MANAGERIAL ECONOMICS

MODULE 3
 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.
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 Demand Analysis
Law of Demand:
Law of demand expresses the
relationship between the Quantity
demanded and the Price of the P Qd
commodity. 1 60
The law of demands states that,
Ceteris Paribus, (other things 2 50
remaining constant) the lower the 3 40
price of a commodity the larger the
quantity demanded of it and vice 4 30
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.

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 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.
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 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.
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 Demand Analysis
Table Showing the IDC & MDC :

Price Quantity demanded by Market Demand

(Per Kg) Individual Customers
A B C D

6 4 3 5 6 19
7 3 2 4 5 14
8 2 1 3 4 10
9 0 0 1 2 03

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 Demand Analysis
Graphical Representation of IDC & MDC

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 Demand Analysis
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)

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 Demand Analysis
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.

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 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).
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 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)

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 Demand Analysis
The situations given below are the cases where
Individuals 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:

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 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)

Consumers Expectation of future price.
Consumers Expectation of future income.

Additional Factors:( Market Demand)

Population
Social, Economic & Demographic distribution of
Consumers.

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 Demand Analysis
Demand Distinctions:

Producers Good and Consumers 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.

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 Demand Analysis
Problems:
1. 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?
2. 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?

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 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

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 Elasticity of Demand
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

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 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).

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 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

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 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).
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 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.

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 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 = .

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 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.
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 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.
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 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
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 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.

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 Demand Forecasting
Criteria of a good Forecasting Method:
Accuracy
Plausibility (Mgt must have confidence
and understanding)
Durability
Availability
Economy (Cost Effectiveness)

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 Demand Forecasting
Methods of Demand Forecasting:
Opinion polling method
Consumers Survey Methods
Complete enumeration survey
Sample Survey
End User (Input Output) Method

Sales force Opinion or Collective Opinion

or Reaction Survey Method
Experts Opinion

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 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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 Demand Forecasting
Barometric / Leading Indicator Technique:
Coincident Indicators and Lagging Indicators.
Leading Indicators
Index Nos (Diffusion & Composite Indicators)
Statistical Methods:
Nave Method
Correlation
Regression Method
Simple Linear Equation
Graphical Method
Least Square Method
Non Linear Equation
Parabolic Regression Model
Logarithmic Regression Model
Multiple Regression Model

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 Demand Forecasting
Methods of Demand Forecasting:
Opinion polling method
Consumers Survey Methods
Complete enumeration survey
Sample Survey
End User (Input Output) Method

Sales force Opinion or Collective Opinion

or Reaction Survey Method
Experts Opinion

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