Page 25 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 2.1 Market Demand

Demand is one of the crucial requirements for the existence of any business enterprise. A firm is
interested in its own profit and/or sales, both of which depend partially upon the demand for its
product. The decisions which management takes with respect to production, advertising, cost
allocation, pricing, etc., call for an analysis of demand.

Demand for a commodity refers to the quantity of the commodity which an individual household
is willing and able to purchase per unit of time at a particular price.
Demand for a commodity implies:
1. Desire to acquire it,

2. Willingness to pay for it, and
3. Ability to pay for it.
Demand has a specific meaning. As stated earlier, mere desire to buy a product is not demand.

Example: A miser’s desire for and his ability to pay for a car is not demand because he
does not have the necessary will to pay for it. Similarly, a poor man’s desire for and his willingness
to pay for a car is not demand because he does not have the necessary ability to pay (purchasing
power).
One can also think of a person who has both the will and purchasing power to pay for a
commodity, yet this is not demand for that commodity if he does not have desire to have that
commodity.
Demand for a commodity has to be stated with reference to time, its price and that of related
commodities, consumer’s income and taste, etc. Demand varies with changes in these factors.

Example: As demand for sweets go up, the demand for sugar also goes up Or as your
income increases, you demand for branded clothes also goes up.

2.1.1 Determinants of Demand

The demand for a commodity arises from the consumer’s willingness and ability to purchase the
commodity. The demand theory says that the quantity demanded of a commodity is a function
of or depends on not only the price of a commodity, but also on income of the person, price of
related goods – both substitutes and complements – tastes of consumer, price expectation and all
other factors. Demand function is a comprehensive formulation which specifies the factors that
influence the demand for the product.

D = f(P , P , P , B, A, E, T, U)
x x y z
Where,
D = Demand for item x
x
P = Price of item x
x
P = Price of substitutes
y
P = Price of complements
z
B = Income of consumer
E = Price expectation of the user
A = Advertisement Expenditure

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