Concept of

Demand
Demand:
Demand Analysis very important to Management. If D for firm’s product
is falling ----firm need to undertake sales promotion activities like
advertisement, use of media etc. if demand exceeds supply firm has to
reverse its production plan.

Larger the demand for firm’s product, the higher is the price, the firm
can charge.

The whole range of planning by the firm production planning, cost

budgeting, pricing decision, advertisement budget, profit planning etc.
call for analysis of Demand.
 Concept Of Demand :

Demand = desire to buy + Willingness to

pay + Ability to pay

Demand depends on price of commodity and its substitute

commodity’s price & availability, income of consumer, their
taste, and preferences

So,
 D = f(P1,Ps,Y,T,Pr)

Where ,
f = function,
D =demand,
P =Price,
Y = income,
Ps = price of substitutes,
t =taste,
Pr = preferences
If other things remain unchanged then D = F (p).
LAW of DEMAND :--

If other things being remain

equal, Demand for particular
goods, at lower price is higher
than the at higher price demand
will be less.

Qty. Price wheat qty.

rs./kg. In kg. demanded
A 30 100
B 25 125
C 20 150
D 15 175
E 10 200
Downward slopping
demand curve relates to P
D
quantity of goods to
A
30
price. The law of demand B

Price K G
25
express the functional C
20
D
relationship between 15
E
10
price and quantity
demanded

o Q
Types of Demand : --

1. Direct demand and Derived Demand

2. Domestic & Industrial Demand
3. Autonomous & Induced Demand
4. Perishable & Durable goods demand
5. New & Replacement demand
6. Final & Intermediate demand
7. Individual & Market demand
 Supply Curve: --
Supply curve shows relation
between market prices and Supply
the quality of goods that curve
produces are willing to
supply 30

25
Price QTy
A 30 200 20
15
B 25 175
10

C 20 150 0
100 125150 175 200 q
D 15 125
Qty. supply (KG)

E 10 100
Ss = supply curve –slop upward
 Equilibrium of Supply and Demand : --

the equilibrium price is that

at which the amount
willingly supplied and
amount willingly Demanded
are EQUAL. Competitive
equilibrium must be at the
interaction point of supply
and Demand curve .
Item price qty. (kg) qty. (kg.)
Rs/kg. demanded supplied
A 30 100 200
B 25 125 175
C 20 150 150
D 15 175 125
E 10 200 100

30 Supply

25
Equilibrium Point
20

15

10

0 100 125 150 175 200

q
 Types of Demand

Large number of goods and services available in every economy. For

meaningful demand analysis, their classification is important for
managerial decisions. It also helps in policy decision. Main
classification are as under :--
1) Demands for consumer’s goods & Producer’s goods
goods and services used for final consumptions are called CG---
food items, clothes, . In contrast, producer’s goods ( raw materials)
called PG—plant machinery, factory buildings etc.

2 Demands for Perishables 7 Durable goods

CG & PG classified into Peri. & non peri. Goods—milk, fish, eggs,
paper cups, etc. are perishables goods. While furniture, cars,
clothes, shoes etc. are durable goods.
3) Autonomous (direct) & Derived (indirect) Demand
Goods whose demand is not tied with the demand for some other
goods are said to have Auto. Demand, while rest are derived demand.

4) Individual buyer’s and Market (aggregate) demand

Demands for goods by Idividual buyers is called I.D. while demand for
goods by all buyers in a market is called Market demand.

5) Firm / Domestic and Industrial Demand

Demand for Maruti car is a Firm’s demand where as demands for all
kinds of cars is Industry’s demand.—Same way Godrej’s fridge’s
demand

6) New & Replacement Demand : Purchase of items for stock is a New

demand While purchase of items to repair or maint. old stock is called
replacement demand
 Determinant of Demand

• Demand Analysis is required basically for

Three purposes :--

1. To provide the basis for analyzing market influences on

the market
2. To provide the guidance for Manu plating the demand
3. To guide in production on planning through forecasting
the demand
.
 Demand
Determinant

For Durable
For
For all and/or
aggregate
demand expensive
demand
goods

Price of Consumer’s Consumer’s

Consumer’s Number of Distribution of
related taste and expectations
Income consumers consumers
goods preference about

Substitute Complementary
Future Future
good’s goods
Income Prices
price price
Purpose of Demand Analysis

Demand analysis is needed basically for three purposes :--

1) To provide basis for analyzing market influence on the

demand

2) To provide guidance for manipulating the demand

3) To guide in production on Planning through

forecasting the demand
 Consumers’ income and Demand

- Ability to pay is determined by Income, Wealth

or / and Creditworthiness of consumer
-Wealth is a stock variable
-Income would include labour and property
 Demand Function:
Function describes the relationship between a variable and its
determinant. Demand function for X goods are as under :--
Dx = f (y, Px, Ps, Pc, T, Ep, Ey; N, D, U )
Where
Dx = demand for goods X
y = consumer’s income
Px = price of good X
Ps = price of substitute of X
Pc = price of complements of X
T = measure of consumer’s taste & preferences
Ep = consumers’ expectations about future prices
Ey = consumers’ expected future prices
N = number of consumers
D = distribution of consumers
U = ‘other” determinants of the demand for X
f = unspecified function, to be read as “function of”
fi = partial derivative of ‘f’ with respect to the ith variable.
Demand and Revenue Relationship

• Definite relationship between demand for goods and revenue

generated by the goods.
-- Total revenue (TR) = Qty. of Prodn. (total qty. sold)
-- Average Revenue (AR) refers to revenue per unit sold
AR = TR/ Q = QP/ Q = P
Marginal Revenue MR = change TR/ change TQ sold
In total revenue by last quantity sold
Credit worthiness depends heavily on the Income and Wealth of
person. As such it is also excluded from the exclusive list of
demand determinants.
--- Increased income – changes use of inferior goods
-- Engel was first economist to study this relationship
-- Engel’s curve
2) Own price and Demand ( the Law of Demand)
Price Effect = Income effect +Substitution Effect
PE = IE + SE, IE refers to effect of a price change on its demand

3) Price of Related Goods and Demand :

Consumer goods have two kinds of relationship :
a) Substitutes b) Complements

4) Consumers Tastes and Preferences and Demand

Consumers’ taste and preferences are important determinant of
Demands for all consumer goods

5) Consumers’ Expectations and Demand

Consumers’ expectations plays a vital role in case of Demand for
durable and expensive items.

6) Number of Consumers, their Distribution and Demand

Aggregate demand depends on number of consumers