Indian economic environment 2. demand and the consumer

2Demand and

the Consumer

Demand and the Firm

• Market demand– competitive markets and the market price

– imperfectly competitive markets

• Demand for the firm– price takers

• horizontal demand curve (perfectly elastic)

• effect of changes in market demand and supply

– price makers• downward sloping demand curve

• important for firms to know the price elasticity

• in firms' interests to make demand less elastic

Understanding Consumer Behaviour

• Utility and consumer satisfaction

• Total and marginal utility

– diminishing marginal utility

• Marginal utility and the demand curve

– an individual’s demand curve.

MU = D

MU, P

QO Q1

P1

aConsumption at Q1

where P1 = MU

Deriving an individual person’s demand curve

Q2O

P1

Q1

a

P2

b

Consumption at Q2

where P2 = MU

MU, P

Q

MU = D


P2

Q2O

P1

Q3Q1

a

P3

c

Consumption at Q3

where P3 = MU

b

MU, P

Q

MU = D







– an individual’s demand curve

– the firm's demand curve








• the shape of the demand curve








• the shape of the demand curve

• shifts in the demand curve


• The problem of imperfect consumer information– risk and uncertainty

• Insurance: a way of removing risks– how insurers spread risks

• the law of large numbers

• importance of the independence of risks

– problems for insurers• adverse selection

• moral hazard

Estimating and Predicting Demand

• Methods of collecting data

– Market observations

• seeing how demand has changed over time

• seeing how possible determinants of demand have changed over time

• using the information to estimate determinants of demand

– but past relationships may not hold in future

• Methods of collecting data (cont.)– Market surveys

• advantages

• conditions for accuracy of market surveys– random sample

– clarity of the questions

– avoidance of leading questions

– truthful response

– stability of demand

– Market experiments• types of market experiment

• problem of possible lack of realism



• Forecasting demand– Simple time-series analysis

• use of simple time-series analysis• limitations of simple time-series analysis

– The decomposition of time paths• trends• cyclical fluctuations• seasonal fluctuations• short-term shifts in demand or supply• limitations of simple the analysis

0 1 2 3 4 5 6 7 8 9 10

The decomposition of time pathsS

ale

s (n

umbe

r of

jum

per

s)

Years

Trend

Cyclical

SeasonalActual





– Barometric forecasting





– Barometric forecasting• using leading indicators





– Barometric forecasting• using leading indicators• limitations of barometric forecasting

Influencing demand

• Product differentiation– Features of a product

• technical standards

• quality standards

• design standards

• service characteristics

– Vertical and horizontal product differentiation

– Market segmentation• targeting specific parts of the market

• niche markets

• Marketing the product

– Product / market strategy

• alternative approaches

• a growth vector matrix

– market penetration

– product development

– market development

– diversification

Influencing demand

Present New

Present

New

Product

Market

A B

C D

Growth vector components

Marketpenetration

DiversificationMarket

development

Productdevelopment

• Marketing the product (cont.)

– The marketing mix

• product considerations

• pricing considerations

• place considerations

• promotion considerations

Influencing demand

• Advertising

– Aims of advertising

• shifting the demand curve to the right

• making demand less price elastic

– creating greater brand loyalty

Influencing demand

P

Q O

D1

Effect of advertising on the demand curve

Q1

P1

Advertising shifts thedemand curve to the rightand makes it less elastic

D2

P

Q O

D1

Q2Q1

P1


Q2

D2

P

Q O

D1

Q3Q1

P2

P1


• Advertising





– Effects of advertising

Influencing demand

• Advertising






• advertising and the long run

Influencing demand

Advertising and the long run

Sales

Habit sales

Direct effecton sales

Long-termeffect

Sal

es (

wee

kly)

Time

Advertisingcampaign

t1 t2 t3 t4 t5

s2

s3

s1

Sales

• Advertising






• advertising and the long run

• advertising and company growth

Influencing demand

Product image andcompany reputation

Relative quality of offering Relative price

Advertising expenditure relative to competitors

(Relative) customer value

Real market growth

Growth

Market share

Profit margins

Advertising, profit margins and company growth

• Advertising (cont.)

– Assessing the effects of advertising

• benefits of advertising

– to firms

– to consumers

• costs of advertising

– to firms

– to consumers and society generally

Influencing demand

Indian economic environment 2. demand and the consumer

Education

Transcript of Indian economic environment 2. demand and the consumer