Demand Analysis

The Concept of
Demand. . .
Market refers to the interaction
between seller and buyers of a good or
services at a mutually agreed upon
price.
Demand is defined as that want, need
or desire which is backed by willingness
and ability to buy a particular
commodity, in a given period of time.
Demand is the quantity of a commodity
which consumers are willing to buy at a
given price for a particular unit of time.
 The Concept of
Demand. . .
Quantity P
Demanded refers
to the amount Unwilling to
buy
(quantity) of a
good that buyers
are willing to
Willing
purchase at to buy
alternative prices
for a given period.
Q
 Definition of Demand
The demand for a product refers
to the amount of it which will be
bought per unit of time at a
particular price
Demand = Desire + Ability to
pay (i.e., Money or Purchasing
Power) + Will to spend
Demand is an effective desire, as
it is backed by willingness to pay
and ability to pay.
 Types of Demand
1. Demand for consumers’ goods and
producers’ goods
2. Demand for perishable and durable
goods
3. Autonomous (direct) and derived
(indirect) demand
4. Normal/superior and inferior goods
5. Necessary, comforts and luxury goods
6. Related goods: Substitutes and
complementary goods
Consumers’ Goods and Producers’
Goods
Goods and Services used for final
consumption are called
consumers’ goods.
These include those consumed by
human-beings (e.g. food items,
clothes, kitchen tools, residential
houses, medicines, and services of
teachers, doctors, lawyers, washer
men and shoe-makers), animals
(e.g. dog food and fish food), birds
(e.g. grains), etc.
Producers’ goods refer to the
goods used for production of other
goods.
Thus, producers’ goods consist of
plant and machines, factory
buildings, services of business
employees, raw-materials, etc.
 Perishable and durable
goods
Both consumers’ and producers’
goods are further classified into
perishable (non-durable) and durable
goods.
In laymen’s language, perishable
goods are those which perish or
become unusable after sometime,
the rest are durable goods.
In economics, perishable goods refer
to those goods which can be
consumed only once while in case of
durable goods, their services only are
consumed.
Perishable goods Perishable goods have less
shelf-life. This is generally consumed quickly in
one shot service. The demand for perishable
goods is immediate and more elastic. e.g.
demand for milk and milk products, fruits,
vegetables etc constitute demand for perishable
goods by manufacturers.Durable goods pose
more complicated problems for
demand analysis than do non-durables.
Sales of non-durables are made largely
to meet current demands which
depends on current conditions.
In contrast, sales of durable goods
go partly to satisfy new demand
and partly to replace old items.
Further, the later set of goods are
generally more expensive than
the former set, and their demand
alone is subject to preponment
and postponement, depending on
current market conditions vis-à-vis
expected market conditions in
future.
 Autonomous (direct) and
Derived (Indirect) Demand
The goods whose demand is not tied
with the demand for some other
goods are said to have autonomous
demand, while the rest have derived
demand.
Thus, the demands for all producers’
goods are derived demands, for they
are needed in order to obtain
consumers or producers goods.
Thus, the demand for goods
which fulfill our basic Physiological
requirements, are generally
included in autonomous demand.
For example; Demand for soap,
clothing etc
While the demand for goods for
the production of other goods and
services are included in derived.
For example; Demand for raw
material like steel, cement, plant
and machinery etc,
Demand for money which is needed
not for its own sake but for its
purchasing power, which can buy
goods and services.
Similarly, demand for car’s battery or
petrol is a derived demand, for it is
linked to the demand for a car.
There is hardly anything whose
demand is totally independent of any
other demand.
But the degree of this dependence
varies widely from product to product.
For ex: Demand for petrol is totally
linked to the demand for petrol driven
vehicles, while the demand for sugar is
only loosely linked with the demand for
milk.
Goods that are demanded for their own
sake have direct demand while goods
that are needed in order to obtain
some other goods possess indirect
demand.
In this sense, all consumers’ goods
have direct demands while all
producers’ goods, including money,
have indirect demand.
 Normal/Superior and Inferior
Goods
Normal goods, also called as superior
goods.
The former are those whose demand
increases as income increases, and the
latter are those whose demand falls as
income goes up, and vice versa.
For example, milk, refrigerator,
television, education, and the good
quality of food grains and clothes are
superior goods while the poor quality
of food grains and clothes are inferior
goods.
In other words, the superior goods
are the ones which the rich people
consume while the inferior goods
are for the poor people’s
consumption.
Further, these are relative concepts.
Thus, for example, scooter/bike is a
superior good in relation to a cycle,
while it is an inferior good relative
to a car.
Necessary, comforts and Luxury
Goods
In common sense, the necessary goods
are essential for existence, comforts
goods make the life comfortable and
luxury goods are luxuries of life.
However, in economics they have special
meanings.
These all are considered as superior
goods but of different degrees.
Thus, as the consumers income rise,
more of each of these three kinds of
goods is consumed but the proportion of
the consumption budgets differ.
In case of necessary goods, as
income increases, while the
consumption expenditure on them
increases, the percentage of total
expenditure/income spent on each of
them goes down.
In case of comforts, the said
percentage remains the same, while
in case of luxuries, it goes up.
In general, ordinary foods, drinks,
clothing, some education and medical
aids are considered as necessary.
Some means of transport, good
quality of food, drinks and
clothing, tourism, etc. are taken
as comforts.
Luxuries include foods in high
end hotels, designers clothing,
specious residences, foreign
touruism, and so on.
 Substitute and Complementary
Goods
Goods which crated joint demand are
complementary goods.
Therefore demand for one commodity is
dependent upon demand for the other one.
For ex: pen and ink, printer and ink cartridge,
computer and software, car and petrol(diesel)
etc.
Goods that complete with each other to
satisfy any particular want are called
substitute.
Also, note that the degree of substitution
might vary form product to product.
 Substitute and Complementary
Goods
Example of Close substitutes: Coke
and Pepsi, WagonR and Santro, petrol
driven car or diesel driven car, saving
a/c with SBI or ICICI bank, investing in
govt bonds or company deposits, and so
on.
On the other hand, there are products
which are not so good substitutes of
each other, for example, car and bike,
airways and railways.
This categorization of goods helps
producers in taking decisions related to
price, output, advertising, etc.
Individual’s Demand and
Market Demand
The demand for a good by an
individual buyer is called
individual’s demand while the
demand for a good by all buyers in a
market is called market demand.
For ex, if the milk market consisted
of, say, only three buyers, then
individuals and market demand
(monthly) could be as follows.
 Individual firm Demand
Amul’s Demand: Ice Cream
Cones
Price/cones
Daily quantity
_________________________________
Rs10.00 12
Rs15.00 10
Rs20.00 8
Rs25.00 6
Rs30.00 4
 Market Demand
Market demand is the sum of all
individual demands at each possible
price.
Assume the ice cream market has two
buyers as follows:
Price Per Cone Amul Vadilal Market
Demand
 Rs10.00 12 + 7 = 19
 Rs15.00 10 + 6 = 16
 Rs20.00 8 + 5 = 13
 Rs25.00 6 + 4 = 10
 Rs30.00 4 + 3 = 7
 Firm and Industry
Demand
Most goods today are produced by
more than one firm and so there is a
difference between the demand facing
an individual firm and that facing an
industry (all firms producing a
particular good constitute an industry
engaged in the production of that
good).
For ex: Cars in India are manufactured
by Maruti Suzuki, TATA motors,
Hindustan Motors, Premier
Automobiles, and Standard Motor
Products of India.
Demand for Maruti car alone is a firm’s
(company) demand where as demand
for all kinds of cars is industry’s
demand.

Similarly, demand for Godrej

refrigerators is a firm’s demand while
that for all brands of refrigerators is
the industry’s demand.
 Why Demand Analysis is
needed?
Demand analysis is needed
basically for three purpose:
1.To provide the basis for analyzing
market influences on the demand
2.To provide the guidance for
manipulating the demand
3.To guide in production planning
through forecasting the demand
 Demand Function
A function is that which describes the
relationship between a variable
(dependent variable) and its
determinants (independent variables).
Thus, the demand function for a good
relates the quantities of a goods
which consumers demand during
some specific period to the factors
which influence that demand.
Mathematically, the demand function
for a goods x can be expressed as
follows:
Demand function
Dx= f (Y, Px, Ps, Pc, T; Ep, Ey, N, D)

 Dx =Demand of goods x
 Y =Income of consumers
 Px =Price of x
 Ps =Price of substitute of x
 Pc =Price of complements of x
 T =Taste of consumers
 Ep =Consumers’ expectations about future price
 Ey = Consumers’ expectations about future
income
 N =No. of consumers
 D =Distribution of consumers
 Determinants of
Demand
Product’s Own Price
Consumer Income
Prices of Related Goods
Tastes & preferences
Expectations about future price &
income
Number of Consumers & their
Distribution