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2 Demand & Supply

2 Demand & Supply

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Published by: kukkur007 on Aug 07, 2010
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  • Demand
  • Factors determining demand
  • Demand Function
  • Analyse the demand for
  • refrigerators
  • The Case / Situation
  • Law of Demand
  • Exceptions to law of demand
  • Why do demand curves slope
  • downwards?
  • Change in -quantity demanded /
  • demand ( Shift of demand curve)
  • Revenue concepts
  • Elasticity of Demand
  • Types of Elasticity of demand
  • Price elasticity of demand
  • Types of Income Elasticity
  • Types of demands
  • Types of demand
  • Importance of Elasticity of
  • Other types of demand
  • Demand Forecasting
  • Purpose of Forecasting Demand
  • Steps involved in Forecasting
  • Levels of Forecast
  • Determinants for Consumer
  • Durable goods
  • Determinants of Consumer goods
  • Determinants for Capital goods
  • Methods of forecasting
  • ARIMA METHOD (Box Jenkin)
  • Barometric Technique
  • Demand forecasting of new
  • Supply
  • Determinants of supply
  • Miscellaneous determinants
  • Law of Supply
  • Elasticity of supply


‡ 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

3) Increase of 1 person in population = increases the demand by 0.001units 4) For each additional Re. .Analyse the demand for refrigerators ‡ Parameters 1) 1 Re. Spent on Ads = increase the demand by 0.05 units. Increase in Per capita Income = Demand increase by 100 units.increase in Price = Demand Decrease by 200 units 2) 1 Re.

a3.1.000 Q = a1 P + a2 Y + a3 Pop + a4 A P = Price Y = Per capita income of the consumer Pop = Population A = Advertisement A1.a4 = Respective parameters of demand function.The Case / Situation ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Price increase by Rs. Advertisement = Rs.00. Answer = 50.000 units.00. . Population = 70.000 Per capita income rise by Rs.00.a2.

‡ P = Price . ‡ Qdx = F(P) ‡ Qdx = Quantity demanded of Product.Law of Demand ‡ Higher the price lower the quantity demanded and vice versa. other things remaining constant.

.Exceptions to law of demand ‡ Giffen goods ‡ Commodities which are used as status symbols ‡ Expectations of change in the price of the commodity.

‡ Substitute products price effect.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.

. ‡ 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. Movement along a demand curve caused by a change in the own price of the commodity.Change in .quantity demanded / demand ( Shift of demand curve) ‡ Change in quantity demanded: Contraction or Extension of demand curve.

MRn=TRn-1 or d(TR)/dQ.Revenue concepts It is the sale proceeds of a firm of a good during a particular period of time. 3 Parts. 1. Average Revenue = TR/Q=Q*P/Q=P 3. Total Revenue (TR=Q*P) 2. Marginal Revenue: Marginal revenue is defined as the change in total revenue when there is a change in quantity sold of the product. ‡ .

Elasticity of Demand ‡ Is defined as the percentage change in quantity demanded caused by one percent change in the demand determinant under consideration. ‡ E= . while other determinants are held constant. ‡ E = % change in quantity demanded of good X / % change in determinant Z.

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. .

however large.(E=0). ‡ Unit elasticity of demand: Where a given proportionate change in price causes an equally proportionate change in quantity.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. causes no change in quantity demanded.(E=1).

(E<1) .(E>1) ‡ Relatively inelastic demand: Where a change in price causes a less than proportionate change in quantity demanded.‡ Relatively elastic demand: Where a change in price causes a more than proportionate change in quantity demanded.

2. 5. High income elasticity:(Ey>1) Unitary income elasticity (Ey=1) Low income elasticity : (Ey<1) Zero income elasticity : (Ey=0) Negative income elasticity: (Ey<0). .Types of Income Elasticity 1. 3. 4.

1) Derived Demand . .Producer¶s goods demand 2) Autonomous Demand ± Consumers goods demand.Types of demands. ‡ Autonomous demand is more elastic than derived demand. 3) Industry demand 4) Firm demand. ‡ Firm demand is more elastic than Industry demand.

Market segment demand.Types of demand 5. 8. Short run demand: Demand with its immediate reaction to price changes. Long run demand: is which will ultimately exist as a result of the changes in pricing. 7. Market demand. 6. after enough time is allowed to let the market adjust itself to the new situation. . promotion or product improvement.

Electricity. . Eg. ‡ Fixation of Rewards for factors of production. ‡ Decision making ± public utilities. ‡ Government policies. ‡ Taxation policy. ‡ Fixing rate of exchange.Importance of Elasticity of Demand ‡ Level of output &price.

1. Latent demand ± A degree without writing examinations or attending college. 4. Negative demand ± Vasectomies. .Other types of demand. Irregular demand ± Theme parks. No demand ± Foreign Language courses for students 3. 5. Air conditioners. 6. Declining demand ± Applications for arts colleges. Full demand : Applications for MBA. 2.

AIDS. Unwholesome demand ± against cigarettes. 8. . drugs. alcohol. Theme parks in summer season. Overfull demand ± Seats for Medical colleges.7.

under given conditions. Forecast Passive forecasts Active forecasts .Demand Forecasting ‡ A forecast is a prediction or estimation of a future situation.

Fixing suitable price. . Financial planning. ‡ ‡ ‡ ‡ Long Run Forecasts Capital planning Installing production capacity.Purpose of Forecasting Demand ‡ ‡ ‡ ‡ Short Run Forecasts Decide on sales policy Decide on inventory level. Manpower planning. Deciding on Advertisements and promotional matters.

2. 1. 3. Determining the nature of goods under consideration. Identification of objective. Selecting a proper method of forecasting.Steps involved in Forecasting. 4. Interpretation of results. .

5. 7. Segment forecasting. 3. Macro economic forecasting. Industry demand forecasting Firm demand forecasting Product line forecasting. . 6. 2. New product forecasting.Levels of Forecast 1. Types of commodities for which forecast is to be undertaken 8. Miscellaneous factors. 4.

6. . 2. 5. Tastes and scales of preference of consumers. Income levels of consumers Consumer credit outstanding. Existing stock of the good. 3. Population Saturation limit of the market. 7. Replacement demand Vs new demand. 4.Determinants for Consumer Durable goods 1.

P. 3. Size & characteristics of population D = f(Yd. 2.Determinants of Consumer goods 1. Disposable Income.S) . Price.

3. . Financial position of the company. Excess capacity in the industry. Existing stock & its age distribution of the capital goods. Rate of obsolescence. 8. 5. Tax provisions on repurchase. Price of Substitute / complementary goods. 7. Growth possibility of the industry of the particular firm. Forecast for consumer goods. 9. 1. 4. Norm of consumption of capital goods/unit of installed capacity. 6. 2.Determinants for Capital goods.

Methods of forecasting Forecasting Opinion polling methods Statistical Methods .

Oin np llin e o s p io o g th d Cnu e s rv y o s mrs u e Sle o eo in n Ep rtso in n e o a s rc p io x e p io t d (Dlp i Tc n u ) e h eh iq e Cml t u e tio op mr n s rv y ue SmleSrvy& ap ue Ts mrk tin et a e g Edue n s (In u u u mt o ) p t-o tp t e d .

D i R iff Li ii BJ i C i x i i ii .il i lE l i x ( ji B i ii R i E i (i l i ) F ii i i li b y lyi bvi ( l ) i AIA L i .

1) linear trends 2) Non linear trends.‡ 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: ³Line of best fit´ By statistical methods a trend line is fitted and by extrapolating the trend line for future we get the forecasted sales.

. cyclical movements and irregular variations ± for a long period of time. seasonal fluctuations. ‡ Smoothing methods: It attempts to cancel ouot the effect of random variations on the values of the series. 1) moving average 2) Exponential smoothing.‡ Decomposing a time series: Composed of trend.

Used when inherent pattern of time series exists. 2. Removal of trend ± those time series does not have a long term trend component.ARIMA METHOD (Box Jenkin) ‡ ‡ Auto Regressive Integrated Moving Averages. Model Identification: a) Order of involvement of auto regressive terms b) no. of differences of the original series of inherent trend to be removed. 5 stages 1. .

4. . Parameter estimation : Using least square method coefficients are obtained. 5.3. Forecasting: Using the Coefficients. Verification : Goodness of fit using residuals generated.

. Diffusion indices indicators. Coincident series: GNP ± Industrial production.Demand for construction material. Lagging Series: Inventory ± Consumer credit outstanding. 4. 2. B) Birth rate ± Demand for school seats. 3.A) Applications for housing loans . Leading series(indicators) : eg.Barometric Technique 1.

‡ Econometric models : All economic and demographic variables that influence a future are taken into account and build a cause effect relationship. .‡ Regression Equation method ± Once the variables are identified. they are expressed as an equation.

3. Decline. . Test marketing Life cycle segmentation analysis. Introduction. a) b) c) d) e) Survey of buyer¶s intentions.Demand forecasting of new products 1. Growth Maturity Saturation. 2.

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. .

. Prices of factors of production.Determinants of supply 1. Political disturbances. Producers objectives. Taxation on output. 3. 8. To raise price ± supply may be destroyed. Time period. Technological know how¶s. 2. 4. 9. 6. Cartels 7. Price of the good. 10. Prices of related goods. 5.

. 3. control. Government procurement / Govt. Inventory. Natural factors ± monsoons. Expectations of the future level of prices. 2.Miscellaneous determinants 1. floods etc. 4.

. ‡ Shift in Supply Vs Change in supply. more of a commodity is supplied at a higher price and less of it is supplied at a lower price.Law of Supply ‡ Law of supply states that other things remaining constant.

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

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