PRESENTATION ON DEMAND ANALYSIS

GROUP MEMBERS: ANKUR GUPTA (69) PRIYANK SOOD LINU KOSHI SAVITA RAWAT DEEPANSHU AMBERIA(101)

MEANING AND DEFINITION OF DEMAND Demand in economics means a desire to possess a good

supported by willingness and ability to pay for it.

If you have a desire to buy a certain commodity, say a car, but you do not have the adequate means to pay for it, it will simply be a wish, a desire or a want and not demand. Demand is an effective desire, i.e., a desire which is backed by willingness and ability to pay for a commodity in order to obtain it.

In the words of Prof. Hibdon:  "Demand means the various quantities of goods that would be

purchased per time period at different prices in a given market".

CHARACTERISTICS OF DEMAND There are thus three main characteristic's of demand in

economics. (i) Willingness and ability to pay- Demand is the amount of a

commodity for which a consumer has the willingness and also the ability to buy.

(ii) Demand is always at a price-If we talk of demand without reference to price, it will be meaningless. The consumer must know both the price and the commodity. He will then be able to tell the quantity demanded by him.

(iii) Demand is always per unit of time-The time may be a day, a week, a month, or a year.

Example: For instance, when the milk is selling at the rate of $15.0 per liter,

the demand of a buyer for milk is 10 liters a day. If we do not mention the period of time, nobody can guess as to how much milk we consume? It is just possible we may be consuming ten liters of milk a week, a month or a year.  

TYPES OF DEMAND The major classifications of demand are as

follows:

1. Individual and market demand 2. Demand for firm's product and industry's

products 3. Autonomous and derived demand 4. Demand for durable and non-durable

goods 5. Short-term and long-term demand

1. INDIVIDUAL AND MARKET DEMAND FOR A COMMODITY"The individuals demand for a commodity is the amount of a commodity which the consumer is willing to purchase at any given price over a specified period of time".

Price (p) is here an independent variable and quantity (q) is dependent variable.

CONTD.

Individual's Demand Schedule:  The demand schedule of an individual for a commodity is a

list or table of the different amounts of the commodity that are purchased from the market at different prices per unit of time. An individual demand schedule for a good say shirts is presented in the table below:

Individual Demand Schedule for Shirts:

Price Per Shirt ($) 100 80 60 40 20 10

Quantity Demanded Per Year

57 10 15 20 30

According to this demand schedule, an individual buys 5 shirts at $100 per shirt and 30 shirts at $10 per shirt in a year.

dxQ

INDIVIDUAL DEMAND CURVE Demand curve is a graphical

representation of the demand schedule.

According to Lipsey:

"The curve, which shows the relation between the price of a commodity and the amount of that commodity the consumer wishes to purchase is called demand curve".

 

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MARKET DEMAND OF A COMMODITY The market demand for a commodity is

obtained by adding up the total quantity demanded at various prices by all the individual over a specified period of time in the market. It is described as the horizontal summation of the individuals demand for a commodity at various possible prices in market.

MARKET DEMAND SCHEDULE The horizontal summation of individuals demand

for a commodity will be the market demand for a commodity.

In a market, there are a number of buyers for a commodity at each price. In order to avoid a lengthy addition process, we assume here that there are only four buyers for a commodity who purchase different amounts of the commodity at each price.

A market Demand Schedule in a Four Consumer Market:

Price ($) 

Quantity Demande

d

Quantity Demand

ed

Quantity Demande

d

Quantity Demande

d

Total Quantity Demande

d Per Week (in thousand

s) 

First Buyer

 

Second Buyer

Third Buyer

Fourth Buyer

10 8 6 4 2

1015254060

13203035 50

6 9

10 15 30

11162030 40

40 60 85 120180

 

MARKET DEMAND CURVEMarket demand curve for a Commodity is the

horizontal sum of individual demand curves of all the buyers in a market. This is illustrated with the help of the market demand schedule given above.

2. DEMAND FOR FIRM’S PRODUCT AND INDUSTRY’S PRODUCT The quantity of a firm's yield, that can be

disposed of at a given price over a period refers to the demand for firm's product. The aggregate demand for the product of all firms of an industry is known as the market-demand or demand for industry's product.

3. AUTONOMOUS DEMAND AND DERIVED DEMAND An Autonomous demand for a product is one

that arises independently of the demand for any other good whereas a derived demand is one, which is derived from demand of some other good.

4. DEMAND FOR DURABLE AND NON-DURABLE GOODS

Durable goods are those goods whose total utility is not exhausted in single or short-run use. Such goods can be used continuously over a period of time. Durable goods may be consumer goods as well as producer goods. Durable consumer goods include clothes, shoes, house furniture, refrigerators, scooters, and cars.

On the other hand, non-durable goods are those goods, which can be used only once such as food items and their total utility is exhausted in a single use. This category of goods can also be grouped under non-durable consumer and producer goods. All food items such as drinks, soap, cooking fuel, gas, kerosene, coal and cosmetics fall in the former category whereas, goods such as raw materials', fuel and power, finishing materials and packing items come in the latter category.

5. SHORT-TERM AND LONG-TERM DEMAND Short-term demand refers to the demand for goods

that are demanded over a short period. In this category fall mostly the fashion consumer goods, goods of seasonal use and inferior substitutes during the scarcity period of superior goods.

The long-term demand, on the hand, refers to the demand, which exists over a long-period. The change in long-term demand is visible only after a long period. Most generic goods have long-term demand. For example, demand for consumer and producer goods, durable and non-durable goods, is long-term demand, though their different varieties or brands may have only short-term demand.

LAW OF DEMAND We have stated earlier that demand for a

commodity is related to price per unit of time. It is the experience of every consumer that when the prices of the commodities fall, they are tempted to purchase more. Commodities and when the prices rise, the quantity demanded decreases. There is, thus, inverse relationship between the price of the product and the quantity demanded. The economists have named this inverse relationship between demand and price as the law of demand.

E. Miller writes: "Other things remaining  the same, the quantity

demanded increases with every fall in the price and decreases with every rise in the price".

LAW OF DEMAND CURVE/DIAGRAM"This curve, which shows the relation between the price of a commodity and the amount of that commodity the consumer wishes to purchase is called demand curve".

ASSUMPTIONS OF LAW OF DEMANDAccording to Prof. Stigler and Boulding: There are three main assumptions of the Law:          (i) There should not be any change in the tastes of the

consumers for goods (T).

(ii) The purchasing power of the typical consumer must remain constant (M).

 (iii) The price of all other commodities should not vary

(Po).

EXAMPLE OF LAW OF DEMAND If there is a change, in the above and other assumptions, the law May not hold true. For example, according to the law of demand, other things being equal quantity demanded increases with a fall in price and diminishes with rise to price. Now let us suppose that price of tea comes down from $40 per pound to $20 per pound. The demand for tea may not increase, because there has taken place a change in the taste of consumers or the price of coffee has fallen downas compared to tea or the purchasing power of the consumers has decreased, etc., etc. From this we find that demand responds to price inversely only, if other thing remains constant. Otherwise, the chances are that, the quantity demanded may not increase with a fall in price or vice-versa.  Demand, thus, is a negative relationship between price and quantity.

SLOPE OF DEMAND CURVE The fundamental reasons for demand curve to slope downward

are as follows:i. Law of diminishing marginal utility-When a consumer

purchases more units of a commodity, its marginal utility declines. The consumer, therefore, will purchase more units of that commodity only if its price falls. Thus a decrease in price brings about an increase, in demand. The demand curve, therefore, is downward sloping.

ii. Income effect- Other things being equal, when the price of a commodity decreases, the real income or the purchasing power of the household increases. The consumer is now in a position to purchase more commodities with the same income.

iii. Substitution effect- if the price of a commodity increases the relative price of the substitute goods decreases as a result of which the demand for the commodity decreases.

iv. Entry of new buyers- When the price of a commodity falls, its demand not only increases from the old buyers but the new buyers also enter the market.

 

LIMITATIONS/EXCEPTIONS TO LAW OF DEMANDi. Prestigious goods: There are certain commodities like

diamond, sports cars etc., which are purchased as a mark of distinction in society. If the price of these goods rise, the demand for them may increase instead of falling. 

ii. Price expectations: If people expect a further rise in the price particular commodity, they may buy more in spite of rise in price. The violation of the law in this case is only temporary.

iii. Ignorance of the consumer: If the consumer is ignorant about the rise in price of goods, he may buy more at a higher price.

iv. Giffen goods: If the prices of basic goods, (potatoes, sugar, etc) on which the poor spend a large part of their incomes declines, the poor increase the demand for superior goods, hence when the price of Giffen good falls, its demand also falls. There is a positive price effect in case of Giffen goods.

DEMAND FUNCTION

Where = quantity demanded of the good or service P = price of the good or service M = consumers’ income(generally per capita) = price of related goods or services T = taste patterns of consumers = expected price of the good in some future

period N = number of consumers in the market

),,,,,( NPTPMPFQ ERD

DQ

RP

EP

DETERMINANTS OF DEMANDPrice factor Non-price factors1. Prices of the commodity- The functional

relationship between price of a commodity and its demand is represented by price demand.

2. Prices of the related goods or products-substitutes, complements

The functional relationship between demand for a commodity and price of its related goods is represented by cross demand.3. Income of the consumer- the effect on demand

due to income of a consumer on the quantity demanded depends on the nature of the commodity.

3 categories of goods-NecessitiesInferior goodsLuxury/Normal goods

Contd..4. Consumers' taste and preferences-directly related to the quantity demanded.

5. Advertisement Expenditure

6. Consumers’ Expectations about future price rise.

7. Demonstration Effect-Influence on consumers by buying pattern of other consumers.

8. Consumer-Credit FacilityIf it is easily available then the demand will increases and vice-a-versa.

9. Distribution of National Income

MOVEMENT V/S SHIFT IN DEMAND CURVE Changes in demand for a commodity can be shown through the

demand curve in two ways:(1) Movement Along the Demand Curve and (2) Shifts of the

Demand Curve.

(1) Movement Along the Demand Curve: Demand is a multivariable function. If income and other

determinants of demand such as tastes of the consumers, changes in prices of related goods, income distribution, etc., remain constant and there is a change only in price of the commodity, then we move along the same demand curve.

In this case, the demand curve remains unchanged. When, as a result of change in price, the quantity demanded increases or decreases, it is technically called extension and contraction in demand.

CONTD..

Here the price of a commodity falls from $8 to $2. As a result, therefore, the quantity demanded increases from 100 units to 400 units per unit of time. There is extension in demand by 300 units. This movement is from one point price quantity combination (a) to another point (b) along a given demand curve. On the other hand,if theprice of a good rises from $2 to $8, there is contraction in demand by300 units.

SHIFTS IN DEMAND CURVE Demand, as we know, is determined by many factors. When

there is a change in demand due to one or more than one factors other than price, results in the shift of demand curve.

  For example, if the level of income in community rises, other

factors remaining the same, the demand for the goods increases. Consumers demand more goods at each price per period of me (rise or Increase in demand). The demand curve shifts upward from he original demand curve indicating that consumers at each price purchase more units of commodity per unit of time.

  If there is a fall in the disposable income of the consumers or

rise in the prices of close substitute of a good or decline in consumer taste or non-availability of good on credit, etc, there is a reduction in demand (fall or decrease in demand). The fall or decrease in demand shifts the demand curve from the original demand curve to the left. The lower demand curve shows that consumers are able and willing to buy less of the good at each price than before.

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