Demand Theory & Analysis

Presented By:Gauransh GandhiPM/2014/402

What is Demand?

Demand is defined as that want, need or desire which is backed by willingness and ability to buy a particular commodity in a given period of time.

Input or Factor Markets:-The markets in which the resources used to produce products are exchanged.

Output or Product Markets:-The markets in which goods and services are exchanged.

Different Types of Demand

Direct & Derived Demands:-

Demand for goods that are directly used for consumption by the ultimate consumers, is known s direct demand. Since such goods are used for final consumption, such demand is also called as consumer’s goods demand.Examples:- Demand for tea, coffee, readymade clothes etc.

When a product derives its usage from the use of some primary product, its demand is derived demand.Examples:- petrol for vehicles, electricity for electronics.

Recurring and Replacement Demands

Recurring Demand:- Demand for goods which are used multiple times.Examples:- read newspaper everyday, fill petrol once a week etc

Replacement Demand:- Demand for goods which are used for sometime and then replaced with new one. Examples:- mobiles, vehicles etc.

Complementary and Competing Demands

Complementary Demand:- Demand which create joint demand i.e. when a product derives its usage from the use of some primary product, is called complementary demand.

Examples:- computer with software, printer with cartridge.

Competing Demand:- Demand for goods which are substitutes. Example:- In a competitive demand situation faced by a business, prospective buyer could choose either of the two competing products and still receive roughly the same level of satisfaction as in case of tea and coffee.

Factors affecting demand of a product

• Price of the product• Income available to the household• The household’s amount of accumulated wealth• The price of the other products available to the

household• The price of the related products or substitutes• The household’s tastes and preferences• The household’s expectations about future income,

wealth and prices

Law of Demand

The relation of price to sales is known in economics as the ”Law of Demand”. The law states that “higher the price, lower the demand and vice-versa, other things remaining the same”.

Demand Curve

Chief characteristics of the Law of Demand• Inverse relationship between price and quantity

demanded• Price is independent variable & Demand is dependent

variable• Other things remain the same which will influence the

demand like income, substitute’s price, consumers’ tastes and preferences etc.• Reasons underlying the Law of Demand :-1. Income Effect2. Substitution Effect

Demand curve shifts to right

Demand curve shifts to left

Exceptions to the Law of Demand

• Inferior goods ( Giffen goods)• Snob appeal• Future expectation of prices• Goods with no substitutes• Life saving drugs

Individual Demand & Market demand

The quantity demanded by an individual purchaser at a given price is known as individual demand.The total quantity demanded by all the purchasers together is known as market demand.