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Demand Analysis
Demand Analysis
What is demand?
-demand is desire backed by the ability
to pay & the willingness to pay at a certain time and a certain price
Determinants of demand
1. 2. 3. 4. 5. 6. 7.
Price of the commodity Price of related goods Income of the consumer Tastes & preferences of the consumer Expectation of price changes in future Size of population Distribution of income
Demand function
Dx={ Px,Pr,Y,T,E,P,Yd}
Dx= demand for the commodity Px= price of the commodity Pr=price of related goods Y= income of the consumer T = tastes & preferences E= expectations of future price changes P= composition of population Yd= distribution of income
States of demand
Negative demand No demand Latent demand Declining demand Irregular demand Full demand Overfull demand Unwholesome demand
Law of demand
-other things being equal , the demand for a commodity goes up when the price goes down and goes down when the price goes up.
i.e. Demand is inversely proportional to price
No change in price of related goods No change in income No change in taste & preferences No expectations of future change in prices
10 12 14 17 20
50 45 40 35 30
25 22 20 18 15
100 83 70 57 45
Law of diminishing marginal utilty Income effect Substitution effect Diverse uses of commodity Size of consumer groups
Giffen goods Distinct or conspicuous goods ( veblen effect) Ignorance Goods of low value Speculative goods
Elasticity of demand
The elasticity of demand measures the responsiveness of the quantity demanded of a good , to change in its price, price of other goods and changes in consumers income
Degrees of Price Ed Unit elasticity of demand {Ed=1} Perfectly elastic demand {Ed=} Perfectly inelastic demand {Ed=0} More than unit elastic {Ed>1} Less than elastic {Ed<1}
Nature of commodity Availability of substitutes Goods with multiple uses Postponement of use Income Habits, tastes Proportion of income spent Price level Joint demand
Price determination under monopoly Price discrimination Taxation policies International trade Wage determination