DEMAND ANALYSIS

UNIT- II
DEMAND ANALYSIS

Introduction & Meaning:

 Demand in common words means the desire for an object. But in
economics demand is something more than this.
 In the market if the consumer have the desire to buy a commodity ,if they
are willing to buy the commodity and they need to have the purchasing
power to buy the commodity then we can say that there is a demand for
the commodity.
 Demand is defined as the ability of a consumer to buy goods and services
in the market.
 LAW OF DEMAND
 The law states that the demand is inversely
proportionate to the price of a good or service.
This law states if the price is low, the customers’
willingness to purchase increases and vice versa.
 In the words of Marshall, “the amount
demand increases with a fall in price and
diminishes with a rise in price”.
NOW WE WILL OBSERVE THESE DIFFERENCES IN
THE FORM OF TABLE AND A CURVE.
DEMAND SCHEDULE:
Price of Apple Quantity
(In. Rs.) Demanded

 If the law of demand will be explained in the form of 10 1

table it is called as the demand schedule.
 When the price falls from Rs. 10 to 8 quantity demand 8 2

increases from 1 to 2. In the same way as price falls,

6 3
quantity demand increases on the basis of the demand
schedule we can draw the demand curve.
4 4
 Based on this details we will draw the demand curve
now…. 2 5
DEMAND CURVE:
 When it is represented graphically, the
demand curve showcases the relationship between
a product's price and quantity.
 The demand curve DD shows the inverse relation
between price and quantity demand of apple.
 It is downward sloping from left to right.
 Changes in factors besides price and quantity can
shift a demand curve to the right or left.
 There are some exceptions to the relationship
between price and demand , these are…
EXCEPTIONS TO LAW OF DEMAND:
 Veblen goods are the ones whose demand increases with their Price. They
become more valuable with their price rise. Like a high-priced gold necklace, it's
more desirable to the customer than the one with lower costs.
 Ifa consumer anticipates that the price of a commodity will rise in future he will
purchase more of that commodity now.
 Some times people feel like high priced goods have high quality and low priced
goods have less quality and in this time the application of law of demand will fail.
A significant exception to the law is the Demand for luxury goods. In such cases,
even if the price increases, the consumer won't stop consumption.
 The Giffen good or inferior good is an exception to the law of demand. When the
price of an inferior good falls, the poor will buy less and vice versa.
FACTORING AFFECTING DEMAND:
 Price : When the own price of a commodity falls, its demand rises and when its
own price rises, its demand falls . Thus, we can say that there is an indirect
relation between the price of a commodity and its quantity demanded.
 Price of related goods : Substitute goods (For example, if the price of Maruti
Swift increases, the demand for i20 will rise.), complementary goods (For
example, if the price of petrol rises, the demand for cars falls..)
 Income of the consumer : Most important factor influencing demand is
consumer income. In fact, we can establish a relation between the consumer
income and the demand at different levels of income,
 Tastes and preferences of the consumer : The amount demanded also depends
on consumer’s taste. Tastes include fashion, habit, customs, etc. A consumer’s
taste is also affected by advertisement.
DEMAND FUNCTION:
 It is a mathematical expression of showing the relation between demand and demand
affecting factors in economics.
Dx = f(P x, Y, R, T, A,………)
Dx = demand of good
F = Function of
P x = Price of good x
Y = Income of consumer
R = Related goods prices
T = Taste and preferences of consumer
A = Advertisements
TYPES OF DEMAND:
 Joint demand: For example, the demand for milk, coffee beans, and sugar is a joint
demand as all these goods are demanded together to prepare coffee.
 Composite demand: For example, the demand for water is a composite demand as it can
be used for various purposes like bathing, drinking, cooking, etc.
 Derived demand: For example, demand for workers/labour , producing bags is a derived
demand as it depends on the demand for bags.
 Direct demand: For example, demand for books, stationery, clothes, food, etc., is a direct
demand as these goods directly satisfy the wants.
 Short - long term demand: Which has the demand for temporary like seasonal
things,long term means for long period they have demand food itiems like oil, rice, house,
eclectronic gadgets.
 Durable non-Durable demand: Durable goods are those goods whose total utility is
not exhausted in single or short-run use. clothes, shoes, house furniture,
refrigerators, scooters, and cars. Non durable goods lose theis value in single use.
Company demand: The demand for a company's product of an industry, such as Pepsi
products, For instance, the soap industry consists of several soaps manufactured by
different companies Unilever Limited, Godrej etc..
Industry demand: It refers to the total demand for the partuicular industry, such as
there are several companies manufacturing toothpaste like CloseUp, Colgate, Promise,
Neem etc. All these companies come under the category Of single industry namely
tooth paste industry.
Market demand: Also known as aggregate demand, this is the total economic demand
for all individuals in a market.
Individual demand: The demand for a product by a single person at a specific pric
ELASTICITY OF DEMAND:
 Elasticity of demand is having a very important role in the field of economics.
 Demand will be changing most of the time because of the price, income, taste and
preferences, expectations, advertisements,prices of related goods and time.
 With this elasticity of damand we can measure the change of demand and we will
get the particular value of the change.
 And the word ELASTICITY borrowed from physics, it shows the change of one
variable due to the change in another variable and the changes will be measured.
 The Elasticity of demand shows the responsiveness or sensitiveness of demand due
to the changes of determinants of demand.
Here in this elasticity of demand we are going to use two important words namely
ELASTIC and IN- ELASTIC.
 Elastic:- When a little change in the determinants results in a substantial or a big
change in the quantity demanded.
 In-elastic:-Inelastic demand refers to a change in the determinats result in no or
slight change in the quantity demanded.
Types of Elasticity of Demand: There are three types of elasticity of demand.
 1.Price elasticity of demand
 2.Income elasticity of demand
 3.Cross elasticity of demand
PRICE ELASTICITY OF DEMAND;
 Price elasticity of demand is a measurement of the change in the
demand for a product as a result of a change in its price. If a price
change creates a large change in demand, that is known as elastic
demand.
 Perfectly elastic demand:When small change in price leads to
an infinitely large change is quantity demand, it is called perfectly
or infinitely elastic demand. In this case E=∞
 Perfectly Inelastic Demand: In this case, even a large change in price
fails to bring about a change in quantity demanded. In this case ‘E’=0.

 Unitary elasticity:The change in demand is exactly equal to the change

in price. When both are equal E=1 and elasticity if said to be unitary.
Relatively elastic demand:Demand changes more than proportionately to a
change in price. i.e. a small change in price loads to a very big change in the
quantity demanded. In this case E > 1. This demand curve will be flatter.

Relatively in-elastic demand:Quantity demanded changes less than

proportional to a change in price. A large change in price leads to small change
in amount demanded. Here E < 1. Demanded carve will be steeper.
 EP= PERCENTAGE CHANGE IN QUANTITY DEMAND
PERCENTAGE CHANGE IN PRICE

For example:
Suppose an individual buy 15 bananas when its price is Rs.5 per banana, when the
price increases to Rs.7 per banana, reduces the demand to 12 bananas.
P1=5 , P2=7
Q1=15 , Q=12
percentage change in quantity demand percentage change in price
%=▲Q/Q1×100 %=▲P/P1×100

=3/15×100 =2/5×100
=O.2×100 =0.4×100
=20 =40
EP=20/40 0.5
AND THE RESULT IS LESS THAN ONE MEANS IT IS THE RELATIVELY IN-ELASTIC DEMAND.
 Degrees in price Description
elasticity of demand
Significant change in demand
Perfectly elastic demand Ed =
Ex:Gold
Demand declines to zero (no change)
Perfectly In-elastic demand Ed = 0
Ex:Medicines
Demand and price changes equally
Unitary elastic demand Ed = 1
Ex:Smartphones,electricity
Demand change is greater then the
Relatively elastic demand price change
Ed > 1
Ex:Luxury goods
2. INCOME ELASTICITY OF DEMAND:
Income elasticity of demand shows the change in quantity
demanded as a result of a change in income.
Proportionate change in the quantity demand of commodity

Income Elasticity = ---------------------------------------------------------------------------------

Proportionate change in the income of the people

Income elasticity of demand can be classified in to five types.

A. Zero income elasticity:
Quantity demanded remains the same, even though money income
increases. Symbolically, it can be expressed as Ey=0. It can be
depicted in the following way:
ex:salt
B. Negative Income elasticity:
When income increases, quantity demanded falls. In this case, income elasticity
of demand is negative. i.e., Ey < 0.
Ex: public transport

c. Unit income elasticity:

When an increase in income brings about a proportionate increase in quantity
demanded, and then income elasticity of demand is equal to one. Ey = 1
Ex:Electricity
d. Income elasticity greater than unity:
In this case, an increase in come brings about a more than proportionate increase in
quantity demanded. Symbolically it can be written as Ey > 1

Ex:luxury goods

E. Income elasticity leas than unity:

When income increases quantity demanded also increases but less than proportionately. In
this case E < 1.

Ex:Necessary goods
 PROPORTIONATE CHANGE IN THE QUANTITY DEMAND OF COMMODITY
INCOME ELASTICITY = --------------------------------------------------------------------------------------------
PROPORTIONATE CHANGE IN THE INCOME OF THE PEOPLE

For example :
if a persons income increased to 3000 to 5000 than his purchasing power for onions also
will increase from 5 kg to 6kg,then what kind of elasticity change we are observing here?
Q=5 ,Q1=6
Y=3000 ,Y1=5000
proportionate change in quantity demand proportionate change in income
=▲Q÷Q×100 =▲Y÷Y×100
=1/5×100 =2000/3000×100
=0.2×100 =0.6×100
=20 =60
=20/60
=0.3
it is less than 1 then it is income elasticity less than unitary elasticity
 Degrees in income
Description
elasticity of
demand
Demand declines to zero(No change)
Zero elasticity of demand Ed = 0
Ex:Salt
If income increases, quantity demand
Negative elasticity of ddemand falls .Ed < 0
Ex:Public transport
Demand and income changes equally
Unitary elasticity of demand Ed = 1
Ex:Electricity
Demand change is greater then the
Greater than unitary elasticity of income change.Ed > 1
demand Ex:luxury goods
3. Cross elasticity of Demand:
A change in the price of one commodity leads to a change in the
quantity demanded of another commodity. This is called a cross
elasticity of demand. The formula for cross elasticity of demand is:
Proportionate change in the quantity demand of
commodity “X”
Cross elasticity =
-----------------------------------------------------------------------
Proportionate change in the price of commodity
“Y”
a. In case of substitutes, cross elasticity of demand is positive. Eg:
Coffee and Tea
When the price of coffee increases, Quantity demanded of tea
increases. Both are substitutes.
b. Incase of compliments, cross elasticity is negative. If increase in
the price of one commodity leads to a decrease in the quantity
demanded of another and vice versa.

When price of car goes up from OP to OP!, the quantity demanded of

petrol decreases from OQ to OQ!. The cross-demanded curve has
negative slope.
 DEMAND FORECASTING
 Demand forecasting is the process of predicting how much demand
there will be for a product in the future. It's a business process that
helps businesses plan for demand by using data to estimate how many
units of a product will be sold in a given time period.
 Demand forecasting isn’t just a fancy way to predict future sales. It
offers dozens of tangible benefits to help you drive major business
value.
 Demand forecasting, which uses historical data to predict future sales. It
ensures you have the right stock at the right time, helping keep
customers happy, avoid stocking issues, and improve your profits.
 THE NEED FOR FORECASTING THE
DEMAND
 Improved Planning and Decision Making
 Increased Efficiency
 Better Customer Service
 Enhanced Financial Performance
 Improving Pricing and Promotions
 Cost Reduction for Expiring Products
Methods or techniques for demand forecasting
SURVEY METHODS:
i. Experts’ Opinion Poll:
Refers to a method in which experts are requested to provide their
opinion about the product.Generally, in an organization, sales
representatives act as experts who can assess the demand for the
product in different areas, regions, or cities.
ii. Delphi Method:
Refers to a group decision-making technique of forecasting demand.
In this method, questions are individually asked from a group of
experts to obtain their opinions on demand for products in future.
iii. Market Experiment Method:
Involves collecting necessary information regarding the current and
future demand for a product. This method carries out the studies and
experiments on consumer behavior under actual market conditions.
Statistical Methods:
Statistical methods are complex set of methods of demand
forecasting. These methods are used to forecast demand in the long
term. In this method, demand is forecasted on the basis of historical
data and cross-sectional data.
I.Trend Projection Method:
Trend projection or least square method is the classical method of
business forecasting. In this method, a large amount of reliable data
is required for forecasting demand. In addition, this method assumes
that the factors, such as sales and demand, responsible for past
trends would remain the same in future.
Barometric Method:
In barometric method, demand is predicted on the basis of past events or key
variables occurring in the present. This method is also used to predict various
economic indicators, such as saving, investment, and income.
Econometric Methods:
Econometric methods combine statistical tools with economic theories for
forecasting. The forecasts made by this method are very reliable than any
other method. An econometric model consists of two types of methods
namely, regression model and simultaneous equations model.
i. Regression Methods:
Refer to the most popular method of demand forecasting. In regression
method, the demand function for a product is estimated where demand is
dependent variable and variables that determine the demand are
independent variable.
Correlation:
Correlation analysis is a way of quantifying the strength and direction of the
relationship between two variables. For example, you might want to know if
there is a correlation between sales and marketing expenses, or between
customer satisfaction and retention rate. A correlation coefficient is a number
that ranges from -1 to 1, and indicates how closely the variables move
together. A positive correlation means that as one variable increases, the other
also increases. A negative correlation means that as one variable increases,
the other decreases.
 SUPPLY
Supply is a fundamental economic concept that describes the total amount of
a specific good or service that is available to consumers.
This relates closely to the demand for a good or service at a specific price;