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

52. Relatively Inelastic Demand Curve
52

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

55. Unitary Elastic Demand Curve
55

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

79. Thank you
79