MANAGERIAL ECONOMICS MODULE 3

BY Mr. Anirban Christ College Institute of Management Bangalore

Demand Analysis
Meaning of Demand: Demand: Demand for a particular commodity refers to the commodity which an individual consumer or household is willing to purchase per unit of time at a particular price. price. Demand for a particular commodity implies: implies:
Desire of the customer to buy the product; product; product; The customers willingness to buy the product; Sufficient purchasing power in the customers possession to buy the product. product.

The demand for a particular commodity by an individual consumer or household is known as Individual demand for the commodity and Summation of the individual demand is known as the Market demand. demand.
Anirban / Micro Economics / Module 3 / CCIM 2

Demand Analysis
Law of Demand: Demand:
Law of demand expresses the relationship between the Quantity demanded and the Price of the commodity. commodity. The law of demands states that, Ceteris Paribus, (other things remaining constant) the lower the price of a commodity the larger the quantity demanded of it and vice versa. versa. 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. increase. P 1 2 3 4 Qd 60 50 40 30

Anirban / Micro Economics / Module 3 / CCIM

Demand Analysis
Assumptions: Assumptions: No change in taste and preference. preference. Income of the consumer is constant. constant. No change in customs, habit, quality of goods. goods. No change in substitute products, related products and the price of the product. product. No complementary goods. goods.
Anirban / Micro Economics / Module 3 / CCIM 4

Demand Analysis
Demand Schedule: Schedule: A demand schedule is a numerical tabulation that shows the quantity of demeaned commodity at different prices. prices. The demand schedule may be of 2 types : Individual demand Schedule Market demand Schedule. Schedule.
Anirban / Micro Economics / Module 3 / CCIM 5

Demand nal
Table Showing the IDC & MDC :

i
Market Demand

Price (Per Kg)

Quantity demanded by Individual Customers A B C D 4 3 2 0 3 2 1 0 5 4 3 1 6 5 4 2

6 7 8 9

19 14 10 03
6

Anirban / Micro Economics / Module 3 / CCIM

Demand Analysis
Graphical Representation of IDC & MDC

Anirban / Micro Economics / Module 3 / CCIM

Demand Analysis
Demand Function: Function:
A Mathematical relationship between quantity demanded of the commodity and its determinants is known as Demand Function. 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. function. Individual Demand Function : Qdx = f (Px, Y, P1. Pn-1, T, A, Ey. Ep, U) . PnEy.

Anirban / Micro Economics / Module 3 / CCIM

Demand Analysis
Qdx Px Y P1..Pn-1 ..PnT A Ey Ep U = Quantity demanded for product X. = Price of product X = Level of Income = Prices of all other products = Taste of the consumer = Advertisement = Expected future income = Expected future price = Other determinants not covered in the list of determinants. determinants.

Market Demand Function: Function: Qdx = f (Px, Y, P1. Pn-1, T, A, Ey, Ep, P, D, U, P) . PnP D = Population = Distribution of consumers. consumers.

Anirban / Micro Economics / Module 3 / CCIM

Demand Analysis
Causes of downward sloping of Demand Curve: Curve:
According to the law of demand there exists a opposite relationship between the PRICE and the QUANTITY DEMANDED, and that is why demand curve is downward sloping. sloping. Let the linear form of demand curve : P = a + bq, where a, q constant and b < 0, i.e. dp/dq = b < 0 (Assumption), so slope of the demand curve is negative. negative. The various reasons for this downwards sloping of demand curves are as follows: follows: Law of Diminishing Marginal Utility and Equi-Marginal utility. Equiutility. Price Effect. Effect. Income Effect. Effect. Substitution Effect. Effect. Different Use ( Electricity). Electricity).
Anirban / Micro Economics / Module 3 / CCIM

10

Demand Analysis
Exceptions of Law of Demand: Demand:
In certain cases the slope of Demand Curve is upward i.e. positively sloped, it is known as the exceptions of Law of Demand. Demand. These exceptions are as follows: follows: Giffen Goods (Giffen Paradox) Emergency (War etc) etc Conspicuous necessities (Car, Fancy Cloths etc) and etc Conspicuous Consumption (Fancy Diamonds, High price shoes, pens etc) etc Depression ( Price and quantity demand is low) Ignorance Effect (High priced commodity is better in quality) Speculation (Future change in price)
Anirban / Micro Economics / Module 3 / CCIM

11

Demand nal

The situations given below are the cases where Individuals demand depends on the demands of the other people. people. Bandwagon Effect (Positive Network Externalit ) : Flatter or more elastic Snob Effect: (Negative Network Externalit ): Steeper or Less Effect: ): elastic Veblen Effect : Steeper or Less elastic

Shift (Contraction & Expansion) and Change in Demand: Demand:

Anirban / Micro Economics / Module 3 / CCIM

12

Demand Analysis
Factors Determining Demand: Demand:
General Factors: Factors:
Price of the product Taste and Preference Income Prices of the related goods

Additional Factors: (Luxury Goods & Durables) Factors:

Consumers Expectation of future price. price. Consumers Expectation of future income. income.

Additional Factors:( Market Demand) Factors:

Population Social, Economic & Demographic distribution of Consumers. Consumers.

Anirban / Micro Economics / Module 3 / CCIM

13

Demand Analysis
Demand Distinctions: Distinctions:
Producers Good and Consumers Good. Good. Durable and Perishable Good. Good. Derived Demand Autonomous Demand. Demand. Industry Demand and Firm (Company) Demand. Demand. Total Demand and Market segment Demand Short Run Demand and Long Run Demand. Demand. Short Run Demand Fluctuations and Long Run Demand Trends. Trends.

Anirban / Micro Economics / Module 3 / CCIM

14

Demand Analysis
Problems: Problems:
1. The demand equation is Q = 90 3P. At what price would no one be willing to buy any of the commodity? If the commodity is given free, what is the quantity demanded? If the price is reduced by 1 unit how much the quantity demanded change? The demand equation is Q = 25 5P. What is the quantity demanded if the price is Rs 3? Assume the demand is 18 units, then what is the corresponding price? What would be the demand if the commodity in question were a free good? What is the highest price anybody will pay for the commodity?

2.

Anirban / Micro Economics / Module 3 / CCIM

15

Elasticity of Demand
Elasticity of Demand: Demand:
Elasticity of demand is defined as the percentage change in quantity demanded caused one percent change in each of the determinants under consideration while the other determinants are held constant. constant. Ed = % change in quantity demanded / % change in the determinant. determinant. There are mainly five types of Elasticity of Demand : Price Elasticity of demand Income Elasticity of demand Cross Elasticity of demand Promotional Elasticity of demand Expectation Elasticity of demand

Anirban / Micro Economics / Module 3 / CCIM

16

Elasticity of Demand
Price Elasticity of Demand :
Price Elasticity of Demand measures the degree of responsive ness of the quantity demanded of a commodity due to a change in its own price. price. Ep = - (% change in quantity demanded) /
( % change in the Price). Price). Here we ignore the ve sign as the relation between price and the quantity demanded is opposite. opposite. Price Elasticity of Demand are of 5 types :

Perfectly elastic demand Perfectly / Absolutely inelastic demand Relatively Elastic demand Relatively inelastic demand Unit Elastic demand
Anirban / Micro Economics / Module 3 / CCIM 17

Elasticity of Demand
Income Elasticity of Demand: Demand:
Income Elasticity of Demand measures the degree of responsive ness of the quantity demanded of a commodity due to a change in money income of the consumer. consumer. Em = - (% change in quantity demanded) /
( % change in the Money Income). Income).

Cross Elasticity of Demand: Demand:

Income Elasticity of Demand measures the degree of responsive ness of the quantity demanded of one commodity due to a change in price of some related goods. goods. Exy = - (% change in quantity demand of goods Y) /
( % change in the price of goods X). X).

Anirban / Micro Economics / Module 3 / CCIM

18

Elasticity of Demand
Factors affecting the Elasticity of Demand :
Nature of the product Availability of the substitute product Uses of the commodity Income Levels Proportion of Income spent Postpone consumption Price levels Time period Durability Taste & Preference Demonstration Effect Advertisement Special Demand (Medicine) Complementary Goods Expectation of the future price etc etc
Anirban / Micro Economics / Module 3 / CCIM

19

Elasti it
Advertising Demand: Demand:

f Demand
of

r Pr motional Elasti it Promotional

Advertising or Promotional Elasti it of Demand measures the degree of responsive ness of the quantit demanded of a commodit due to a change in expenditure on advertising and other sales promotion activities. activities. Ea = (% change in quantit demanded) / ( % change in the Expenditure on Advertisement). Advertisement).
Anirban / Micro Economics / Module 3 / CCIM

20

Elasticity of Demand
Importance or Significance of Elasticity of Demand: Demand:
Practical Importance: Importance:
Production Planning Theory of Pricing Theory of distribution Theory of Foreign exchange Theory of International Trade Theory of Public Finance Declaration of Public Utilities Theory of Forecasting of Demand Plenty of Paradox

Theoretical Importance: Importance:

MR = AR ( 1 1/ e) Monopoly Market and limits of monopoly power Determinants of the status of the commodity, complementary or substitute. substitute.
Anirban / Micro Economics / Module 3 / CCIM 21

Elasticity of Demand
If the demand function is Q = 225 15p 15p. Find the elasticity of demand, when P = 5. Given the demand function p = 1 q, find the expression of Ed and the value of Ed when q = .

Anirban / Micro Economics / Module 3 / CCIM

22

Demand Forecasting
Meaning: Meaning: Forecasting is defined as a study with scientific prediction in regard to an event which may have future demand for goods, services either at the micro level or at the macro level. level. Demand forecasting is a prediction or estimation of a future situation, under given condition. condition. Demand forecasting is all about prediction rather than estimation as the former one predicts about future trends where as later one tries to find out expected present sales level, given the sales determinant. determinant.
Anirban / Micro Economics / Module 3 / CCIM

23

Demand orecasting
Steps in Demand Forecasting: Forecasting:
Identification of the objectives. objectives.
Estimation of quantity and composition of demand Estimation of price. price. Inventory Control etc etc

Determination of the nature of the goods. goods.

Capital Goods Consumer durables Non consumer durables

Selection of the proper method of forecasting. forecasting. Interpretation of results. results.

Anirban / Micro Economics / Module 3 / CCIM 24

Demand Forecasting
Factors involved in Demand Forecasting: Forecasting:
Time period Levels of forecasting
International level Macro level Industry level Firm level

Purpose of forecasting Methods of forecasting Nature of the commodity Nature of the competition
Anirban / Micro Economics / Module 3 / CCIM 25

Demand Forecasting
Objectives: Objectives:
Helping for continuous production Regular supply for the commodities Formulation of the price theory Effective sales performance Arrangement of finance Determination of the production capacity Labour requirement. requirement.

Anirban / Micro Economics / Module 3 / CCIM

26

Demand Forecasting
Criteria of a good Forecasting Method: Method:
Accuracy Plausibility (Mgt must have confidence and understanding) Durability Availability Economy (Cost Effectiveness)

Anirban / Micro Economics / Module 3 / CCIM

27

Demand Forecasting
Methods of Demand Forecasting: Forecasting:
Opinion polling method Consumers Survey Methods
 Complete enumeration survey  Sample Survey  End User (Input Output) Method

Sales force Opinion or Collective Opinion or Reaction Survey Method Experts Opinion

Anirban / Micro Economics / Module 3 / CCIM

28

Demand Forecasting
Mechanical Extrapolation / Trend Projection Method: Method:
Graphical ( Fitting trend line by observation) Statistical (Semi average) Algebraic / Least Square (Straight Line, Parabolic & Logarithmic or Exponential) Smoothing Techniques (Moving Average & Exponential Smoothing) ARIMA (Auto regressive integrated moving average or Box Jenkin Technique)

Econometric Models: Models: Simultaneous Equation Model: Model:

Anirban / Micro Economics / Module 3 / CCIM 29

Demand Forecasting
Barometric / Leading Indicator Technique: Technique:
Coincident Indicators and Lagging Indicators. Indicators. Leading Indicators Index Nos (Diffusion & Composite Indicators)

Statistical Methods: Methods:

Nave Method Correlation Regression Method Simple Linear Equation
 

Graphical Method Least Square Method Parabolic Regression Model Logarithmic Regression Model Multiple Regression Model
Anirban / Micro Economics / Module 3 / CCIM

Non Linear Equation

  

30

Demand Forecasting
Methods of Demand Forecasting: Forecasting:
Opinion polling method Consumers Survey Methods
 Complete enumeration survey  Sample Survey  End User (Input Output) Method

Sales force Opinion or Collective Opinion or Reaction Survey Method Experts Opinion

Anirban / Micro Economics / Module 3 / CCIM

31