Demand

• The quantity of the commodity which an

individual consumer or a household is willing to
purchase per unit of time at a particular price.
• Demand for a commodity implies:\
a) Desire of the consumer to buy the product
b) his willingness to buy the product
c) Purchasing power.
• Demand for a commodity by all the individuals in
the market – Market demand / aggregate demand.
 Factors determining demand
• Price of the commodity
• Income of the consumer
• Prices of related goods. ( Complementary /
Substitutes )
• Tastes and preferences.
• Advertisement
• Expectations
1) Related to their future income
2) Related to future prices of good and its related goods.
 Demand Function
• A mathematical expression of the relationship between quantity
demanded of the commodity and its determinants.
• Qdx = F (Px,Y,P1,..Pn-1,T,A,Ey,Ep,u )
Qdx = Quantity demanded of Product.
Px = Price of product.
Y = Level of House hold income
P1..Pn-1 = Prices of other related products
T = Tastes of consumer
A = Advertising
Ey = Consumers expected future income
Ep = Consumers expectations about future prices
U = other determinants
 Analyse the demand for
refrigerators
• Parameters
1) 1 Re.increase in Price = Demand Decrease by
200 units
2) 1 Re. Increase in Per capita Income = Demand
increase by 100 units.
3) Increase of 1 person in population = increases
the demand by 0.001units
4) For each additional Re. Spent on Ads = increase
the demand by 0.05 units.
 The Case / Situation
• Price increase by Rs.4,000
• Per capita income rise by Rs.1,000
• Population = 70,00,00,000.
• Advertisement = Rs.10,00,00,000
• Q = a1 P + a2 Y + a3 Pop + a4 A
• P = Price
• Y = Per capita income of the consumer
• Pop = Population
• A = Advertisement
• A1,a2,a3,a4 = Respective parameters of demand function.
• Answer = 50,00,000 units.
 Law of Demand

• Higher the price lower the quantity

demanded and vice versa, other things
remaining constant.
• Qdx = F(P)
• Qdx = Quantity demanded of Product.
• P = Price
 Exceptions to law of demand

• Giffen goods
• Commodities which are used as status
symbols
• Expectations of change in the price of the
commodity.
 Why do demand curves slope
downwards?

• Law of diminishing utility

Individual consumer comes to an equilibrium
where marginal utility is equal to its price
• More use.
• Rise in consumers real income when prices
are decreased.
• Substitute products price effect.
 Change in - quantity demanded /
demand ( Shift of demand curve)
• Change in quantity demanded: Contraction or
Extension of demand curve. Movement along a
demand curve caused by a change in the own price
of the commodity.
• Change in demand / Shift of demand curve:
Change in factors like
• Income of the consumer
• Prices of substitute products
• % of women going out to work.
 Revenue concepts
• It is the sale proceeds of a firm of a good
during a particular period of time. 3 Parts.
1. Total Revenue (TR=Q*P)
2. Average Revenue = TR/Q=Q*P/Q=P
3. Marginal Revenue: Marginal revenue is
defined as the change in total revenue
when there is a change in quantity sold of
the product. MRn=TRn-1 or d(TR)/dQ.
 Elasticity of Demand
• Is defined as the percentage change in
quantity demanded caused by one percent
change in the demand determinant under
consideration, while other determinants are
held constant.
• E = % change in quantity demanded of
good X / % change in determinant Z.
• E=
 Types of Elasticity of demand

• Price elasticity of demand

• Income elasticity of demand
• Cross elasticity of demand
• Promotional elasticity of demand.
• Expectations elasticity of demand.
 Price elasticity of demand
• Perfectly elastic demand = No reduction in price is
needed to cause an increase in quantity demanded.
(E=infinite)
• Absolutely inelastic demand = Where a change in
price, however large, causes no change in quantity
demanded.(E=0).
• Unit elasticity of demand: Where a given
proportionate change in price causes an equally
proportionate change in quantity.(E=1).
• Relatively elastic demand: Where a change
in price causes a more than proportionate
change in quantity demanded.(E>1)
• Relatively inelastic demand: Where a
change in price causes a less than
proportionate change in quantity demanded.
(E<1)
 Types of Income Elasticity

1. High income elasticity:(Ey>1)

2. Unitary income elasticity (Ey=1)
3. Low income elasticity : (Ey<1)
4. Zero income elasticity : (Ey=0)
5. Negative income elasticity: (Ey<0).
 Types of demands.
1) Derived Demand - Producer’s goods demand
2) Autonomous Demand – Consumers goods
demand.
• Autonomous demand is more elastic than derived
demand.
3) Industry demand
4) Firm demand.
• Firm demand is more elastic than Industry
demand.
 Types of demand
5. Short run demand: Demand with its immediate
reaction to price changes.
6. Long run demand: is which will ultimately exist as
a result of the changes in pricing, promotion or
product improvement, after enough time is
allowed to let the market adjust itself to the new
situation.
7. Market segment demand.
8. Market demand.
 Importance of Elasticity of
Demand
• Level of output &price.
• Fixation of Rewards for factors of
production.
• Government policies.
• Decision making – public utilities. Eg.
Electricity.
• Taxation policy.
• Fixing rate of exchange.
 Other types of demand.
1. Negative demand – Vasectomies.
2. No demand – Foreign Language courses for
students
3. Latent demand – A degree without writing
examinations or attending college.
4. Declining demand – Applications for arts colleges.
5. Irregular demand – Theme parks, Air conditioners.
6. Full demand : Applications for MBA.
7. Overfull demand – Seats for Medical
colleges, Theme parks in summer season.
8. Unwholesome demand – against
cigarettes, alcohol, drugs, AIDS.
 Demand Forecasting

• A forecast is a prediction or estimation of a

future situation, under given conditions.

F o re c a s t

P a s s iv e fo r e c a s t s A c t iv e fo r e c a s t s
 Purpose of Forecasting Demand
Short Run Forecasts Long Run Forecasts
• Decide on sales policy • Capital planning
• Decide on inventory • Installing production
level. capacity.
• Fixing suitable price. • Manpower planning.
• Deciding on • Financial planning.
Advertisements and
promotional matters.
 Steps involved in Forecasting.

1. Identification of objective.
2. Determining the nature of goods under
consideration.
3. Selecting a proper method of forecasting.
4. Interpretation of results.
 Levels of Forecast
1. Macro economic forecasting.
2. Industry demand forecasting
3. Firm demand forecasting
4. Product line forecasting.
5. Segment forecasting.
6. New product forecasting.
7. Types of commodities for which forecast is to be
undertaken
8. Miscellaneous factors.
 Determinants for Consumer
Durable goods
1. Population
2. Saturation limit of the market.
3. Existing stock of the good.
4. Replacement demand Vs new demand.
5. Income levels of consumers
6. Consumer credit outstanding.
7. Tastes and scales of preference of consumers.
Determinants of Consumer goods

1. Disposable Income.
2. Price.
3. Size & characteristics of population
D = f(Yd,P,S)
 Determinants for Capital goods.
1. Growth possibility of the industry of the particular
firm.
2. Norm of consumption of capital goods/unit of
installed capacity.
3. Excess capacity in the industry.
4. Forecast for consumer goods.
5. Existing stock & its age distribution of the capital
goods.
6. Rate of obsolescence.
7. Financial position of the company.
8. Tax provisions on repurchase.
9. Price of Substitute / complementary goods.
 Methods of forecasting

F o r e c a s t in g

O p in io n p o llin g m e t h o d s S t a t is t ic a l M e t h o d s
 O p in io n p o llin g M e th o d s

C o n s u m e rs s u rv e y S a le s F o rc e o p in io n E x p e rts o p in io n M e th o d
(D e lp h i T e c h n iq u e )

C o m p le te e n u m e ra tio n S a m p le S u rv e y & E nd use

s u rv e y T e s t m a rk e tin g (In p u t-o u tp u t m e th o d )
 S t a st i c a l M et h ods

M echani c al E xt r a pol a t i o n B arom e t r i c T echi n i q ue s R egressi o n m et h od E cono m e t r i c m et h od

(T re nd proj e ct i o n m et h ohd (S i m ul t a neous eq uat i o n
m et h o d)

F i t i n g T rend T i m e seri e s S m oot h i n g A R I M A Lea di n g, D i f u si o n

l i n e by a nal y si s m et h ods m et h o d La ggi n g & i n di c e s
observat i o n (l e ast squares B o x-Jenki n C oi n ci d ent
m et h od ) T echni q ue i n di c at o rs
• Fitting trend by observation: Involves merely the
plotting of annual sales on a graph, observing it
and extrapolating it.
• Time Series analysis employing Least Square
Method: “Line of best fit” By statistical methods a
trend line is fitted and by extrapolating the trend
line for future we get the forecasted sales. 1) linear
trends 2) Non linear trends.
• Decomposing a time series: Composed of
trend, seasonal fluctuations, cyclical
movements and irregular variations – for a
long period of time.
• Smoothing methods: It attempts to cancel
ouot the effect of random variations on the
values of the series. 1) moving average
2) Exponential smoothing.
 ARIMA METHOD (Box Jenkin)
• Auto Regressive Integrated Moving Averages.
• Used when inherent pattern of time series exists.
5 stages
1. Removal of trend – those time series does not
have a long term trend component.
2. Model Identification: a) Order of involvement of
auto regressive terms b) no. of differences of
the original series of inherent trend to be
removed.
3. Parameter estimation : Using least square
method coefficients are obtained.
4. Verification : Goodness of fit using
residuals generated.
5. Forecasting: Using the Coefficients.
 Barometric Technique
1. Leading series(indicators) : eg.A) Applications
for housing loans - Demand for construction
material. B) Birth rate – Demand for school
seats.
2. Coincident series: GNP – Industrial production.
3. Lagging Series: Inventory – Consumer credit
outstanding.
4. Diffusion indices indicators.
• Regression Equation method – Once the
variables are identified, they are expressed
as an equation.
• Econometric models : All economic and
demographic variables that influence a
future are taken into account and build a
cause effect relationship.
 Demand forecasting of new
products
1. Survey of buyer’s intentions.
2. Test marketing
3. Life cycle segmentation analysis.
a) Introduction.
b) Growth
c) Maturity
d) Saturation.
e) Decline.
 Supply

• Supply of a commodity refers to the various

quantities of the commodity which a seller
is willing and able to sell at different prices
in a given market, at a point of time, other
things remaining the same.
 Determinants of supply
1. Price of the good.
2. Prices of related goods.
3. Prices of factors of production.
4. Producers objectives.
5. Technological know how’s.
6. Cartels
7. To raise price – supply may be destroyed.
8. Taxation on output.
9. Political disturbances.
10. Time period.
 Miscellaneous determinants

1. Expectations of the future level of prices.

2. Natural factors – monsoons, floods etc.
3. Government procurement / Govt. control.
4. Inventory.
 Law of Supply

• Law of supply states that other things

remaining constant, more of a commodity is
supplied at a higher price and less of it is
supplied at a lower price.
• Shift in Supply Vs Change in supply.
 Elasticity of supply

1. Perfectly Elastic supply. (Es=infinity)

2. Perfectly Inelastic supply. (Es=0)
3. Unitary Elastic supply. (Es=1)
4. Relatively Inelastic supply. (Es < 1)
5. Relatively Elastic supply. ( Es > 1)
• Formula.