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2 Demand & Supply

2 Demand & Supply

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10/29/2011

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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

Spent on Ads = increase the demand by 0. Increase in Per capita Income = Demand increase by 100 units. 3) Increase of 1 person in population = increases the demand by 0.05 units.Analyse the demand for refrigerators ‡ Parameters 1) 1 Re. .increase in Price = Demand Decrease by 200 units 2) 1 Re.001units 4) For each additional Re.

a4 = Respective parameters of demand function. .000 units.00.00.00.000 Q = a1 P + a2 Y + a3 Pop + a4 A P = Price Y = Per capita income of the consumer Pop = Population A = Advertisement A1.a3.1.000 Population = 70.a2.00. Answer = 50.00. Advertisement = Rs.4.000.000 Per capita income rise by Rs.10.The Case / Situation ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Price increase by Rs.

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

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

‡ Rise in consumers real income when prices are decreased. .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. ‡ Substitute products price effect.

quantity demanded / demand ( Shift of demand curve) ‡ Change in quantity demanded: Contraction or Extension of demand curve.Change in . ‡ 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. .

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. ‡ . Average Revenue = TR/Q=Q*P/Q=P 3. Total Revenue (TR=Q*P) 2. 3 Parts. 1.Revenue concepts It is the sale proceeds of a firm of a good during a particular period of time.

‡ E= . ‡ E = % change in quantity demanded of good X / % change in determinant Z.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.

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.

(E=infinite) ‡ Absolutely inelastic demand = Where a change in price. causes no change in quantity demanded.Price elasticity of demand ‡ Perfectly elastic demand = No reduction in price is needed to cause an increase in quantity demanded. ‡ Unit elasticity of demand: Where a given proportionate change in price causes an equally proportionate change in quantity.(E=0).(E=1). . however large.

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

3. 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). . 5.Types of Income Elasticity 1. 2. 4.

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

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

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

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

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

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

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

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

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

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

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

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

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 .

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 . D i R iff Li ii BJ i C i x i i ii .

‡ 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. observing it and extrapolating it.‡ Fitting trend by observation: Involves merely the plotting of annual sales on a graph. 1) linear trends 2) Non linear trends. .

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

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

. 5. Forecasting: Using the Coefficients. 4. Parameter estimation : Using least square method coefficients are obtained. Verification : Goodness of fit using residuals generated.3.

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

‡ 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.

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

at a point of time. . other things remaining the same.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.

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

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

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. ‡ Shift in Supply Vs Change in supply. .

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

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