Demand Definition

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DEMAND AND SUPPLY ANALYSIS

Definition of Demand

Cardinal and Ordinal Approaches of Demand

Elasticity of Demand

Supply Function





Demand is the desire or want backed up

by money.Demand =Desire + Ability to pay + Will to

spend

Demand is always relative to Price andTime

Demand may be viewed Ex-Ante

(Potential D) or Ex-post (actual amount

purchased)



Demand can be viewed at two levels

Individual Level ²demand for a commodity

from the individual point of view. And

Market Level ---The total demand of all

buyers, taken together.



Determinants of Individual Demand

Price

Tastes, Habits, Preferences

Advertisement Effect Income

Rel. prices of other goods²

complementary and substitution products Consumer expectations



Determinants of Market Demand

Distribution of Income and Wealth in Community

# of Buyers and Population Growth Price

Community Common Habits and Scale of Preferences

Standard of Living and Sending Habits

Age Structure and Sex Ratio of Population Future expectations

Tax and Tax Structures

Inventions and Innovations

Fashion

Climate and Weather Customs

Advertisement and Sales Propaganda



Types of Demand

Demand for Consumer¶s and Producer¶s Goods Demand for Perishable and Durable Goods

Autonomous and Derived Demand

Industry and Company Demand S-R Demand and L-R Demand

Joint and Composite Demand

Price f(P), Income f(M) and Cross Demand

Dx=f(Py)



The Law Of Demand

Stated by Alfred Marshall.

Ceteris Paribus, the higher the price of a commodity,

the smaller is the quantity demanded and lower the

price, larger the quantity demanded.

D=f(P)

D-demand, p-price, f-functional relationship.

Dx= f(Px)---Downward Sloping Demand Curve. Indicates

inverse relation.

D

5

D

4

2

3

400300200100

1

500

Demand

Price

P of

commodity

X (in Rs.)

Qt.

Demanded

(in

units/week)

5 1004 200

3 300

2 400

1 500



Assumptions

No change in income

No change in in Preferences

No change in Fashion

No change in price of related goods

No expectation of future Price changes or shortages

No change in size, age and Sex ratio of the

population

No change in range of goods available

No change in Govt Policy

No change in weather conditions



Exceptional Demand Curve

(Upward Sloping Demand Curve)

Contrary to the Law of Demand, in some cases, with a fall in price,Demand also falls and a with a rise in price, demand also rises.

Have upward sloping demand curve. Shows Direct functional

relationship.

Price

Demand

D

D

P1

P2

Q1 Q2



Few Exceptional Cases

Giffen Goods (named after Robert Giffen)For inferior goods, when P increases, Qt. purchased decreases

coz of the -ve income effect and people¶s increasing preferences

for a superior commodity with the increase in real income.

Cheap Potatoes(good potatoes)

Vegetable Ghee( Pure Ghee)

Pucca rice (Basmati Rice)

Articles of Snob Appeal ± Certain goods are demanded just coz they are expensive or

prestige

± goods and have a snob appeal.

± Satisfy the aristocratic desire to preserve exclusiveness for uniquegoods.

± Purchased by fewer rich ad use as status symbol.

Diamonds, Rolls Royce.



Speculation

When people speculate about changes inthe price pf a commodity, they tend to buy more

even at the existing high price for the purpose of

hoarding.

Shares in stock market.

Consumer¶s Psychological Bias or Illusion

When a consumer is wrongly biased against the

quality of a commodity with the price change, hemay contract this demand with a fall in price.

Stock clearance sale at reduced price.



Network Externalities in Market Demand

Assumed Individual demand for the product areindependent.

Market demand function is the sum of all

individual buyer¶s demand.

In reality, there may be interdependence of demand i.e. individual demand may be depending

on the demands of the other people in case of

some goods. This situation µNetwork Externality¶,

which may be +ve or ±ve in effect. Bandwagon Effect

Snob or Veblen Effect.



Bandwagon Effect Demand for certain goods is on account

of demonstration or bandwagon effect.

D is influenced by the consumption of pace setters or trend setters like actors,models, group-leaders, etc.

Price is minor consideration.

1. DD ± Initial Demand Curve OP Initial Price

OQ- Initial Qt.

2 Small fall in price (PP1) OP- New price

OQ1 New Qt. demand on the same DDcurve. QQ1 is Qt. Demanded in absence of BW effect on the fall in price.

3. Q1Q2 is the Qt. demanded due tobandwagon effect. The demand curveshifts upwards at D1D1 suggesting risein demand.

Ex: Jeans, Barbie Dolls3. Use of modern media in advertising

strategies are meant to produce thebandwagon effect to manipulate marketdemand.

Q1

Quantity

Price

X

Y

e

Q

BW Effect

D

D

Q2

D1

D1

b

a

P1

P

O



Koenigsegg CCX

A bottle of Louis Roederer Cristal (1993)



The Snob Effect Or Veblen Effect

The SE refers to the desire of a person (rich) to own

exclusive or unique product is called Snob or Veblengood.

Thorstein Veblen argued that affluent class

demonstrate their superiority of high class by

spending on frivolous goods and services.

When P rises of these goods, D shifts upward. P

falls, D shifts downwards.

Network externality of snob effect is ±ve as the

luxury/snob good loses its snob effects/prestige when

it is available freely. In such case even if P falls, Drises but individual demand of the snobbish buyer

decreases.





Veblen Effect Paradox

In certain branded goods likeRay Ban or Levi¶s product,there is a paradox.

When having snob appeal,they are high in demand for the rich.

large quantity productiondecreases P.

Mass appeal to upper middleincome groups, expandingdemand.

Hence no exclusivity. Demanddecreases.

Loss of appeal of brandedgoods-competition withunbranded goods

Goods disposed off at hugediscounts. ± P1- Qt is Q1

± Lowered P2- Qt is Q2

± Reduced P3.- Qt is Q3

± Discounted P4- Qt is Q4

a

b

D

Q4Q3Q2Q1

P4

P3

P2

P1

Qt/month

P r i c e

Discount

D



Change in Qt. Demanded

Versus

Change in Demand

Extension & Contractionof Demand

Phrase µchanges in Qt.demanded¶ relates to theLaw of demand- Changes

in qt. on account of pricechange.

A variation in demandimplies extension or contraction of demand on

the same demand curve. D extends when P falls (a

to b)

D contracts when P rises(a to c).

D

D

P

P2

QQ1

P1

Q2

P r i c e

b

a

c

Qt. Demanded



Change in Demand

Contrary to Law of D,Increase or decrease in

demand refers tochanges in demandcaused by the changesin various other determinants of demands, priceremaining unchanged.

Shifting the demandcurve shows theincrease or decrease inD.

For a change in demandthe changed in other factors other than price isresponsible.

Increase in D

Decrease in D

P r i c e

P

P

Q Q1

D

D

D1

D1

D

D

QQ2

P r i c e

D2

D2

Demand

Demand

a b

c a



Demand Curve Faced by a Firm

Depends on Market Structure

Market demand curve

Imperfect competition

± Firm¶s demand curve has a negative slope

± Monopoly - same as market demand

± Oligopoly

± Monopolistic Competition

Perfect Competition

± Firm is a price taker

± Firm¶s demand curve is horizontal



Demand Curve Faced by a Firm Depends

on the Type of Product

Durable Goods

± Provide a stream of services over time

± Demand is volatile Nondurable Goods and Services

Producers¶ Goods

± Used in the production of other goods ± Demand is derived from demand for final

goods or services

Documents

Demand Definition