Unit II

DEMAND AND SUPPLY ANALYSIS (10)

Demand

• The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price.

• Desire on the product

• Willingness to pay for it

• Ability to pay the specified price for it

Types of Demand

• Price Demand- Quantity of Products demanded for a given price

• Income Demand – Quantity of a given product at a given level of income

• Cross Demand – Quantity of given product given the price of related goods

Determinants of Demand

• Price of the product• Income level of the consumer• Taste and preference of the consumer• Price of the related goods• Expectation about price in future• Expectation about income in future• Size of population• Distribution of consumers over different region• Advertising Efforts

Demand Function

• Demand function -- a behavioral relationship between quantity consumed and a person's maximum willingness to pay for incremental increases in quantity.

Law of Demand

• Law of demand states that when other things remaining the same, the amount of quantity demanded raises with every fall in price and vice versa

Assumptions

• Other things remaining same– Income level of consumers– Taste and preference of consumers– Price of the related goods– Size of the population

• Q= f(x)

• Q – Quantity Demanded

• X- Price of the product

Contd.,

Law of Demand and Substitution Effect

• When there is shortage of necessaries feared• Veblen Goods- Prestigious goods• Giffen Goods – Raise in price of good s

increases the demand of the goods• Bread is a staple food. Bread is much cheaper

than any one of its substitutes. If the price of such staple food item increases the consumer has to readjust his expenses by cutting down expenditure on other items and spending the same amount of money on bread as before

Extension and Contraction in Demand

Extension

Contraction

Elasticity of Demand

• The term elasticity is defined as the rate of responsiveness in demand of a commodity for a given change in price or any other determinants of demand.

• Ed= proportionate change in quantity demanded / Proportionate change in price

• Ed= (Q2-Q1)/Q1/((P2-P1)/P1)

Measurement of Elasticity

• Perfectly elastic demand

• Perfectly inelastic demand

• Relatively elastic demand

• Relatively in elastic demand

• Unity Elasticity

Contd.,

Value Descriptive Terms

Ed= 0 Perfectly inelastic demand

-1<Ed<0 Inelastic or relatively inelastic demand

Ed= -1 Unit elastic

-infinity < Ed < -1 Elastic or relatively elastic demand

Ed= infinity Perfectly elastic demand

Perfectly Inelastic Demand

Perfectly Elastic

Relatively Inelastic Demand

Unit Elastic Demand

Relatively Elastic Demand

Factors Governing Elasticity of Demand

• Nature of the product

• Time Frame

• Degree of Postponement

• Number of Alternative uses

• Availability of close substitutes

• Incase of compliment and join goods

Significance of Elasticity of Demand

• Prices of factors of production• Price fixation• Government policies

– Tax policies– Raising bank deposits– Public utilities– Reevaluation and devaluation of currencies

• Forecasting Demand• Planning the level of output

Laws of Consumption

• Utility– Utility can be defined as the satisfaction which a person

derives from consumption of a given product or service.

• Total Utility– Refers to full satisfaction or units derived by the

customer from the consumption of product or service.

• Marginal utility – Refers to additional utility derived from an additional unit

consumed.

• Diminishing Marginal utility

Contd.,

• Cardinal Utility– Utility derived on consuming every unit of

product or service is assumed to be measurable exactly in terms of money that the consumer is prepared to pay for another unit of a commodity.

Law of Diminishing Marginal Utility

• Law of Diminishing marginal utility states that the marginal utility derived on the consumption of every additional unit of good or services goes on diminishing, other things remaining the same.

Law of equi marginal utility

• Consumer maximizes his total utility by allocating his income among the goods and services available to him in such a way that the marginal utility from one good equals the marginal utility from the other good.

• Marginal utility of product X/ Price of product X = Marginal utility of pdt Y/ Price of Pdt Y

Marginal Utility schedule for customer C

Units bought Marginal Utility obtained from

Pants Shirts

1 40 35

2 32 28

3 28 20

4 20 10

5 10 8

Suppose

• A pant and Shirt cost Rs. 100

• Total satisfaction from 3 pants and two shirts 165

• Total satisfaction from 3 shirts and 2 pants 155.

Consumer Surplus

• Consumer surplus is the difference between what the consumer is prepared to pay and what he actually pays when he is buying a commodity.

Indifference Curve

• An indifference curve is a curve that reveals certain combinations of goods or services yielding the same utility of the customer.

Indifference Curve

Properties of an indifference curve

• It slopes downwards from left to right– Consumption of pdt A increase – Pdt B

decrease

• It is convex to the origin– Rate of substitution is proportional to degree

of convexity

• It cannot intersect with another indifference curve- – choose another curve for greater satisfaction

Methods of Demand Forecasting

• Survey Methods

• Statistical Methods

• Other Methods

Survey Methods

• Survey of buyer intentions– Census Method– Sample method

• Sales force opinion Methods

Statistical Methods

• Trend projection Methods– Trend line observation– Least square method– Time series analysis method– Moving averages method– Exponential smoothing method.

• Barometric Techniques

• Simultaneous Equation Method

• Correlation and regression method

Other Methods

• Expert opinion method

• Test marketing

• Controlled experiments

• Judgmental approach

Supply

• Supply means the quantity of goods and service offered for sale at various prices at a given time period.

• Law of Supply– More quantities of a commodity will be offered

for sale at higer prices and less quantities will be offered for lower prices.

Law of Supply

Shift in supply curve

• Changes in price of inputs

• Changes in technology

• Changes in number of firms

• Changes in price of related products

• Govt policies

Elasticity of supply

• Elasticity of supply may be defined as the degree of responsiveness of the the quantity of a commodity supplied for a small change in its price.

Types of Elasticity

• Perfect Elasticity Es= infinity

• Perfectly inelastic Es= 0

• Unit elastic Es= 1

• Relatively elastic Es >1

• Relatively inelastic Es < 1

Demand and Supply