2.1 Objectives
After studying this unit, you should be able to:
- Understand the meaning and concept of demand.
- Explain the demand function, demand schedule, and law of demand.
- Identify determinants of demand.
- Distinguish between change in demand and change in quantity demanded.
- Analyze demand from a managerial decision-making perspective.
2.2 Introduction
Demand analysis is one of the most important aspects of Managerial Economics. Every business firm must estimate the demand for its product before making production, pricing, and investment decisions.
Demand refers to the quantity of a commodity that consumers are willing and able to purchase at a given price during a specific period of time.
In managerial decision-making, understanding consumer behavior and market demand helps firms forecast sales and maximize profits.
2.3 Demand Function, Demand Schedule & Law of Demand
(a) Demand Function
A demand function expresses the functional relationship between quantity demanded and its determinants.Qd=f(P,Y,Pr,T,A,E)
Where:
- Qd = Quantity demanded
- P = Price of the product
- Y = Income of consumers
- Pr = Price of related goods
- T = Tastes and preferences
- A = Advertisement
- E = Expectations
(b) Demand Schedule
A demand schedule is a table showing different quantities demanded at different prices.
| Price (₹) | Quantity Demanded |
|---|---|
| 10 | 100 |
| 20 | 80 |
| 30 | 60 |
| 40 | 40 |
It shows the inverse relationship between price and quantity demanded.
(c) Law of Demand
The Law of Demand states that:
“Other things remaining constant (ceteris paribus), the quantity demanded of a commodity decreases when its price increases, and increases when its price decreases.”
Reasons:
- Law of diminishing marginal utility
- Income effect
- Substitution effect
- Entry of new consumers
2.4 Determinants of Demand
The demand for a product depends on several factors:
- Price of the Product – Inverse relationship with demand.
- Income of Consumers –
- Normal goods: Demand increases with income.
- Inferior goods: Demand decreases with income.
- Price of Related Goods –
- Substitute goods (e.g., tea & coffee)
- Complementary goods (e.g., car & petrol)
- Tastes and Preferences
- Advertisement and Sales Promotion
- Consumer Expectations
- Population and Demographics
- Government Policies (tax, subsidy)
2.5 Changes in Demand
There are two types of changes:
(a) Change in Quantity Demanded
- Caused only by change in price.
- Movement along the same demand curve.
- Known as expansion and contraction of demand.
(b) Change in Demand
- Caused by change in other factors (income, taste, etc.).
- Shift of demand curve.
- Known as increase and decrease in demand.
2.6 Demand Distinction
It is important to distinguish between:
| Basis | Change in Quantity Demanded | Change in Demand |
|---|---|---|
| Cause | Change in price | Change in other factors |
| Curve | Movement along curve | Shift of curve |
| Term | Expansion/Contraction | Increase/Decrease |
2.7 Demand Forecasting
Demand forecasting refers to estimating future demand for a product.
Methods:
- Survey method
- Statistical method
- Trend projection method
- Regression analysis
- Delphi method
Managers use forecasting to plan production, manpower, inventory, and pricing strategies.
2.8 Summary
Demand analysis is a crucial component of managerial economics. It helps firms understand the relationship between price and quantity demanded and other factors influencing demand. The law of demand explains the inverse price-quantity relationship. Determinants such as income, related goods, and advertisement affect demand significantly. Managers must clearly distinguish between movement along a demand curve and shifts of the demand curve. Demand forecasting supports better planning and decision-making.
2.9 Questions
Short Answer Questions:
- Define demand.
- What is a demand function?
- State the law of demand.
- What are determinants of demand?
Long Answer Questions:
- Explain the demand function, demand schedule, and law of demand.
- Discuss determinants of demand in detail.
- Differentiate between change in demand and change in quantity demanded.
- Explain methods of demand forecasting.
About the Author
