3A Demand Analysis PDF

3A Demand Analysis Introduction : Demand Schedule : You have already studied the concept of Demand schedule is a tabular representation utility in the previous chapter. Utility is the basis of the function...

3A Demand Analysis Introduction : Demand Schedule : You have already studied the concept of Demand schedule is a tabular representation utility in the previous chapter. Utility is the basis of the functional relationship between price and of demand. Utility may generate a desire or a quantity demanded for a particular commodity. need to have a particular commodity, but utility A demand schedule may be either individual on its own cannot generate demand for the demand schedule or market demand schedule. commodity. This chapter is an effort to analyse Individual Demand Schedule : the concept of demand. Demand analysis is Individual demand is the quantity of a concerned with consumer behaviour. commodity demanded by a consumer at a given Meaning of Demand : price during a given period of time. In ordinary language, demand means a Individual demand schedule is a tabular desire. Desire means an urge to have something. representation showing different quantities of In Economics, demand means a desire which is commodities that an individual consumer is backed by willingness and ability to pay. prepared to buy at various prices over a given For example, if a person has the desire to period of time. purchase a television set but does not have This can be explained with the help of the the adequate purchasing power then it will be following individual demand schedule. simply a desire and not a demand. Individual demand schedule : Thus, demand is an effective desire. All Table 3.1 desires are not demand. Price of commodity Quantity demanded of In short, ‘x’ ( ` ) commodity ‘x’ (in kgs) Demand = Desire + willingness to 10 1 purchase + Ability to pay. 8 2 6 3 Try this : 4 4 2 5 Identify the concepts : Table 3.1 shows different quantities of 1) A poor person wants to have a car …… commodity ‘x’ purchased by an individual 2) A rich person bought a car …… consumer at various prices. It can be observed that less quantity of commodity is demanded at Definition of Demand : rising prices and more quantity of commodity According to Benham, “the demand for is demanded at falling prices. It indicates an anything at a given price is the amount of it, inverse relationship between price and quantity which will be bought per unit of time at that demanded. price.” Individual Demand Curve :   Thus, following are the features of demand : Individual demand curve is a graphical 1) Demand is a relative concept. representation of the individual demand 2) Demand is essentially expressed with schedule. reference to time and price. Fig. 3.1 represents an individual demand curve 17  which is based on table 3.1 the demand of all consumers at various prices. Individual Demand Curve It also indicates an inverse relationship between price and quantity demanded. Y This can be explained with the help of D DD = Demand Curve 10 following market demand schedule. 8 Market demand schedule : Price in ` Table. 3.2 6 Price of Quantity of ‘x’ Market 4 commodity demanded Kgs. demand Con- Con- Con- 2 D ‘x’( ` ) A+B+C sumer sumer sumer A B C 0 1 2 3 4 5 6 7 X 10 5 10 15 30 Quantity Demanded in (Kgs) 8 10 15 20 45 Fig. 3.1 6 15 20 25 60 4 20 25 30 75 In figure 3.1, X axis represents quantity 2 25 30 35 90 demanded and Y axis represents the price of the commodity. The demand curve DD slopes Table 3.2 shows different quantities of downward from left to right, indicating an commodity x purchased by different consumers inverse relationship between price and quantity (A, B, C) at various prices. It can be observed demanded. that less quantity of commodity is demanded at rising prices and more quantity of commodity is demanded at falling prices. Thus, there is an inverse relationship between price and quantity demanded. Market Demand Curve : Graphically, the market demand curve is a horizontal summation of individual demand curves. It is based on the market demand schedule. Fig. 3.3 represents the market demand curve Market Demand Curve Y DD = Market Demand Curve D Fig. 3.2 Individual Demand 10 Market Demand Schedule : 8 Price in ` Market demand is total demand for a 6 commodity from all the consumers at a given price during a given period of time. 4 Market demand schedule is a tabular 2 D representation showing different quantities of commodity which all consumers are prepared to 0 20 40 60 80 100 X buy at various prices over a given period of time. Quantity Demanded in (Kgs) It is obtained by a horizontal summation of Fig. 3.3 18  In figure 3.3, X axis represents market 4) Multi-purpose uses : When a commodity demand and Y axis represents the price of the can be used for satisfying several needs, its commodity. The market demand curve ‘DD’ demand will rise with a fall in its price and slopes downward from left to right, indicating an fall with a rise in its price. inverse relationship between price and market 5) New Consumers : When the price of a demand. commodity falls, a new consumer class appears who can now afford the commodity. Thus, total demand for commodity increases with fall in price. Try this : Complete the following hypothetical demand schedule. Price of commodity ‘x’(`) Qty. Demanded kgs 350 3 300 250 10 Fig. 3.4 Market Demand 200 Try this : 150 Prepare a monthly demand schedule of 100 30 your family for various commodities. For example, vegetables, fruits, medicines etc. Types of Demand : Reasons justifying downward sloping demand 1) Direct demand curve are as follows : 2) Indirect demand Types of 1) Law of Diminishing Marginal Utility : 3) Complementary/ Joint demand Demand We have seen that marginal utility goes on 4) Composite demand diminishing with an increase in the stock 5) Competitive demand of a commodity and vice-versa. Therefore, a consumer tends to buy more when price 1) Direct demand : It is the demand by falls and vice-versa. This implies that the consumer for goods which satisfy demand curve is downward sloping. their wants directly. They serve direct consumption needs of the consumers. Thus, 2) Income effect : In the case of normal goods, it is the demand for consumer goods. For when price falls, purchasing power (real example, demand for cloth, sugar, etc. income) of a consumer increases which enables him to buy more of that commodity. 2) Indirect demand : Indirect demand is This is known as income effect. also known as derived demand. It refers to demand for goods which are needed 3) Substitution effect : In case of substitute for further production. It is the demand goods, when the price of a commodity rises, the consumer tends to buy more of for producer's goods. Hence, all factors of its substitute and less of that commodity production have indirect or derived demand. whose price has increased. This is known For example, demand for workers in a sugar as substitution effect. factory is derived or indirect demand. 19  3) Complementary/Joint demand : When 2) Income : Income of a consumer decides two or more goods are demanded jointly to purchasing power which in turn influences satisfy a single want, it is known as joint or the demand for the product. Rise in income complementary demand. For example, car will lead to a rise in demand for the and fuel etc. commodity and a fall in income will lead to a fall in demand for the commodity. 4) Composite demand : The demand for a commodity which can be put to several 3) Prices of Substitute Goods : If a substitute uses is known as composite demand. For good is available at a lower price then example, electricity is demanded for several people will demand cheaper substitute good than costly good. For example, if the price uses such as light, fan, washing machine etc. of sugar rises then demand for jaggery will 5) Competitive demand : It is demand for rise. those goods which are substitute for each 4) Price of Complementary Goods : Change other. For example, tea or coffee, sugar or in the price of one commodity would also jaggery etc. affect the demand for other commodity. For Try this : example, car and fuel. If the price of fuel rises, then demand for cars will fall. Complete the table 5) Nature of product : If a commodity is a Type of demand Example necessity and its use is unavoidable, then Direct demand its demand will continue to be the same Workers in cotton textile irrespective of the corresponding price. industry For example, medicine to control blood Joint demand Coffee Powder pressure. For 6) Size of population : Larger the size of preparing population, greater will be the demand Coffee for a commodity and smaller the size of population smaller will be the demand for CNG and petrol, pen and a commodity. pencil Tea 7) Expectations about future prices : If Curd the consumer expects the price to fall in Milk Direct future, he will buy less in the present at the consumption Sweets prevailing price. Similarly, if he expects the price to rise in future, he will buy more in the present at the prevailing price. Determinants of Demand : The demand for goods is determined by the 8) Advertisement : Advertisement, sales promotion scheme and effective sales- following factors : manship tend to change the preferences 1) Price : Price determines the demand for a of the consumers and lead to demand for commodity to a large extent. Consumers many products. For example, cosmetics, prefer to purchase a product in large tooth brush etc. quantities when price of a product is less and 9) Tastes, Habits and Fashions : Taste and they purchase a product in small quantities habits of a consumer influence the demand when price of a product is high. for a commodity. If a consumer likes to 20  eat chocolates or consume tea, he will x = Commodity demand more of them. Similarly, when a f = Function new fashion hits the market, the consumer Px = Price of a commodity demands that particular type of commodity. If a commodity goes out of fashion then Assumptions : suddenly the demand for that product tends Law of demand is based on the following to fall. assumptions : 10) Level of Taxation : High rates of taxes on 1) Constant level of income : If the law goods or services would increase the price of demand is to find true operate then, of the goods or services. This, in turn would consumers' income should remain constant. result in a decrease in demand for goods or If there is a rise in income, people may services and vice-versa. demand more at a given price. 11) Other factors : 2) No change in size of population : It is 1) Climatic conditions assumed that the size of population remains unchanged. Any change in the size and 2) Changes in technology composition of population of a country 3) Government policy affects the total demand for the product. 4) Customs and traditions etc. 3) Prices of substitute goods remain constant Law of Demand : : It is assumed that the prices of substitutes Introduction : remain unchanged. Any change in the price The law of demand was introduced by of the substitute will affect the demand for Prof. Alfred Marshall in his book, ‘Principles of the commodity. Economics’, which was published in 1890. The 4) Prices of complementary goods remain law explains the functional relationship between constant : It is assumed that the prices price and quantity demanded. of complementary goods remain unchanged because a change in the price of one good Statement of the Law : will affect the demand for the other. According to Prof. Alfred Marshall, 5) No expectations about future changes in “Other things being equal, higher the price of a prices : It is assumed that consumers do not commodity, smaller is the quantity demanded expect any further change in price in the and lower the price of a commodity, larger is the near future. If consumers expect a rise in quantity demanded.” prices in future, they may demand more in In other words, other factors remaining the present even at existing high price. constant, if the price of a commodity rises, 6) No change in tastes, habits, preferences, demand for it falls and when price of a fashions etc. : It is assumed that consumers' commodity falls demand for the commodity tastes, habits, preferences, fashions etc. rises. Thus, there is an inverse relationship should remain unchanged. Any change between price and quantity demanded. in these factors will lead to a change in Symbolically, the functional relationship demand. between demand and price is expressed as : 7) No change in taxation policy : Taxation Dx = f (Px) policy of the government has a great impact Where D = Demand for a commodity on demand for various goods and services. 21  Therefore, it is assumed that there is no In fig. 3.5, X axis represents the demand for change in the policy of taxation declared the commodity and Y axis represents the price by Government. of commodity x. DD is the demand curve which The law of demand is explained with the slopes downward from left to right due to an help of the following demand schedule and inverse relationship between price and quantity diagram. demanded. Demand schedule : Try this : Table. 3.3 Draw a demand curve from the following Price of Quantity demanded of demand schedule : commodity ‘x’ (`) commodity ‘x’ (in kgs.) 50 1 Price of Apple (`) Quantity demanded per kg (in kgs.) 40 2 40 5 30 3 50 4 20 4 60 3 10 5 70 2 As shown in Table 3.3 when price of 80 1 commodity ‘x’ is ` 50, quantity demanded is 1 kg. When price falls from ` 50 to ` 40, quantity Exceptions to the Law of Demand : demanded rises from 1 kg to 2 kgs. Similarly, at There are certain exceptions to the law price ` 30, quantity demanded is 3 kgs and when of demand. It means that under exceptional price falls from ` 20 to ` 10, quantity demanded circumstances, consumer buys more when the rises from 4 kg sto 5 kgs price of commodity rises and buys less when Thus, as the price of a commodity falls, price of commodity falls. In such cases, demand quantity demanded rises and when price of curve slopes upwards from left to right. i.e. the commodity rises, quantity demanded falls. This demand curve has a positive slope as shown in shows an inverse relationship between price and fig. 3.6. quantity demanded. Exceptional Demand Curve Demand Curve Y DD = Exceptional Demand curve Y D D 50 40 Price in ` Price in ` 30 20 10 D D 0 X 0 1 2 3 4 5 X Quantity Demanded in kgs Quantity Demanded in kgs Fig. 3.5 Fig. 3.6 22 Following are the exceptions to the law of consumption, certain goods like tea is demand: purchased in required quantities even at a 1) Giffen's paradox : Inferior goods or low higher price. quality goods are those goods whose Find out : demand does not rise even if their price falls. At times, demand decreases when the Examples of the given exceptions to the price of such commodities fall. law of demand.   Sir Robert Giffen observed this behaviour 1) Prestigious goods – in England in relation to bread. He noted 2) Habitual goods – that, when the price of bread declined, 3) Branded goods – people did not buy more because of an increase in their real income or purchasing Variations in Demand : power. They preferred to buy superior When the demand for a commodity falls or good like meat. This is known as Giffen's rises due to a change in price alone and other paradox. factors remain constant, it is called variations in 2) Prestige goods : Expensive goods like demand. It is of two types : diamond, gold etc. are status symbol. So 1) Expansion of demand : Expansion of rich people buy more of it, even when their demand refers to rise in quantity demanded prices are high. due to fall in price alone while other factors 3) Speculation : The law of demand does like tastes, income of the consumer, size of not hold true when people expect prices to population etc. remain unchanged. rise still further. In this case, although the  Demand moves in downward direction prices have risen today, consumers will on the same demand curve. demand more in anticipation of further rise  This is explained with the help of in price. For example, prices of oil, sugar following fig. 3.7 etc. tend to rise before Diwali. So people go Expansion of Demand on purchasing more at a high price as they anticipate that prices may rise during Diwali. Y 4) Price illusion : Consumers have an illusion that high priced goods are of a better D Price in ` P a quality. Therefore, the demand for such goods tend to increase with a rise in their b P1 prices. For example, branded products D which are expensive are demanded even at a high price. 0 Q Q1 X 5) Ignorance : Sometimes, due to ignorance Quantity Demanded in kgs people buy more of a commodity at high Fig. 3.7 price. This may happen when consumer is  As shown in fig. 3.7, DD is demand ignorant about the price of that commodity curve. A downward movement on the at other places. same demand curve from point a to point b 6) Habitual goods : Due to habit of indicates an expansion of demand. 23  2) Contraction of Demand : Contraction of Increase in Demand demand refers to a fall in demand due to rise in price alone. Other factors like tastes, income of the consumer, size of population etc. remain unchanged. Price in `  Demand curve moves in the upward direction on the same demand curve.  This can be explained with the help of following fig. 3.8 Contraction of Demand Quantity Demanded in kgs Fig. 3.9 As shown in fig. 3.9, DD is the original Price in ` demand curve. Demand curve shifts outward to the right from DD to D1D1 which indicates increase in demand. 2) Decrease in demand : It refers to decrease in quantity demanded due to unfavourable changes in other factors like tastes, income of the consumer, climatic conditions etc. Quantity Demanded in kgs and price remains constant. Fig. 3.8 Demand curve shifts to left hand side of  As shown in fig. 3.8, DD is a demand the original demand curve. This can be curve. An upward movement on the same explained with the help of fig. 3.10 demand curve from point a to point b shows Decrease in Demand contraction of demand. Changes in Demand : When demand for a commodity increases or decreases due to changes in other factors and Price in ` price remains constant, it is known as changes in demand. It is of two types : 1) Increase in demand : It refers to increase in quantity demanded due to favourable changes in other factors like tastes, income of the consumer, climatic conditions etc. Quantity Demanded in kgs and price remains constant. Fig. 3.10  Demand curve shifts to the right hand As show in fig. 3.10, DD is the original demand side of the original demand curve. This can curve. It shifts inward to the left from DD to be explained with the help of fig. 3.9 D2D2 which indicates decrease in demand. 24  You should know : 2) Aggregate demand is a macro economic 1) Demand is a micro economic concept. concept. It refers to the total amount of Demand is that quantity of a commodity sales proceeds which an entrepreneur which a person is ready to buy at a actually expects from the sale of output particular price and during a specific produced at a given level of employment period of time. during the year. EXERCISE Q. 1. Complete the following statments : Q. 2. Give economic terms : 1) The relationship between demand for a good 1) A situation where more quantity is demanded at and price of its substitute is…….. lower price ……… a) direct 2) Graphical representation of demand schedule b) inverse ……… c) no effect 3) A commodity which can be put to several uses d) can be direct and inverse ……… 2) The relationship between income and demand 4) More quantity is demanded due to changes in the for inferior goods is……. factors determining demand other than price a) direct ……… b) inverse 5) A desire which is backed by willingness to c) no effect purchase and ability to pay ……… d) can be direct and inverse Q. 3. Distinguish between : 3) Symbolically, the functional relationship 1) Desire and Demand between Demand and Price can be expressed as 2) Expansion of demand and Contraction of demand................ 3) Increase in demand and Decrease in demand a) Dx = f(Px) b) Dx = f(Pz) Q. 4. State with reasons whether you agree or c) Dx = f(y) disagree with the following statements : d) Dx = f(T) 1) Demand curve slopes downward from left to 4) When less units are demanded at high price it right. shows............... 2) Price is the only determinant of demand. a) increase in demand 3) When price of Giffen goods fall, the demand for b) expansion of demand it increases. c) decrease in demand d) contraction in demand 25 Q. 5. 1) Observe the following table and answer 3) Explain the diagrams : the following questions : A) B) Quantity demanded Y Y Market D D Price Con- Con- Con- Price in ` Price in ` demand per kg. sumer sumer sumer P a P2 a (in kgs) in ` A B C b b (A+B+C) P1 D P D 25 16 15 12 0 Q Q1 X 0 Q2 Q X 30 12 11 10 Quantity Demanded in kgs Quantity Demanded in kgs 35 10 09 08 A) B) 40 08 06 04 1) Diagram A    1) Diagram B represents...... in represents....... in a) Complete the market demand schedule. demand demand b) Draw market demand carve based on above 2) In diagram A    2) In diagram B market demand schedule. movement of movement of 2) Observe the given diagram and answer the demand curve demand curve following questions : is in...... direction is in...... direction Y Q. 6. Answer in detail : D2 D D1 1) State and explain the law of demand with exceptions. Price in ` P D1 2) Explain in detail the determinants of demand. D D2  0 Q2 Q Q1 X Quantity Demanded in kgs 1) Rightward shift in demand curve............ 2) Leftward shift in demand curve............ 3) Price remains.......... 4) Increase and decrease in demand comes under.......... 26