DEMAND

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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: Anirban / Micro Economics / Module 3 / CCIM

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

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