Demand Analysis

Demand Analysis

What is Demand? 

Demand refers to the consumer is willingness and ability to purchase the good at given prices and giventime. The demand relationship expresses that willingness and ability for the whole range of prices.

Characteristics of Demand Demand has three main characteristics. 1. 2. 3.

Willingness to pay Ability to purchase Demand is always at a price

Quantity Demanded vs. Demand 

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Quantity Demanded The quantities of a good or service that people will purchase at a specific price over a given period of time. Demand Demand for product is the amount that consumers are willing and ably to purchasers good or service at different prices at a given time

Types of Demand 

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Individual Demand The quantity of a good that an individual or firm stands ready to buy at various prices at a given time. Market Demand The sum of the individual demands in the marketplace. Income Demand Income demand refers to various quantities of goods and service which would purchased by consumers various income.

Determinants of Demand 

Changes in income

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Price Level

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Changing Prices of a Substitute Good Changing Price of a Complement Change in Tastes and Preferences Consumer Expectations.

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Determinants of Demand Changes in income  Higher incomes  increase in demand  Lower incomes  decrease in demand When an individual’s income goes up, their ability to purchase goods and services increases, and this causes an outward shift in the demand curve. When incomes fall there will be a decrease in the demand for most goods.

Price Level 



Higher Price  lower Demand for Product. Lower price  Higher demand for product

Changing Prices of a Substitute Good Substitutes  Increase in the price of substitutes  increase in demand another product. Example: Due to increase price of copy powder, cause a increase demand for tea . 

.

Changing Price of a Complement 

Complements  Increase in the price of complements  decrease in demand Examples: An increase in the cost of flights from London to New York would cause a decrease in the demand for hotel rooms in New York A reduction in the market price of computers should lead to an increase in the demand for printers, scanners and software applications

Change in Tastes and Preferences 

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Changing tastes and preferences can have a huge effect on demand. Example Persuasive advertising is designed to cause a change in tastes and preferences and thereby create an outward shift in demand. A good example of this is the recent surge in sales of smoothies and other fruit juice drinks.

The Law of Demand 

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Prof. Samuelson has defined the law of demand as “it explains that people will buy more at lower prices and buy less at higher prices, other things remaining the same According to law of demand, if prices falls, the quantity of demand of commodity will rise, and if price commodity rises, its quantity demand will decline. According law of demand, there is Inverse relationship between price and quantity demanded, other things remain constant

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Price Commodity

Quantity Demanded

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Price Commodity

Quantity Demanded

Demand Schedule and Demand Curve 

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Demand schedule  A table showing the various quantities of a good or service that will be demanded at various prices The Demand Schedule is a table of numbers that shows the relationship between price and quantity demanded by a consumer, ceteris paribus (everything else held fixed). Demand curve  A curve that indicates the number of units of a good or service that consumers will buy at various prices at a given time

Individual Demand Schedule for CD Price per CD Rs. 25

Quantity of CD Demanded per Year

20

30

15

35

10

40

8

45

20

Individual Demand Curve 

The Individual Demand Curve shows the relationship between the price of a good and the quantity that a single consumer is willing to buy, or quantity demanded.

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According to Lipsey, “it is a curve which shows the relation between the price of a commodity and the amount of that commodity which the consumer wishes to purchase in a given time period.”

Individual Demand Curve 

When price increases, demand for CD falls, when prices falls, demand for CD 25 increases. 2 0 Prices per CD1 . Rs 5 10 8 20 3 35 . Demand for 0CD

4 0

4 5

Market Demand 

We can get Market Demand from Individual Demand, by adding the quantities demanded by all consumers at each of the various possible prices.

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The Market Demand can be described as the horizontal summation of the individuals demand for a commodity at various possible prices in market.

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Market Demand Curve is a curve showing the relationship between price and quantity demanded by all consumers together, ceteris

Market Demand Schedule Price per CDConsumer A Rs.

Consumer B

Consumer C

Total Market Demand

25

20

18

22

50

20

30

26

31

87

15

35

30

37

102

10

40

35

41

116

8

45

40

46

131

Movement along the Demand Curve 

If other all factors remains constant and only there is change in the price of the commodity, then we move along the same demand curve.

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When there is change in the prices, the quantity demanded increases or decreases, it is called as Extension and Contraction in Demand.

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If we examine the CD demand curve so at price Rs.25 there are only 20 CD demanded but when price falls to Rs.20 so 30 CD are demanded, it is an Extension in the Demand Curve while when price increases from Rs.2 to Rs. 10 there is decrease in the Demand which is Contraction in Demand.

Movement of the Demand Curve 25

Px

20 Extension

15 10 8 0

Contraction

20

30

35

40 45 Qd x

Increase in Market Demand Curve

Price

D0 Quanti ty

D 1

Decrease in Market Demand Curve

D D 1

0

Supply 

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Supply  The total quantities of a good or service that sellers stand ready to sell at different prices at a given time Individual supply  Quantities offered for sale at various prices at a given time by an individual seller Market supply  Sum of the individual supply schedules in the marketplace

Determinants of Supply 

Changes in the cost of resources 

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Increase in the cost of resources  decrease in supply

Technology 

Improvements  increase in supply

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Expectations of future prices (Shift to the right)

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Prices of related products

Expectations of Future Prices 

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If sellers expect price of the good to fall in the future, they will sell more now before the price actually falls!! Supply increases today... ..rightward shift

Law of Supply The quantity offered by sellers of a good or service is directly related to price, all things being equal Why?. Producers are more willing to sell greater amounts of a good at a higher price , because this good has become relatively more profitable to produce, compared to other gds

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Supply schedule  A table showing the various quantities of a good or service that sellers will offer at various prices at a given time Supply curve  A line showing the number of units of a good or service that will be offered for sale at different prices at a given time

Individual Supply schedule

Individual supply curve

Market Supply 

Market Supply is the sum of individual supplies of all producers in market

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Since market supply sum of the amount supplied at each price by all producers, market supply depend on number of producers in the market.

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If number of producers increases, supply increase. If number of producers decreases, supply decreases.

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Market Supply schedule

Market Supply curve

Increase in Market Supply Curve SS ’SS

Decrease in Market Supply Curve ’SS

S S