2.0 Demand Analysis
2.0 Demand Analysis
2.0 Demand Analysis
DEMAND ANALYSIS
Definition of Demand
Quantity of goods/services that customers
have desire, willing and able to buy during
specific period of time, ceteris paribus.
Law of Demand
There is an inverse/negative relationship
between Px and Qdx, ceteris paribus.
Determinants of Demand
Demand depends on price of the product,
price of related products, consumer
income, taste, advertising, etc.
Determinants of demand
1.
Price
Inverse relationship between price and
quantity demanded.
Increase in price- Decrease demand
Decrease in price- Increase demand
2.
3.
Income
Positive relationship between income and
demand for normal goods
Negative relationship between income
and demand for inferior goods.
2
4.
Qx = aPxb1Pyb2Yb3
- multiplicative function
Ex 1
Given the estimated demand function is :
Qx = 2 3Px + 2Y + 3Py + T
Given :
Px = 2, Y = 4, Py = 3, T = 1
Q1 : Derive the demand curve function.
Qx = 2 3Px + 2(4) + 3(3) + (1)
Qx = 20 3Px
Px = 20/3 Qx/3
D
Qty
Price
Quantity
TR
MR
$ 10
$ 10
18
24
28
30
30
28
-2
8
TR
Qty
Elastic
Inelastic
P,MR
Unitary
elastic
MR>0
MR=0
MR < 0
Qty
MR
Note
MR has the same intercept as demand equation
Slope of MR is twice the slope of demand curve
MR > 0--------- TR increases
MR < 0---------TR decreases
MR =0----------TR maximum
ELASTICITY OF DEMAND
A) PRICE ELASTICITY OF DEMAND
Responsiveness of demand towards a change in price
A % change in price -------------- effect on % change
in quantity demanded?
Law of demand-Inverse relationship between price
and quantity demanded
Ep= % change in Quantity demanded
% change in price
Two formula for Ep:
a) Point price elasticity of demand
Elasticity at a given point on demand curve
Ep= % Q
%P
= Q/Q
P/P
=Q.P
P Q
Ep = dQ .P
dP Q
10
E.g Q = 100 4P
dQ/dP = -4
If P = $10, Q= 100-40
Q =60
Ep = dQ . P
dP Q
=-4 x 10
60
= -0.67
1 % increases in price will decrease Quantity demanded
by 0.67%
b) Arc price elasticity of demand
Measures the percentage effect on Quantity
demanded because of a percentage change in price
Ep= % Q
%P
Midpoint formula:
Ep = (Q2 Q1)
(Q2 +Q1)/2
____________
(P2- P1)
(P2+ P1)/2
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(P2 + P1)
(P2 P1)
Unitary elastic
Inelastic
D
MR> 0
MR =0
MR <0
MR
12
-10
$10
Elastic
-4.5
18
-2.67
24
-1.75
28
67
-1.2
30
-0.83
30
Inelastic
-0.57
28
-2
-0.38
24
-4
13
c) Unitary elastic
d) Relatively Inelastic
lEpl
=1
lEpl < 1
D
D
Q
Q
e) Perfectly Inelastic
P
lEpl = 0
Q
Determinants of Price Elasticity
1. Availability of substitutes
Many substitutes- more elastic (e.g drinks)
Few substitutes-inelastic (e.g sugar)
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INCOME ELASTICITY
Measures a change in demand because of a change in
income.
Responsiveness of demand towards a change in income
Income elasticity of = % change in demand
Demand
% change in income
a) Point income elasticity of demand
Ey= dQ x Y
dY Q
e.g Q=500+2Y
Y = 1000
Q=500 + 2000=2500
Ey =2 x 1000/2500 =2000/2500=4/5 =0.8
1 % change in income------ quantity demand
will change by 0.8%
This product is a necessity good
b) Arc income elasticity of demand
Ey= ( Q2-Ql) x Y2 +Y1
(Q2 +Q1) (Y2-Y1)
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Rule:
i) Ey > 0
Normal goods
a) 0<Ey<1
% Q < % Y
Necessity good (E, =0.7)
e.g rice
b) Ey> I
Luxury goods (Ey =2.4)
% Q >% Y
e.g jewelleries
Positive relationships between income and demand
for normal goods
ii) Ey <0 Inferior goods
e.g Ey= -4.3
Negative relationships between income and
demand for inferior goods
Income elasticity and decision making
(Important uses)
1 .To forecast the changes in demand for the products
that a firm sell under different economic conditions
(different stages of business cycle)
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a) Economic expansion
Demand for luxury good increases
Large changes in demand (e.g vacations)
Demand for product with low income elasticity of
demand such as necessity will be less affected
and less fluctuates.
b) Recessionary period
Sharp decrease in demand for luxury goods.
For necessity goods, demand will be less affected.
2. Marketing strategy
Identify the markets of the products
-which types of customers are most likely to buy
the products.(e.g high income or lower income )
-determine the most suitable media for its
promotional campaign to reach the target
customers.
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Q B = 60 + 0.2P A
P1 A =$30
Q1 B = 60 +0.2 (30)
=66
P2 A = $40 Q2 B = 60 + 0.2 (40)
=68
Ec= (68-66)x (40+30)
(68 +66) (40 -30)
=0.1
1 % increase in price of A will cause 0.1 %
increase in Qty of B
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