DEMAND ANALYSIS

WHEN DO ROSES COST MORE AND WHY?

(1) On Valentine’s day

(2) During rest of the year

 WHEN ARE TV ADS COSTLIER AND WHY?

(1) During the normal course

(2) During a particular event/ sport

DEMAND

 Quantity of commodity which an individual consumer or

a household is willing (& able) to purchase during a
period of time, at a particular price

 Effective demand- demand backed by purchasing

power
DEMAND

Demand for a commodity implies:

 Desire of consumer to buy product

 Willingness to buy product

 Sufficient purchasing power in possession to buy product

TYPES OF DEMAND RELATIONS
1. Generalised demand function
QdX = f(PX, M, PY, T, Ep, N)
where:
QdX: quantity demanded of commodity X by an
individual per time period
PX : price per unit of commodity X
M: consumer’s income
PY: price of related (substitute/ complementary)
T: tastes of the consumer
Ep: Consumer’s expectations about future
prices
N: No of consumers in market

QdX = a + b PX + c M + d PY + e T + f Ep+ g N

Contd…
SUMMARY OF GENERALISED DEMAND FUNCTION
VARIABLE RELATION TO Qd SIGN OF SLOPE
PARAMETER
P Inverse b = QdX/PX < 0

M Direct for normal goods c = QdX/M> 0

Inverse for inferior goods c = QdX/M< 0

Py Direct for substitute goods d = QdX/PY > 0

Inverse for complementary d = QdX/PY < 0

goods
T direct e = QdX/T > 0
Ep direct f = QdX/Fp > 0
N direct g = QdX/N >0
Factors affecting demand

 http://articles.economictimes.indiatimes.com/2015-07-
20/news/64638777_1_dry-weather-pulses-palm-oil

 http://articles.economictimes.indiatimes.com/2015-07-
20/news/64638768_1_power-generation-capacity-capacity-
addition-power-purchase
 As the cost of running gas-guzzling tractors soars, even-toed ungulates are
making a comeback, raising hopes that a fall in the population of the desert
state’s signature animal can be reversed.
 It’s excellent for the camel population if the price of oil continues to go up
because demand for camels will also go up,” says Ilse Köhler-Rollefson of the
League for Pastoral Peoples and Endogenous Livestock Development. “Two
years ago, a camel cost little more than a goat, which is nothing. The price has
since trebled…
 ”Market prices for these “ships of the desert”, which crashed with the growing
affordability of motorised transport, are rising again as oil prices soar.
 A sturdy male with a life expectancy of 60-80 years now fetches up to Rs40,000
($973), compared to Rs5,000-Rs10,000 three years ago, according to
Hanuwant Singh of the Lokhit Pashu-Palak Sansthan, a non-profit welfare
organisation for livestock keepers. Entry-level tractors cost around $4,000.
TYPES OF DEMAND RELATIONS
2. Direct demand function

 Shows relation b/w quantity demanded & price of product

when all other factors affecting demand are held constant
at specific values.
 Q = f (P)

Example: Given that

Qd = 1800 – 20P + 0.6M – 50 Py
M = 20000, Py = 250
Find the direct demand function

Solution: Qd = 1300 – 20P

DEMAND SCHEDULE: Tabular representation showing
different quantities of goods that are being demanded at different price levels,
cetirus peribus

PRICE PER CUP NO OF CUPS OF

OF TEA (Rs) TEA DEMANDED
7 1
6 2
5 3
4 4
3 5
2 6
1 7
DEMAND CURVE: Locus of points showing various alternative
combinations of price & quantity (inverse relation)

PRICE

O X
QUANTITY DEMANDED
LAW OF DEMAND

 Inverse relationship between price & Qd per time period

 It states that other things being equal (cetirus peribus), the

quantity of a product demanded per unit of time increases
when its price falls & decreases when its price increases
TYPES OF DEMAND RELATIONS

(3) INVERSE DEMAND FUNCTION

 When price is expressed as a function of quantity demanded.

 It gives the maximum price that consumers will pay for a specific
amount of a good.

 P = f (Q)
MARKET DEMAND

Sum of all quantities of a good or service

demanded per period by all the households
buying in the market for that good or service
MARKET DEMAND SCHEDULE: Schedule obtained by
summing up quantity demanded by all the consumers at each price

PRICES QUANTITY DEMANDED MARKET

(DOZENS) (DOZENS) DEMAND

A B C D
10 1 0 3 0 4

9 3 1 6 4 14

8 7 2 9 7 25

7 11 4 12 10 37

6 13 6 14 12 45
MARKET DEMAND CURVE: horizontal summation of
demand curves of individual consumers
DETERMINANTS OF MARKET DEMAND

 Number of consumers

 Consumer preferences

 Income

 Prices of other goods

 Market Demand Function
QDX = f(PX, N, I, PY, T)
WHERE:
QDX = quantity demanded of commodity X
PX = price per unit of commodity X
N = number of consumers on the market
I = consumer income
PY = price of related (substitute or complementary)
commodity
T = consumer tastes
EXCERCISE
 A senior student has question bank of Mathematics, which he wants
to sell now. Three junior students are willing to purchase it. He has
estimated their demand eq as:
Q1 = 30 – P
Q2 = 22.50 – 0.75P
Q3 = 37.5 – 1.25 P

 Find the market demand eq for question bank

 How many more questions can he sell for each one rupee decrease
in price?

 If he has a QB of 60 questions, what price should he charge to sell

entire QB?
SOLUTION

 1. Qm = Q1 + Q2 + Q3 = 90 - 3P

 2. A 1 Rupee decrease in P will increase Qd by 3

 3. 60= 90 – 3P
P = Rs. 10
EXCEPTIONS TO LAW OF DEMAND

 Giffen goods

 Expectations regarding future prices

 Status goods
CHANGE IN QUANTITY DEMANDED
(MOVEMENT ALONG A CURVE) VERSUS
CHANGE IN DEMAND (SHIFT OF CURVE)

 MOVEMENT ALONG A DEMAND CURVE: change in quantity

demanded due to a change in its own price

 SHIFT OF DEMAND CURVE: change in demand due to change in

all other factors affecting demand, other than the change in its own
price
CHANGE IN QUANTITY DEMANDED-
MOVEMENT ALONG A CURVE- CONTRACTION
OF DEMAND

Price
An increase in price
causes a decrease in
quantity demanded.
P1

P0

DEMAND CURVE
Quantity
Q1 Q0
CHANGE IN QUANTITY DEMANDED-
MOVEMENT ALONG A CURVE- EXPANSION
OF DEMAND

Price
A decrease in price
causes an increase in
quantity demanded.

P0

P1 DEMAND CURVE

Quantity
Q0 Q1
REASONS FOR CHANGES IN DEMAND

 Change in Buyers’ Tastes

 Change in Buyers’ Income

 Normal Goods

 Inferior Goods

 Change in the Price of Related Goods

 Substitute Goods

 Complementary Goods
CHANGE IN DEMAND- SHIFT OF DEMAND
CURVE- INCREASE IN DEMAND

An increase in demand
Price
D1 refers to a rightward shift
D
in the demand curve.

P0

Quantity
Q0 Q1
CHANGE IN DEMAND- SHIFT OF DEMAND
CURVE- DECREASE IN DEMAND

A decrease in demand
Price
D1 D
refers to a leftward shift
in the demand curve.

P0

Quantity
Q1 Q0
TOTAL AND MARGINAL REVENUE

 TOTAL REVENUE: total proceeds generated from the

sale of units produced

 MARGINAL REVENUE: change in revenue associated

with a one unit change in output
TOTAL AND MARGINAL REVENUE
Price Quantity Total Marginal
Revenue Revenue
10 1 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
3 8 24 -4
2 9 18 -6
1 10 10 -8
 TOTAL AND MARGINAL REVENUE

Price Quantity Total Marginal

Revenue Revenue
10 1 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
3 8 24 -4
2 9 18 -6
1 10 10 -8
 35 Total Revenue
Total Revenue 30

25

20

15

10

0
0 2 4 6 8 10 12

Quantity per period

15
MR/Price

10

5
Quantity Demanded
0

0 2 4 6 8 10 12 Quantity per
-5
period
Marginal Revenue
-10
INFERENCES (1)

TR declines from 6 units onwards

 Sound pricing decision requires info about dd.

 In some cases, higher P may increase TR, in some it

may reduce it.
INFERENCES (2)

MR is negative from 7th unit

 To sell extra, firm must reduce P of all units sold (inverse

relation b/w P & dd)

 Rupees received from selling extra unit are not sufficient to

compensate for rupees lost as a result of selling all other
units at a lower price

 Firm should not increase O/P beyond a point where MR is

0.
MARGINAL REVENUE EQUATION

Demand Equation Q = B + ap P

P = -B/ap + Q/ap

TR = PQ = -B/ap*Q + Q2/ap

MR = d(PQ)/dQ = -B/ap+ 2Q/ap

MR = 0 , Q = B/2

For Q < B/2 , MR = +ve Q > B/2 , MR = -ve

RELATION OF DEMAND & MARGINAL
REVENUE CURVE

 The curves intercept y-axis at same point

 Intercept of MR & Demand (DD)
curve = -B/ap

 Slope of (DD) curve = 1/ ap

 Slope of MR curve = 2/ ap = 2 DD curve

EXCERCISE

 Demand eq faced by XYZ Co is P = 10,000 – 4Q

 Write MR eq.
 At what P & Q will MR be 0?
 At what P & Q will TR be max?
 If P is increased from Rs 6000 to 7000, what will be the
effect on TR?