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).
Anirban / Micro Economics / Module 3 / CCIM

19. Elasticity of Demand Factors affecting the Elasticity of Demand :
Nature of the product
Availability of the substitute product
Uses of the commodity
Income Levels
Proportion of Income spent
Postpone consumption
Price levels
Time period
Durability
Taste & Preference
Demonstration Effect
Advertisement
Special Demand (Medicine)
Complementary Goods
Expectation of the future price etc…
Anirban / Micro Economics / Module 3 / CCIM

20. Elasticity of Demand Advertising or Promotional Elasticity of Demand:
Advertising or Promotional Elasticity of Demand measures the degree of responsive ness 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).
Anirban / Micro Economics / Module 3 / CCIM

21. Elasticity of Demand
Importance or Significance of Elasticity of Demand:
Practical Importance:
Production Planning
Theory of Pricing
Theory of distribution
Theory of Foreign exchange
Theory of International Trade
Theory of Public Finance
Declaration of Public Utilities
Theory of Forecasting of Demand
Plenty of Paradox
Theoretical Importance:
MR = AR ( 1 – 1/ e)
Monopoly Market and limits of monopoly power
Determinants of the status of the commodity, complementary or substitute.
Anirban / Micro Economics / Module 3 / CCIM

22. Elasticity of Demand
If the demand function is Q = 225 – 15p. Find the elasticity of demand, when P = 5.
Given the demand function p = 1 – q, find the expression of Ed and the value of Ed when q = ¼.
Anirban / Micro Economics / Module 3 / CCIM

23. Demand Forecasting Meaning:
Forecasting is defined as a study with scientific prediction in regard to an event which may have future demand for goods, services either at the micro level or at the macro level.
Demand forecasting is a prediction or estimation of a future situation, under given condition.
Demand forecasting is all about prediction rather than estimation as the former one predicts about future trends where as later one tries to find out expected present sales level, given the sales determinant.
Anirban / Micro Economics / Module 3 / CCIM

24. Demand Forecasting Steps in Demand Forecasting:
Identification of the objectives.
Estimation of quantity and composition of demand
Estimation of price.
Inventory Control etc…
Determination of the nature of the goods.
Capital Goods
Consumer durables
Non consumer durables
Selection of the proper method of forecasting.
Interpretation of results.
Anirban / Micro Economics / Module 3 / CCIM

25. Demand Forecasting Factors involved in Demand Forecasting: Time period
Levels of forecasting
International level
Macro level
Industry level
Firm level
Purpose of forecasting
Methods of forecasting
Nature of the commodity
Nature of the competition
Anirban / Micro Economics / Module 3 / CCIM

26. Demand Forecasting Objectives: Helping for continuous production
Regular supply for the commodities
Formulation of the price theory
Effective sales performance
Arrangement of finance
Determination of the production capacity
Labour requirement.
Anirban / Micro Economics / Module 3 / CCIM

27. Demand Forecasting Criteria of a good Forecasting Method: Accuracy
Plausibility (Mgt must have confidence and understanding)
Durability
Availability
Economy (Cost Effectiveness)
Anirban / Micro Economics / Module 3 / CCIM

28. Demand Forecasting Methods of Demand Forecasting:
Opinion polling method
Consumer’s Survey Methods
Complete enumeration survey
Sample Survey
End User (Input – Output) Method
Sales force Opinion or Collective Opinion or Reaction Survey Method
Expert’s Opinion
Anirban / Micro Economics / Module 3 / CCIM

29. Demand Forecasting Mechanical Extrapolation / Trend Projection Method:
Graphical ( Fitting trend line by observation)
Statistical (Semi average)
Algebraic / Least Square (Straight Line, Parabolic & Logarithmic or Exponential)
Smoothing Techniques (Moving Average & Exponential Smoothing)
ARIMA (Auto regressive integrated moving average or Box – Jenkin Technique)
Econometric Models:
Simultaneous Equation Model:
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30. Demand Forecasting Barometric / Leading Indicator Technique:
Coincident Indicators and Lagging Indicators.
Leading Indicators
Index Nos (Diffusion & Composite Indicators)
Statistical Methods:
Naïve Method
Correlation
Regression Method
Simple Linear Equation
Graphical Method
Least Square Method
Non Linear Equation
Parabolic Regression Model
Logarithmic Regression Model
Multiple Regression Model
Anirban / Micro Economics / Module 3 / CCIM

31. Demand Forecasting Methods of Demand Forecasting:
Opinion polling method
Consumer’s Survey Methods
Complete enumeration survey
Sample Survey
End User (Input – Output) Method
Sales force Opinion or Collective Opinion or Reaction Survey Method
Expert’s Opinion
Anirban / Micro Economics / Module 3 / CCIM