Demand Analysis

1. Unit 3
DEMAND ANALYSIS
Dr. Babasaheb Jadhav
Associate Professor

2. Outline of the Unit:
• Meaning of Demand
• Direct Vs Derived Demand
• Recurring Vs Replacement Demand
• Complementary Vs Competing Demand
• Individual Vs Market Demand
• Determinants of Demand
• Demand Function
• Demand Schedule- Individual Vs Market
• Demand Curve
• Law of Demand
• Assumptions & Exceptions to Law of Demand
• Change in Demand
• Elasticity of Demand

3. Market Demand Analysis serves the following Managerial
Purposes:
1. It is an important technique for sales forecasting.
2. It provides a guidelines for demand manipulation through
advertising & sales promotion.
3. It shows direction to product planning & product
development.
4. It is useful in determining sales quotas & appraisal of
performance of the personnel in sales department.
5. It is an anchor for the pricing policy.
6. It indicates the size of the market for a given product & the
market share of the concerned firm.
7. It reflects the scope for market expansion & competitive
position of the firm in the market.

4. MEANING OF DEMAND:
Demand means desire or want for something.
Demand refers the ‘effective demand’ i.e. ‘The amount the buyers
are willing to purchase at a given price over a given period of
time’.
The concept of demand may be looked upon as follows:
1. Demand is the desire or want backed up by money-
Demand = Desire + Ability to Pay (Money or Purchasing Power)
+ Willingness to Spend
2. Demand is always related to price & time-
The demand for a product refers to the amount of it which will be
bought per unit of time at a particular price.
3. Demand may be viewed as ex-ante & ex-post-
Demand for a commodity may be viewed as ex-ante i.e. intended
demand or ex-post i.e. what is already purchased.

5. INDIVIDUAL DEMAND & MARKET DEMAND:
Consumer demand for a product may be viewed at two levels-
1. INDIVIDUAL DEMAND:
Individual demand refers to the demand for a commodity from the individual
point of view.
The quantity of a product consumer would buy at a given price over a given
period of time in his individual demand for a particular product.
Individual demand is considered from one person’s point of view or from that
of a family or household’s point of view.
Individual demand is a single consuming entity’s demand
2. MARKET DEMAND:
Market demand refers to the total demand of all the buyers taken together.
Market demand is a aggregate of the quantities of a product demanded by all
the individual buyers at a given price over a given period of time.
Market demand function is the sum total of individual demand function. It is
derived by aggregating all individual buyers demand function in the market.
Market demand is more important from the business point of view-

6. •Sales depend on the market demand.
•Business policy & planning are based on the market demand.
•Prices are determined on the basis of market demand.
•Determination of equilibrium price.
•Monopoly.
•Product positioning.
•Profitability.
DETERMINANTS OF DEMAND:
Factors Influencing Individual Demand-
1. Price of the products
2. Income
3. Tastes, Habits & Preferences
4. Relative prices of other goods- substitute & complementary products
5. Consumers expectation
6. Advertisement effect
Factors Influencing Market Demand-

7. 1. Price of the product
2. Distribution of income & wealth in the community
3. Communities common habits & scale of preferences
4. General standards of living & spending habits of the people
5. Number of buyers in the market & growth of population
6. Age structure & sex ratio of the population
7. Future expectations
8. Level of taxation & tax structure
9. Inventions & innovations
10. Fashions
11. Climate or weather conditions
12. Customs
13. Advertisement & sales propaganda

8. If you can’t pay for a things, don’t buy it.
If you can’t get paid for it, don’t sell it.
-Benjamin Franklin

9. DIRECT VS DERIVED DEMAND:
Direct Demand Derived Demand
This refers to demand of products
which are directly consumed by
people.
When the demand of a product is
derived from the demand of any
other product, such a demand is
called derived demand.
Goods that yield direct satisfaction
to the consumers are said to have a
direct demand.
Goods that are needed by the
producers are said to have derived
demand.
This demand comes from the
consumers side.
This demand comes from the
producers side.
For example- the demand of a
washing machine does not depend
on the demand of any other product.
The washing machine is consumed
(used) directly by the people.
For example- cement. Cement is
demanded not for direct
consumption but is demanded as
there is demand for housing. Thus
cement derives its demand from
demand of housing
Demand for food, cloth and house
etc. are the examples of direct
demand.
Demand for land, labor, capital, etc.
are the examples of derived
demand.
All the finished goods have a direct All factors of production have

10. RECURRING VS REPLACEMENT DEMAND:
Recurring Demand Replacement Demand
Consumer goods have a direct
demand & are purchased frequently
& hence known as recurring
demand.
Durable goods are purchased to be
used for long time but they need a
replacement after particular time &
hence known as replacement
demand.
Recurring demand means a
consumable goods because they
are consumed very frequently.
Replacement demand means
durable goods because they are
consumed for long duration.
For example- Snacks, Newspaper,
Petrol etc.
For example- TV, Car, Bikes etc.

11. COMPLEMENTARY VS COMPETING DEMAND:
Complementary Demand Competing Demand
Goods which create joint demands
are known as complementary
demand
Goods which compete with each
other are known as competing
demand
Complementary goods are jointly
demanded.
Competing goods are independently
demanded.
For example- Pen & Ink, Computer
& Software, Car & Petrol etc.
For example- Samosa & Vada Pav,
Coke & Pepsi, Swift Dezire & Honda
Ascent, SBI & ICICI (savings) etc.

12. DEMAND FUNCTION:
In demand analysis one should recognize that at any point of time the quantity
of given product that will be purchased by the consumers depends on a number
of key variables or determinants.
In technical jargon it is stated in terms of demand function for the given
product.
A demand function in mathematical terms expresses the functional relationship
between the demand for the product & its variable determinants.
In symbolic terms demand function can be stated as:
Qd = f (Px,X1,X2......Xn)
Where as-
Qd - Quantity demanded
P- Price
X1,X2......Xn - Other demand determinants
In reality the demand function is complex phenomenon.
Utmost care is thus needed in identification of the key determinants.

13. In economic theory, a very simple statement of demand function is adapted.
The most commonly stated demand function is as follows:
Dx = f (Px)
Which connotes that the demand for commodity X is the function of its price.
In other words the statement is ‘the amount demanded (quantity demanded) is
the function of its price’.

14. DEMAND SCHEDULE:
A tabular statement of price/quantity relationship is called demand schedule.
There are two types of demand schedule:
1. Individual demand schedule
2. Market demand schedule
Individual Demand Schedule:
A tabular list showing the quantities of a commodity that will be purchased by
an individual at each alternative price in a given period of time is called as
individual demand schedule.
Price of Mangos (per kg) Amount demanded per week (in kg)
80 2
70 4
60 6
50 10
40 16

15. Market Demand Schedule:
The demand side of the market is represented by the demand schedule.
It is a tabular statement narrating the quantities of a commodity demanded in
aggregate by all the buyers in the market at different prices over a given period
of time.
Market demand schedule represents the total market demand at various prices.
Price in Rs.
Commodity X demand per day
by Individuals Total Market
Demand
A B C
40 1 1 3 5
30 2 3 5 10
20 3 5 7 15
10 5 9 10 24

16. DEMAND CURVE:
A demand curve is a graphical presentation of a demand schedule.
The demand curve has a negative slope .
It slopes downwards from left to right, representing an inverse relationship
between price & demand.
Demand Curve for Commodity
Price Per Unit in Rs. (Px) Quantity/Units Demanded (Dx)
10 18
20 16
30 14
40 12
50 10

17. LAW OF DEMAND:
The law of demand describes the general tendency of consumers
behaviour in demanding a commodity in relation to changes in price.
Law of demand expresses the functional relationship between two
variables i.e. Price & Quantity Demanded.
Statement of law of demand “The higher the price of a commodity,
the smaller is the quantity demanded and lower the price of a
commodity, larger the quantity demanded’’.
In other words, the demand for a commodity extends as the price falls
and contracts as the price rises.
The mathematical expression of law of demand is:
D = f (P)
Where as-
D represents demand
P represents price
f represents functional relationship

18. Assumptions of Law of Demand:
1. No change in consumers demand
2. No change in consumers preferences
3. No change in the fashion
4. No change in the prices of related goods
5. No expectation of future price changes or shortages
6. No change in size, age composition & sex ratio of the population
7. No change in the range of goods available to the consumers
8. No change in the distribution of income & wealth of the community
9. No change in the government policy
10. No change in whether conditions
Price of Commodity X in Rs. Quantity/Units Demanded Per Week
50 100
40 200
30 300
20 400
10 500

19. EXCEPTIONS TO THE LAW OF DEMAND:
It is a universal phenomenon of the law of demand that when prices
falls, the demand extends and it contracts when the prices rises.
But, sometimes it may be observed very rarely that, with a fall in
prices, demand also falls and with a rise in price, demand also rises.
This is a paradoxical situation or a situation is contrary to the law of
demand.
Cases in which this tendency is observed are referred to as ‘Exceptions
to the General Law of Demand’.
It will be upward sloping demand curve.
It is described as exceptional demand curve.
Exceptional cases to the law of demand:
1. Giffen goods
2. Articles of snob appeal
3. Speculation

20. CHANE IN QUANTITY DEMANDED AND CHANGE IN
DEMAND:
The changes in the quantity demanded refers to the changes in the
quantities purchased by the consumer on account of the changes
in price.
We may say that quantity demanded of a commodity increases
when its price increases. But it is incorrect to say that demand
decreases when price increases or demand increases when price
decreases.
For ‘increase or decrease’ in such a demand is referred as changes
in demand due to changes in determinants of demand.
The phrase ‘changes in quantity demanded’ referring to:
1. Extension and Contraction of Demand
2. Increase and Decrease in Demand

21. REASONS FOR CHANGE IN DEMAND (INCREASE OR
DECREASE):
1. Changes in income
2. Changes in taste, habits and preferences
3. Change in fashion & customs
4. Change in the distribution of income
5. Change in substitutes
6. Change in demand of position of complementary goods
7. Change in population
8. Advertisement and publicity
9. Change in value of money
10. Change in the level of taxation
11. Expectation of future changes in prices

22. ELASTICITY OF DEMAND:
Concept of Elasticity of Demand:
“Elasticity of demand is the responsiveness of the quantity
demanded of a commodity to changes in one of the variables on
which demand depends”.
“In other words, it is the percentage change in quantity demanded
divided by the percentage change in one of the variables on
which demand depends”.
Elasticity of Demand = Percentage Change in Quantity
Demanded / Percentage Change in Determinants of Demand
The variables on which demand can depend on are:
1. Price of the commodity
2. Prices of related commodities
3. Consumer’s income

23. The economists considers three important kinds/types of
elasticity of demand:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand

24. 1) PRICE ELASTICITY OF DEMAND:
Meaning:
“The extent of response of a demand for commodity to a given change
in price is termed as price elasticity of demand”.
“Price elasticity of demand is an economic measure of the change in
the quantity demanded or purchased of a product in relation to its price
change”.
“The price elasticity of demand is defined as the ratio of relative
change in demand and price variables”.
The co-efficient of price elasticity (e) is measured as:
e = Percentage Change in Quantity Demanded / Percentage Change in
Price
The relative change of variables can be measured either in terms of
percentage change or proportional change.
e = Proportional Change in Quantity Demanded / Proportional Change
in Price

25. Representing it in a symbolic terms, the price elasticity formula
can be stated as:
e = ΔQ/Q / ΔP/P
Alternatively,
e = ΔQ/Q × P/ΔP
Or by rearranging,
e = ΔQ/ΔP × P/Q
Where,
Q = Original demand
P = Original price
ΔQ = Change in demand (It is measured as the difference
between new demand and old demand) (ΔQ = Q2 – Q1)
ΔP = Change in price (It is measured as the difference between
new price and old price) (ΔP = P2 – P1)

26. For Example:
Thus,
(ΔP = P2 – P1) = 20 – 21 = 1 and P = P1 = 20
(ΔQ = Q2 – Q1) = 96 – 100 = (4) and Q = Q1 = 100
Therefore, price elasticity of demand is (minus sign is ignored):
e = ΔQ/ Q × P/ ΔP
= (4)/100 × 20 / 1
= 4/5
= (0.8)
Price of Apples in Rs. Quantity Demanded in Kgs.
20 (P1) 100 (Q1)
21 (P2) 96 (Q2)

27. Types of Price Elasticity:
Marshall has suggested a three fold classification of types of price
elasticity of demand, viewing the co-efficient of price elasticity in
terms of unity or 1.
Since the numerical coefficient (e) values range between ‘0’ to ‘∞’.
The Marshall’s classification is as follows:
1. Unit elasticity of demand (e = 1)
2. Elastic demand (e > 1) i.e. Elasticity is greater than unity
3. Inelastic demand (e < 1) i.e. Elasticity is less than unity
Kinds/Types of elasticity of demand:
1. Perfectly elastic demand
2. Perfectly inelastic demand
3. Relatively elastic demand
4. Relatively inelastic demand
5. Unitary inelastic demand

29. Price Elasticity of Demand:
Numerical
Value
Terminology Description
e = ∞
Perfectly elastic
demand
Consumers have indefinite time at
particular price & none at all at an
even slightly higher than this given
price
e = 0
Perfectly inelastic
demand
Demand remains unchanged whatever
be the change in price
e > 1
Relatively elastic
demand
Quantity demanded changes by a
larger percentage than does price
e < 1
Relatively
inelastic demand
Quantity demanded changes by a
smaller percentage than does price
e = 1
Unitary inelastic
demand
Quantity demanded changes by
exactly the same percentage as does
price

30. Factors Influencing Elasticity of Demand:
1. Nature of Commodity
2. Availability of Substitute
3. Number of Uses
4. Consumers Income
5. Height of Price & Rage of Price Change
6. Proportion of Expenditure
7. Durability of the Commodity
8. Habit
9. Complementary Goods
10. Time
11. Recurrence of Demand
12. Possibility of Postponement

31. Income Elasticity of Demand:
Income is a major determinant of demand for a number of goods.
We may have an income demand function:
D = f (M)
Where, M refers to the money income of the buyer
“The income elasticity of demand is defined as a ratio of percentage or
proportional change in the quantity demanded to the percentage or
proportional change in income”.
Income Elasticity = % Change in Quantity Demanded / % Change in Income
Symbolically,
em = %ΔQ/%ΔM
Where, %ΔQ signifies percentage change in demand and %ΔM signifies
percentage change in income.
Types of Income Elasticity of Demand:
1. Unitary Income Elasticity of Demand (em = 1)
2. Income Elasticity of Demand greater than Unity (em > 1)
3. Income Elasticity of Demand less than Unity (em < 1)
4. Zero Income Elasticity of Demand (em = 0)
5. Negative Income Elasticity of Demand (em < 0)

33. Applications of Income Elasticity of Demand:
1. Long term business planning
2. Market strategy
3. Housing development strategy

34. Cross Elasticity of Demand:
“The cross elasticity of demand refers to the degree of responsiveness of
demand for a commodity to a given change in price of related commodity”.
Cross Elasticity = Proportionate or % Change in Quantity Demanded for X /
Proportionate or % Change in price of Y
Symbolically,
ec = ΔQx/Qx / ΔPy/Py
or
ec = ΔQx/Δpy × Px/Qx
Where,
ec – cross elasticity of demand
ΔQx - change in the quantity demanded for commodity x
Qx – initial demand for commodity X
ΔPy - change in the price of commodity Y
Px - initial price of commodity Y

35. Cross Elasticity of Demand:
*Butter 50 gram packets)
We may take the data for tea & coffee & measure the co-efficient of price cross
elasticity as under:
Let us assume- X = Tea & Y = Coffee
Qx = 50, ΔQx = 60 – 50 = 10
Py = 4, Δpy = 5 – 4 = 1
ec = ΔQx×Py/ΔPy×Qx
= 10 × 4/1 ×50
= 4/5 = 0.8
Commodity
Original Changed
Price
(in Rs.)
Quantity
(in Units)
Price
(in Rs.)
Quantity
(in Units)
Tea 3 50 3 60
Coffee 4 30 5 20
Bread 2 80 2 90
Butter 75 30* 6 40*

36. Practical Applications of Elasticity of Demand:
1. To businessmen
2. To the government and finance minister
3. In international trade
4. To policy makers

37. THANK YOU