NEW Presentation III - Demand Analysis

DEMAND
Demand
 Desire
 Ability to pay Demand
 Willingness to pay
Demand for a particular commodity refers to the commodity
which an individual consumer is willing and able to purchase
per unit of time at a particular price.
Law of Demand: Given by Marshall 4
 Law of demand expresses

relationship
the between the Quantity P Qd
demanded and the Price of the
commodity. 60
1 50
 The law of demands states that,
“Ceteris Paribus, (other things 2 40
remaining constant) the lower the 3 30
price of a commodity the larger the
4
quantity demanded of it and vice
versa.”
PricePen
 In simple terms other things remain
constant, if the price of the commodity
increases, the demand will decrease and if the
price of the commodity decreases, the demand
will increase. 0
QuantityPen
Assumptions:
 Ceteris Paribus includes:
 No change in Income
 No change in taste and preference
 No change in price of related good
 No change in expectation of future prices
 No change in population
 No change in total assests
 No change in income distribution
6
Demand Function
 Function refers to the relation between two

variables.
 A Mathematical relationship between quantity
demanded of the commodity and its determinants is
known as Demand Function.
 When this relationship relates to the demand by an
individual consumer it is known as Individual
demand function and while it relates to the market
its known as market demand function.
Determinants of Demand
Individual Demand Function
 Dependent Variable = f (Independent variable)

 Qdx = f (Px, Py, Y, T, E)
 Qdx = Quantity Demanded of product X

 F = Demand Function
 Px = Price of product X
 Py = Price of related product
 Y = Income(Monetary Income)
 T = Taste
 E = Future expectation of Prices
Determinants of Demand
Market Demand Function
 Dependent Variable = f (Independent variable)

 Qdx = f (Px, Py, Y, T, E, Ps, Di)
 Qdx = Quantity Demanded of product X

 F = Demand Function
 Px = Price of product X
 Py = Price of related product
 Y = Income(Monetary Income)
 T = Taste
 E = Future expectation of Prices
 Ps = Size of the population
 Di = Distribution of Income
9 Table Showing the IDC & MDC :

Price Quantity demanded by Market Demand

(Per Kg) Individual Customers
A B C D
6 4 3 5 6 18
7 3 2 4 5 14
8 2 1 3 4 10
9 0 0 1 2 03
10 Graphical Representation of IDC & MDC
Individual Demand Curve

Market Demand Curve
Why does demand curve slopes downward
1. Income Effect ( Real Income Effect)
When the price of a commodity falls, the consumer can buy more quantity of the
same commodity with his given income.
First Case Second Case

X ( Good) X(Good)
Px =10 Px =20
Income= Rs.20 Income= Rs.20
Qdx= 2 Qdx= 1
Purchasing Power or real income reduced
2. Substitution effect
When the price of a good decreases, it becomes relatively

cheaper than other goods.
This induces the consumer to substitute the goods whose price has
fallen in comparison to the other good which has now become dearer.
3. Increase in the number of consumer
When price of a commodity decreases, more consumers can

afford it and thus its demand increases.
4. Multiple uses:
If price of the commodity reduces, it can be obtained more at

same income and can be put to different uses.
Price
Exceptions
1. Giffen Goods ( Special kind of Inferior Goods)

 Given by sir Robert Giffen
 P Q
 Demand for Giffen goods rises when the price rises and falls when
the price falls, this results in an upward-sloping demand curve,
contrary to the fundamental law of Demand.
2. Bandwagon Effect
 The bandwagon effect is a psychological phenomenon in which people do something

primarily because other people are doing it, regardless of their own beliefs.
3. Snob Effect
 Snob effect refers to the desire to possess a unique commodity having a
prestige value.
 Snob effect works quite contrary to the bandwagon effect.
 The quantity demanded of a commodity having a snob value is greater, the
smaller the number of people owning its.
4. Veblen Effect:
 Abnormal market behavior where consumers purchase the higher-

priced goods whereas similar low-priced (but not identical)
substitutes are available.
 It is caused either by the belief that higher price means higher
quality, or by the desire for conspicuous consumption (to be seen
as buying an expensive, prestige item).
 Named after its discoverer, the US social-critic Thorstein Bunde
Veblen
Continue…
5. Necessity
E.g. ? Salt, Life Saving Drug
If salt price increases, there is no effect on Demand of salt
6. Habit
Chain smoker’s demand for cigarette will not change even if the price of cigarette
increases.
7. Emergency
In case of emergency, demand for certain goods increases even if their prices have not
decreased.
8. Expectation of future prices:

If there is expectation that the prices of the petrol will rise from tomorrow, the
demand for petrol today will rise even when the current price has not changed.
Change in Demand curve
 Extension and contraction of Quantity demand/Movement along the

demand curve
Y
Price
10
5 10
Quantity x

 Extension in the demand curve:
 When more quantity is purchased because of reduced price, there is
downward movement along the demand curve.
 Contraction along the demand curve:

 When less quantity is purchased because of increased price, there is
upward movement along the demand curve.
 Note: Here, ceteris paribus is assumed.

Increase and Decrease in
Demand
Y
Py
Qx X
 Increase in the demand curve: When there is increase in demand
due to change in factors other than price.
 Decrease in the demand curve: When there is decrease in demand

due to change in factors other than price.
 Note: Here, Price remains constant.

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DEMAND

 Ability to pay Demand

 Law of demand expresses

 Function refers to the relation between two

 Dependent Variable = f (Independent variable)

 Qdx = Quantity Demanded of product X

 Dependent Variable = f (Independent variable)

 Qdx = Quantity Demanded of product X

Price Quantity demanded by Market Demand

Individual Demand Curve

First Case Second Case

When the price of a good decreases, it becomes relatively

3. Increase in the number of consumer

When price of a commodity decreases, more consumers can

If price of the commodity reduces, it can be obtained more at

1. Giffen Goods ( Special kind of Inferior Goods)

 The bandwagon effect is a psychological phenomenon in which people do something

 Abnormal market behavior where consumers purchase the higher-

8. Expectation of future prices:

 Extension and contraction of Quantity demand/Movement along the

 Contraction along the demand curve:

 Note: Here, ceteris paribus is assumed.

 Decrease in the demand curve: When there is decrease in demand

 Note: Here, Price remains constant.

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