Economics and Managerial Economics: Demand Analysis

Posted on Mar 17, 2025 in Economy

Economics Vs. Managerial Economics

Here’s a comparison between Economics and Managerial Economics:

Economics

  1. Deals with both micro and macro aspects.
  2. Both positive and normative science.
  3. Deals with theoretical aspects.
  4. Studies both the firm and the individual.
  5. Wide scope.

Managerial Economics

  1. Deals only with micro aspects.
  2. Only a normative science.
  3. Deals with practical aspects.
  4. Studies the problems of the firm only.
  5. Narrow scope.

Demand Analysis

Demand analysis is an attempt to determine the factors affecting the demand for a commodity or service and to measure such factors and their influences. Demand analysis includes the study of the law of demand, demand schedule, demand curve, and demand forecasting.

Main objectives of demand analysis are:

  1. To determine the factors affecting the demand.
  2. To measure the elasticity of demand.
  3. To forecast the demand.
  4. To increase the demand.
  5. To allocate resources efficiently.

Understanding Demand

Demand means the quantity of goods and services that a person can purchase with a requisite amount of money.

Law of Demand

The Law of Demand states that people will buy more at lower prices and buy less at higher prices. In other words, while other things remain the same, an increase in the price of a commodity will decrease the quantity demanded of that commodity, and a decrease in the price will increase the demand for that commodity.

The relationship described by the law of demand is an inverse or negative relationship because the variables (price and demand) move in opposite directions. It shows the cause-and-effect relationship between price and quantity demand.

Demand Curve

The demand curve slopes downward from left to right (Negative Slope) due to:

Law of Diminishing Marginal Utility

As the consumer buys more and more of the commodity, the marginal utility of the additional units falls. Therefore, the consumer is willing to pay only lower prices for additional units. If the price is higher, he will restrict its consumption.

Principle of Equi-Marginal Utility

Consumers will arrange their purchases in such a way that the marginal utility is equal in all their purchases. If it is not equal, they will alter their purchases until the marginal utility is equal.

Other factors include:

  • Income effect
  • Substitution effect
  • Different uses of a commodity
  • Psychology of people
  • Tendency of human beings to satisfy unsatisfied wants.

Exceptions to the Law of Demand

  • Giffen paradox: Giffen goods are inferior goods that are an exception to the law of demand. When the price of an inferior good falls, the poor will buy less and vice versa.
  • Veblen or Demonstration effect
  • Speculative Effect
  • Fear of Shortage
  • Brand Loyalty

The Law of Variable Proportions

The law of variable proportions states that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline. This means that up to the use of a certain amount of variable factor, the marginal product of the factor may increase, and after a certain stage, it starts diminishing. When the variable factor becomes relatively abundant, the marginal product may become negative.