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Theoretical foundation for demand analysis Consumers equilibrium : Cardinal Utility: Law of Diminishing marginal Utility Law of equimarginal Principle.

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Presentation on theme: "Theoretical foundation for demand analysis Consumers equilibrium : Cardinal Utility: Law of Diminishing marginal Utility Law of equimarginal Principle."— Presentation transcript:

1 Theoretical foundation for demand analysis Consumers equilibrium : Cardinal Utility: Law of Diminishing marginal Utility Law of equimarginal Principle Consumers equilibrium and derivation demand curve Ordinal utility Analysis: Indifference Curve, Budget line, Equilibrium using indifference curves Changes in Equilibrium Due to change in Income – ICC Curve - Engel Curve Due to change in Price - PCC Curve – Demand Curve DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

2 1. Demand Analysis : Meaning of demand : No. of units of a commodity that customers are willing to buy at a given price under a set of conditions. Demand function : Q d = f (P, Y, P r W) Demand Schedule : A list of prices and quantitives and the list is so arranged that at each price the corresponding amount is the quantity purchased at that price Demand curve : Slops down words from left to right. Law of demand : inverse relation between price and quantity Exceptions to the law of demand : Giffens paradox Thorsten Veblen's Doctrine of conspicuous consumption Price expectations DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

3 Elasticity : Measure of responsiveness - Q d = f (P, Y, P r W) E = percentage change in DV/ percentage change in IV Concepts of price, income, and cross elasticity Price Elasticity : Ep = Types of price elasticity : 1. Perfectly elastic demand Ep = 2. Elastic demand Ep > 1 3. Inelastic demand Ep < 1 4. Unit elastic demand Ep = 1 5. Perfectly inelastic demand Ep = 0

4 DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

5 Elasticity and expenditure : If demand is elastic a given fall in price causes a relatively larger increase in the total expenditure. P - TR when demand is elastic. P - TR when demand is inelastic. P - TR remains same when demand is Unit elastic. Elastic Demand Unit Elastic Demand Inelastic Demand PQPQPQPQPQPQ 10 1,000 units 10, ,000 units 10, ,000 units 10, ,000 units18, ,111 units 10, ,050 units 9, ,000 units 24, ,250 units 10, ,100 units 8,800 DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

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7 Measurement of elasticity : Point and Arc elasticity

8 DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao Measurement of elasticity : Point Elasticity

9 Arc elasticity : Ep = PRICE QUANTITY PRICE QUANTITY DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

10 Elasticity when demand is linear

11 DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao Elasticity and Change in Linear Demand :

12 DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao Determinants of elasticity : (1) Number and closeness of its substitutes, (2) the commoditys importance in buyers budgets, (3) the number of its uses. Other Elasticity Concepts Income elasticity = Cross elasticity =

13 DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao Forecasting : Meaning and Importance Types of Forecast : 1. Short Run Forecast 2. Long Run Forecast 1. Forecasting the Demand for existing Products Methods of Forecasting 1. Survey of Buyers intensions a. Complete Enumeration b. Sample Survey 2. Survey of Experts Opinions a. Opinions of Sales Persons b. Opinions of Experts/Wholesalers/Dealers 3. Market experiments a. Pilot Testing b. Laboratory Experiments 4. Delphi Method 5. Statistical Methods a. Trend Analysis b. Regression Analysis

14 DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao Trend Projection Method: YearSales (in 000 Rs.) Y Deviations X XY (2 x 3) X2X2 Trend Values n = 7Y=50X=0XY=24X 2 =28 The equation for the straight line trend = Y = a + bX To determine the values of a and b the following two equations are to be solved. Equation -1: Y = na + b X Equation – 2: XY = a X + b X 2 50 = 7a + b x 0 24 = x 0 + b x = 7a, = 7a = 50, a = 50/7 = = 28b, 28b = 24 b = 24/28 = Projected sales for the year 1990 = Y = a + bX x 7 =

15 2. Forecasting the Demand for new Products a. Evolutionary Approach b. Substitute Approach c. Growth-Curve Approach d. Opinion Poll Approach e. Sales Experience Approach f. Vicarious Approach 3. Criteria of a Good Forecasting Method: a. Accuracy b. Plausibility c. Durability d. Flexibility e. Availability f. Economy DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao


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