Managerial Economics/Demand Theory

Managerial Economics: Demand Analysis

Demand Demand is the quantity of good and services that customers are willing and able to purchase during a specified period under a given set of economic conditions. The period here could be an hour, a day, a month, or a year. The conditions to be considered include the price of good, consumer’s income, the price of the related goods, consumer’s preferences, advertising expenditures and so on. The amount of the product that the customers are willing to buy, or the demand, depends on these factors. There are two types of demand. The first of these is called direct demand. This model of demand analysis individual demand for goods and services that directly satisfy consumers desires. The prime determinant of direct demand is the utility gained by consumption of goods and services. Consumers budget, product characteristics, individuals preferences are all important determinants of direct demand. The other type of demand is called derived demand. Derived demand is the demand resulting from the need to provide the final goods and services to the consumers. Intermediate goods, office machines are examples of derived demand. An other good example is mortgage credit. Mortgage credit demand is not demanded directly, but derived from the demand for housing.

Market demand function The market demand function for a product is a function showing the relation between the quantity demanded and the factors affecting the quantity of demand. A demand function for the good X can be expressed as follows: Quantity of product X demanded = Qx = f (the price of X, prices of related goods, expectations of price changes, income, preferences, advertising expenditures and so on. ) For use in managerial decision making, the relation between quantity of demand and each demand determining variable must be specified.

Demand Curve The demand function specifies the relation between the quantity demanded and all factors that determine demand. But the demand curve expresses the relation between the price of a product and the quantity demanded, holding constant all the other factors affecting demand.