ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - DEMAND ANALYSIS

7/28/2019 ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - DEMAND ANALYSIS

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Dr.K.Baranidharan

Present by


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EngineeringEconomics &

FinancialAccountingment

Ee&fa213 July 2013


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DEMAND & SUPPLY ANALYSIS

By

Dr.K.BaranidharanA P . II - M B A

Sri Sairam Institute Technology

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DEMAND

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What is DEMAND? Every want supported by the

willingness and ability to buy

constitutes demand for a particular

product or services..

In other words, if a person wants a CAR

and cannot pay for it. There is nodemand for the CAR from his or her

side..5


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A product or service is said to have

demand when three conditions are

met:

1.Desire on the part of the buyer to buy.

2.Willing to pay for it 3,Ability to pay the specified price for it.

Unless all these conditions are fulfilled,the product is not said to have any

demand.6


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A person when desiring is willingand able to pay for what he/she

desires , the desire is changed intodemand.

Demand is always: @ Price , PerUnit Time.

Demand refers to the quantity of agood or service that buyers arewilling to buy during a particular

period at a given price.


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Types ofDEMAND

Demand can be of three

types:1. Price Demand

2. Income Demand3. Cross demand

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Price DEMAND

Price demand refers to

the quantity of aparticular product or

service demanded at agiven price

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Income DEMAND Income demand refers to

the quantity of a particular

product or servicedemanded at a given level

of income of a consumer orhousehold.

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Cross DEMAND

Cross demand refers to the

quantity demanded for a

particular product or service,given the price of a related good.

The related good may becomplementary or a substitute

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Example:

1.Tyres and tubes arecomplementary goods (one

cannot go without the other) 2.Tea and Coffee are

substitutees. Take one andyou have to leave the other.

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Nature ofDEMAND

The nature of demand is better understood

when we see these variations as follows: Consumer goods vs producer goods

Autonomous demand vs derived demand

Durable vs perishable goods

Firm demand vs industry demand

Short-run demand vs long-run demand

New demand vs replacement demand

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Consumer goods vs producer goods

The goods can be grouped under consumer

goods and producer goods.

Cg refers to such product and services,

which are capable to satisfying human

needs.

Cg are those which are available for

ultimate consumption.(give direct andimmediate satisfaction)

Example: bread, apple, rice, etc

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Pg are those which are used for furtherprocessing or production of goods/service to

earn to INCOME. This goods yield indirect satisfactionand are used

to produce cg

Example: machinery , tractor etc., The product may be both pg & cg

The farmer having 10 bags of paddy, 5 bags

personel use, next 5 bags as SEEDS for the nextcrop.

PADDY is both pg & cg

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Autonomous demand vs derived demand

Ad refers to direct demand for product and

services. Example: the demand for the service of a

super-specialty hospital can be consider ad

Dd the demand for the product arises out ofthe purchase of a parent product.

Example: the demand for hotel around thathospital is called dd.

A demand for houses is autonomous whereasa demand for these input is derived.

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Durable vs perishable goods

Durable goods are those goods

that give service for relatively long

period.

Example: rice, sugar etc.,

The life of perishable goods is very

smalla few hours or days.

Example: vegetable, milk, fish etc.,

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Firm demand vs industry demand

A firm is a single business unit.

The quantity of goods demanded by a singlefirm is called fir demand.

Example: a construction company may use100 tonnes of cement during the month.fd

The group of firm carrying on similar activities.

The quantity demanded by the industry as awhole is called industry demand.

Example: the construction industry particularstate may have used 10 million tonnes.

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Short-run demand vs long-run demand

The demand for a particular product or

service in a given REGION for a particular

DAY can be viewed as a shor-run demand.

Example: available taste and technology

The demand for a longer period for the

same region can be viewed as a long-run

demand. Example: changes in design and technology

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New demand vs replacement demand

The demand for a new product and itis in addition to the existing stock.

Example: new model car

The item of purchase to maintain the

asset in good condition

Example: replacement of car spareparts

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Total markets vs Segment market

The total demand for a product in the

region is the total market demand.

Example; sugar, rice

The demand for the sugar from thesweet industry from the region is the

segment (specific criteria)market

demand. Example: age, gender, income,

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Determinants ofDemand

Price of the product

Price of the related goods

Consumers income level

Distribution pattern of national income

Consumers taste and preferences

Advertisement of the product

Consumers expectation about future price and supplyposition

Demonstration effect and Band-Wagon effect

Consumer credit facility

Demography and growth rate of populationGeneral std. of living and spending habits

Climatic and weather conditions

Customs


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Factors determining DEMAND

The following factor determine the demand

for a given product:

1.Price of the product (P)

2.Income level of the consumer (I)

3.Tastes and preferences of the consumer (T)

4.Prices of related goods which may besubstitutes/complementary (PR)

5.Expectation about the prices in future (EP)

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6.Expectation about the incomes in

future (EI

)

7.Size of population (SP)

8.Distribution of consumers over

different region (DC)

9.Advertising efforts (A)

10.Any other factor capable ofaffecting the demand (O)

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DEMAND function Demand function describe the relationship

between one variable and its determinants. It describe the quantity of goods bought at

alternative prices of a goods and relatedgoods. Alternative income levels andalternative values of other variables affectingdemand.

The demand function for a goods relates to

the quantity of a goods that consumerdemand during the given period to the factorthat influenced demand.

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Matheamatically, the demand

function for product X can beexpressed as follows:

Qd = f(P, I, T, PR, EP, EI, SP, DC,

A, O)

Where Qd refer to the quantity of

demand

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Impact ofDEMAND factors

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1.Price of the product

Demand for a product is inversely

related to its price.

In other words, if the price rise, thedemand falls and vice versa.

This is the price demand functionshowing the PRICE EFFECT OF

DEMAND

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2.Income of the consumer

The income of the consumer or the

household increases, there is a

tendency to buy more and more upto a particular limits.

The demand for product is directly

related to the income of the

consumer

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3.Prices of Substitutes or

Complementaries

The demand for product X is determined by

the prices of its related products: substitutes

or complementaries.

If there is an increase in the price of a

substitute, the demand of product X will go

up and vice versa.

Similarly, if the price of complementary goodsgoes up, the demand for product X will fall.

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Tastes and Preferences

If the tastes and preference of the consumerschange, there is change in the productdemanded also.

The companies keep changing the productand services(when T & P)

The companies take advantages of the

technological changes and upgrade theproduct and services.(to meet specificrequirements of customers)

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Law ofDEMAND

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Law of demand

Statement of Law : Other things

being equal, the higher the price of

a commodity, the smaller is the

quantity demanded and lower the

price, larger the quantity

demanded.

The Law of Demand states the relationshipbetween price and demand of a

particular product or services


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Assumptions of the Law ofDEMAND

Other things being equal : include

income level of the consumer, tastes

and preferences of the consumer,prices of related goods, expectation

about the prices or incomes in the

future, size of population, advertisingefforts and any other factor capable ofaffecting the demand

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The Law ofDemand

When a goods price is lower,

consumers will buy more of it

When a goods price is higher,

consumers will buy less of it


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DEMAND Curve

The graph has two axis - vertical

line is labeled as price and the

horizontal line is for the quantitynumber.

Remember to state the units usedfor price and quantity and name the

graph.


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DEMAND Curve

Demand reflects an inverse

relationship between price and

quantity demanded.

The Demand Curve is a graphreflecting the price consumers

are willing to pay and the

quantity consumers are willing

buy.


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Demand Curve

Copyright 2004 South-Western

Price of

Ice-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity of

Ice-Cream Cones

$3.00

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1. A decrease

in price ...

2. ... increases quantity

of cones demanded.38SUPPLY AND DEMAND


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Law of Demand and Income effect

When there is a fall in the price of acommodity. It leads to a rise in the realincome of the consumer.

Rise in real income means the consumer

will be able to buy more commodities

for a given amount of money. Example:the price of fall in bananas

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Law of Demand and Substitution effect

The price of commodity falls, the prices of itssubstitutes remaining the same, thecommodity will now be cheaper when

compared to substitutes.When consumers react to an increase on a

goods price by consuming less of thatgood and more of other goods.

Ex.- McDonalds raise prices, more people buyBurger King

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Changes in demand

The increase or decrease in demand

due to change in the factor other

than price is called change indemand.

Change in demand leads to a shift

in the demand curve to the right or

to the left.

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Increase DEMAND

If the consumers are willing andable to buy more of a particular

brand of shirts (say.X) at thesame price, the result will be an

increase in demand.

The demand curve will shift to

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2009 Pearson Addison-Wesley. All rights reserved. 2-43

Increase

Demand Curve

p,

Price

ofproduct.

X

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Effect of a 60 increase in the price of beef

D1

D2

232

Quantity demanded

0

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Decrease in DEMAND

A decrease in demand occurs

when buyers buy less of a

product at each possible pricerise because of factors like fall in

income, rise in price ofcomplementary goods etc.,

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Decrease in

demand

At each and

every price Less

of the good is

demanded

Shifts to the LeftD2

$5

D1

B

Price

Quantity90 100


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Extension and Contraction in DEMAND

Extension is a downward movement

along the demand curve, which idicates

that a higher quantity is demand for a

given fall in the price of a good.

Contraction is an upward movement

along the demand curve which idicatesthat a lower quantity is demanded for a

given increase in the price of the good

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Movements Along the Demand Curve

Price

Quantity

D1

P2

P1

P3

Q2 Q1 Q3

Contraction of Demand

Expansion of Demand

ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - DEMAND ANALYSIS

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