DEMAND ANALYSIS

DEMAND

 Quantity of commodity which an individual

consumer or a household is willing (& able) to
purchase during a period of time, at a
particular price

 Effective demand- demand backed by

purchasing power
DEMAND

Demand for a commodity implies:

 Desire of consumer to buy product

 Willingness to buy product

 Sufficient purchasing power in possession

to buy product
TYPES OF DEMAND RELATIONS
1. Generalised demand function
QdX = f(PX, M, PY, T, Ep, N)
where:
QdX: quantity demanded of commodity X by an
individual per time period
PX : price per unit of commodity X
M: consumer’s income
PY: price of related (substitute/ complementary)
commodity
T: tastes of the consumer
Ep: Consumer’s expectations about future
prices
N: No of consumers in market
Contd…
Linear form:

QdX = a + b PX + c M + d PY + e T + f Ep+ g N

Contd…
SUMMARY OF GENERALISED DEMAND FUNCTION
VARIABLE RELATION TO Qd SIGN OF SLOPE PARAMETER
P Inverse b = QdX/PX < 0

M Direct for mormal c = QdX/M> 0

goods
Inverse for inferior c = QdX/M< 0
goods
Py Direct for substitute d = QdX/PY > 0
goods
Inverse for d = QdX/PY < 0
complementary
goods
T direct e = QdX/T > 0
Ep direct f = QdX/Fp > 0
N direct g = QdX/N >0
TYPES OF DEMAND RELATIONS

2. Ordinary demand function

Shows relation b/w quantity demanded & price

of product when all other factors affecting
demand are held constant at specific values.

Contd…
Example

Qd = 1800 – 20P + 0.6M – 50 Py

Given that M = 20000, Py = 250

Qd = 1300 – 20P
DEMAND SCHEDULE: Tabular representation showing
different quantities of goods that are being demanded at different
price levels, cetirus peribus

PRICE PER CUP NO OF CUPS OF

OF TEA (Rs) TEA DEMANDED
7 1
6 2
5 3
4 4
3 5
2 6
1 7
DEMAND CURVE: Locus of points showing various
alternative combinations of price & quantity (inverse relation)

PRICE

O X
QUANTITY DEMANDED
LAW OF DEMAND

 Inverse relationship between price & Qd per time

period

 It states that other things being equal (cetirus

peribus), the quantity of a product demanded per
unit of time increases when its price falls &
decreases when its price increases

 Change in commodity price affects qty demanded

in 2 ways:
 Substitution Effect

 Income Effect
MARKET DEMAND

Sum of all quantities of a good or service

demanded per period by all the
households buying in the market for that
good or service
MARKET DEMAND SCHEDULE: Schedule obtained
by summing up quantity demanded by all the
consumers at each price

PRICES QUANTITY DEMANDED MARKET

(DOZENS) (DOZENS) DEMAND

A B C D
10 1 0 3 0 4

9 3 1 6 4 14

8 7 2 9 7 25

7 11 4 12 10 37

6 13 6 14 12 45
MARKET DEMAND CURVE: horizontal summation
of demand curves of individual consumers
DETERMINANTS OF MARKET DEMAND

 Number of consumers

 Consumer preferences

 Income

 Prices of other goods

 Market Demand Function
QDX = f(PX, N, I, PY, T)
WHERE:
QDX = quantity demanded of commodity X
PX = price per unit of commodity X
N = number of consumers on the market
I = consumer income
PY = price of related (substitute or complementary)
commodity
T = consumer tastes
EXCERCISE
 A senior student has question bank of Mathematics,
which he wants to sell now. Three junior students are
willing to purchase it. He has estimated their demand eq
as:
Q1 = 30 – P
Q2 = 22.50 – 0.75P
Q3 = 37.5 – 1.25 P

 Find the mkt demand eq for question bank

 How many more questions can he sell for each one

rupee decrease in price?

 If he has a QB of 60 questions, what price shd he charge

to sell entire QB?
SOLUTION

 1. Qm = Q1 + Q2 + Q3 = 90 - 3P

 2. A 1 Rupee decrease in P will increase Qd by 3

 3. 60= 90 – 3P
P = Rs. 10
EXCEPTIONS TO LAW OF DEMAND

 Giffen goods

 Expectations regarding future prices

 Status goods
CHANGE IN QUANTITY DEMANDED
(MOVEMENT ALONG A CURVE) VERSUS
CHANGE IN DEMAND (SHIFT OF CURVE)

 MOVEMENT ALONG A DEMAND CURVE: change in

quantity demanded due to a change in its own price

 SHIFT OF DEMAND CURVE: change in demand due to

change in all other factors affecting demand, other than
the change in its own price
CHANGE IN QUANTITY DEMANDED-
MOVEMENT ALONG A CURVE- CONTRACTION
OF DEMAND

Price
An increase in price
causes a decrease in
quantity demanded.
P1

P0

DEMAND CURVE
Quantity
Q1 Q0
CHANGE IN QUANTITY DEMANDED-
MOVEMENT ALONG A CURVE- EXPANSION
OF DEMAND

Price
A decrease in price
causes an increase in
quantity demanded.

P0

P1 DEMAND CURVE

Quantity
Q0 Q1
REASONS FOR CHANGES IN DEMAND

 Change in Buyers’ Tastes

 Change in Buyers’ Income

 Normal Goods

 Inferior Goods

 Change in the Price of Related Goods

 Substitute Goods

 Complementary Goods
CHANGE IN DEMAND- SHIFT OF DEMAND
CURVE- INCREASE IN DEMAND

An increase in demand
Price
D1 refers to a rightward shift
D
in the demand curve.

P0

Quantity
Q0 Q1
CHANGE IN DEMAND- SHIFT OF DEMAND
CURVE- DECREASE IN DEMAND

A decrease in demand
Price
D1 D
refers to a leftward shift
in the demand curve.

P0

Quantity
Q1 Q0
TOTAL AND MARGINAL REVENUE

 TOTAL REVENUE: total proceeds generated

from the sale of units produced

 MARGINAL REVENUE: change in revenue

associated with a one unit change in output
TOTAL AND MARGINAL REVENUE

Price Quantity Total Marginal

Revenue Revenue
10 1 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
3 8 24 -4
2 9 18 -6
1 10 10 -8
 TOTAL AND MARGINAL REVENUE

Price Quantity Total Marginal

Revenue Revenue
10 1 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
3 8 24 -4
2 9 18 -6
1 10 10 -8
INFERENCES (1)

TR declines from 6 units onwards

 Sound pricing decision requires info about

dd.

 In some cases, higher P may increase TR,

in some it may reduce it.
INFERENCES (2)

MR is negative from 7th unit

 To sell extra, firm must reduce P of all units

sold (inverse relation b/w P & dd)

 Rupees recd from selling extra unit are not

sufficient to compensate for rupees lost as a
result of selling all other units at a lower price

 Firm shd not increase O/P beyond a pt where

MR is 0.
 35 Total Revenue
Total Revenue 30

25

20

15

10

0
0 2 4 6 8 10 12

Quantity per period

15
MR/Price

10

5
Quantity Demanded
0

0 2 4 6 8 10 12 Quantity per
-5
period
Marginal Revenue
-10
MARGINAL REVENUE EQUATION

Demand Equation Q = B + ap P

P = -B/ap + Q/ap

TR = PQ = -B/ap*Q + Q2/ap

MR = d(PQ)/dQ = -B/ap+ 2Q/ap

MR = 0 , Q = B/2

For Q < B/2 , MR = +ve Q > B/2 , MR = -ve

RELATION OF DEMAND & MARGINAL
REVENUE CURVE

 The curves intercept y-axis at same point

 Intercept of MR & Demand (DD)
curve = -B/ap

 Slope of (DD) curve = 1/ ap

 Slope of MR curve = 2/ ap = 2 DD curve

EXCERCISE

 Demand eq faced by XYZ Co is P = 10,000 – 4Q

 Write MR eq.
 At what P & Q will MR be 0?
 At what P & Q will TR be max?
 If P is increased from Rs 6000 to 7000,
what will be the effect on TR?