UNIT-I

Managerial Economics
and Demand Analysis 
PART-II
Demand Analysis 
Managerial Economics and
Financial Analysis 
Demand Analysis 
 Demand Analysis 
Demand
• Demand 
    Demand for a commodity refers to the quantity of the commodity  which  an
individual consumer or a household is willing to purchase per unit  of time at a
particular price. 
       (a)  Desire of the consumer to buy the product
       (b)  Willingness to buy the product
       (c)  Sufficient purchasing power to buy the product
                  “Demand means effective desire or want for a commodity which is backed
up by the ability (purchasing power) and willingness to pay for it”.
 Demand Analysis

• Individual demand
         Individual demand for a product is the quantity of it a consumer would buy at a
given price, during a given period of time.
Footwear
Ice-cream 
• Household demand
 Refrigerator
Grinder/Mixi 
 Demand Analysis

• Market demand/aggregate demand

•            Market demand for a product is the total demand of all the
buyers in the market taken together at a given price during a
given period of time.
vNegative demand 
         When consumers use their purchasing power to reject a brand or
company by not buying its product(pay more for other brand) 
 Determinants of Demand 
  Price of the commodity                                         

  Income of the consumer

  Tastes and preferences
  Prices of related goods
 Substitutes(directly related to each other)
    Related to goods that satisfy the same need of consumer but at  a            different
price 
Complements( Inversely related to each other)
    Goods that are consumed simultaneously or in combination 

  Advertisement
 Determinants of Demand 
v Quality

v  Season & Weather

v  Expectations
 Related to their future income
 Related to future  prices of the good and its related goods
v  Population
v  Social, economic and   demographic distribution of consumers
 Demand Function 
• A mathematical expression of the relationship between quantity demanded of the
commodity and its determinants is known as the demand  function.
• When this relationship  relates to the demand by an individual consumer it is
known as individual demand function.
• Individual demand function 
• QdX =f (PX, Y, P1,….....,Pn-1. T. A, EY, EP, u)
     QdX = Quantity demanded of product X.,
      PX     = Price of product X
       
 Demand Function
• Y                      = level of household Income
• P1,….....,Pn-1 = all other related products in economy(Substitutes and                     
               (Complements)
• T                        =   Tastes and Preferences of the consumer
• A                        =   Advertising
• EY                      =  Expected future Income
• EP                      =  Expectation's about future prices
• U                        =  all those determinants which are not covered in the
list of determinants given above 
 Demand Function

• Market Demand Function 

• QdX =f (PX, Y, P1,….....,Pn-1. T. A, EY,EP, P.D,u)
• P     =  Population(size of the market)
• D    =  distribution of consumers in various categories depending on income,age,sex etc., 
 Law of Demand 
• Alfred Marshall stated Law of demand as.... 

         “a rise in the price of commodity or service is  followed by a reduction in demand and  fall
in  price is followed by an increase in demand, if  the conditions of demand remain  constant.” 
• Marshall stated that the Law of Demand is  based on the Law of Diminishing Marginal 
Utility. 
• Samuel son states.....
“Other things being equal, the quantity  demanded increases with a fall in price and 
decreases with a rise in price.” 
 Law of Demand 
• The Law of Demand may be explained with the  help of the following  Demand Schedule.

Price of Mangoes Quantity demanded

(Rs.)  (units)
1  25 

2  20 

3  15 

4  10 

5  5 
Demand Curve 
 Demand Curve 

• In the above Diagram, demand is shown on  OX –axis and price is shown on
OY-axis. 
• DD is the demand curve. 
• The demand curve DD shows the inverse  relation between price and quantity 
demand of Mangoes. 
• The demand curve slopes downward from  left to right. 
 Law of Demand 
• The Law of demand operates due to underlaying effects of Substitution and Real
income changes.
• Substitution effect
• A fall in the price of normal good leads to rise consumer's purchasing power
buy more of it.
• Income effect 
• An increase in price will reduce his purchasing power and there by reducing
demand for the commodity. 
 Why do Demand curve slopes downwards? 

• The Law of diminishing marginal utility

• A commodity tends to be put more use
• Real Income
• New buyers
• Old buyers will buy more
• Substitution effect 
 Exceptions to the Law of demand 
• Giffen goods / Inferior goods
• Veblen goods / Prestigeous goods
• Speculation
• Impulse buying
• Consumer psychological bias
• Necessities 
 Demand Schedule 
• A demand schedule  is a tabular presentation of the relationship between the amount
demanded of a commodities and different price levels of that commodity. 
• In other words demand schedule is a tabular statement of price and quantity relationship.

Price of the Commodity Demand of a Commodity

(Rs)  (Units) 
5  15 
8  14 
10  12 
12  10 
15  8 
20  5 
 Characteristics of Demand schedule 

A demand schedule shows variations in demand of a commodity at its varying

prices
It indicated behavior of an individual consumer in purchasing the commodity at
alternative prices
It shows the inverse relationship between demand and price of a commodity 
 Types of Demand schedule 

• Individual Demand Schedule 

Price of oranges Demand of

Per dozen (Rs) Oranges (Nos)

45 2
38 3
30 4
25 6
20 10
 Types of Demand schedule 
Market Demand Schedule 
Price of the Demand by
Total Market demand 
Commodity   Individuals 

A  B  C 

6  1  1  2  4 

5  2  3  4  9 

4  3  5  5  13 

3  4  6  7  17 

2  5  7  10  22 

1  6  8  12  26 
 Change in demand Vs Change in Quantity demanded
 
• Change in Quantity demanded

Price Quantity

• demanded E1
12000
12,000 15 unit

Price of good 
E2 
8,000 20 unit 8000 

• An extension of demand  denote  E1 to E2

QQQQQQQQqqq

15  20 
 Change in Quantity demanded
 

• Extension of demand 
• An Extension is the downward movement along a demand curve, which indicated that higher
quantity is demanded for a given fall in the price of a good. 
• An extension of demand  denote  E1 to E2 
• is an rise in the quantity demanded because the price has changed , other factor reaming the same. 
 Change in Quantity demanded
Contraction of demand 

Price Quantity
P
r E2 
12,000 15 unit i 15000
c
15,000 10 unit e
12000  E1 
o
f

g
o
o
d
10  15 
Quantity demanded
 Change in Quantity demanded
Contraction of demand 

• A Contraction is the upward movement along a demand curve, which indicates that
a lower quantity is demanded for a given increase in the price of the good. 
• An CONTRACTION  of demand is an fall in the quantity demanded  because the
price has changed , other factors reaming the same. 
Change in Quantity demanded
Extension and Contraction
Change in demand 
Increase in demand
Change in demand 
Decrease in demand
 Nature of demand  (or)  Types of demand
 
• Consumer goods  demand and Producer's goods demand
• Durable goods demand and Perishable goods demand
• Derived demand and Autonomous demand
• Firm demand and Industry demand 
• Total Market demand and Segment market demand
• New demand and Replacement demand
• Short-run demand and Long run demand