The document discusses demand analysis and forecasting. It defines demand and outlines the key determinants and types of demand, including price demand, income demand, and cross demand. It also explains the law of demand and its assumptions. Methods of measuring price elasticity of demand are described, including the total expenditure method, point method, and arc method. The significance and levels of demand forecasting are discussed. The main methods of demand forecasting are the survey method, including expert opinion surveys and consumer interviews, and statistical methods.

1. DEMAND ANALYSIS
Meaning of Demand
Demand implies 3 conditions :
 Desire for a commodity or service
 Ability to pay the price of it
 Willingness to pay the price of it.
Further demand has no meaning without reference to time period such as a week, a month or
a year.
The demand for a product can be defined as the “Number of units of an commodity that
consumer will purchase at a given price during a specified period of time in the market.”
Types of Demand
Demand can be broadly classified into 3 types :
They are,
 Price Demand
 Income Demand
 Cross Demand
Law of Demand
The law of demand expresses the
relationship between the price & quantity
demanded .It says that demand varies inversely
with price.
The Law can be stated in the following:
“ Other things being equal, a fall in the price leads to expansion in demand and a rise in price leads to
contraction in demand.”
Assumptions- Law Of Demand
 Consumers Income remains Constant

2.  The Tastes & Preferences Of the Consumers remain the same
 Prices of other related Commodities remain Constant
 No new Substitutes are available for the Commodity.
 Consumers do not expect further change in the price of the commodity.
 The Commodity is not of Prestigious value
Eg: Diamond
 The size of population is constant
 The rate of taxes remain the same
 Climate & Weather Conditions do not change.
DEMAND SCHEDULE
 Individual Demand Schedule
 Market Demand schedule
1. Individual Demand Schedule:
It is a list of various quantities of a commodity which an individual consumer purchases at
different prices at one instant of time.
D= f (P) (or) D(x) = f(Px)

3. 2. Market Demand Schedule
The market demand Schedule canbe obtained by adding all the individual
Demand Schedules of Consumers in the market.
Hypothetical market demand schedule is as follows:
Hypothetical market demand schedule

4.  Giffen’s Paradox (Robert Giffen-Irish Economist)
 Veblen’s Effect (Thorstein Veblen – USA )
 Price Illusion
 Fear of Future Rise in Prices
 Emergency
 Necessaries
 Conspicious Necessaries (More Noticeable)

5. Eg:- TV, Watch, Scooters, Car etc
 Fear of Shortage
 Ignorance
 Speculation (Stock Market)
Why does the demand curve slope downwards to right
OR
Why does demand curve has a negative
slope?
 Operation of the Law of Diminishing Marginal Utility
 Income Effect
 Substitution Effect
 Different Uses
 New Buyers
CHANGES IN DEMAND
A. Extension & contraction of demand:
When demand changes due to change in the price of the commodity, it is a case of either
extension or contraction of demand. The Law of demand relates to the Extension & Contraction of
Demand.

6. 2. Increase and decrease in demand:
When demand changes, not due to
changes in the price of the commodity or
service but due to other factors on which
demand depends.
Eg:- Income, Population, Climate, Tastes & Habits etc.

7. 1. DETERMINANTS OF DEMAND
Change in population
2. Change in climatic conditions
3. Change in Fashions
4. Change in tastes & Habits
5. Change in Quantity of money in circulation
6. Change in Distribution of income & wealth
7. 7. Availability of Substitutes
8. 8. Advertisements & Salesmanship
9. 9. Complementary Goods
10. 10. Technical Progress
DEMAND DISTINCTIONS
“Demand distinctions may be defined as the difference in the forces acting on the demand for
different goods.”
 Demand for Producer goods and Consumer Goods
 Demand for Durable goods and Non-Durable Goods.

8.  Derived Demand and Autonomous Demand.
 Industry Demand and Company Demand
 Short run Demand And Longrun demand
 Total Market demand & Market Segment Demand
DETERMINANTS OF DEMAND (OR) FACTORS AFFECTING DEMAND
(Refer: Lekhi&Agarwal- Business Economics)
 Price of Commodity
 Price of Related Goods
 Income of the Consumer
 Distribution of Wealth
 Tastes & Habits
 Population growth
 State of Business (Business Cycle)
 Government Policy
 Advertisement
 Level of Taxation
Factors determining demand for different types of goods.
 Three main types of goods:-
1.Non durable consumer goods.
2.Durable consumer goods.
3.Producer goods or capital goods.
1.Non durable consumer goods:-
a) Purchasing power
b) Price

9. c) Demography
Thus, demand for non durables can be expressed in the form of following formula:
d= f( Y,P,D)
Where ,d=demand,Y=disposable personal income ,P=price ,D=demography and f is the function.
2.Durable consumer goods.
Demand of such goods is two types
a) Replacement demand- demand for a new product in place of an old one which is worn out or
obsolete.
b) Expansion demand-demand for additional units of the same product.
Factors influencing expansion in demand.
 Financial position of consumers.
 Maintenance and operating costs.
 Number of households.
 Price and credit conditions.
3.Producers’ goods
Also called capital goods.
Factors determining the demand for capital goods.
 No. of industrial undertakings.
 Profitability.
 Ratio of production to capacity utilization.
 Level of wage rates.
 Growth prospects.
 Price and quality of the produce.

10. ELASTICITY OF DEMAND
Elasticity of Demand
 Elasticity of demand measures the responsiveness of demand for a
commodity to a change in the variables confined to its demand.
 For measuring the elasticity coefficient, a ratio is made of two variables,
%change in quantity demanded
% change in determinants of demand
Important Kinds of Elasticity of Demand
1. Price ED:
e = % change in quantity demanded
% change in price
2. Income ED:
e = % change inquantity demanded
% change in income
3.Cross ED:
e = % change in quantity demanded of X
% change in price of Y
4. Advertising / Promotional ED:
% change in sales
% change in advertisement expenditure
Types of Income Elasticity of Demand
1. Negative Income Elasticity
2. Zero Income Elasticity
3. Income Elasticity Less Than One

11. 4. Unitary or Income Elasticity Of Demand is equal to 1.
5. Income Elasticity Greater Than One
Factors Influencing Elasticity of Demand
or
Determinants of Price Elasticity of Demand
1. Nature of Commodity:
 Necessaries --- inelastic
 Comforts and Luxuries --- elastic
2. Availability of Substitute:
 A commodity which has more substitutes the demand is ------ more elastic.
Ex: Tea , Coffee, Milk ,Bournvitaetc,
3. No of users of a commodity:
 More no of users ---elastic
Ex: Electricity, Iron and Steel etc.
 Only one use --- inelastic
Ex: Printing machine , stitching machine

12. 4. Proportion of Income Spent on the Goods:
 Small proportion of income --- inelastic
Ex: Salt, Match box, Postcard
5. Habit:
Ex: Coffee ,Tea --- inelastic
6. Level of Income of the People:
 Rich People --- inelastic
 Poor People --- elastic
7. Period of time:
 Short period --- inelastic
Habit and prices of commodities do not change much.
 Long period --- elastic
8. Durability of a commodity:
 Durable goods --- elastic
Ex: fan, table, Chair
 Perishable goods --- inelastic
Ex: Milk, flower
9. Postponement of Purchase:
 Postponement --- elastic
Ex: Fan, TV, Fridge
 Cannot be postponed --- inelastic
Ex: Medicine, Rice, Wheat
10. Level of Prices:
 High priced --- elastic
Ex: Cars, TV , Air conditioners

13.  Low priced --- inelastic
Ex: Newspaper, Nails, Needle
MEASUREMENT OF PRICE ELASTICITY OF DEMAND
Practical Application
Uses Of Price Elasticity of Demand In Decision Making
Ref: Jhingan & Stephen Pg: 81
D.M.MithaniPg: 157
1. To the businessmen
2. To the trade unions
3. In international trade
4. To the government
5. Helpful in Adopting the Policy of Protection
6. In the declaring certain industries as public utilities
Different Degrees of Price Elasticity of Demand
1. Perfectly Elastic Demand
2. Perfectly Inelastic Demand
3. Relatively Elastic demand
4. Relatively Inelastic Demand
5. Unitary Elastic Demand
There are four methods of measurement of price elasticity of demand:
1. Mathematical (or) Ratio Method.
2. Total Outlay Method (or) Total Expenditure Method.
3. Point Method
4. Arc Method
Mathematical Method
Under this method price elasticity of demand is measured by using the
formula given below:

14. PEd = % change in quantity demanded
% change in the price
= % change in Q
% change in P
Price Elasticity of Demand
is = 1
The Elasticity is equal to one when the demand changes by the same % as the price.
Suppose the price has fallen by 20% and the quantity demanded has expanded by
20%, as a result of fall in the price. The Elasticity of demand is = 1.

15. PEd = % change in demand =20% = 1
% change in price 20%
PEd = 1
Price Elasticity of Demand > 1
If the % change in demand is more than the % change in price, then the Elasticity is = >
1.
Ex: If the price falls by 20% and demand increases by 20%, then the elasticity is greater
than one.
PEd = 40% = 4 = 2
20% 2
PEd> 1

16. Price Elasticity of demand <1
If the % change in demand is less than the % change in the price, then the Elasticity is
< 1.
Ex: If the price falls by 20% and the demand increases by only 10%, then the E is = ½
i.e less than one.
PEd = 10% =1 = 0.5
20% 2
PEd< 1
Total Expenditure / Outlay Method
By Prof . Marshall
Under this method we measure the price elasticity of demand by examining
the change in total expenditure as a result of change in the price and quantity demanded for a
commodity.
TE = Price / unit X Total quantity
purchased

17. Following are the observations about the nature of PEd
1. In first case , with every fall in price the TE goes on increasing. Therefore the PEd> 1.
2. In second case, whatever may be the change in price the TE remains the same. Therefore the
PEd = 1.
3. In third case, with every fall in price the TE goes on decreasing. Therefore the PEd< 1

18. Point Method
Prof . Marshall
Point Ed = lower segment of the demand curve below the given point
upper segment of the demand curve above the given point
or PE = L ; PE = point elasticity
U L = lower segment
U = upper segment

20. ARC METHOD
In arc elasticity, the change in price is expressed asa proportion or average of the old price
&theprevious quantity and the new quantity. Thus, the arc elasticity is called as average
elasticity.Any two points of the demand curve makes an arc. An arc is a curved line of a section or
a segment of a demand curve. Arc elasticity is the elasticity at the mid point of an arc of a
demandcurve.

22. DEMAND FORECASTING METHODS
Demand Forecasting
Meaning:
Demand forecasting means estimating the
expected future demand for a product , related to a
particular period of time.
Methods of forecasting:
The methods of forecasting can be broadly
classified into two categories. They are:
1. Survey Method
2. Statistical Method
SIGNIFICANCE
OF DEMAND FORECASTING
SIGNIFICANCE OF SHORT TERM FORECASTING
 To prepare appropriate production schedule.

23.  Helping the firm in reducing costs of purchasing materials.
 To determine appropriate price policy.
 To fix sales targets and incentives.
 To evolve proper advertising policy.
 To forecast short term financial requirements.
SIGNIFICANCE OF LONG TERM FORECASTING
 To plan for new units or to expand the existing units.
 To plan long term financial requirements.
 To plan man power requirements.
LEVELS OF DEMAND FORECASTING
 1. Macro level
 2. Industry level
 3. Firm level
Criteria of a good forecasting method.
 Accuracy
 Plausibility
 Simplicity
 Economy
 Availability
 Flexibility
(A) Survey Method
The survey method consists of two methods:
 Survey of experts opinion
 Survey of consumers intentions through direct interview with them.
Experts Opinion Method (or) Collective Opinion Method
This method is also known as Sales Force Composite Method.

24. Advantages:
It is a simple method of forecasting.
It involves minimum statistical work.
It is less expensive.
It is based on the first hand knowledge of the salesmen who are directly connected with the
sales.
5. It is more useful for short term forecasting rather than long term forecasting.
6. It is particularly useful in forecasting the sales of new products.
Disadvantages:
1. It is subjective approach.
2. The salesmen may underestimate the demand.
3. The salesmen may not be able to judge the future trends in the economy and their impact on
the sales of the product of the firm.
(2) Direct Interview Method (or) Customers Interview Method
Under this method ,consumers are directly interviewed to find out the
future demand or demand trends for a product by a firm. They are three types of consumers’
interview:
 Complete Enumeration Method
 Sample Survey Method
(Stratified = Society divided into different
classes)
 End Use Method
A. Complete Enumeration Method
under this method ,almost all the consumers of the product are interviewed and are asked to
inform about their future plan of purchasing the product in question.
Advantages:
 This method is true from any bias of the salesmen ,as they only collect the information and
aggregate it.

25.  This method seems to be ideal, since almost all the consumers using the product are
contacted.
Disadvantages:
1. This method is however very costly and tedious.
2. It is also too much time consuming, since every potential customer is to be interviewed.
3. It would be very difficult and impractical if the consumers who are spread over the entire
country are to be contacted.
Hence this method is highly cumbersome in nature.
B. Sample Survey Method:
When the demand of consumers is very large
this method is used by selecting a sample of consumers
for interview .
Advantages:
1. This method is single and less costly and hence it is widely used.
2. It is less time consuming ,since only a few selected consumers are contacted.
3. 3. It is used to estimate short term demand by business firms, governments
departments and household customers.
4. 4. It is highly useful in case of new products.
5. 5. This method is of greater use in forecasting where consumersbehaviour is subject to
frequent changes.
6. However the success if this method depends on the sincere co-
operation of the selected consumers.
7. 3. It is used to estimate short term demand by business firms, governments
departments and household customers.
8. 4. It is highly useful in case of new products.
9. 5. This method is of greater use in forecasting where consumersbehaviour is subject to
frequent changes.
10. However the success if this method depends on the sincere co-
operation of the selected consumers.

26. 11. End Use Method:
Under this method, the sale of the product under consideration is
projected on the basis of the demand survey’s of the industries using this given product or
intermediate product.
Advantages:
1. This method is used to forecast the demand for intermediate products only.
2. It is quite useful for industries which largely produces goods like aluminium, steel, etc.
Disadvantages:
The main limitation of this method is that , as the number of end- users of a product
increases, it becomes more difficult to estimate demand under this method.
(B) Statistical Method
Under these methods, statistical or mathematical techniques
are used to forecast the demand for a product in the long period. The following are
the important statistical methods used in forecasting:
1. Trend Projection Method
2. Regression Method
3. Barometric Method
(1) Trend Projection Method
This method is also known as Time Series Analysis.
Time series refers to the data over a period of time. During this time period,
fluctuations and turning points may occur in demand conditions .These fluctuations in
demand occur due to the following four factors. They are:
 Secular Trends
 Seasonal Variations
 Cyclical Fluctuations
 Random Variations

28. Advantages :
1. Trend projection method is quite popular in business forecasting, because it is a simple
method.
2. The use this method requires only the simple working knowledge of statistics.
3. It is also less expensive , as its data requirements are limited to the internal records.
4. This method yields fairly reliable estimates if future course of demand.
Disadvantages:
• The most important limitation of this method arises out of its assumption that the past rate of
change in the dependent variable ( demand).
• This method is not useful for short run forecasting and cyclical fluctuations.

29. • This method does not explain the relationship between dependent and independent
variables.
(2)Regression Method
It combines the economic theory and statistical techniques of estimation.
(2) Barometric Method
This method is also known as Economic Indicators Method. Under this
method , a few economic indicators become the basis for forecasting the sales of a company.
Some of the most commonly used indicators are given below:
 Construction contracts
 Personal Income
 Automobile registration
Limitations
 It is difficult to find out an appropriate economic indicator
 It is not suitable for new products as past data not available
 It is best suited where relationship of demand with a particular indicator is characterized by
time-lag
Significance of Demand Forecasting
 Production planning
 Sales Forecasting
 Control of business
 Inventory control
 Growth and Long term Investment Programs
 Stability
 Economic planning and Policy making

30.  SUPPLY ANALYSIS
Meaning:
Supply of a commodity may be defined as the quantity of that commodity which the
sellers or producers are able and willing to offer for sale at a particular price during a certain
period of time.
For eg: At the price of Rs.10 per litre , diary farms’ daily supply of milk is 200 liters.
Distinction between stock & supply
Stock refers to total quantity of output kept in the warehouse which can be offered for sale
in the market by the seller.
On the other hand, the term supply refers to that part of the stock which is actually offered
for sale in the market at a price per unit of time.
Law of supply
“ Other things remaining the same, the supply of a commodity expands (rises) with a rise in its
price and contracts (falls) with a fall in its price.”
Thus supply varies directly with the price. In other words, the relationship between
supply & price is direct.

31. Assumptions underlining the Law of Supply:
1. Cost of Production is Unchanged

32. 2. No Change in techniques of Production
3. Fixed scale of Production
4. Government policies are unchanged
5. No change in Transport Cost
6. The prices of related goods are constant
INCREASE & DECREASE IN SUPPLY
The 2 terms are introduced to explain the
changes in Supply without any change in
price are:
1. Increase in Supply
2. Decrease in Supply

33. Determinants of supply
1.Price of the commodity
2. Price of the related goods

34. 3. Cost of production
4. Technology
5. Natural factors
6. Tax & subsidy
7. Development of transport & communication
8. Agreement among producers
9. Future Expectations

37. 1. Factors determining Elasticity of Price of Commodity
2. Cost of Production
3. Price of Other Products
4. Change in Technology

38. 5. Time Period
6. Objective of the Firm
7. Size of the Firm
8. Imposition of Taxes
9. Number of Producers
10. Agreement among Producers
11. Political Disturbances
12. Mobility of factors of Production
13. Availability of Markets
14. Nature of Commodities (perishable &
Durable goods)
15. Improvement in the means of Communication
16. Nature of production (paintings)