Business Economics-

Demand Analysis
Unit 2
 Meaning of Demand

 Demand is meant the desire or want for something. In economics, however demand means much more than that,
i.e. the amount buyers are willing to purchase at a given price and over a given period of time.

 Demand = Desire + Ability to pay + Willingness to spend

 Demand Analysis through Demand Estimation and Demand Forecasting

 Demand is a relative concept

 Price of the Product - The price of commodity or services directly affects its demand. The fall in the price of
a commodity leads to rise in its demand and rise in price leads to fall in its demand. Price is the only
determinant of demand in the short run.

 Price of Related Goods - Two or more goods can be complementary or substitutes of each other. The
demand for a commodity is also affected by changes in price of its complementary or substitute good. If two
goods are substitute for each other then the increase in price of one will result in increased demand for the
other and vice-versa. E.g. Pepsi and Cocacola are substitute of each other. The rise in the price of Cocacola
increases demand for Pepsi and vice-versa.

 Level of Income- Income is an important determinant of demand for acommodity, ordinarily, with an
increase in income, demand for goods increase. There is a direct relationship between income and quantity
demanded. Rich consumers usually demand more and more goods than the poor customers. Demand for
luxury and expensive goods is related to the income.
 Taste, Habits and preferences of Consumer- The demand for many goods also depends on consumer's
taste, habit and preferences. Demand for goods changes with change in fashion, habits, customs, traditions
and general life-style of the society. Demand for several products like ice-cream, chocolates etc. depends on
taste and demand tea, cigarettes, tobacco is a matter of habits.

 Future trend of Prices - If it is expected that in future the price of a commodity will go up the demand for
the commodity in the present also will go up. If the prices are expected to fall then the demand would fall.

 Changes in Population - Generally the demand for a commodity increases with increase in size of
population, other things being equal, it is not merely the change in the size of population but the changes in
the composition of population also affect the demand for certain commodities. In a country of increasing
population like India where hundreds of children are born daily in big cities there will naturally be demand
for toys, baby food and alike.

 State of Business- If the country is passing through prosperity and boom conditions, there will be a marked
increase in demand. When the country is passing through recession and depression then level of demand
would go down.
 Distribution of Income and Wealth - If the distribution of income is more equal then the demand for all
normal goods will be more. If the income is so unevenly distributed that majority of population is poor then the
demand for inferior and necessaries' will be larger.

 Availability of Consumer Credit - If the credit facilities are available sufficiently to consumers for the
purchase of high priced durable goods such as car, colour TV, scooters and alike, then their demand will
increase.

 Different Uses - When the price of a commodity is high, it will be used only in its more important use. As the
price of the commodity falls it will be used even in less important uses. Thus, the demand increases will fall in
price and vice-versa.

 Change in the number of Buyers- With the fall in the price of a commodity the number of its purchasers
increase and vice-versa. Therefore, demand increases with fall in price and decreases with rise in price.

 Advertisement and Salesmanship- In the modern market, advertisement greatly influence the demand for a
commodity. In fact, the demand for many products like to toothpaste, Cosmetics etc. is greatly affected by
advertisement. The best salesmanship is the one who does not merely sell what buyers want but who makes the
buyers buy what he sells.
 Inventions and Innovations. introduction of new goods or substitutes as a result of inventions and innovations
in a dynamic modern economy tends to adversely affect the demand for the existing products.

 Climate and weather conditions - demand for certain products is determined by climatic and weather
conditions for example, in summers there is a great demand for cold drinks, fans, air conditioners etc.

 Fashions - the demand for many products is affected by changing fashions. For example demand for jeans is
based on current fashions.

 Customs - demand for certain goods is determined by social customs, festivals etc., for example, during the
Dipawali days there is a great demand for sweets & during Christmas cake are more in demand.
 Types of Demand

1. Individual Demand market Demand

2. Demand for Capital goods , Demand for Consumer Goods

3. Autonomous Demand , Derived Demand

4. Short-term Demand , Long- term Demand

 The Law of demand expresses the relationship between price and quantity demanded of a commodity, other
things being constant.

 It explains the inverse relationship between price and quantity demanded.

 Statement of law of demand:- “Ceteris paribus, the higher the price of a commodity, the smaller is the
quantity demanded and lower the price, larger the quantity demanded”.
 Characteristics of the Law of Demand

 Inverse Relationship. The relationship between price and the demand of a particular commodity is inverse
i.e., the demand of a commodity will fall with the increase in the price of the commodity or it will increase
with the fall in-the price.

 Price an Independent Variable and Demand a Dependent Variable. In the Law of Demand, price is
regarded as an independent variable that affects the demand inversely. Thus, it is the effect of price on demand
that is to be examined and not the effect of demand on price.

 It is a Qualitative Statement. The Law of Demand simply explains the direction of change in the demand
with the increase or decrease in the price of a commodity. It does not explain the quantum of change. The law
is thus, a qualitative statement and not a quantitative statement.

 Other thing remains the same. The Law of Demand applies only when other things remain the same. In
other words, there should be no change in factors influencing demand except price.
 Assumptions of the Law of Demand

 No change in taste, habits, preferences : It is assumed that there is no change in the taste, habits, preferences
of a rational consumer. Thus, consumers' choice of product must remain the same.

 No change in the income level: If the consumer's income rises, he will demand more though the prices of
commodities rise. In such a situation, the law will not hold good.

 No change in population : The law is based on the assumption that there should be no change in population,
size, sex ratio, age composition, etc.

 No change in prices of related goods : The law assumes that the prices of close substitutes and the
complementary products should remain constant.

 No expectation of future change in the price: If the consumers expect high rise in the price in future, they
demand more though current price is high. In such condition, the Law of Demand cannot be verified.
 No change in taxation : It is assumed that the structure of direct and indirect taxes remain constant. Thus,
the disposable income of a consumer should remain the same.

 No introduction of new product: It is assumed that there is no introduction of a new product in the market.
Thus, the consumer's taste, habits and preferences remain constant.

 No change in technology : The law assumes that the present technology of production remains constant.

 No change in weather conditions : Climatic and weather conditions may bring sudden change in demand,
though there is no change in the price. Therefore, it is assumed that weather conditions remain constant.
 Exceptions to the Law of Demand

 The demand curve slopes from left to right upward if despite the increase in price of the commodity,
people tend to buy more due to reasons like fear of shortages or it may be an absolutely essential good. The
law of demand does not apply in every case and situation. The circumstances when the law of demand
becomes ineffective are known as exceptions of the law.

 Giffen Goods: Some special varieties of inferior goods are termed as Giffen goods. Cheaper varieties
millets like bajra, cheaper vegetables like potato etc come under this category. Sir Robert Giffen of
Ireland first observed that people used to spend more of their income on inferior goods like potato and
less of their income on meat. After purchasing potato the staple food, they did not have staple food
potato surplus to buy meat. So the rise in price of potato compelled people to buy more potato and
thus raised the demand for potato. This is against the law of demand. This is also known as Giffen
paradox.
 Veblen Effect: This exception to the law of demand is associated with the doctrine propounded by Thorsten
Veblen. A few goods like diamonds etc are purchased by the rich and wealthy sections of society. The prices
of these goods are so high that they are beyond the reach of the common man. The higher the price of the
diamond, the higher its prestige value. So when price of these goods falls, the consumers think that the
prestige value of these goods comes down. So quantity demanded of these goods falls with fall in their price.
So the law of demand does not hold good here.
 Demand Function

 Represents the relationship between the quantity demanded for a commodity (dependent variable) and the
price of the commodity (independent variable).

 Mathematically, a function is a symbolic representation of the relationship between dependent and

 Let us assume that the quantity demanded of a commodity X is D x, which depends only on its price Px, while
other factors are constant. It can be mathematically represented as: Dx = f (Px)

 Linear Demand Function and Non Linear Demand function

 The linear demand function, the slope of the demand curve remains constant throughout its length. A linear
demand equation is mathematically expressed as: Dx = a – bPx

 The non linear or curvilinear demand function, the slope of the demand curve (ΔP/ΔQ) changes along the
demand curve. Instead of a demand line, non-linear demand function yields a demand curve. A non-linear
demand equation is mathematically expressed as: D x = a (Px)-b
Thank You
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