DEMAND AND GAME THEORY

- Kishore Raveendran

Demand: "The demand for a commodity at a given price is the amount of it which will be bought per unit of time at that price”.

Law of Demand: “The demand for a commodity increases with a fall in its price and decreases with a rise in its price, other things remaining the same”. The Law of demand thus merely states that the price and demand of a commodity are inversely related, provided all other things remain unchanged or as economists put it ceteris paribus.

ASSUMPTIONS Income level should remain constant, Tastes of the buyer should not change, Prices of other goods should remain constant, No new substitutes for the commodity, Price rise in future should not be expected and Advertising expenditure.

Why Demand Curve Slopes Downwards

The reasons behind the law of demand, i.e., inverse relationship between price and quantity demanded are following:

Substitution effect, Income effect, Diminishing marginal utility.

Market Demand The total quantity which all the

consumers of a commodity are willing to buy at a given price per time unit, other things remaining the same, is known as market demand for the commodity. In other words, the market demand for a commodity is the sum of individual demands by all the consumers (or buyers) of the commodity, per time unit and at a given price, other factors remaining the same

Individual Demand The individual demand means the

quantity of a product that an individual can buy given its price. It implies that the individual has the ability and willingness to pay.

Demand Function Demand function is a mathematical

expression of the law of demand in quantitative terms. A demand function may produce a linear or curvilinear demand curve depending on the nature of relationship between the price and quantity demanded. The functional relationship between the demand for a commodity and its various determinants may be expressed mathematically as;

Dx = f (Px, Py, M, T, A, U) where, Dx = Quantity demanded for commodity X, f = functional relation, Px = The price of commodity X, Py = The price of substitutes and complementary

goods, M = The money income of the consumer, T = The taste of the consumer, A = The advertisement effects, U = Unknown variables or influences

Elasticity of Demand The concept of elasticity of demand can be

defined as the degree of responsiveness of demand to given change in price of the commodity.

Methods of Measurement of Elasticity of Demand By using three different methods, elasticity of

demand is measured. Ratio Method Expenditure Method Point Method

Demand Forecasting According to Cardiff and Still,

“Demand forecasting is an estimate of sales during a specified future period based on a proposed marketing plan and a set of particular uncontrollable and competitive forces’’.

Objectives of Demand Forecast

Formulation of production policy Price policy formulation Proper control of sales Arrangement of finance To decide about the production capacity Labour requirements Production planning

GAME THEORY Game theory is a branch of applied

mathematics that is used in the social sciences, most notably in economics, as well as in biology (particularly evolutionary biology and ecology), engineering, political science, international relations, computer science and philosophy. It attempts to capture behaviour mathematically in strategic situations or games in which an individual's success in making choices depends on the choices of others.