Demand analysis ppts
- 2. Demand for a commodity refers to the desire to buy a commodity backed with sufficient purchasing power and the willingness to spend. For Example: You desire to have a Car, but you do not have enough money to buy it. Then, this desire will remain just a wishful thinking, it will not be called demand. • If inspite of having enough money, you do not want to spend it on Car, demand does not emerge. • The desire become demand only when you are ready to spend money to buy Car.
- 3. In Economics, demand refers to effective demand, which implies three things: • Desire, • Means to purchase, and • On willingness to use those means for that purchase
- 4. Features of Demand • Desires and Demand: Demand is the amount of commodity for which a consumer has willingness and ability to buy. • Demand and Price: Demand is always at a price. Unless price is stated, the commodity has no meaning. The consumer must know both the price and the commodity. • Point of Time: The amount demanded must refer to some period of time. Such as 10 kg of rice per week. The amount demanded and price must refer to a particular date. • Utility: Demand depend upon utility of the commodity. A consumer is rational and demands only those commodities which provide utility.
- 5. Objectives of Demand Analysis • Demand Forecasting: Forecasting of demand is the art of predicting demand for a product or a service at some future date on the basis of certain present and past behaviour patterns of some related events. • Production Planning: Demand analysis is prerequisite for the production planning of a business firm. Expansion of output of the firm should be based on the estimates of likely demand, otherwise there may be overproduction and consequent losses may have to be faced. • Sales Forecasting: Sales forecasting is based on the demand analysis. • Control of Business: For controlling the business, it is essential to have a well conceived budgeting of costs and profits that is based on the estimation of annual demand/sales and prices.
- 6. • Inventory Control: A satisfactory control of business inventories requires satisfactory estimates of the future requirements which can be traced through demand analysis. • Growth and Long Term Investment Programs: Demand analysis is necessary for determining the growth rate of the firm and long-term investment planning. • Economic Planning and Policy Making: Demand analysis at macro level for the nation as a whole is of great help, the government can determine its imoprt and export policies in view of the long-term demand forecasting and estimation for various goods in the country,
- 7. Demand & Quantity Demanded • The term Demand refers to various quantities of commodity that the consumer is ready to buy at different possible prices of a commodity. • The term Quantity Demanded refers to a specific quantity to be purchased against a specific price of a commodity. • Example: A Consumers’ Demand is 2 ice creams if the price per ice cream is Rs.15, and 4 ice cream if the price per ice cream is Rs.10. • Quantity Demanded is 4 ice creams if price happens to be Rs. 10 per ice cream.
- 8. Demand Schedule & Demand Curve • Demand Schedule is that schedule which expresses the relation between different quantities of the commodity demanded at different price. • According to Samuelson, “The table relating to price and quantity demanded is called the demand schedule. • Demand Curve is simply a graphic representation of demand schedule. • According to Leftwitch, “The Demand Curve represents the maximum quantities per unit of time that consumer will take at various prices. • Demand Schedule and Demand Curve are of two types – Individual Demand Schedule & Individual Demand Curve – Market Demand Schedule & Market Demand Curve
- 9. Individual Demand Schedule & Individual Demand Curve • Refers to a tabular representation of quantity of products demanded by an individual at different prices and time. • The slope of an individual demand curve is downward from left to right that indicates the inverse relationship of demand with price.
- 10. Market Demand Schedule & Market Demand Curve • In every market, there are several consumers of a commodity. Market demand schedule shows total demand of all the consumers in the market at different prices of the commodity.
- 11. Demand Function • Demand Function shows the relationship between demand for a commodity and its various determinants. • It shows how demand for a commodity is related to, say price of the commodity or income of the consumer or other determinants. • There are two types of Demand Function: • Individual Demand Function • Market Demand Function
- 12. • Individual Demand Function Individual Demand function shows how demand for a commodity, by an individual consumer in the market, is related to its various determinants. It is Expressed as: • Dx = f (Px, Pr, Y, T, E) • Market Demand Function Market Demand Function shows how market demand for a commodity (or aggregate demand for a commodity in the market) is related to its various determinants. • Mkt. Dx = f (Px, Pr, Y, T, E, N, Yd)
- 13. • Here, Dx: Quantity Demanded of commodity X • Px : Price of the Commodity X • Y : Consumer’s Income • T : Consumer’s Taste & Preferences • E: Consumer’s Expectations • N : Population Size • Yd : Distribution of Income
- 14. Law of Demand • The Law of Demand States that, other things being constant (Ceteris Peribus), the demand for a good extends with a decrease in price and contracts with an increase in price. • In other words, there is an inverse relationship between quantity demanded of a commodity and its price. • The term other thing being constant implies that income of the consumer, his taste and preferences and price of other related goods remains constant.
- 15. Assumptions of the Law of Demand • Tastes and Preferences of the consumers remain constant. • There is no change in the income of the consumer. • Prices of the related goods do not change. • Consumers do not expect any change in the price of the commodity in near future.
- 16. Why More of a Good is Purchased When its Price Falls? Or Why Does Demand Curve Slope Downwards? • Law of Diminishing Marginal Utility: According to this law, as consumption of a commodity increases, the utility from each successive unit goes on diminishing to a consumer.Accordingly, for every additional unit to be purchased, the consumer is willing to pay less and less price.Thus, more is purchased only when price of the commodity falls.
- 17. • Income Effect: Income effect refers to change in quantity demanded when real income of the buyer changes as a result of change in price of the commodity. Change in the price of a commodity causes change in real income of the consumer. With a fall in price, real income increases. Accordingly, demand for the commodity expands.
- 18. • Substitution Effect: Substitution effect refers to substitution of one commodity for the other when it becomes relatively cheaper.Thus, when price of commodity X falls, it becomes cheaper in relation to commodity Y. Accordingly, X is substituted for Y.
- 19. • Size of Consumer Group: When price of a commodity falls, it attracts new buyers who now can afford to buy it. • Different Uses: Many goods have alternative uses. Milk, for example, is used for making curd, cheese and butter. If price of milk reduces its uses will expand.Accordingly, demand for milk expands.