Demand Analysis Flashcards
define demand
desire backed by financial ability and willingness to pay the current market price. both must be present for demand to be EFFECTIVE
D = f(A, W)
ways to increase willingness
- appropriate advertising
- reducing supply to create illusion of scarcity and induce panic buying (Amazon - only 1 left).
- increasing the 3 As.
ways to increase ability
- incomes increase (permanent purchasing power)
- availability of credit increases and more flexible payment options (emi, hire purchase, buy now pay later) (temporary ownership)
- prices fall - but this is NOT sustainable for a profit-maximising firm! More likely they will use use illusion of discount to increase willingness or perception of ability
- govt subsidies
subsidy vs concession
S - direct financial payment made to firms to lower the costs of production and increase supply. Budgetary burden for govt
C - corporations are required by govt to offer G/S at reduced prices or on specific terms. Corporate burden because revenues are reduced and firms are not compensated for this
cross subsidisation used to offset losses in revenue due to concessions (price another item or consumer group more highly)
define ‘current market price’
the equilibrium price determined by the intersection of demand and supply at any given point in time - Qd=Qs and the market clears - draw basic D/S diagram and show equilibrium price
4 rules for using venn diagrams to depict W and A to pay
1) must intersect - if disjoint sets or merely tangential, shows that the two factors do not interact and there is no EFFECTIVE demand (overlapping section represents this)
2) need not be congruent sets - circles don’t need to have the same radii. different radii represent unequal A and W
3) the goal of any rational producer is to maximise the area of overlap, i.e. effective demand. will increase revenue and potentially profits
4) Can increase area of overlap by increasing the radius of A and/or W. if A<W, can increase A by offering CREDIT, or using illusion of discount (lowering price not sustainable). Do NOT suggest reducing W. If W<A, can increase W by appropriate advertising and reducing supply to create illusion of scarcity and induce panic buying (Amazon - only 1 left). 3 As.
illusion of discount - hike prices up, above normal selling price, then reduce them
you must suggest the typical strategies for increasing A and W to increase the overlapping area
the three As as suggested by CK Prahlad
awareness
affordability
accessibility
increasing 3As = increased willingness
Here’s how the Three A’s are implemented in India’s sachet hair product market:
- Awareness – Companies use regional advertising, celebrity endorsements, and localized marketing (e.g., ads in vernacular languages) to educate rural and lower-income consumers about the benefits of branded hair products.
- Access – Sachet packs are widely distributed through roadside vendors and small corner stores ensuring availability in both urban slums and remote villages.
- Affordability – Single-use sachets cost as little as ₹1–₹5, making premium shampoos accessible to price-sensitive consumers who cannot afford full-sized bottles.
elasticity of demand
responsiveness of demand, the effect, to a change in a particular stimulus, the cause. Y is changing due to a proportionate (%) change in X
stimuli could be price of good, income of potential consumers or price of related good
elasticity notation
Price: Edp
Income: EdY
Cross: EdXY - you consider the demand of the variable closest to d in response to a change in the other one - so here, demand X wrt change Y
types and degrees of elasticity
n types (can find change in limitless variables in response to a change in limitless variables).
5 main degrees: perfectly ie (0), rel ie (<1), unitary (1), rel e (>1), perfectly e (INFINITY).
READ THE QUESTION: V(Edp) is asking for NUMERICAL value of Edp, while D(Edp) is asking for the degree, an adjective
Only PIE, RIE AND RE are important - others are theoretical (ok lol)
derivation of elasticity formula
check notes
remember: Q before you P! effect over cause!!!
Explain why PIE/RIE equals zero or is less than one respectively
must refer to the relative sizes of the numerators and denominators! For e.g. with RIE, change in demand is proportionately less than change in price, which means num is smaller than denom, resulting in a quotient less than 1
TINA factor
There Is No Alternative - directly depends on substitutability
RIE tends to PIE when the TINA factor is maximised, i.e. you reduce competition and hence the number of available alternatives
examples of all the degrees of elasticity
PIE = covid vaccines
RIE = salt, electricity (rapidly diminishing marginal utility or storage capacity!)
unitary = clothing and personal care products
RE = luxury goods (think ITO TINS)
PE = vegetables in local markets (perfect competition! homogenous products)
UNITARY - Necessity: These products are essential to a degree (e.g., basic clothing or hygiene items), so consumers will still buy them even if prices change.
Substitutability: However, there are many alternatives and brands available, so consumers can switch to different options if prices rise significantly.
This balance leads to a proportional response in demand to price changes, characteristic of unitary elasticity.
is moving from RIE to RE or RE to RIE better?
need more info on how prices are changing! if prices are rising, then RIE is preferable since quantity demanded falls by proportionately less than the price increases, which means total revenue rises!
complements vs components
complements - supportive goods! When used together, can result in greater value, but not necessary to do so. Can function on their own as separate goods for e.g. milk and cereal
components - INDIVISIBLE parts of a larger overall good, without which the good can’t perform its intended function. For e.g. a watch and battery
calculating elasticity of demand
if tabular data: % change in Dx over % change in P/Y/Py
if regression equation (Dx = mX+h):
PED = m(Px/Dx)
YED = m(Y/Dx)
XED = m(Py/Dx) - the price of the OTHER good over demand for the good in question
remember to MOD YOUR ANSWER BEFORE STATING DEGREE! CANNOT STATE DEGREE OF ELASTICITY WITHOUT THIS
delta = (new-old)/old * 100
we ignore sign on PED because: relationship b/w P and Q is always negative due to law of demand (exceptions include veblen and giffen goods with upward sloping demand curves). It is redundant to include the sign because you know that for e.g. a PED of 2 is a 2% DECREASE in Q for every 1% increase in P. Ignored to simplify and focus on magnitude of value instead.
inferences when doing PED calculation questions
CANNOT stop at the calculation! MUST draw inference for more marks! What this means, whether it is good or bad news (or what it being good/bad news depends on) and the total outlay method result! (TR as found by P*Q has fallen/risen which is bad/good news. Must compare old and new revenues)
For regression questions: can’t tell if good/bad news because no info on price change is given! Link to EOIS here and fully explain logic ITO proportions
UE:
1) market has stagnated and whether this is good or bad news depends on prior state of customer base! for e.g. if coming out of covid, stagnation preferable to reduction in market share
2) sunset commodities - obsolete e.g. typewriters
explain an example of how a good might fall under different degrees of elasticity of demand throughout its life cycle
pencil
Intro (after being invented and innovated into market) - RIE because few alternatives at this point
Growth/maturity - RE as popularity increases, competitors arrive and production rises (more alternatives and choice)
Saturation - PIE because it becomes a COMPULSION to have (either for practical or social purposes)
explain the relationship between prices and demand for substitutes and complements
Let the demand being measured be of Good X
Substitutes (competitive/rival goods):
- if price of Y increases, demand for Y reduces and consumers switch to cheaper alts, so demand for X increases
- this is because X and Y can perform EACH OTHER’S function - TINA factor is WEAK
- value of XED is ALWAYS positive because cause Py and effect Dx move in the same direction
Complements (supportive goods)
- if price of Y increases, demand for Y falls and since X and Y tend to be consumed together, the demand for X falls also
- because X and Y are consumed together and are thus jointly demanded
- value of XED is ALWAYS negative because cause Py and effect Dx move in opposite directions
USE ‘MARSHALLIAN’ CURVES TO ILLUSTRATE S AND C - upward sloping curve with Dx on X axis and Py on Y axis for substitutes; downward sloping curve with Dx on X and Py on Y for complements
for substitutes, is RE or RIE better?
for complements, is RE or RIE better?
interpret EdY values
- negative = inferior
- positive between 0 and 1 = normal
- positive greater than 1 = luxury
problems with calculating and interpreting elasticity values
