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8/2/2019 DEmand Anaysis
1/22
Demand
Demand means effective desire or wantfor a commodity, which is backed up by
the ability and willingness to pay for it.
Demand = Desire + Ability to pay + Will to spend
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Types of Demand
Demand for consumer goods & producer goods
Demand for perishable goods and durable goods
Autonomous demand and derived demand
Industry demand and company demand
Short run demand and long run demand
Joint or complimentary demand and compositedemand
Price Demand, Income demand, Cross demand
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Determinants of Demand Factors influencing individual demand :
Price of products
Income
Tastes, habits and preferences
Relative prices of other goods substitute and complimentary goods
Consumers Expectations
Advertisement Effect
Factors influencing Market demand : Price of the product
Distribution of income and wealth
General standards of living and spending habits of people
Number of buyers in the market and growth of population
Future expectations
Level of taxation & tax structure
Climate & weather conditions
Advertisement
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Demand Function A demand function in mathematical terms expresses the
functional relationship between the demand of the productand its various determining variables :
Dx = f (Px, Ps, Pc, Yd, T, A, N, u )
P = The price of the product
Ps = Price of substitutesPc = Price of Complementary goods
Yd = Level of disposable income with buyers
T = Change in buyers tastes and prefrences
A = Advertisement effect
N = No. of buyers
u= Other unknown determinants of demand for commodity X
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Law of Demand
A decrease in the price of a good, allother things held constant, will cause an
increase in the quantity demanded ofthe good.
An increase in the price of a good, all
other things held constant, will cause adecrease in the quantity demanded ofthe good.
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Change in Quantity
Demanded
Quantity
Price
P0
Q0
P1
Q1
An increase in price
causes a decrease in
quantity demanded.
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Change in Quantity
Demanded
Quantity
Price
P0
Q0
P1
Q1
A decrease in price
causes an increase in
quantity demanded.
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Exceptions to the law of Demand
Giffen Goods (named after Sir Robert Giffen)Articles of Snob AppealSpeculationConsumers Psychological Bias or Illusion
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Change in Demand
Quantity
Price
P0
Q0 Q1
An increase in demand
refers to a rightward shift
in the market demand
curve.
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Change in Demand
Quantity
Price
P0
Q1 Q0
A decrease in demand
refers to a leftward shift
in the market demand
curve.
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Law of Supply
A decrease in the price of a good, allother things held constant, will cause a
decrease in the quantity supplied of thegood.
An increase in the price of a good, all
other things held constant, will cause anincrease in the quantity supplied of thegood.
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Change in Quantity Supplied
Quantity
Price
P1
Q1
P0
Q0
A decrease in price
causes a decrease in
quantity supplied.
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Change in Quantity Supplied
Quantity
Price
P0
Q0
P1
Q1
An increase in price
causes an increase in
quantity supplied.
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Changes in Supply
Change in Production Technology
Change in Input Prices Change in the Number of Sellers
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Change in Supply
Quantity
Price
P0
Q1Q0
An increase in supply
refers to a rightward shift
in the market supply curve.
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Change in Supply
Quantity
Price
P0
Q1 Q0
A decrease in supply refers
to a leftward shift in the
market supply curve.
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Market Equilibrium
Market equilibrium is determined at theintersection of the market demand curve
and the market supply curve. The equilibrium price causes quantity
demanded to be equal to quantity
supplied.
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Market Equilibrium
Quantity
Price
P
Q
D S
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Market Equilibrium
Quantity
Price
P0
Q0
D0 S0
Q1
P1
D1
An increase in demand
will cause the market
equilibrium price and
quantity to increase.
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Market Equilibrium
Quantity
Price
P1
Q1
S0
Q0
P0
D0D1
A decrease in demand
will cause the market
equilibrium price and
quantity to decrease.
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Market Equilibrium
Quantity
Price
P0
Q0
D0 S0
Q1
P1
An increase
in supply
will cause
the marketequilibrium
price to
decrease and
quantity toincrease.
S1
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Market Equilibrium
Quantity
Price
P1
Q1
D0
Q0
P0
A decrease in
supply will
cause the
marketequilibrium
price to
increase and
quantity todecrease.
S1 S0