Page 27 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 6. Promotional effect on demand: Advertisement increases the sale of a firm up to a point.
This can be shown as:
D A
x
This means that, demand for x is directly proportional to advertisement expenditure of
the firm producing x. (Note: advertisements do not that powerful effect on demand)
Socio-psychological determinants of demand like tastes and preferences, custom, habits, etc., is
difficult to explanation theoretically.

Did u know? If there is an increase in GDP, will the demand be affected?
Yes. An increase in GDP means that the total output of products and services have increased.
Since, it represents the economy of a country, so any increase will have a positive effect on
demand.

Task List a few products that are: (a) substitutes and (b) complements
2.1.2 Basis of Demand

The basic source of demand is the need of individuals. Individual need products and services and
they are also willing to pay a price to acquire those products and services. The firms analyse the
needs and create products and services for them. The market for a firm’s product cannot be
analysed without reference to the demand conditions. For a firm or an industry consisting of
several firms, the extent of demand determines the size of market. Successful business firms,
therefore, spend considerable time, energy and effort in analysing the demand for their products.
Without a clear understanding of consumers’ behaviour and a clear knowledge of the market
demand conditions, the firm is handicapped in its attempt towards profit planning or any other
business strategy planning.

Example: Estimating present demand and forecasting future demand constitutes the
first step towards measuring and determining the flow of sales revenue and profits which
generate internal resources to finance business. The stability and growth of business is linked to
size and structure of demand.

Case Study Micro Factors Affecting Demand for Tanishq Products

Price of Jewellery – Symbol of Quality Provided
Price of a commodity is known to have a direct influence on demand for it. This follows
from the Law of Demand. But in the case of Tanishq jewellery this does not hold true,
making it an exception to the Law. This can be explained in terms of Veblen effect, where
the price of a commodity is regarded as an indicator of its quality. Sometimes certain
commodities are demanded just because they happen to be expensive or prestige goods,
and hence have a "snob appeal". These are generally luxury articles that are purchased by
the rich as status symbols. The price of Tanishq jewellery is regarded by patrons as being
the just cost of the purity and trustworthiness of the brand. Not only was Tanishq the first
to offer branded jewellery in India, but it was also the first to introduce concepts such as
Contd...

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