Demand Analysis

SSIMS-3

• Demand Curve• Linear • Non-linear – very minute changes

• Usually downward slope / -ve slope :represents inverse relationship

Y-A

xis

Pri

ce

X -Axis Quantity100

25

a

b

15

10

4060

Slope of DD Curve

• Q= 100-4P• Y=mx+c• Q= -4P +100• dq/dp = -4

Complete the table if Q=100-0.25P

• Price (Rs.) Qtd.(Units) • 90• 70• 50• 30• 10

Individual & Market DD

• C1 : Q1=12-P• C2: Q2= 5-0.5P• C3: Q3= 10-P

• (Market DD) Qm= C1+C2+C3 = 27-2.5P• Hence P= 10.8 -0.4Qm

Market DD Schedule

• P Q1 Q2 Q3 Qm

• 10• 8• 6• 4• 2

Why study Demand• No demand implies production is unwarranted.

• If demand is lagging behind production, create new demand through better advertisement, improvement in quality and so on.

• Necessitates Identification and analysis of the

factors affecting demand (consumer needs & Preferences).

• Facilitates Setting up the price, forecasting future demand for product, adoption of suitable marketing strategy to maximize profit (short run & long run).

Exceptional DD Curve

• Bandwagon Effect: Demand for a commodity is determined by the number of people opting for it. You demand for a commodity as others also buy it.

Read Shiv Khera’s ‘You can Win’ as others are reading the same book

• Goods with SNOB Appeal:

Demand for a commodity falls when more people consume it.

Demand for Membership of an organization or CLUB

Uncertain Product Quality

On account of asymmetry of information, quality can be judged based on the prevailing price of the commodity.

Higher the price, better the quality- People Perceive.

Increase in price over a period implies improvement in quality-A perception

Opt for the product (increase in demand when price is high)

Giffen Good: English Economist Robert Giffen coined the term Giffen Good.

Demand curve for some inferior goods can slope upward for theoretical reason. No empirical evidence accumulated so far!

Exceptions to Law of Supply:Quantity supplied can be high at lower price and low when price is

high on account of information asymmetry. Used cars, Medical Insurance

Supply

• Qs= f( P,Ip,T, Ps,……..)• P: Price of the product• Ip: Input prices• T: Technology• Ps: Price of substitutes

• Direct relationship : P & QS

Slope of SS Curve

• Qs= -40+20P• Slope = 20

Calculate Qs for the following prices if Qs= - 40+20P

• Price (Rs.) Qs. (Units)• 6• 5• 4• 3• 2• 1

ELASTICITY OF DEMAND

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PRICE ELASTICITY OF DEMANDOR

ELASTICITY OF DEMAND

• Own price elasticity is:– percentage change in quantity demanded,

divided by percentage change in price:

• If demand is price-elastic, revenue increases with lower prices.

• If demand is price-inelastic, revenue decreases with lower prices

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• Ed=% change in quantity dd of x / % change in the price of the product x

• Five different values / types

• 0 to

• Ped =dq/dp x P/Q

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Calculate PED at point P=10 Q=360. If P=100-0.25Q

• Q=400-4P• Dq/dp=-4• -4 X 10/360 = -1/9 = .11 Inelastic

• P=70 Q=120• =2.33 elastic

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PERFECTLY INELASTIC

• Zero-elasticity at all prices

Price

Quantity

Ed = 0

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PERFECTLY ELASTIC

• Infinite elasticity at all prices

Price

Quantity

Ed =

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UNITARY ELASTIC

• Unitary elasticity at all prices

Price

Quantity

Ed = -1This curve is a ‘rectangular hyperbola’

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MEASUREMENT OF PED

• RATIO METHOD

• ARC METHOD

• GEOMETRIC/ POINT ELASTICITY METHOD– LOWER SEGMENT / UPPER SEGMENT

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The Demand-Curve:Examples

• A Linear Demand Curve

Price

Quantity

Ed = -1

Ed = 0

Ed = -

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DETERMINANTS OF OWN-PRICE ELASTICITY

• SUBSTITUTES: how close and at what prices?– How narrowly defined is the product? The more

narrowly defined the more close substitutes• PROPORTION OF CONSUMERS’ INCOME

spent on the product • TIME. Demand is more elastic over longer

periods of time

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• NO: OF USES• CONSUMER’S INCOME• POSSIBILITY OF POSTPONEMENT• HABITS & CUSTOMS• NATURE OF THE PRODUCT– LUXURY / NECESSARY

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MANAGERIAL USES

• DEVALUATION

• TAXATION POLICY

• PRICING

• DDs OF TRADE UNIONS

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INCOME ELASTICITY OF DD

–percentage change in quantity demanded, divided by percentage change in the income of the consumer–THREE TYPES–POSITIVE : >1, <1 & =1– ZERO : no change–NEGATIVE: Inverse relationship

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Determinants

• Income Elasticity– Type of good• necessities - salt, drinking water, zero elasticity• luxuries, zero at low levels of income then high when

income thresholds exceeded• inferior goods - negative, purchase less as income rises

- bus travel, low-grade bread

• Giffen’s goods

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CROSS PRICE ELASTICITY

• % CHANGE IN QUT. DD OF x TO % CHANGE IN PRICE OF y

• Influence of Py on Qdx

• Px constant

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• SUBSTITUTES• X & Y

• Py – Qdx :Positive• Py reduces – Qdy increases –Qdx reduces

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• COMPLEMENTARY GOODS• X & Y

• Py – Qdx: Negative

• Py reduces – Qdy increases –Qdx increases

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• UNRELATED GOODS

• X & Y

• Py – Qdx : zero slope

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Determinants

• Cross-price elasticity– substitutes or complements,and how close?– An industry is a group of firms producing

products with high positive cross-elasticities

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PROMOTIONAL ELASTICITY OF DD

• Rate of change in qut. dd due to changes in sales promotion expenditure

• +ve• -ve• zero

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Demand & Marginal Revenue

• A Linear Demand Curve

RS.

Quantity

Ed = 1

Ed = 0

Ed =

Marginal Revenue

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• TR is Maximum• PED =1• MR= 0• TR= PQ• P=100-.25Q• TR =(100-.25P)Q

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• TR =100Q –.25Q2

• Xn = nx n-1

• dTR/ dQ = 100-0.5Q

• MR= 100-0.5Q• If MR =0

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• 0=100-0.5Q

• .5Q=100

• Q=200

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Price, MR & TR

• TR=PQ• MR=dTR/dQ• =dPQ/dQ• 1st Variable x derivative of 2nd

• Plus • 2nd Variable x Derivative of first

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• P x dQ/dQ +Q x dP/dQ• P + Q ( dP/dQ)• P/P +Q/P(dP/dQ)• P {1+Q/P (dP/dQ)}• MR= P( 1+ 1/ep)

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D

MR

Rs.

TR

Max. Rev

Output