Demand Analysis Updated

5/28/2018 Demand Analysis Updated

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Consumer Behaviour

Demand and Utility

Analysis

Indifference CurveAnalysis

Reveal Preference

Theory

Game Theory


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Be Nice to the Ones who SMOKE..

Every Cigarette might be their last..


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Demand = Desire or Want

+ Willingness to Buy

+ Ability to Pay

At a specific price andper unit of time


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Case: 1.

Which of the following statements depicting

demand are correct. Give reasonsa. In Boregaon village, the total population is

one lakh

b.50 buffaloes give 150 litres of milk every day

which is consumed by an entire village in oneday

c. In a bustling part of a city, 100 packets of idlisare sold within an hour

d.A fruit vendor sell 50 fruits (of differentvarieties) in a day

e.A toy shop selling different types of toys, eachpriced at Rs. 20 at a hill station makes abusiness of Rs. 3500 each day.


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Demand Functions

Long Run functionQDx = f{ Px, Y, Pr, A, T, N, Fe, Tx, O..}

Independent VariableDependant Variable

ShortRun Function

QDx = f (Px)


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Demand Determinants

Price of the product demanded.Income of the consumer.

Prices of related goods.Advertising expenditure.

Future Expectations of the

Consumer about the Price of

the product.

Habits.


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Demand Determinants

Growth of Population, Age

structure, Sex ratio etc

Direct TaxesFashion, Tastes, Trends etc

Climatic ConditionsCredit Facilities

Brand Name


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Income of the ConsumerLuxury

goods

EssentialConsumer

goods (ECG)

Inferior

Goods

Normal Goods

Quantity Demanded

ConsumersIncome

0X

Y


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Advertisement Expenditure

Sales Curve

Advertisement Expenditure (Rs.)0

VolumeofSa

les

X

Y


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Case: 2

Following are some instances explain how

demand will be affected for that product inspecific or in general? Why?

a. A firm announces a double bonus for all itsemployees this Diwali.

b. Right next to a busy snack centre, a new onecomes up.

c. VAT is announced on all saleable commodities

d. A vegetable hawker announces that allcustomers after 9.30pm to his shop will enjoy a25% off on any good

e. An epidemic in a country kills thousands ofpeople, mostly affecting the older generation

f. Prices of washing machines go down drastically


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Case: 3

Point out the factors

determining the demand

for avirus- proof laptop.

OrPen-cum-pendrive


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Individual Demand Schedule

of Pizza

Price (Rs) Quantity Demanded

by Gautam

(In units)

100 6

200 5

300 4400 3

500 2

600 1


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Individual Demand Curve of

Pizza

Quantity Demanded

X

Y

DD

P

P

P

Q Q QO

PRICE


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Demand Curve

Why does a demand curve

slope downwards?

PriceQuantity relationship

Law of Diminishing Marginal

Utility

Income Effect

Substitution Effect


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Price

(Rs.)

QD by

Gautam

(Smokin

Joes)

QD by

Gayatri

(Pizza

Hut)

QD by

Jay

(Dominos)

Marketdemand

Or Total

Demand400 1 3 3

300 2 4 5

200 3 5 7

100 5 9 10

Market Demand Schedule of

Pizza


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Price

(Rs.)

QD by

Gautam

(Smokin

Joes)

QD by

Gayatri

(Pizza

Hut)

QD by

Jay

(Dominos)

Market

Demand

Or Total

Demand400 1 3 3 7

300 2 4 5 11

200 3 5 7 15

100 5 9 10 24

Market Demand Schedule of

Pizza


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Market Demand

is a horizontal

summation of individual

demand.


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Law of Demand states that

Otherthings remaining the same

(Ceterius Paribus) the higher theprice the lower will be the demand

and vice versa.

QDx = f {Px}


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Other things remaining the

same

No change in consumers income

No change in prices of relatedgoods

No change in advertisingexpenditure

No change in fashion, tastes,preferences

No expectations about future

change in price


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Other things remaining the

same

No change in age-composition and

sex ratio of the population

No change in government policy

No change in climatic conditions

No change in credit facilities, brandname, habits etc


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Exceptions to the Law of

Demand

1. Giffen Paradox2. Prestigious goods or conspicuous

consumption or status symbol

goods3. Speculation

4. Consumers ignorance

5. Emergency


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Case: 4

1. With news floating about a possible

outbreak of war in the Gulf, what

would be the reaction of the people

in terms of demand (if for anyparticular product) and why?

2. Some people only buy branded

products. Comment3. Some people are addicted to few

products. Discuss.


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Changes In Quantity Demanded

Expansion in quantity

demandedContraction in quantity

demanded.


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Changes In Quantity Demanded

QUANTITY DEMANDED

X

Y

DD

P

R

I

C

E

P

P

P

Q Q Q

b

c

o

a


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Changesin Demand

Increase in demandDecrease in demand


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QUANTITY DEMANDED

X

Y

DD

P

R

I

C

E

P

Q

Increase in Demand

DD

Qo

C


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Increase in Income of Consumer

Taste, Fashion in favor of The Products

Increase in Price of SubstituteDecrease in price of Complementary

ConsumersIgnorance

EmergencyFuture Expectations About Rise in Price

Increase in population

Increase in Demand Can be

Due to ------


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QUANTITY DEMANDED

X

Y

DD

P

R

I

C

E

P

Q

Decrease in Demand

DD

Qo

D i D d C b


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Decrease in Demand Can be

Due to ------

Decrease in Income of Consumer

Taste, Fashion Against The Products

Decrease in Price of SubstituteIncrease in price of Complementary

Future Expectations About Fall in Price

Decrease in Populationetc etc..


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Case: 5

1. A farmer gets a bumper crop this

season and makes a lot of money.

He goes to the market and buys a

lot of things for his family. This isexpansion of demandJustify.

2. Making door-to-door calls for the

product Tide washing power hasbrought in lot of orders for the

product. How is the demand

behaving? Explain.

C 6


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Case: 6

Given the following features,

describe the effect of each of thefollowing in terms of whether itwould increase or decrease the

quantity demanded or the demandfor housing.

a) An increase in housing prices.

b) A fall in interest rates on Home loan

c) A rise in interest rates on Homeloan

d) A severe economic recession

e) A robust economic expansion

MISTAKES ARE NEW LESSONS FOR


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MISTAKES ARE NEW LESSONS FOR

SUCCESS


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The degree of responsiveness of

quantity demanded due to change in any

factor affecting demand.

Percentage change in quantity

demanded

Ep= -------------------------------------------------

Percentage change in any factor

affecting demand

Elasticity of Demand


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Price elasticity


demanded

Ep= -------------------------------------------------

Percentage change in price

QDx = f (Px)


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Income Elasticity

Percentage change in

quantity demandedei=------------------------------------------------------

Percentage change in the

Income of consumer

QD = f (Y)


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Cross Elasticity

Percentage change in Quantity demanded

of good X

QDX

Exy =

Percentage change in price of good Y

=f (PY)


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Price elasticity

The degree of responsiveness of

quantity demanded due to change in

price.


demanded

Ep= -------------------------------------------------

Percentage change in price


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Method of Price Elasticity

eP =Q

P

P

Q

.. .

Q2- Q1

P2- P1

P1

Q1

Ratio or Percentage Method

X

XeP =


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Ratio or Percentage Method

Where, P1= Initial Price

P2= New Price

Q1= Initial Quantity

Q2= New Quantity


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Types of Price Elasticity

1. Perfectly elastic (ep = )

2. Perfectly inelastic (ep = 0 )

3. Relatively elastic demand (ep > 1)4. Relatively inelastic demand

(ep< 1)

5. Unitary elastic demand (ep = 1)


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1. Perfectly elastic(ep=)

X

Y

QUANTITY DEMANDED

PR

I

C

E

P DD

Q

Q

=

Q Q Q0


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2. Perfectly inelastic(ep=0)

X

Y

QUANTITY DEMANDED

P

R

I

C

E

DD

Q

P

P

P

Q

Q

= 0

0

3 Relatively elastic demand


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3. Relatively elastic demand

(ep > 1) Luxury goods

X

Y

QUANTITY DEMANDED

PR

I

C

E

DD

QQ

P

P

Q

Q

>P

P

Q

P

o

4 Relatively inelastic demand


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4. Relatively inelastic demand

(Ep < 1)Necessary Goods

X

Y

QUANTITY DEMANDED

PR

I

C

E

DD

QQ

P

P

Q

Q1

ep=1

ep


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ep =

Q2Q1

P

P2+ P1

Q2+ Q1

ARC Method

X

Q

Q2+ Q1 2

2

P2P1

P2+ P1

ep =


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X

Y

DD

a

b

Arc

Quantity Demanded

Price

0


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Method of Calculating Price Elasticity:

Total Revenue or Total Expenditure or

Total Outlay Method

Total Revenue = Price x Quantity

Total Revenue/Total Expenditure/


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Total Outlay Method-More elastic

o

DD

P

P

Q Q

a

b

P TR

Price

Quantity Demanded

P

Q

C

P TR



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Total Outlay Method-less elastic

o

P

P

QQ

a

b

P TRPrice

Quantity Demanded

DD

P

Q

P TR

Total Revenue/Total Expenditure/ Total


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Total Revenue/Total Expenditure/ Total

Outlay Method-Unitaryelastic

P

P

Q Q

DD

a

b

Quantity Demanded

Price

0

T t l R M th d


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Total Revenue Method

Type of

Elasticity

(Ep)

Price

(Rs)

QDD

(in units)

TR

(in Rs.)

Ep = 1

2

4

1

10

5

20

20

20

20

Ep > 1

2

41

10

424

20

1624

EP < 1

2

4

1

10

6

16

20

24

16

T t l R M th d


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Total Revenue Method

Price Total Revenue(TR) Type ofElasticity

(Ep)

IncreaseDecrease

ConstantConstant

E = 1(Unitary)

Increase

Decrease

Decrease

Increase

E > 1

(More elastic)

Increase

Decrease

Increase

Decrease

E < 1

(Less elastic)

C 11


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Case: 11The Serpell Report (1983) on

Railway finances in England, forinstances, measured price elasticity ofdemand for rail services on someroutes to be fairly inelastic (-0.15);

hence suggested fares rise of 40 percent for London commuters. In thiscase, work out the revenue effect iffare is raised from pound 10 to pound

14 and daily 1000 passengers aretraveling on this route. Should theauthorities accept this suggestion?Give your comment.


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Case: 11Answer

% Q Q

Ep = _________ = -0.15 = _________

% P 40%

Therefore, Q = 6%

as TR = P X QInitially, TR = 10 X 1000 = Pound 10,000

Q = 6%


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Case: 11cont.

Therefore, with the

rise in fare new Q =

940

At the new pricePound 14

TR = 14 X 940

= pound 13,160

Price Qty TR

10 1000 10,000

14 940 13,160


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Case: 12

Suppose the demand for insulinconsists of two types of consumers,

those who must have a dose each

day and those who are able to gowithout the drug for several weeks.

Suppose the price elasticity of

demand for the first group is 0.01and that for the second group is 4.0.

Explain how the firms producing

insulin might price the insulin.

Factors influencing elasticity of


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demand-

(1) Nature of the commodity :

Necessaries

Comforts and Luxuries

(2) Availability of substitutes :

No substitutes

Close substitutes



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demand-

(3) Number of Uses :

Single Use

Multi Use

(4) Range of Price Change:

Highly PricedLow Priced



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demand-

(5)Proportion of Expenditure :

Less expenditure

More expenditure

(6)Time Period :

Short Period

Long Period



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demand-

(7) Possibility of Postponement :

Can be Postpone --Cannot be Postpone

(8)Influence by Habits & Customs



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g y

demand-

(1) Nature of the commodity :

NecessariesInelastic

Comforts and LuxuriesElastic

(2) Availability of substitutes :

No substitutesInelastic

Close substitutesElastic



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demand-

(3) Number of Uses :

Single UseInelastic

Multi UseElastic

(4) Range of Price Change:

Highly PricedElasticLow PricedInelastic



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demand-

(5)Proportion of Expenditure :

Less expenditureInelastic

More expenditureElastic

(6)Time Period :

Short PeriodInelastic

Long Periodelastic



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demand-

(7) Possibility of Postponement :

Can be Postpone -- ElasticCannot be PostponeInelastic

(8)Influence by Habits & Customs

Inelastic

Practical Applications of Price


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pp

elasticity

1. To a Businessman By knowing the type of elasticity of

demand it is easy to know whether a price

cut is better or a price rise for increasing

the sales, total revenue and the profits.

If the demand is more elastic, a price cut

would lead to an increase in total

revenue. It the demand is inelastic, by raising a

price, no significant decrease in sales will

be effected so the total revenue and the

profit would rise.

C 9


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Case : 9

Just think of the product Mangoes. It

a.Is a perishable commodity

b.Has no substitute

c.Has a high demand in the domestic

as well as the foreign market

-- what can you say about its demand

elasticity in each of the above

aspects?



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elasticity

2. To the Finance Minister

Finance minister has to consider the

elasticity of demand while selecting

commodities for tax. Tax imposition oncommodities for getting substantial

revenue becomes worthwhile only if the

taxed goods have an inelastic demand.

Taxes are levied on commodities whichhas inelastic demand like cigarettes,

wine, sugar etc.

Practical Applications of


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Price elasticity

3. In International Trade

Elasticity is important in

formulating export and import

policies of a country. The relativeelasticities of demand for

commodities in the two countries

are very important. Export thosecommodities which are inelastic in

the international market.



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Price elasticity

4. To Trade UnionistsThe concept of price elasticity is

useful to trade unions in wage

bargaining. The union leaders,when they find that demands fortheir industrys product is fairlyelastic, will ask for a higher wage to

workers and use the producer tocut the price and increase saleswhich will compensate for his lossin total profit.

C 13


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Case: 13

Rainbow Crayons, Inc. as amarketing specialist has just hired

you. The CEO comes to you for

advice on how to raise revenue. Shewants to know if the company

should lower product prices or raise

product prices to increase revenue.What information must you know? If

you have this information, what do

you advise?

Case: 14 Calculate the price elasticity of

d d f diff f h


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demand for different years from the

following data

Year Percentagechange in price

Percentagechange in

quantity

2001 5.0 -3.2

2002 -2.5 5.6

2003 zero 1.2

2004 6.5 -2.5

C 14 A


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Case: 14 Answer

20010.64Relatively inelastic.

20022.24Relatively elastic

2003infinityPerfectly elastic.

2004 -- 0.38Relatively inelastic.


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Income Elasticity

the degree of

responsiveness of the

quantity demanded due tothe change in income of the

consumer.

Measurement of Income


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Elasticity

Percentage change in

quantity demanded

ei=------------------------------------------------------Percentage change in the

Income of consumer



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ElasticityRatio Method

ei=Q

Y

Y

Q

ei=

Q2 - Q1

Y2 - Y1

Y1

Q1

X

X

M t f I


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Elasticity

Where, Y1 = Initial Income

Y2 = New Income

Q1 = Initial Quantity

Q2 = New Quantity

Mesurement of Income


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Elasticity

ei =

Q2Q1

YY2+ Y1

Q2+ Q1

ARC Method

X

Q

Q2+ Q1 2

2

Y2Y1

Y2+ Y1

ei =

T f I l ti it


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Types of Income elasticity

(1)Positive income elasticity can

be :

Greater than one ei > 1 -Luxuries

Less than one ei < 1 -

Necessaries

P iti I El ti it


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Positive Income Elasticity

X

Y

QUANTITY DEMANDED

DD

ei < 1 (necessary goods)

0 QQ

Y

Y

Y

Q

Positi e Income Elasticit


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Positive Income Elasticity

X

Y

QUANTITY DEMANDED

DD

ei > 1 (Luxury goods)

0

Y

Y

Q Q

Y

Q

Negative Income Elasticity


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Negative Income Elasticity

X

Y

QUANTITY DEMANDED

I

N

CO

M

E

DD

0

ei < 0 (Inferior goods)

Y

Q

Y

Y

QQ

C 15


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Case: 15

Paul purchases 10 Kgs per monthon sugar when his income is Rs

1500/- per month, when his income

increases to Rs 1800/- per month hespends 12 Kgs on sugar .Find

Income elasticity.

Answer: ei = 1 (sugar is a normal

good)


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Case: 16

Find income elasticity from thefollowing information and interpretthe result.

Initial Income = Rs. 3000Initial Quantity = 1600 units

New Income = Rs. 3200

New Quantity = 1300 units

Answer: Ey = -2.81( it is an inferiorgood)

Case: 17


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Case: 17

There are three income bracketpeople, very poor, middle class andelite class. In one particular monththe prices of each of these rise. Whatwill be the income elasticity?

Potatoes

Diamonds

Cotton

Paper

Wheat

Practical Applications ofI l ti it


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Income elasticity

K. K. Seo points out the income elasticityof demand is applicable to many planning

and strategy problems, such as

1. Long term Business PlanningIn the long run, demand for comforts

and luxury goods may tend to be highly

income elastic. Hence, prospects for long

run growth in sales for these goods arevery bright. The firm can plan out its

business accordingly.



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Income elasticity

2. Market Strategy

Income elasticity of demand is

helpful in developing market

strategies.

3. Housing Development Strategies

On the basis of income elasticity,

housing development requirementcan be predicted and construction

work can be effectively launched

upon.



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Income elasticity

4. To the Businessman

Income elasticity is important to certain

producers in their demand and sales

forecasting and planning businessexpansion. For instance, the demand for

TV sets is highly income elastic, so when

per capital income or income levels of a

class of consumers is found to be rising,TV manufacturers can expect a greater

sale even at slightly higher prices.

Cross Elasticity


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Cross Elasticity

..is the degree of responsiveness ofquantity demanded of good X due to

the change in Price of goodY(where

good X and Y are either substitutes orcomplementary)

Percentage change in Quantity demandedof good X

Percentage change in price of good Y

Exy =

Measurement of Cross


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Elasticity

ey=QX

PY

PY

QX

ey=

QX2 - QX1

PY2 - PY1

PY1

QX1

X

X

Ratio Method

Mesurement of Cross


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Elasticity

ey =

QX2QX1

PY

PY2+ PY1

QX2+ QX1

ARC Method

X

QX

QX2+ QX1 2

2

PY2PY1

PY2+ PY1

ey =

Cross elasticity in case of


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Substitutes

Priceofcoffe

e

Demand for tea

P

P

Q Q

DD Tea

Exy > 0

X

Y

0



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Complementary goods

Pr

iceofpetrol

Demand for vehicles

DD Vehicles

P

P

Q Q

Exy < 0

0X

Y



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Unrelated goods

PriceofIcecream

Demand for Cloths

DD Cloths

P

P

Q

Exy = 0

0X

Y

P



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Cross elasticity

To determine the competitiveprice strategy and policy in the

alternative rivals modes of

services such as rail-road

services. Cross elasticity, here is

taken, as a measure of the effect

of a change in the fares on the

demand for the rail service and

vice versa.

Case: 18 Calculate cross


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elasticity and interpret results

Instances Price ofGood X

Qtydemanded

of Good Y

Results

01 10 100

20 200

02 15 150

10 150

03 8 100

20 0

04 20 100

15 50

Case: 18 Calculate cross


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elasticity and interpret results

Instances Price ofGood X

Qtydemanded

of Good Y

Results

01 10 100 Exy = 1

20 200 Substitutes

02 15 150 Exy = 0

10 150 Unrelated

03 8 100 Exy = -0.66

20 0 Complementary

04 20 100 Exy = 2

15 50 Substitutes

Case: 19


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There was a sale of 10,000 units of

Acer Laptop in the year 2004 when itsprice was Rs. 40,000. During the same

period 10,500 Toshiba Laptop were at

the price of Rs. 45,000. when the price

of Acer was brought down to Rs.

38,000 its sales increased to 12,000

units and the demand for Toshiba

declined to 9,500 units without thechange in its own price. Calculate

cross elasticity and interpret your

result

Case: 19 Answer


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Case: 19Answer

Exy = 1.90 (Subsitutes)

Case: 20


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Case: 20

When the price of bread was Rs. 20,the demand for bread for 80 units.During the same time price of butterwas Rs. 75 and demand for butter

was 30 units. Price of breadremaining same, if the Price for butterreduces to Rs. 60, then its demandincreases to 40 units and demand for

bread also increases to 90 units.

Answer:Exy = - 0.625

(Complementary goods)Case: 21.Weekly demand of the Household isgiven below. Find the price elasticity of


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g p y

demand for rice and cross elasticity of demand

between rice and wheat.

Original

price (Rs)

Original

Quty (Kgs)

New

Price

(Rs)

New Quty

(Kgs)

Wheat 8 50 8 70

Rice 20 50 23 40

Case: 21 Answer


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Case: 21Answer

Ep= 1.33,

Exy = 2.66 (Substitutes)

Case: 22


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Case: 22

The Times of lndia, is one of theleading newspapers in India. In

September 1972, it lowered its

price from 45 paise to 30 paisewhile prices of its rivals

remained unchanged. The

number of newspapers sold byTOI and its rivals was as follows

:

Case: 22 conti..


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Case: 22 conti..

August2005

May2006

Times of India 3,55,000 5,18,000

Statesman 10,24,000 9,93,000

Hindu 3,92,000 4,02,000

Hindustan

Times

3,25,000 2,77,000

Case: 22 conti..


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Case: 22 conti..

1. Based on the figures, find theprice elasticity of demand for

TOI.

2. Was the cross elasticity of

demand between Statesman

and TOI positive or negative ?

Case: 23 Work out the type of

elasticity the following products


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elasticity the following products

will have:-Electricity

Soaps

Exotic VacationsCigarettes

Wine

AC

Tea

Genius does what it must, and Talent doeswhat it can


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Demand Forecasting


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Demand Forecasting

Isthe method of predicting

the future demand of a

firmsproduct.

Demand Forecasting


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Demand Forecasting

Short Run Forecasting

Survey Method

Long Run Forecasting

Statistical Method

Survey Method

Opinion Polling Method

Collective opinion MethodPanel of Experts

Correlation & Regression

Time Series MethodBarometric Method

Methods of Demand

Forecasting


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Forecasting

For a Established product :

(1) Interview and Survey Approach

(2)Opinion Polling Method(3)Collective Opinion Method

(4) Panel of Experts Or Delphi

method.

(5) Projection Approach (for Long

Period)

Projection Approach (Long

P i d)


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Period)

SALES

0 YEAR

Y

X

For a New Product


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Evolutionary Method

Substitution Method

Growth Pattern Method

Opinion Polling Method

Sample Survey Method

Case: 24


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Case: 24

Mention which method offorecasting will be suitable for

the following products:

a. Toys

b. Getz

c. Washing Powderd. Coffee

Case: 25


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A cartel has been entered into by various

firms into the manufacture of kidsschoolshoes. Price has been set, which the firms

have to respect. To increase profits, the

firms have to increase the quantity

supplied. Your firm is one of them. It is themonth of April. Just 2 more months to go

for the schools to re-open, the time when

most parents do shoe-shopping for their

children. Certain factors are in your

hands, while some are not. Which ones do

Documents

Demand Analysis Updated