# Module 2 Demand Analysis (1).pptx

29 Nov 2022
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### Module 2 Demand Analysis (1).pptx

• 1. Theory of Demand and Supply [8 Sessions]: Demand-law of demand, demand curve, determinants of demand derivation of individual and market demand schedules, exceptions to Law of demand. Elasticity of demand (Applications) Price Elasticity, Income Elasticity & Cross Elasticity - Changes in Demand and Changes in Quantity Demanded. Supply-law of supply, supply curve and determinants of supply - Market Determination of Price and Quantity. Elasticity of supply (Applications), Equilibrium of demand and supply. Module 2: Theory of Demand and Supply 1
• 2. Introduction to Demand • Demand is a combination of three factors: 1. Desire to buy 2. Willingness to pay the price 3. Ability to pay the price • Absence of any one factor will not create demand • Law of Demand is called as First Law of Purchase
• 3. 3 The Law of Demand • The price of a good rises and everything else remains the same, the quantity of the good demanded will fall – The words, “everything else remains the same” are important • In the real world many variables change simultaneously • However, in order to understand the economy we must first understand each variable separately • Thus we assume that, “everything else remains the same,” in order to understand how demand reacts to price
• 4. Demand Meaning: Demand is an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease the quantity demanded, and vice versa. • Demand = Desire + Ability to pay + Willingness to spend Definition: Demand is an economic term that refers to the amount of products or services that consumers wish to purchase at any given price level. The mere desire of a consumer for a product is not demand. Demand includes the purchasing power of the consumer to acquire a given product at a given period. In other words, it’s the amount of products or services that consumers are willing and able to purchase. 4
• 5. The factors of demand for given products or services is related to: • The price of the good or service • The income level • The prices of complementary products • The prices of substitute products • Consumer preferences • Consumption patterns Example: Joy sells ice cream for Rs.8 per unit. At this price level, he sells about 65 ice creams per week, earning Rs.520. However, over the last two weeks, consumer demand for Joy ice cream has declined, so he decides to lower the price at Rs.6.5 per unit. Now, the demand for ice cream increases due to the new lower price and quantity demanded almost doubles. 5
• 6. • Price of the product • Price of the related goods • Consumer’s income level • Distribution pattern of national income • Consumer’s taste and preferences • Size of the population • Consumer’s expectation about future price and supply position • Consumer credit facility • Saving pattern of the consumer • Influence of advertisement • Climatic and weather conditions • Govt. taxation policy • Demonstration effect • Business cycle Demand determinants/Factors influencing Demand 6
• 7. The quantity demanded is always expressed at a given price. Different quantities of a commodity are demanded at different prices. Demand is a flow concept i.e., it is expressed as a quantity demanded per period of time. It is not a study of a single isolated purchase, but a continuous flow of purchases. It is a dynamic concept. Different quantities demanded by a single customer at different price is known as individual demand, collection or summation of all individual demand results in market demand for a good. Law of Demand Statement of Law : “ Other things being equal, the higher the price of a commodity, the smaller is the quantity demanded and lower the price, larger the quantity demanded”. “The amount demanded increases with a fall in price and diminishes with a rise in prices” Alfred Marshall Fall in price Rise in quantity demanded Rise in Price Fall in quantity demand (Inverse relationship) 7
• 8. 8 The Demand Schedule • Demand schedule – A list showing the quantity of a good that consumers would choose to purchase at different prices, with all other variables held constant -Or Shows how much of a given product a household would be willing to buy at different prices for a given time period. • Demand V.S. Quantities demanded - demand is the entire relationship between price and quantity represented in demand curve - quantities demanded are specific amount of goods buyers want to buy
• 9. 9 The Demand Curve • The market demand curve (or just demand curve) shows the relationship between the price of a good and the quantity demanded, holding constant all other variables that influence demand – Each point on the curve shows the total buyers would choose to buy at a specific price • Law of demand tells us that demand curves virtually always slope downward
• 10. Why does demand curve slope downward to right? • Law of diminishing marginal utility • Price effect • Income effect • Substitution effect
• 11. 11 “Shifts” vs. “Movements Along” The Demand Curve • Move along the demand curve – From a change in the price of the good we analyze • In Figure 1 – A fall in price would cause a movement to the right along the demand curve (point A to B) • See figure 1
• 12. 12 Figure 1: Movements Along and Shifts of The Demand Curve Quantity Price P2 Q2 Q1 Q3 P1 P3 Price increase moves us leftward along demand curve Price decrease moves us rightward along demand curve
• 13. 13 “Shifts” vs. “Movements Along” The Demand Curve • Shift of demand curve – a change in other things than price of the good causes a shift in the demand curve itself, for example, income • In Figure 2 – Demand curve has shifted to the right of the old curve (from Figure 1) as income has risen – A change in any variable that affects demand—except for the good’s price—causes the demand curve to shift
• 14. 14 Figure 2: A Shift of The Demand Curve B C Rs8 60,000 80,000 D1 D2 An increase in income shifts the demand curve for maple syrup from D1 to D2. Number of Bottles per Month Price per Bottle At each price, more bottles are demanded after the shift
• 15. 15 “Change in Quantity Demanded” vs. “Change in Demand” • Language is important when discussing demand – “Quantity demanded” means • A particular amount that buyers would choose to buy at a specific price • It is a number represented by a single point on a demand curve • When a change in the price of a good moves us along a demand curve, it is a change in quantity demand – The term demand means • The entire relationship between price and quantity demanded—and represented by the entire demand curve • When something other than price changes, causing the entire demand curve to shift, it is a change in demand
• 16. 16 Income: Factors That Shift The Demand Curve • An increase in income has effect of shifting demand for normal goods to the right – However, a rise in income shifts demand for inferior goods to the left • A rise in income will increase the demand for a normal good, and decrease the demand for an inferior good • Normal good and inferior good are defined by the relation between demand and income
• 17. The Impact of a Change in Income • Higher income decreases the demand for an inferior good • Higher income increases the demand for a normal good
• 18. 18 Wealth: Factors That Shift The Demand Curve • Your wealth—at any point in time—is the total value of everything you own minus the total dollar amount you owe - Example • An increase in wealth will – Increase demand (shift the curve rightward) for a normal good – Decrease demand (shift the curve leftward) for an inferior good
• 19. The Impact of a Change in the Price of Related Goods • Price of hamburger rises • Demand for complement good (ketchup) shifts left • Demand for substitute good (chicken) shifts right • Quantity of hamburger demanded falls
• 20. Number of buyers • An increase in the number of potential buyers will increase the demand for the good. • For example, the demand for land increases as the population increases. • Similarly movie/sports tickets are generally more expensive in larger cities. • Air tickets in peak season
• 21. Future Prices • An increase in the expected future price of a good increases current demand. • A decrease in the expected future price of a good decreases current demand. • For example, Onion Prices due to the fear of shortage. • Prices of financial assets
• 22. Tastes & Quality • Demand curves can shift due to changes in tastes over time. • For example, demand for Bajaj Chetak • Similarly, demand for Honda Activa • Quality: • Demand curves can shift due to changes quality.
• 23. 23 Summary- Factors Affecting Demand • Income (depends on good’s nature: normal or inferior) [positive and negative respectively] • Wealth (depends on good’s nature) [positive and negative respectively] • Prices of substitutes (positively related) • Prices of complements (negatively related) • Population (positively related) • Expected price (positively related) • Tastes (positively related)
• 24. 24 Figure 3(b): Movements Along and Shifts of The Demand Curve Quantity Price D2 D1 Entire demand curve shifts rightward when: • income or wealth ↑ • price of substitute ↑ • price of complement ↓ • population ↑ • expected price ↑ • tastes shift toward good
• 25. 25 Figure 3(c): Movements Along and Shifts of The Demand Curve Quantity Price D1 D2 Entire demand curve shifts leftward when: • income or wealth ↓ • price of substitute ↓ • price of complement ↑ • population ↓ • expected price ↓ • tastes shift away from the good
• 26. Demand schedule A tabular representation of the relationship between price and quantity demanded is known as the demand schedule. Demand schedule may be of two types: individual demand schedule and market demand schedule. Individual demand schedule It shows the quantity of the commodities that a consumer will buy at a selected price. Demand curve A graphical representation of the demand schedule is known as a demand curve. Price (Rs.) Quantity (Units) 5 10 4 15 3 20 2 25 1 30 26
• 27. Y O X D D 10 15 20 25 30 Quantity 5 4 3 2 1 Price Price (in Rs.) Quantity Demanded (in kgs) 10 6 20 4 30 2.5 45 1.5 60 1 O X Y 60 50 40 30 20 10 6 5 4 3 2 1 Quantity Demanded Price D D 27
• 28. Market demand schedule It is the summation of the quantity demanded by various individual households. Price Rs. Customer A Customer B Customer C Total Market demand 5 10 8 12 30 4 15 12 18 45 3 20 17 23 60 2 35 25 40 100 1 60 35 45 140 Market demand curve A graphical representation of the market demand schedule is known as the market demand curve. 28
• 29. Types of demand • Individual demand & Market demand • Demand for capital goods and demand for consumer goods • Autonomous demand & Derived demand - Direct & indirect demand • Demand for durable & non-durable goods - Replacement demand in case of durable goods • Short term demand & Long term demand 29
• 30. • Individual demand & Market demand: – ID refers to the quantity of a product which an individual consumer is wiling to buy at each price at given period of time. – MD refers to the total quantity of a product which all individual consumer are wiling to buy at each price at given period of time. • Demand for capital(producers) goods and demand for consumer goods: – Demand for PG or CG are those goods which can be used for the production of other goods(always derived) – Consumer goods are those goods which can be used for final consumption{output of the firm or industry} 30
• 31. • Autonomous demand & Derived demand(Direct & indirect demand) • Derived demand the demand for a product is directly related to the purchase of some parent product(demand for fuel) • Autonomous demand demand for a product is independent of the demand for other products (demand for food, soap, textiles) • Durable and nondurable goods demand: • Durable goods are those goods which are used more than once over a period of time. (expected price, consumers income, change in technology) • Nondurable goods are those goods which can be consumed only once.(current price, consumers income, tastes and preferences etc.) • Short term demand & Long term demand: • Short term demand -demand for a product which exists over a short period of time. • Long term demand -demand for a product which exists over a long period of time. 31
• 32. Movement from Point A to B (towards Y axis) is denoted as Contraction. Movement from point A to C (towards X axis) is denoted as Expansion. It is known as “Movement along the same demand curve” Expansion and contraction of Demand If demand for a particular commodity changes as a result of changes in its price alone, we denote it as expansion(increase) and contraction(decrease) of demand. Q” Q Q’ P” D Y X QUANTITY Price ` P P’ D O C B A Increase and Decrease in Demand: If demand changes due to other factors, it is denoted as increase and decrease in demand. 32
• 33. Increase in Demand: The demand curve shifts to the right hand side or shifts away from the origin. Price Y 5 10 20 O X Quantity D D D! D! Decrease in Demand: The demand curve shifts towards the origin or to the left hand side. D Quantity Y Price 5000 10 200 O X D! D D! Shift in the demand curve 33
• 34. Exceptions to the law of demand  Prestigious goods  Giffin goods: Future Expectation  Ignorance  Brand Loyalty  Small portion of money being spent  Emergencies or unavoidable circumstances 34
• 35. 35 Elasticity is a concept in economics that talks about the effect of change in one economic variable on the other. Elasticity of Demand, on the other hand, specifically measures the effect of change in an economic variable on the quantity demanded of a product. There are several factors that affect the quantity demanded for a product such as the income levels of people, price of the product, price of other products in the segment, and various others.
• 36. Definition of Elasticity of Demand Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity demanded of a product in response to a change in any of the market variables, like price, income etc. It measures the shift in demand when other economic factors change. In other words, the elasticity of demand is the percentage change in quantity demanded divided by the percentage change in another economic variable. “The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price”. Alfred Marshall, British Economist 36
• 37. Law of Demand: Qualitative Statement P Q P Q Elasticity of Demand = % Changes in Quantity Demanded % Changes in Price = Change in the quantity demanded Original Quantity Demanded (q) Price Original Price (P) 37 Formula for Elasticity of demand q q P P q q X P P P q X q P
• 38. •The formula used here for computing elasticity of demand is: (Q1 – Q2) / (Q1 + Q2) (P1 – P2) / (P1 + P2) • If the formula creates an absolute value greater than 1, the demand is elastic. In other words, quantity changes faster than price. • If the value is less than 1, demand is inelastic. In other words, quantity changes slower than price. • If the number is equal to 1, elasticity of demand is unitary. In other words, quantity changes at the same rate as price. •The demand for a commodity is affected by different economic variables:  Price of the commodity  Price of related commodities  Income level of consumers 38
• 39. Types of Elasticity of Demand On the basis of different factors affecting the quantity demanded for a product, elasticity of demand is categorized into mainly three categories: • Price elasticity of demand (PED) • Income elasticity of demand (YED) • Cross elasticity of demand (XED) 39
• 40. Price Elasticity of Demand (PED) Any change in the price of a commodity, whether it’s a decrease or increase, affects the quantity demanded for a product. For example, when there is a rise in the prices of ceiling fans, the quantity demanded goes down. This measure of responsiveness of quantity demanded when there is a change in price is termed as the Price Elasticity of Demand (PED). The mathematical formula given to calculate the Price Elasticity of Demand is: PED = % Change in Quantity Demanded / % Change in Price The result obtained from this formula determines the intensity of the effect of price change on the quantity demanded for a commodity. 40
• 41. 41 Price elastic – a change in price causes a bigger % change in demand. E.g., Kit Kat chocolate bar. If Kit Kats increase, people will switch to alternative types of a chocolate bar. We say a good is price elastic when an increase in prices causes a bigger % fall in demand. e.g. if price rises 20% and demand falls 50%, the PED = -2.5
• 42. Income Elasticity of Demand (YED) The income levels of consumers play an important role in the quantity demanded for a product. This can be understood by looking at the difference in goods sold in the rural markets versus the goods sold in metro cities. The Income Elasticity of Demand, also represented by YED, refers to the sensitivity of quantity demanded for a certain good to a change in real income (the income earned by an individual after accounting for inflation) of the consumers who buy this good, keeping all other things constant. The formula given to calculate the Income Elasticity of Demand is given as: YED = % Change in Quantity Demanded / % Change in Income The result obtained from this formula helps to determine whether a good is a necessity good or a luxury good. Examples of income elastic (luxury goods): High-end Cars, Organic food products etc. 42
• 43. Cross Elasticity of Demand (XED) In a market where there is an oligopoly, multiple players compete. Thus, the quantity demanded for a product does not only depend on itself but rather, there is an effect even when prices of other goods change. Cross Elasticity of Demand, also represented as XED, is an economic concept that measures the sensitiveness of quantity demanded of one good (X) when there is a change in the price of another good (Y), and that’s why it is also referred to as Cross-Price Elasticity of Demand. The formula given to calculate the Cross Elasticity of Demand is given as: XED = (% Change in Quantity Demanded for one good (X)) / (%Change in Price of another Good (Y)) E.g., Change in the petrol price leads to change in the demand for cars 43
• 44. The result obtained for a substitute good would always come out to be positive as whenever there is a rise in the price of a good, the demand for its substitute rises. Whereas, the result will be negative for a complementary good. These three types of Elasticity of Demand measure the sensitivity of quantity demanded to a change in the price of the good, income of consumers buying the good, and the price of another good. Apart from these three types, we have some other types of Elasticity of Demand which we would look at now. 44
• 45. Cross elasticity of demand CeD= Percentage change in the quantity demanded of Good B Percentage change in Price of Commodity A Quantity demanded of Bikes Complementaries X Y O Demand Curve P1 P Q Q1 Price of Petrol 45
• 46. Substitute X Y O Demand Curve P1 P Q Q1 Quantity Demanded of Tea Price of Coffee 46
• 47. 47 Degrees of Price Elasticity of Demand 1) Relatively Elastic demand (e >1) 2) Relatively inelastic demand (e<1) 3) Unitary elastic demand (e=1) 4) Perfectly inelastic demand (e=0) 5) Perfectly elastic demand (e is infinite)
• 48. Relatively Elastic Demand Relatively elastic demand refers to the demand when the proportionate change in the demand is greater than the proportionate change in the price of the good. The numerical value of relatively elastic demand ranges between one to infinity. In relatively elastic demand, if the price of a good increases by 25% then the demand for the product will necessarily fall by more than 25%. Unlike the above-mentioned types of demand, relatively elastic demand has a practical application as many goods respond in the same manner when there is a price change. Or Relatively Elastic: A slight change in price leads to more than proportionate change in quantity demanded. E >1. The demand curve of relatively elastic demand is gradually sloping. 48
• 49. 1. Relatively Elastic Demand Curve 49
• 50. Relatively Elastic Demand Example Problem An example of computing elasticity of demand using the formula is shown in Example 1. When the price decreases from \$10 per unit to \$8 per unit, the quantity sold increases from 30 units to 50 units. The elasticity coefficient is 2.25. 50
• 51. 2. Relatively Inelastic Demand In a relatively inelastic demand, the proportionate change in the quantity demanded for a product is always less than the proportionate change in the price. For example, if the price of a good goes down by 10%, the proportionate change in its demand will not go beyond 9.9..%, if it reaches 10% then it would be called unitary elastic demand. The numerical value of relatively inelastic demand always comes out as less than 1 and the demand curve is rapidly sloping for such type of demand. or Relatively Inelastic: A large change in price leads to smaller proportionate changes in quantity demanded. E < 1. 51
• 53. Relatively Inelastic Demand Example Problem An example of computing inelasticity of demand using the formula above is shown in Example 2. When the price decreases from \$12 to \$6 (50%), the quantity of demand increases from 40 to only 50 (25%). The elasticity coefficient is .33. 53
• 54. 3. Unitary Elastic Demand When the proportionate change in the quantity demanded for a product is equal to the proportionate change in the price of the commodity, it is said to be unitary elastic demand. If the elasticity coefficient is equal to one, demand is unitarily elastic. For example, a 10% quantity change divided by a 10% price change is one. This means that a 1% change in quantity occurs for every 1% change in price. or Unitary Elastic: Changes in quantity demanded will be equal to changes in price. E =1 54
• 56. 4. Perfectly Inelastic Demand A perfectly inelastic demand is the one in which there is no change measured against a price change. Like perfectly elastic demand, the concept of perfectly inelastic is also a theoretical concept and doesn’t find a practical application. However, the demand for necessity goods can be the closest example of perfectly inelastic demand. The numerical value obtained from the PED formula comes out as zero for a perfectly inelastic demand. or Perfectly Inelastic: Any changes in Price, leaves the demanded unaffected. E = 0 The demand curve for a perfectly inelastic demand is a vertical line i.e. the slope of the curve is zero. An example of perfectly inelastic demand would be a lifesaving drug that people will pay any price to obtain. Even if the price of the drug would increase dramatically, the quantity demanded would remain unchanged. 56
• 57. 57
• 58. 5. Perfectly Elastic Demand When there is a sharp rise or fall due to a change in the price of the commodity, it is said to be perfectly elastic demand. In perfectly elastic demand, even a small rise in price can result in a fall in demand of the good to zero, whereas a small decline in the price can increase the demand to infinity. However, perfectly elastic demand is a total theoretical concept and doesn’t find a real application, unless the market is perfectly competitive and the product is homogenous. Or Perfectly Elastic: for a small change in price, the quantity demanded changes infinitely. Examples of perfectly elastic products are luxury products such as jewels, gold etc. 58
• 59. Perfectly Elastic Demand Curve The degree of elasticity of demand helps to define the slope and shape of the demand curve. Therefore, we can determine the elasticity of demand by looking at the slope of the demand curve. A Flatter curve will represent a higher elastic demand. Thus, the slope of the demand curve for a perfectly elastic demand is horizontal. 59
• 60. Methods of measuring price elasticity of demand 1. Percentage method: The Percentage method is one of the widely used methods for calculating demand price elasticity, where price elasticity is calculated in terms of the rate of the percentage change in the quantity requested to the percentage change in price. The price elasticity of demand can, according to this approach, be mathematically expressed as - PED = % change in quantity demanded / % change in price, where % change in quantity demanded = new quantity (Q2) - initial quantity (Q1) / initial quantity (Q1) x 100 % change in price = new price ( P2) - initial price ( P1) / initial price ( P1) x 100 Therefore, PED = ΔQ / ΔP x P1/ Q1 60
• 61. 2. Total Outlay Method/Expenditure Method: Professor Alfred Marshall developed the total outlay method, also known as the overall cost method of calculating price demand elasticity. The price elasticity of demand can, according to this approach, be calculated by comparing the total expenditure on the commodity before and after the price adjustment. 3. Arc Elasticity of Demand: Arc elasticity of demand measures elasticity between two points on a curve – using a mid-point between the two curves. On most curves, the elasticity of a curve varies depending on where you are. Therefore elasticity needs to measure a certain sector of the curve. Arc elasticity is also defined as the elasticity between two points on a curve. The concept is used in both mathematics and economics. 61
• 62. 4. Point Method: The point method of measuring price elasticity of demand was also devised by prof. Alfred Marshall. This method is used to measure the price elasticity of demand at any given point in the curve. According to this method, elasticity of demand will be different on each point of a demand curve. Thus, this method is applied when there is small change in price and quantity demanded of the commodity. 62
• 63. Determinants of price elasticity of demand: •Availability of substitutes: If goods have many close substitutes, then they have elastic demand and if a good has fewer substitutes, it has inelastic demand. •Position in consumers budget: Goods which occupy a higher proportion of consumers' budget or goods on which the consumers spend a major portion (like clothing, milk, provisions etc.) of their budget have more elastic demand compared to those goods on which the consumers spend only a small portion of their income (like salt, sugar etc.) •Nature of commodity: Luxurious goods like car, and TV are more elastic to changes in price while necessities of life like food, housing etc. are inelastic. •Number of uses of the commodity: Goods which can be put to many uses are more elastic, while those goods which don't have alternative uses are less elastic. •Time period: If consumption of a commodity could be postponed is said to have more elastic demand. On the other hand, goods for which consumers have lesser time period for consumption have less elastic demand. •Consumer habits: Goods which are not habitually used by the consumer have more elastic demand than those that are habitually used by the consumer. •Tied demand: Goods which are jointly demanded have less elastic demand. Goods which have independent demand have more elastic demand. 63
• 64. •Durability: the durability of the goods also one of the important determinant of price elasticity. Consumers will buy more durable goods assuming the price of these goods may go up in the future which will increases the demand for the goods. Demand forecasting Forecast is a prediction about a future event which is most likely to happen under given conditions. The forecasting function is an integral part of business activity and of human behavior. Demand forecasting is an estimate of the most likely or expected future demand for a product related to a particular period of time. Some of its features are as follows: •Demand forecasting is a guess work, but it is an educated and well thought-out guess work. •It covers a particular period of time •It is undertaken in an uncertain atmosphere. •It is based on historical information and data about the past demand •Since it deals with the expected future demand, it cannot be 100% precise •It tells us only the approximate demand for a product in the future. •It is based on certain assumptions, which may remain constant or change over a period of time. 64
• 65. Techniques of Demand Forecasting Survey Method Statistical Method Consumer Survey Method Expert Opinion Method  Economic Indicators  Trend Projection Method  Survey of buyers intentions  Delphi Method  End-use Method  Sample Survey Method  Direct Interview Method  Collective Opinion Method A cement factory reports the following sales of cement as shown against various years. Estimate the sales of cement for the next 2 years (i.e., for 2020 and 2021) with the help of least square method. 65
• 66. Survey Method: A survey is a research method used for collecting data from a predefined group of respondents to gain information and insights into various topics of interest. The process involves asking people for information through a questionnaire, which can be either online or offline. 1. Consumer Survey Method: Consumer Survey is a source to obtain information about consumer satisfaction levels with existing products and their opinions and expectations regarding new products and services. • Survey of buyers intentions: an investigation designed to discover buyers' future plans in respect of purchasing a particular good or service. Such a survey is undertaken to enable a firm to produce more realistic forecasts of the anticipated future demand for their product. See sales forecasting. • Sample Survey Method: A sample survey is a survey which is carried out using a sampling method, i.e. in which a portion only, and not the whole population is surveyed. 66
• 67. • Direct Interview Method: A face to face contact is made with the informants (persons from whom the information is to be obtained) under this method of collecting data. The interviewer asks them questions pertaining to the survey and collects the desired information. • Collective Opinion Method: for predicting future sales, individual estimates are calculated. Then based on several factors like product designs, selling price, ad campaigns, etc., these demands are reviewed. The main principle in this method is that salesman are the closest to the customers. 2. Expert Opinion Method: In this method of demand forecasting, the firm makes an effort to obtain the opinion of experts who have long standing experience in the field of enquiry related to the product under consideration. Based on the responses of other individuals, each expert is then asked to make a revised forecast. • Delphi method : The Delphi method is a process used to arrive at a group opinion or decision by surveying a panel of experts. The experts can adjust their answers each round, based on how they interpret the "group response" provided to them. The ultimate result is meant to be a true consensus of what the group thinks. 67
• 68. • End-use Method: Simply, the method used to know the buyer's likely consumption of the product, his future buying plans and likely the market share of the company is called as end use method. Statistical Method: Statistical methods are mathematical formulas, models, and techniques that are used in statistical analysis of raw research data. The application of statistical methods extracts information from research data and provides different ways to assess the strength of research outputs. • Economic Indicator: An economic indicator is a macroeconomic measurement used by analysts to understand current and future economic activity and opportunity. The most widely-used economic indicators come from data released by the government and non-profit organizations or universities. • Trend Projection Method: The Trend Projection Method is the most classical method of business forecasting, which is concerned with the movement of variables through time. Under this method, it is assumed that future sales will assume the same trend as followed by the past sales records. 68
• 69. Supply Supply: Quantity of a commodity, which a seller offers for sale, in the market, at a particular price and at a particular time”. Supply is a flow concept. The concept of supply should be studied from the manufacturer point of view. Factors influencing supply: (a) Price of the commodity (b)Prices of the related goods (c) Technology (d) Government policy (e) Goals / Objectives of the firm (f) Prices of Factors of Production (inputs) 69
• 70. Factors influencing supply a) Price of the commodity: The most important factor determining the supply of a commodity is its price. As a general rule, price of a commodity and its supply are directly related. It means, as price increases, the quantity supplied of the given commodity also rises and vice-versa. It happens because at higher prices, there are greater chances of making profit. It induces the firm to offer more for sale in the market. Supply (S) is a function of price (P) and can be expressed as: S = f (P). The direct relationship between price and supply, known as ‘Law of Supply’. The following determinants are termed as ‘other factors’ or factors other than price’. 70
• 71. b) Prices of the related goods: As resources have alternative uses, the quantity supplied of a commodity depends not only on its price, but also on the prices of other commodities. Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods. For example, increase in the price of other good (say, wheat) will induce the farmer to use land for cultivation of wheat in place of the given commodity (say, rice). c) Technology: Technological changes influence the supply of a commodity. Advanced and improved technology reduces the cost of production, which raises the profit margin. It induces the seller to increase the supply. However, technological degradation or complex and out-dated technology will increase the cost of production and it will lead to decrease in supply. 71
• 72. d) Government policy: Increase in taxes raises the cost of production and, thus, reduces the supply, due to lower profit margin. On the other hand, tax concessions and subsidies increase the supply as they make it more profitable for the firms to supply goods. e) Goals / Objectives of the firm: Generally, supply of a commodity increases only at higher prices as it fulfills the objective of profit maximization. However, with change in trend, some firms are willing to supply more even at those prices, which do not maximize their profits. The objective of such firms is to capture extensive markets and to enhance their status and prestige. f) Prices of Factors of Production (inputs): When the amount payable to factors of production and cost of inputs increases, the cost of production also increases. This decreases the profitability. As a result, seller reduces the supply of the commodity. On the other hand, decrease in prices of factors of production or inputs, increases the supply due to fall in cost of production and subsequent rise in profit margin. 72
• 73. Law of Supply The law of supply explains the functional relationship between price of a commodity and its quantity supplied. Other things being equal, the quantity of a good produced and offered for sale will increases as the price of the good rises and decrease as the price falls. This shows that there is a direct relationship between price and quantity supplied. P S , P S Functional relationship between quantity supplied and factors affecting the supply – Supply function. S = f (p). A tabular representation of the relationship between price and quantity supplied is known as the supply schedule. Graphical representation of supply schedule is known as Supply Curve. 73
• 74. Price of X(Rs.) Quantity supplied of X (Units) 10 200 20 400 30 600 40 800 50 1000 Price Quantity SS X O Y 200 400 600 800 10 20 30 40 S S By adding up the quantity supplied at various prices by all the sellers in the market, we can get the market supply schedule. Market supply curve is the lateral summation of the individual supply curves of all the suppliers in the market. Expansion or contraction in quantity supplied (movement along the supply curve) S S Q Q1 Q2 O X P1 P P2 Price Quantity SS Y Supply of a good changes only because of changes in its price
• 75. Increase and decrease in supply Price O X Quantity Y S S S1 S1 O X Price Quantity Y S S Changes due to other factors. S1 S1 Elasticity of supply is the degree of responsiveness of the quantity supplied of a good to a change in its price on the part of the sellers. It is also the ratio of percentage change in quantity supplied to percentage change in price.
• 76. Equilibrium of demand and supply In context of demand and supply, equilibrium is a situation in which quantity demanded equals quantity supplied and there is no incentive to buyers and sellers to change from this situation. The market clears itself and becomes stable (that is, at the market equilibrium, every consumer who wishes to purchase the product at the market price is able to do so, and the supplier is not left with any unwanted inventory). Equilibrium price is the price at which the demand is equal to supply. The demand for a product and the supply of a product are two sides of the market, and it is necessary to bring these together to establish equilibrium in the market which is the point where both the sides of the market are satisfied simultaneously. 76
• 77. This can be better understood with the help of the following illustration. Let us take demand and supply schedule for good X and analyze equilibrium position. Equilibrium price is Rs.40 and equilibrium quantity is 9000 units. Demand and Supply Schedule for Commodity or Good X 77
• 78. Demand and Supply Curves • Where X axis is quantity and Y axis shows prices. • In the figure the market equilibrium is established based on the data from Table. • The equilibrium is the state when Demand equals Supply which is at point E. 78