Price and Quantity demanded

7. Demand is regarded as the lifeline of a business enterprise in the following
ways:-
a. Demand analysis is required to identify and measure the forces that determine
sales.
b. Extent of production and cost allocation depends upon demand analysis.
c. Demand analysis is essential for pricing and inventory holdings.
d. Demand analysis helps in sales forecasting and profit planning.
e. New product policy and advertising policy cannot be drawn without the analysis
of demand.
f. Research and development strategy can not be framed without demand
analysis.
g. Demand analysis is the basis of tracing the trend of the firm’s competitive
position in the market.

8. Assume the following three scenarios:-
• A person wants to buy a red Ferrari but can not afford to pay for it.
•Another person can afford to buy a stake board but does not want one.
•A third person want to buy a bicycle and can pay for it.
Only the 3rd scenario the consumer would be considered part of the effective demand
for that Good.

9. Demand
• Demand means the willingness and the capacity to Pay.
• Prices are the tools by which the market coordinates individual desire.
“ The demand for a particular good is the amount that will be purchased at a given
price and at a given time”.

10. Types of Demand
a. Price Demand :-
Price demand expresses the relationship between the price and demand of a
commodity, other things being equal.
Dx= f( Px)
b. Income Demand:-
Income demand expresses the relationship between Income of the consumer and
quantity demanded of a commodity, other things remaining the same.
Dx = f(Y)

11. Cases of Income Demand with respect to Different Types of Goods
a. Normal Goods
like:- Led TV, Cars, Refrigerators, branded clothes etc.
In the case of Normal Goods with the rise in income of the consumer the demand
of the commodity also increases.

12. b. Inferior Good
like:- Bajra , cable television, Inter-City bus service, Inexpensive –Cars.
An inferior good is a type of good whose demand declines when income rises. In other
words demand for inferior goods is inversely related to the income of the consumer.

13. Cross Demand
like- Cinema Tickets and popcorn, Alternative brands of Chocolates like-
Dairy milk silk and Ferrero Rocher
It expresses the relationship between the quantity demanded of good “x” and
the price of related good “y” other things remaining the same.
a. In case of Complementary :-
If two goods are complementary just as pant and shirt, Car and petrol etc., a fall
in price of one good y say car will raise the demand of good x (Petrol).

14. a. In case of Substitutes:-
A product or service that satisfies the need of a consumer that
another product or service fulfills. A substitute can be perfect or imperfect
depending on whether the substitute completely or partially satisfies the
consumer.
A consumer might consider Pepsi to be perfect substitute for coke, or land
O’Lakes butter to be perfect substitute for Kerry gold Irish butter.

15. a. In case of Complementary :-
If two goods are complementary just as pant and shirt, Car and petrol etc., a fall
in price of one good y say car will raise the demand of good x (Petrol).
Some more examples like-
 Printers and Ink Cartridges
 DVD players and DVDs
 Computer Hardware and Computer Software
 Flashlight and Battery

16. Determinants of Demand
 Price of the commodity.
 Prices of Related Goods.
Income of the consumer.
Price Expectations
 Taste and Preferences
Population
Discoveries
 Government Policies.

17. Demand Function
It shows the functional relationship between quantity demanded of a good
and its determinants.
Dx = f( Px, Pr, Y, T…….. etc.)

18. Law of Demand :-
According to Marshall “ It states that other things being equal(Ceteris Paribus)
, the demand for a good extends with a fall in price and contracts with a rise in price.” It is
also known as the First Law of Purchase. It indicates the functional relationship between
the price of the commodity and its quantity demanded in the market.
The law of demand can be given in the form of the formula as under:
P= 1/Q
It is read as Q is inversely related to P.
Here , P= Price of good
Q= Quantity demanded.
 Note that it is mandatory to use the term ceteris paribus or state all else being equal.

19. Other things remaining same or constant places the limitation
on the application of law of demand.
These factors may include changing tastes, prices of other
goods, income , even the weather.

20. What accounts for Law of demand ?
 People tends to substitute for goods whose
price has gone up.

21. Let us take hypothetical demand schedule for Mangoes
Price (Rs.) Q.D (Per week)/kg
10 400
20 300
30 200
40 100
• Note that while drawing demand graph Price is always represented on oy axis
and quantity demanded on ox axis. Quantity demanded should always contain
a time period say a day, a week, a month , or a year.

22. Demand Curve
It is the graphic representation of the law of
demand.
• Demand curve slopes downwards to the right.
• As the price goes up the quantity demanded
goes down.

23. Demand and Quantity Demanded
Demand refers to a schedule of quantities of a good that will be bought per unit of
time at a various prices, other things remaining same.
Quantity Demanded refers to a specific amount that will be demand per unit of time
at a specific price.
Graphically, it refers to a specific point on the demand curve.

24. Shifts in Demand versus Movements along the demand curve
• A movement along a demand curve is a graphical representation of the effect of a
change in price on the quantity demanded .
•A shift in demand is the graphical representation of the effect of anything other
than price on demand.

25. Change in DemandChange in Quantity Demanded

26. Movement along the demand curve or Change in Quantity Demanded
Reason for Movements : Due to change in Price of the commodity other things
remaining the same .
Phases of Movements
 Expansion
Contraction

27. Shifts in Demand Curve or Change in Demand
Reasons for Shift – Due to change in other factors price remaining the same.
Phases
a. Increase in Demand or Rightward shift
b. Decrease in Demand or Leftward Shift

28. Variables that cause shifts in Demand Curve
Shifts the demand curve
to Right
An increase in Because
the price of the
substitute good
Consumer buys less of
substitute goods and more of
this good.
Income (and the good is
normal)
Consumer spends more of
the higher income on this
good
Taste for the good
Consumers are willing to buy
a larger quantity of the good
at every price
Population
additional consumers result
in greater quantity demanded
at every price
the expected price of
the good in future
Consumers buy more of the
good today in order to avoid
the higher price in future

29. Shifts the demand curve to Left
An increase in Because
Price of the
complementary good
Consumer buys less of
complementary goods
and less of this good.
Income (good is
inferior)
Consumer spends less
of their higher income
on this good

30. Reasons for downward sloping demand curve
a. Substitution effect
b. Income effect
c. Different Uses
d. New Buyers

31. Exceptions to law of Demand
Ignorance

32. Speculative Effect

33. The Giffen Paradox

34. Veblen effect –
Prestigious Goods

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