Demand Analysis & Estimation Chapter No. 2

1. Demand Analysis & Estimation Chapter No. 2

2. Demand analysis In this chapter ,we begin our analysis of consumer demand. demand is one of the most important aspects of managerial economics Since firm would not be established or survive if sufficient demand for its product did not exist or could not created That is ,a firm could have the most efficient production techniques and most effective management, but without a demand for its product that is sufficient to cover at least all production and selling cost over the long run , it simply would not survive Indeed many firms go out of business soon after being set up because their expectation of a sufficient demand for their products fail

3. Demand analysis ( cont… ..) • Each year also sees many previously established and profitable firms close as a result of consumers shifting their purchases to different firms and products • Demand is thus essential for the creation, survival, and profitability of a firm

4. Individual demand • Individual demand It shows the demand of an individual at specific price per unit of time

5. Individual demand (Cont..) • Determinants of demand • Qdx=f(p x , m , p s ,T , p e ,etc) • Where as Px=Price of commodity X • Qdx=Quantity demand of commodity X • M=Money income of the household • PS=Price of substitutes • T=Taste of consumer • Pe=Price expectation

6. Individual demand (cont….) • Normal goods versus inferior goods • Normal goods: means goods and services when consumer purchase more and more with increase in income and decrease the purchase with decrease in income • Positive relationship between purchase of commodity and income, (shoes, travel, education etc ) • Inferior goods: means goods and services when consumer purchase less quantity with increase in income and vice versa i.e. potatoes etc

7. (Cont….) • Inverse relationship exist between price and quantity of a commodity • Inverse relationship between price and quantity demand is due to • substitution effect • Income effect or real income • Change in quantity demand & change in demand • Movement along demand curve due to change in price is known as change in quantity demanded • Movement from one demand curve to another demand curve is known as change in demand

8. Market demand Market demand • It shows the demand of all individuals. It is horizontal summation of the individuals demand for a commodity at various prices in market • Market demand is flatter where as individual demand is steeper • Market demand is horizontal summation of individual demand curves only if consumption decision of individual is independent. but this is not always the case • For example people sometime purchase a commodity because others are purchasing it and in order to be fashionable this called………..bandwagon effect

9. Market demand ( cont…..) • Market demand curve became flatter as a result of bandwagon effect • Sometimes consumer seek to be different and decrease the purchase of a commodity as more people consume the commodity this effect is known as “ Snob effect” • This tends the market demand curve steeper

10. Cont…..

11. Marked demand a 10 b Price 8 c 6 d 4 e 2 40 60 85 120 180 Market Demand Curve: Quantity Demand

12. The demand faced by a firm • Analysis of market demand is central to managerial economics • The demand for a commodity faced by a firm depends on the size of the market or industry demand for the commodity, the form in which the industry is organized, and number of firms in industry • If a firm is sole producer for which there is no substitute the firm represented industry • It faces the industry or market demand for the commodity • Examples are local telephone, electricity, public transportation and other public utilities companies

13. The demand faced by a firm (cont….) • There is another form of organization known as price taker or perfect competitor • Large numbers of firm, producing small and homogenous products • Such firm faces a horizontal demand curve for a commodity • this form of market organization is very rare • Actually firms operating in world falls between these two extremes i.e. monopoly and perfect competition • That is • oligopoly • Monopolistic competition

14. The demand faced by a firm (cont….) • In oligopoly: • Few firms are in industry • Product are homogeneous or standardized such as cement, steel and chemical • Products are heterogeneous or differentiated such as automobile, cigarettes and soft drinks • Interdependency exist among firms • Pricing, advertisement and promotional behavior of each firm effect the demand of another firm

15. The demand faced by a firm (cont….) • Monopolistic competition is another form of market organization • Many firms selling the heterogeneous or differentiated products • This form of organization is common in the service sector of economy • Large number of gasoline stations and barber shops in a given areas • Each selling similar but not identical products or services

16. The demand faced by a firm (cont….) • Demand curves under all forms of market organization, except perfect competition is negatively sloping • Forces such as • Numbers of consumers in market • Consumer income & taste • Price of related goods • Level of advertisement and promotional policies • Availability of credit • Type of goods i.e. durable goods or nondurable goods effect demand faced by a firm