# 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

increase in Price = Demand Decrease by 200 units 2) 1 Re. Spent on Ads = increase the demand by 0.001units 4) For each additional Re.05 units.Analyse the demand for refrigerators  Parameters 1) 1 Re. . Increase in Per capita Income = Demand increase by 100 units. 3) Increase of 1 person in population = increases the demand by 0.

a3.000 units.1. Answer = 50.a2.000 Per capita income rise by Rs.000 Q = a1 P + a2 Y + a3 Pop + a4 A P = Price Y = Per capita income of the consumer Pop = Population A = Advertisement A1.00.000 Population = 70.10.00.4.000.a4 = Respective parameters of demand function.00.00.The Case / Situation            Price increase by Rs. . Advertisement = Rs.00.

other things remaining constant.Law of Demand  Higher the price lower the quantity demanded and vice versa.  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.  Substitute products price effect.  Rise in consumers real income when prices are decreased.

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

 . 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. MRn=TRn-1 or d(TR)/dQ. Marginal Revenue: Marginal revenue is defined as the change in total revenue when there is a change in quantity sold of the product. Average Revenue = TR/Q=Q*P/Q=P 3.

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

Expectations elasticity of demand. .Types of Elasticity of demand      Price elasticity of demand Income elasticity of demand Cross elasticity of demand Promotional elasticity of demand.

. (E=infinite)  Absolutely inelastic demand = Where a change in price.  Unit elasticity of demand: Where a given proportionate change in price causes an equally proportionate change in quantity. however large.(E=1). 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.(E=0).

(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.

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

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

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

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

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

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

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

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

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

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

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

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

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

Methods of forecasting Forecasting Opinion polling methods Statistical Methods .

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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. Fitting trend by observation: Involves merely the plotting of annual sales on a graph. . 1) linear trends 2) Non linear trends.

seasonal fluctuations.  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. . 1) moving average 2) Exponential smoothing. Decomposing a time series: Composed of trend.

Model Identification: a) Order of involvement of auto regressive terms b) no. 2. Used when inherent pattern of time series exists. .ARIMA METHOD (Box Jenkin)   Auto Regressive Integrated Moving Averages. 5 stages 1. 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.

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

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

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

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

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. at a point of time. .

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

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

Law of Supply  Law of supply states that other things remaining constant.  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.

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