SML780_2_Demand_Analysis

8/7/2019 SML780_2_Demand_Analysis

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Types of Goods, Demand Analysis,

Elasticities of Demand


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Types of Goods

Consumer Goods

Producer Goods

Durable Goods

Non-durable Goods Consumer Durables

Consumer Non-durables

Producer Durables

Producer Non durables

Compliments & Substitutes


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Demand

Desire to acquire a product: f (Need, Info about Product ...)

Ability to pay for it: f (Income , Wealth, )

Willingness to pay ( Miser ? )

Current Demand (CD) : f (Income, Willingness to convert

wealth into liquid assets,

Ability to borrow, )

Potential Demand (PD): f (Desire to acquire a product &

Willingness to pay for it)

CD

`

Plastic Money

(Credit available)

``

`(PD CD)

`


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Derived Demand vs Autonomous Demand OEM Demand & Replacement Demand

Demand for consumer Durables Demand for Consumer Non-Durables

Demand for Producer durables

Demand for Producer Non-Durables

Demand for Services

QD = f( P) or P = f (QD) ?

QD = f ( P, I, W, PR, Availability of Spares, P Spares , PEA, AE, Exp Price (Spares) , ESP ,

EP, Promotion Expenditure, As, Ac, POP, Stock of goods, E(P), E(I), E(PR),

E(ASP), E(PS), E(AC), Sociological/Demographic factors, Political factors,

Geographical factors, )

Role of Supply in Price Determination?


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Demand Curve

Usual D-Curve

Simplified usual d-curveP2P3

P1


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Elasticities of Demand

Price elasticity of demand

Income elasticity of demand

Cross (price) elasticity of demand

Promotion elasticity of demand

Advertising elasticity of demand


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Price Elasticity of Demand

%change in QD

% change in P=

(concept applicable for small changes in P)

[ ( P2 - P1 ) / P1] * 100

[ ( Q2 - Q1) / Q1] * 100

Q2 - Q1

P2 - P1

=

=

Q

P

P

Q11

=

P : 10

Q : (1) 100 110

(2) 100 105

(3) 100 120

11

P : 10

Q : (1) 100

(2) 100

(3) 100 95

9

90

80

P2 + P1X

Q2+Q1

Q

Arc eD =

P

Q1

P1X

X


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Demand Curves & Elasticity of Demand

PerfectlyInelastic

demand

HighlyInelastic

demand

PerfectlyElastic

demand

Highly

elastic

demand

Elasticity varyingfrom low to high


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Determinants of price elasticity of demand:

Managerial uses of the concept price elasticity of demand (eD)( Relationship between eD , P & TR )

eD Price TR

>1 up (down) down (up)

= 1 up or down Unchanged

< 1 up (down) up (down)

Income Elasticity of Demand (eI) = (% change in QD) / (% change in I)

eI : positive for normal goods

: zero for low priced essential goods (water)

: negative for inferior goods: very high for luxury goods

: low for neccessities

: increases & then decreases for other normal goods

Managerial use (eI) = 0.1 , 1.0 , 2.0


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Cross (Price) Elasticity of Demand ( exy)

Exy = (% change in QD of X) / (% change in P of Y)

> 0 ( substitutes )

= 0 ( unrelated goods )

< 0 ( complements)

High for good substitutes (usual case with 2 competing brands)

exy and eyx (same or different ?)

Managerial use : Be watchful about P of substitutes & complements


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Promotion Elasticity of Demand (eP)

= (%change in QD) / (%change in Expenditure on Promotion)

Advertising Elasticity of demand (eA)

= (% change in QD) / (change in Exp. On advertising)

Managerial Uses

- If eP or eA is high spend more on promotion / Advertising

- If eA (A) = 0.1

eA (B) = 1.0

eA ( C ) = 5.0


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Demand Forecasting

Why demand forecasting?

Nature of demand forecasting

Area Coverage : World, country, province, district, city, tehsil, village

Time Horizon : Year, quarter, month, fortnight, week, day, hour

Industry & firm level

Product group (steel furniture), Product (Almirah), brand (Godrej)

size (small or big), type (specifications, features)

SML780_2_Demand_Analysis

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