DEMAND ANALYSIS

DR M.S.ANNAPOORNA
PROFESSOR
SCHOOL OF MANAGEMENT STUDIES
 Demand
• A relation between the price of a good and
the quantity that consumers are willing and
able to buy during a given period, other things
constant.
– Willing: you want to buy the product
– Able: you can afford the buy the product
 Law of Demand
• States that a quantity of a good demanded
during a given period relates inversely to its
price, other things constant.
• Price increases  Quantity Demanded
decreases
• Price decreases  Quantity demanded
increases
• Creates a downward sloping demand curve
 Why?
• Substitution Effect
– Unlimited wants/scarce resources
– When the price of a good falls, consumers
substitute that good for other goods, which
become relatively more expensive.
– Reverse also holds true
 Why?
• Income Effect
– Money income: is simply the number of dollars
received per period
– Real income: your income measured in terms of
what it can buy.
– A fall in the price of a good increases consumers’
real income making consumers more able to
purchase goods; for a normal good, the quantity
demanded increases.
 Demand Curve

A curve showing the relation between

Price the price of a good and the quantity
demanded.
$6

$5 Point on the line that matches the schedule

Every point on the line matches the schedule.
$4 It is a price/quantity demanded that consumers
are willing and able to buy.
$3
Demand
0 Quantity
50 75 100 150 200
 Movement Along the Demand Curve
• Caused by a change in price
– Only a change in price
• Move from one point to another on the same
graph
• Called a
– Change in quantity demanded.
Movement along the Demand Curve

Price

B
$6

$5 A

Demand

0
75 100 Quantity
 Demand
• Individual demand
– The demand of an individual consumer
• Market demand
– Sum of individual demands of all consumers in the
market
 Shifts in the Demand Curve
• A demand curve isolates the relation between
prices of a good and quantities demanded
when other factors that could affect demand
remain unchanged.
• Factors called assumptions or determinants
 Determinants of Demand
• Changes in consumer income
• Changes in prices of related goods
• Changes in consumer expectations
• Changes in the number or composition of
consumers
• Changes in consumer tastes
 Changes in determinants
• Results in changes to the RELATIONSHIP
BETWEEN PRICE AND QUANTITY DEMANDED.
• At each and every price a DIFFERENT quantity
is demanded.
• Results in a shift in the demand curve
– New curve must be drawn
 Changes in Demand
• Increase in demand
– At each and every price
MORE of the good is
Price
demanded
– Shifts to the right

P Qd1 Qd2 A B
$5
D2
$4 150 200
D1
$5 100 150 Quantity
100 150
$6 75 100
 Causes of Increase in Demand
• Increase in consumer
income
– Causes consumers to
buy more of the product
at each and every price.
– Normal goods
– Inferior goods
 Change in consumer income

• Normal goods
– A good for which demand
increases as consumer
income rise

• Inferior goods
– A good which demand
increases as consumer
income falls
 Changes in Price of Related Goods

• Substitutes
– Goods that are not
consumed jointly
– Goods that are related in
such a way that an increase
in the price of one shifts the
demand curve for the other
rightward.
– Increase in price of Coke
leads to increase in demand
for Pepsi
Changes in Price of Related Goods
• Substitutes
– Suppose that the price of Coke rises from $1 to
$1.50, then the demand for Pepsi will decrease
from 75 to 100.

$1

D1 D2

75 100
 Changes in the price of related goods

• Complements
– Goods that are
related in a such a
way that an increase
in the price of one
shifts the demand of
the other leftward
– Two goods that are
consumed jointly.
– An decrease in the
price of one will
increase demand for
the other
Changes in Price of Related Goods
• Complements
– An decrease in the
price of DVD players,
increases the demand
for DVDs
– Suppose that DVD
players decrease in $20
price from $145 to
$100, now the demand
for DVDs will decrease
from 750 at $20 to D D2
900.
750 900
Changes in Consumer Expectations

• Such as expectations in
– Prices and income
– Affect how consumers
spend their money and
their demand
– If product cheaper today
than tomorrow, then
increase in demand
 Changes in consumer tastes
• Consumer preferences
likes and dislikes in
consumption assumed to
be constant along a given
demand curve assumed
constant along a given
demand curve
• Changes in taste will cause
a shift in the demand
curve as different
quantities are demanded
at each and every price.
 Changes in taste

• Consumers
prefer platform
shoes.
• At $50, demand $50

increases from
100 to 200. D D2

100 200
Change in the number and composition of
consumers
• The market demand curve is the sum of the
individual demand curves.
• If the number of consumers falls then the sum
will be smaller thus shifting the demand curve
 Changes in Demand
• Decrease in demand
– At each and every price
Less of the good is
Price
demanded
– Shifts to the Left

P Qd1 Qd2 B
$5
D1
$4 150 110
D2
$5 100 90 Quantity
90 100
$6 75 60
 Causes of Decrease in Demand
• Decrease in consumer
income
– Causes consumers to
buy less of the product
at each and every price.
 Changes in Price of Related Goods

• Substitutes
– Goods that are not
consumed jointly
– Goods that are related in
such a way that an increase
in the price of one shifts the
demand curve for the other
rightward.
– Decrease in price of Coke
leads to Decrease in demand
for Pepsi
Changes in Price of Related Goods
• Substitutes
– Suppose that the price of Coke drops from $1 to
$0.50, then the demand for Pepsi will decrease
from 100 to 75.

$1

D2 D

75 100
 Changes in the price of related goods

• Complements
– Goods that are
related in a such a
way that an increase
in the price of one
shifts the demand of
the other leftward
– Two goods that are
consumed jointly.
– An increase in the
price of one will
decrease demand
for the other
Changes in Price of Related Goods
• Complements
– An decrease in the
price of DVD players,
increases the demand
for DVDs
– Suppose that DVD
players increase in $20
price from $100 to
$145, now the demand
for DVDs will decrease
from 900 at $20 to D2 D1
750.
750 900
Changes in Consumer Expectations

• Such as expectations in
– Prices and income
– Affect how consumers
spend their money and
their demand
– If product more expensive
today than tomorrow,
then decrease in demand
 Changes in consumer tastes
• Consumer preferences
likes and dislikes in
consumption assumed to
be constant along a given
demand curve assumed
constant along a given
demand curve
• Changes in taste will cause
a shift in the demand
curve as different
quantities are demanded
at each and every price.
Change in the number and composition of
consumers
• The market demand curve is the sum of the
individual demand curves.
• If the number of consumers falls then the sum
will be smaller thus shifting the demand curve
 Review of Demand
• A change in quantity demanded is not a change in
demand
• Change in quantity demanded is caused by a change
in price
• Change in quantity demanded is a movement along
the demand curve
• Change is demand is caused by a change in the
determinants
• Change in demand shifts the demand curve