Demand Analysis

Consumer Behaviour and Demand A. Consumer’s equilibrium (Various Utility concepts) B. Demand 1. Concept 2. Factors affecting demand 3. Law of demand 4. Elasticity of Demand

Demand Meaning and Definition of Demand According to Benham: “The demand for anything, at a given price, is the amount of it, which will be bought per unit of time, at that price.” According to Bobber, “By demand we mean the various quantities of a given commodity or service which consumers would buy in one market in a given period of time at various prices.” Requisites: f. Desire for specific commodity. g. Sufficient resources to purchase the desired commodity. h. Willingness to spend the resources. i. Availability of the commodity at (i) Certain price (ii) Certain place (iii) Certain time.

Kinds of Demand

1. Individual demand 2. Market demand

4. Income demand - Demand for normal goods (price –ve, income +ve) - Demand for inferior goods 4. Cross demand - Demand for substitutes or competitive goods (eg.,tea & coffee, bread and rice) - Demand for complementary goods (eg., pen & ink) 5. 6. 7. 8. 9.

Joint demand (same as complementary, eg., pen & ink) Composite demand (eg., coal & electricity) Direct demand (eg., ice-creams) Derived demand (eg., TV & TV mechanics) Competitive demand (eg., desi ghee and vegetable oils)

Factors Determining Demand - y (i) Price of the commodity – Normally there is an inverse relationship between the price of the commodity and the quantity demanded. (Px) (ii) Income of the Consumer – Determines the purchasing power of the consumer. Generally, there is a direct relationship between the income of the consumer and demand. (Y) (iii) Consumer’s taste and preference (T) (iv) Price of related commodities (Pr) (v) Consumer Expectation (expected change in price) (v) Distribution of income (vi) Size and composition of population (vii) Advertising and Sales Promotion (viii) Other Factors e.g., natural calamities Qdx = f (Px, Pr ,Y , T, D, …)

Demand Schedule Demand Schedule: a tabular presentation showing different quantities of a commodity that would be demanded at different prices. Types of Demand Schedules Individual Demand Schedule Shows various quantities of a commodity that would be purchased at different prices by a household.

Market Demand Schedule Shows the various commodities that would be purchased at different prices by all the buyers of that commodity. It is composed of the demand schedules of all the individuals purchasing that commodity.

Demand Curve Prices of apples

D Quantity Of apples

Demand Curve The demand curve slopes downwards from left to right which indicates that there is an inverse relationship between price and quantity demanded. Demand Schedules for Apples Price/kg 30 25 20 15 10

Demand-A 4 6 9 13 17

Demand-B 3 5 8 12 15

Market(A+B) 7 11 17 25 32

Demand Curve Movement along demand curve Vs. Shift in demand curve: Distinction between change in quantity demanded and change in demand. A. Change in quantity demanded – When quantity demanded changes ( rise or fall ) as a result of change in price alone, other factors remaining the same. • Contraction/fall in quantity demanded • Extension/Rise in quantity demanded The change is depicted/ represented by the movement up or down on a given demand curve. This does not require drawing a new demand curve.

Demand Curve B. Change in demand – When the amount purchased of a commodity rises or falls because of the change in factors other than the price of the commodity. It is called change in demand. Types of Changes Increase in demand.

Decrease in demand

Demand Curve Why does the demand curve Slope Downwards to the Right? • Income Effect – An increase in demand on account of increase in real income is known as income effect. • Substitution Effect • Increase in number of consumers • Several uses of commodity

Law of Demand

Prof. Samuelson: “Law of demand states that people will buy more at lower price and buy less at higher prices, others thing remaining the same.” Ferguson: “According to the law of demand, the quantity demanded varies inversely with price”. Chief Characteristics: 5. Inverse relationship. 6. Price independent and demand dependent variable. 7. Income effect & substitution effect. Assumptions: No change in tastes and preference of the consumers. • Consumer’s income must remain the same. • The price of the related commodities should not change. • The commodity should be a normal commodity

Market Demand versus Individual Demand Market demand refers to the sum of all individual demands for a particular good or service. Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

Shifts in the Demand Curve Change in Quantity Demanded • Movement along the demand curve. • Caused by a change in the price of the product.

Changes in Quantity Demanded A tax that raises the price of ice-cream cones results in a movement along the demand curve.

1

B A

2

D 0

4

8

Shifts in the Demand Curve • • • • •

Consumer income Prices of related goods Tastes Expectations Number of buyers

Shifts in the Demand Curve Change in Demand • A shift in the demand curve, either to the left or right. • Caused by any change that alters the quantity demanded at every price.

Shifts in the Demand Curve Price of IceCream

Increase in demand Decrease in demand

Demand curve, D2 Demand curve, D1 Demand curve, D3

0

Quantity of Ice-Cream

Shifts in the Demand Curve Consumer Income • As income increases the demand for a normal good will increase. • As income increases the demand for an inferior good will decrease.

Consumer Income Price of IceCream 3 Cone 2.50

Normal Good

An increase in income... Increase in Demand

2 1.50 1

D2

.50 D1 0 1

2

3

4

5 6

7 8 9 10 11 Quantity of ice cream cone

Consumer Income Inferior Good

Price of IceCream Cone

An increase in income... Decrease In Demand

D1 0

D

Quantity of Ice Cream Cone

Shifts in the Demand Curve Prices of Related Goods • When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. • When a fall in the price of one good increases the demand for another good, the two goods are called complements.

Variables That Influence Buyers Variable

A Change in this Variable

Price Income

Represent a movement along the curve Shifts the demand curve

Prices of related goods

Shifts the demand curve

Tastes

Shifts the demand curve

Expectations

Shifts the demand curve

No. of Buyers

Shifts the demand curve