DEMAND

ANALYSIS

JOJET B. ANDRINO, LPT, MBA (OCC.)

 WHAT IS DEMAND?
Demand is an economic concept that relates to a consumer's desire to
purchase goods and services and willingness to pay a specific price for them.
TYPES OF DEMAND

Demand can be of the following types: 6. Composite demand – goods with more than one
1. Market demand - describes the demand for a use. (Milk for cheese, yogurt, and others.
given product and who wants to purchase it. 7. Joint demand - the demand for complementary
2. Individual demand - the demand for a good or a products and services.
service by an individual (or a household) 8. Direct and derived demand
3. Cross demand – goods with a substitute. Changes • Direct demand is the demand for a final good.
in the price of one good can affect the quantity Food, clothing, and cell phones are an example of
demanded of another good. this.
4. Price demand - the amount a consumer is willing • Derived demand is the demand for a product that
to spend on a product at a given price. comes from the usage of others. For example, the
5. Income demand - This means people will buy demand for pencils will result in the demand for
more overall when they earn more income. wood, graphite, paint, and eraser materials.
LAW OF DEMAND

All other things remain constant

(ceteris paribus), If the Price
increases, then the Quantity
Demanded decreases. If the Price
decreases, then the Quantity
Demanded increases.
 DEMAND SCHEDULE AND DEMAND CURVE

DEMAND CURVE MARKET DEMAND CURVE

Price
(PHP) • The straight line connecting
100 those points
90 • A curve indicating the total
80
quantity of a good all
70
consumers are willing and
60 able to purchase at each
50 possible price, holding the
price of related goods,
0
200 300 400 500 600 700 income, advertising, and
Quantity Demanded (in
thousands per year
other variables constant.
Table 1. –Demand Schedule
 DEMAND FUNCTION
(EQUATION)
An equation that lets you know how a variable like demand is
determined is called a linear function, if it produces a straight line
when it is graphed. The demand function takes the form Qd= a – bP,
and this states how the price (P) of a good or service determines the
quantity demanded (Qd).
Where:
•Qd = quantity demanded
•a = the quantity demanded when the price = 0 (because b x 0 = 0)
•P = price
•b = coefficient (tells us how steep the demand curve will be)
CALCULATING THE QUANTITY DEMANDED FROM A
DEMAND FUNCTION

Using the demand function to calculate the quantity demanded when the price is $5:

Qd = 100 – 10P (10P means 10 multiplied by the price)

Qd = 100 – (10 × P) → (10 × P in brackets because you need to calculate this first.)
Qd = 100 – (10 × 5) → Simplify by multiplying 10 by 5
Qd = 100 – 50 → Simplify by subtracting 50 from 100
Qd = 50

When the price is $5, the quantity demanded will equal 50 units of the good or service; i.e., at the price of $5, consumers
in the market will demand 50 of that good or service.
USING THE DEMAND FUNCTION TO CONSTRUCT A DEMAND
SCHEDULE
Given the demand function, we can create the
demand schedule by simple substitution.
Demand Function
Demand Function Qd = a - bP
Qd = a - bP
Qd = 100 – 20P Table 3. – Qd = 100 – 20P
Qd = 100 – 10P Table 2. – Qd = 100 – 10P
 Graphical Demand Equation
In the Figure, we see the two demand schedules associated
with both demand functions: Qd = 100 – 10P and Qd = 100 –
20P.

Quantity demanded is twice less responsive to price change in

the green demand curve (where value b = 20) than in the red
demand curve (where value b = 10).

Thus, for example, the green demand curve shows that when
the price changes from $4 to $3, the quantity demanded
changes from 20 to 40 units of the good or service, a change of
20 units. Whereas on the red demand curve, when the price
changes from $4 to $3, the quantity demanded changes from
60 to 70 units of the good or service, a change of 10 units.

Essential statement: Changes to the value of ‘b’ result in

changes to the slope of the demand curve. It affects how Graphical Demand Equation
responsive the quantity demanded will be to a change in price.
 HOW TO SHIFT THE DEMAND CURVE
In the demand function
shown in Table 4: Qd =
Table 4. – Qd = 100 – 10P Table 5. – Qd = 80 – 10P
100 – 10P. If the value of
‘a’ changes from 100 to
80: Qd = 80 – 10P. The
new demand function
has new associated
quantities demanded at
each price, and these are
calculated and shown in
the demand schedule
(table 5) right.
 SHIFT DEMAND CURVE GRAPHICAL EQUATION
By graphing the demand functions
we can see that the demand curve
has shifted down and to the left –
demand has decreased. The value of
‘a’ has changed by 20 (100-80), and
demand for this good or service has
fallen by 20 at each price. We have
shifted the demand curve.

Essential statement: Changes to the value of ‘a’ result in a

change in demand. If ‘a’ increases then demand increases at
each price – the demand curve will shift up and to the right. If
‘a’ decreases then demand decreases at every price and the Graphical Demand Equation
demand curve will shift down and to the left.
DETERMINANTS OF DEMAND
(SHIFTERS)
1. Consumer Income
2. Advertising and Consumer Tastes
3. Price of Related Goods
4. Number of Buyers
5. Consumer Future Expectations

Changes in demand determinants will shift the

Demand Curve.
EXAMPLE: If Consumer Income increases
(people have more money), then Demand will
increase (people have more money and are willing to
spend more/buy more products).
 DEMAND SHIFTERS
1. CONSUMER INCOME
Normal Goods
• a good whose demand increases (shifts to the right) when consumer incomes rise.
• When consumers suffer a decline in income, the demand for a normal good will decrease
(shift to the left)
• Examples: steak, airline travel, and designer jeans.
Inferior Goods
• A good for which an increase (decrease) income leads to a decrease (increase) in the
demand for that good.
• Examples: Ukay-ukay, Carenderia.

2. ADVERTISING AND CONSUMER TASTES

• Advertising often provides consumers with information about the existence
or quality of a product, which in turn induces more consumers to buy the
product (Informative Advertising)
• Advertising can also influence demand by altering the underlying
tastes of consumers. For example, advertising that promotes the
latest fad in clothing may increase the demand for a specific fashion
item by making consumers perceive it as ‘’the’’ thing to buy
(Persuasive Advertising)
 DEMAND SHIFTERS
3. PRICE OF RELATED GOODS
SUBSTITUTE GOODS
• Goods for which an increase (decrease) in the price of
one good leads to an increase (decrease) in the demand
for the other good.
• Example: Pepsi for Coke
COMPLEMENTARY GOODS
• Goods for which an increase (decrease) in the price of
one good leads to a decrease (increase) in the demand
for the other good.
• Example: Bread and Butter
 DEMAND SHIFTERS
4. POPULATION (Number of Buyers)
• Population rises, more and more individuals wish to buy
a given product, and this has the shifting the demand
curve to the right.

5. CONSUMER FUTURE EXPECTATION

Changes in consumer expectations also can change the
position of the demand curve for a product.
For Example, if consumers suddenly expect the price of
automobiles to be significantly higher next year, the demand
for automobiles today will increase.
 ELASTICITY OF DEMAND

The elasticity of demand refers to the shift in demand for an

item or service when a change occurs in one of the variables
that buyers consider as part of their purchase decisions. It’s
a relationship between demand and another variable, such
as price, availability of substitutes, advertising pressure, and
customer income.
 Five Categories of Elasticity of Demand

1. Perfectly inelastic demand is when demand does not

change, regardless of changes in other factors. Products that
are considered a necessity, with no substitutes, are in this zone,
such as essential foods and lifesaving drugs. Perfectly inelastic
demand has a PED of zero.

2. Relatively inelastic demand

means that it takes large changes in a factor, such as a price, to
cause a small change in demand. Gasoline and salt are common
Perfectly inelastic demand examples of relatively inelastic products. Relatively inelastic
demand has a PED of less than one.

Relatively inelastic demand

 Five Categories of Elasticity of Demand
3. Unitary elastic demand
A arises when the impact on demand is an equal, one-for-one change compared
with another factor. For example, a 10% increase in price causes a 10% decrease in
demand quantity. Unitary elastic demand is mostly a hypothetical concept, as it is
unusual to find a product with such perfect correlation. Unitary elastic demand has a
PED of exactly one.
4. Relatively elastic demand
means a small change in one factor creates a disproportionately larger change in
demand. For example, if a 5% increase in the price of a streaming service caused a
Unitary Elastic Demand
10% decrease in subscribers, it would be considered relatively elastic. Most products
and services fall into this zone. Relatively elastic demand has a PED greater than one.
5. Perfectly elastic demand is the extreme scenario where demand
drops 100% due to changes in one of the factors. This is relatively rare since
characteristics like accessibility, brand loyalty, and quality will often cause
some customers to continue to purchase a product. As an example, if the
price of organic bananas goes up at Fred’s Supermarket but not at Barney’s
Grocery, under perfect elasticity of demand no shoppers would purchase
the bananas at Fred’s. However, some customers might decide to pay the
higher price to save time and effort, especially if they believe Fred’s
produce is fresher. The result of the PED calculation for perfect elasticity is
infinity — representing the all-or-nothing buying decision.
Perfectly elastic demand
Relatively elastic demand
 ELASTICITY OF DEMAND
Four Types of Elasticity EXAMPLE:
KMR Inc. is in the online retail shoe business. In 2021,
1. Price Elasticity of Demand KMR sold 1,500 pairs of snow boots at an average
• Price elasticity of demand is a measurement of the change
price of $100 per pair. In 2022, KMR lowered the price
in the consumption of a product in relation to a change in
to $90 and sold 1,800 pairs. In both years, KMR’s cost
its price.
of goods sold was $40. The price elasticity of demand
can be calculated as:
Price Elasticity of Demand = Change in Quantity Demanded ÷
Change in Price
PED = % change in quantity / % change in price
PED = change in quantity / change in price PED = [(Q2–Q1)/Q1+Q2/2] / [(P2–P1)/P1+P2/2]
Or Q1 = 1,500
PED = [(Q2–Q1)/Q1+Q2/2] / [(P2–P1)/P1+P2/2] Q2 = 1,800
P1 = $100
Q1 = initial quantity of demand P2 = $90
Q2 = new quantity of demand
P1 = initial price = [(1,800–1,500)/1,500+1,800/2] /
P2 = new price [($90–$100)]/($100+90)/2)]
= (300/1,650) / (-10/95)
ARC ELASTICITY METHOD OR MID-POINT = 0.1818 / -0.1053
METHOD = -1.73 or Relatively Inelastic Demand
 ELASTICITY OF DEMAND
Four Types of Elasticity
2. Cross Elasticity of Demand (XED):
Cross elasticity happens when changes in the price of one product prompt changes in demand for another. The two
products must be related, either as complements or substitutes for each other. When products are substitutes for each
other, a rise in the price of one will usually cause a rise in demand for the other. For example, if coffee prices rise, then
demand for breakfast tea is likely to increase as customers substitute tea for coffee. When two products are
complementary, a rise in the price of one will usually cause a decrease in the demand for the other. For example, if
coffee prices rise, demand for coffee creamer will likely decline as people drink less coffee.
ARC ELASTICITY METHOD OR MID-POINT EXAMPLE: A company producing torches and batteries is analyzing the
METHOD cross-price elasticity of the two goods. For example, the demand for torches
was 10,000 when the price of batteries was $10, and the demand rose to
The formula for XED is: 15,000 when the price of batteries was reduced to $8.
XED = change in quantity for product A / change in price Solution:-
for product B •Percentage change in the number of torches
Or = [(15000 – 10000) / (15000 + 10000)] / 2 = 5000 / 12500 = 0.40
XED = [(Q2a – Q1a) / (Q2a + Q1a/2)] / [(P2b – P1b) / •Percentage change in price of batteries
(P2b + P1b/2)] = [(8 – 10) / (10 + 8)] / 2 = -2 / 9 = -0.2222
Q1a = initial quantity of demand of product A Thus, cross-price elasticity of demand = 0.40/ -0.2222 = -1.8
Q2a = new quantity of demand of product A Since the cross-price elasticity of demand for torches and batteries is
P1b = initial price of product B negative, thus these two are complementary goods.
P2b = new price of product B
If the result is positive, then goods are substitute goods.
 ELASTICITY OF DEMAND
Four Types of Elasticity
3. Income Elasticity of Demand (YED):
YED — with a “Y” because that’s the notation economists use for income — is the relationship between demand and a
customer’s income. As income decreases, quantity of demand tends to decline, even if all other factors remain the same,
including price. YED tends to differ according to the priority of a product, meaning that what economists refer to as
“normal goods,” like food, clothes and other necessities, are likely to be prioritized over luxury goods when customers’
income declines. Further, spending on normal goods is more likely to increase first when income increases, and increase
of luxury goods happens on a lag.
The formula for YED is: Let’s take an example of a shop that sells computers. They estimate that when
the average real income of its customers falls from $60,000 to $40,000, the
YED = change in quantity / change in income demand for its computers falls from 5,000 to 4,000 units sold, with all other
Or things remaining the same.
YED = [(Q2–Q1)/Q1+Q2/2] / Using the income elasticity of demand formula,
[(Y2–Y1)/Y1+Y2/2] YED = [(Q2–Q1)/Q1+Q2/2] / [(Y2–Y1)/Y1+Y2/2]
Q1 = initial quantity of demand = (4,000 – 5,000)/(5,000+4,000/2) / (40,000-60,000)/(60,000+40,000/2)
= (-1,000/4,500) / (-20,000/50,000)
Q2 = new quantity of demand
= -0.22 / -0.40
Y1 = initial income = 0.55
Y2 = newOR
ARC ELASTICITY METHOD income
MID-POINT This produces an elasticity of 0.55, which indicates customers are not particularly
METHOD sensitive to changes in their income when it comes to buying these computers.
The demand does not fall significantly with a fall in income.
 ELASTICITY OF DEMAND
Four Types of Elasticity
3. Income Elasticity of Demand (YED)
Types of Income Elasticity of Demand
1. Income Elasticity of Demand for a Normal Good 4. Relatively Inelastic Income Elasticity of Demand
A normal good has an Income Elasticity of Demand (greater 0 < Income Elasticity of Demand < 1 are goods that are
than) > 0. This means the demand for a normal good will relatively inelastic. This means that consumer demand
increase as the consumer’s income increases. rises less proportionately in response to an increase in
income.
2. Income Elasticity of Demand for an Inferior Good
An inferior good has an Income Elasticity of Demand (less 5. Income Elasticity of Demand is 0
than) < 0. This means the demand for an inferior good will Income Elasticity of Demand = 0 means that the
decrease as the consumer’s income decreases. demand for the good isn’t affected by a change in
income.
3. Income Elasticity of Demand for a Luxury Good
Luxury goods usually have an Income Elasticity of Demand >
1, which means they are income elastic. This implies that
consumer demand is more responsive to a change in income.
For example, diamonds are a luxury good that is income
elastic.
 ELASTICITY OF DEMAND
Four Types of Elasticity
4. Advertising Elasticity of Demand (AED):
This type of elasticity focuses on the relationship between customer demand and a seller’s advertising. It’s a measure of
advertising effectiveness that assesses whether increases in advertising elevate customers’ impressions to the point
where they respond by buying more.
EXAMPLE: Your vending machine company starts a new
The formula for AED is: ad campaign, “Vend for Yourself.” Currently, your
company sells soft drinks at $1.50 per bottle, and at
AED = change in quantity / change in advertising that price, customers purchase 2,000 bottles per week.
Or Initially, you spend $400 per week on advertising. After
AED = [(Q2–Q1)/Q1+Q2/2] / [(A2–A1)/A1+A2/2] a month, you’re spending $500 per week on advertising
Q1 = initial quantity of demand and, without changing the price of soft drinks, sales
Q2 = new quantity of demand have increased to 3,000 bottles per week.
A1 = initial advertising expenditure AED = [(3,000 – 2,000) / 2,000+3,000/2] / [(500-
A2 = new advertising expenditure 400)/400+500/2)]
AED = [(1,000/2,500) / (100/450)]
AED = 0.40 / 0.22
ARC ELASTICITY METHOD OR MID-POINT AED =1.82
METHOD
 HOW IMPORTANT IS ELASTICITY IN THE
ANALYSIS OF THE DEMAND OF THE MARKET?
WHAT DETERMINES
ELASTICITY OF DEMAND?
The elasticity of demand is influenced
by several factors to which customers
respond with differing levels of
intensity.
• Availability of substitutes
• Urgency of purchase
• Duration of price change
• Percentage of income
• Necessity
• Brand loyalty
• Buyer. The “other people’s money”
REFERENCES

• https://www.indeed.com/career-advice/finding-a-job/demand-definition-economics#:~:text=Price%20d
emand,perception%20of%20that%20product%27s%20value
.

• https://www.etsu.edu/uschool/faculty/frasier/documents/supply_demand_helpful_hints.pdf

• https://www.ibdeconomics.com/demand.html

• https://www.netsuite.com/portal/resource/articles/business-strategy/elasticity-of-demand.shtml#:~:tex
t=Elasticity%20of%20demand%20refers%20to,advertising%20pressure%20and%20customer%20income
.
• https://www.intelligenteconomist.com/income-elasticity-of-demand/
• https://www.wallstreetmojo.com/cross-price-elasticity-of-demand-formula/
THANK YOU
CCGCJOJET22@GMAIL.COM
REFERENCES

• https://www.indeed.com/career-advice/finding-a-job/demand-definition-economics#:~:text=Price%20d
emand,perception%20of%20that%20product%27s%20value
.

• https://www.etsu.edu/uschool/faculty/frasier/documents/supply_demand_helpful_hints.pdf

• https://www.ibdeconomics.com/demand.html

• https://www.netsuite.com/portal/resource/articles/business-strategy/elasticity-of-demand.shtml#:~:tex
t=Elasticity%20of%20demand%20refers%20to,advertising%20pressure%20and%20customer%20income
.