Demand

• Demand is consumer's desire to purchase goods or services and willingness to

pay a price for a good or service
• i.e desire is backed by purchasing power or ability to pay and willingness
to pay
• Demand can be either market demand for a specific good or aggregate demand
for the total of all goods in an economy
Determinants of Demand
• Factors that influence the decision of consumers to purchase a product or service
1. Price of Commodity
• The price of a commodity or service is inversely proportional to the quantity
demanded while other factors are constant
• As per the law of demand, it implies that when the price of the commodity or
service rises, its demand falls and vice versa
2. Price of Related Goods
• The demand is not only depending on its own price but also on the price of
related goods
• Two items are said to be related to each other if the change in price of one item
affects the demand for the other item
• Substitute or competitive goods:
• Goods used interchangeably as they serve the same purpose so they are
the competitors of each other
• Tea and coffee
• Complementary goods:
• Complementary goods are used jointly
• Car and petrol
3. Income of Consumers
• The level of income determines their purchasing power
• Income and demand are directly proportional to each other
• This implies that rise in the consumers’ income results in rise in the demand for
a commodity
• Normal goods
 Demand rises with an increase in the level of income of consumers
  Demand for clothes rises with an increase in individuals’ income
• Inferior goods
 Demand falls with an increase in consumers’ income
4. Tastes and preferences of consumers
• Demand for commodity changes with changes in the tastes and preferences of
consumers
• Customs
• Traditions
• Beliefs
• Lifestyles
5. Consumers Expectations
• Demand also depends on the consumers’ expectations regarding the future price
of a commodity
• Such expectations usually cause rise in demand for a product
• Ex- if a consumer expects a rise in the price of a commodity in the future,
he may purchase larger quantities of the commodity in order to stock it
6. Size and composition of the population
• Population size refers to the actual number of individuals in a population
• An increase in the size of a population increases the demand for commodities as
the number of consumers would increase
• Ex- A population with youngsters will have higher demand for commodities like
t-shirts, jeans, bikes
7. Government Policy
• Fiscal policy and monetary policy such as taxation levels, budgets, money supply,
and interest rates
• Government policies have direct impact on the demand for various commodities
• High taxes on commodities, their prices would increase, which would lead to a
fall in their demand
Demand Function
• Demand function shows the functional relationship between Quantity demanded
for a commodity and its various determinants
• Dx= f (Px, Pr, M, T, A, U)
 Px- price of product x
  Pr- price of related product
 M- money income of consumer
 T- taste of the consumer
 A- advertisement effect
 U- unknown variables
Law of Demand (First fundamental law of economics)
• Law of demand explains the relationship between change in quantity demanded
and change in price
• It states higher the price, lower would be the demand
• Lower the price, higher would be the demand
• Law of demand says that the price and the quantity demanded are inversely
proportional, if all other things remain the same
Assumptions of Law of Demand
• Income level of consumer should remain constant
• Tastes of buyers should not change
• No change in price of related products
• There should be no new substitutes
• No expectation of price changes of commodity in near future
Demand Schedule, Demand Curve
• If we list the different quantities of a commodity demanded at different prices in
the form of row and column, the resulting format is demand schedule
• Establishes a functional relationship between independent price and depended
demand
• Demand curve is a graphical representation of demand schedule
• The demand curve will move downward from the left to the right, which
expresses the law of demand
Exceptions to the law of demand
• Law of demand is valid in most cases, however there are certain cases where this
law does not hold good
1. Conspicuous good (Prestigious good)
• The law of demand does not apply to the status symbol commodities
• Ex- Diamond, precious metals
 • Rich people buy such goods mainly because their prices are high and they
buy more when its prices move up (Veblen effect)
2. Giffen Goods (Sir Robert Giffen)
• When the price of bread increased, British workers purchased more bread
not less of it
• The reason is that when the price of bread went up, it caused large decline
in the PP of the poor people
• They cut down other expensive foods such as meat and other substitutes
3. Future expectations about price
• Consumers expect an increase in prices in future, they buy more of that
commodity despite the increase in its price
4. Ignorance Effect
• Consumers ignorance about price or sometimes they think like high price
commodity is better in the quality
• Thus, with the increase in price, demand increases
Expansion and Contraction in Demand Curve
• Demand Expansion
• When prices fall, demand increases
• Demand Contraction
• When prices increase, demand decreases

1200

Contraction
1000 1000

800 800
Expan-
600 600 sion

400
300
200

0
5 10 15 20 25 30 35
Shift in Demand Curve
• Shift in demand curve occurs when the change in demand is not because of price
but because of other determinants
• Eg- change in taste, population, income, future expectations
• In such cases demand curve shift towards right or left

Elasticity of Demand
• Percentage change in quantity demanded divided by the percentage in one of the
variables on which demand depends
• Elasticity of Demand refers to the relative responsiveness of demand curve in
relation to price
 The more elastic, the more quantity will change with change in price
 The more inelastic, harder it will be to change quantity consumed, even
with a large change in price
Types of Elasticity of Demand
Price Elasticity of Demand
• Price elasticity of demand is the responsiveness of demand for a commodity to
its change in price
• It is the percentage change in demand as a result of one per cent change in price
• Ep=Percentage change in quantity/percentage change in price
• Ep=ΔQ/Q÷ΔP/P
• Ep= ΔQ/Q x P/ΔP
• Ep= ΔQ.P/ΔP.Q
Degree of Elasticity
1. Perfectly Elastic Demand (Ep=∞)
• When there is a minor change in price leads to an infinite change in quantity
demanded
 • Extreme case of elasticity
• Rarely found in practice

2. Perfectly Inelastic Demand (Ep=0)

• If the demand for a commodity does not change in spite of an increase or
decrease in its price
• Extreme case of inelasticity
• Ex- Medicines

3. Unitary Elastic Demand (Ep=1)

• When the change in demand is exactly proportionate to the change in price
• When the price is ₹10 and quantity demanded is 100 (Total outlay=1000)
• If the price increases to ₹20 the quantity demanded declines to 50 units (Total
outlay=1000)

Revenue
P Q
(PxQ)

₹20 50 ₹1000

₹10 100 ₹1000

₹5 200 ₹1000
4. Relatively Elastic Demand (Ep>1)
• Elastic demand is when the percentage change in quantity demanded is greater
than the percentage change in price
• Price elasticity is greater than one
• Change in quantity demanded is relatively faster than change in price

5. Relatively Inelastic Demand (Ep<1)

• Percentage change in price produces relatively less percentage change in demand
• Price elasticity is less than one
• Change in quantity demanded is relatively slower than change in price
• Ex- Petrol
Q. Find out price elasticity of demand

• Q=100
• P=40
• Q1=96
• P1=42
• Ep= ΔQ.P/ΔP.Q
• ΔQ=Q1-Q= 96-100 = -4 = 4
• ΔP = P1-P= 42-40 = 2
• Ep= ΔQ.P/ΔP.Q
• Ep= 4x40/2x100
• Ep= 0.8
• Conclusion:
• Price elasticity of the commodity is less than 1
• Ep<1
• Relatively Inelastic Demand
Measuring Price Elasticity of Demand
1. Proportionate Method
2. Total Outlay Method
3. Arc Method
1. Proportionate Method (Marshall)
• Ratio of percentage change in the amount demanded and percentage change in
price of the commodity
Percentage change in quantity
• Ep =
Percentage change in price
Δ Q.P
• Ep =
Δ P.Q
• If Ep > 1 then demand is Elastic
 • If Ep < 1 then demand is Inelastic
• If Ep= 1 then demand is Unitary
2. Total Outlay Method/Total Expenditure method (Marshall)
• Price elasticity of demand is measured on the basis of change in total outlay or
total expenditure in response to change in price
• Total Outlay = Price X Quantity
• According to Marshall, three types of elasticity based on Total Outlay Method
• Unitary Elasticity- Changes in price, total outlay unaffected
• Elastic demand- If small reduction in price, total outlay increases
• Inelastic demand- if small reduction in prices leads to fall in total outlay

3. Arc Method
• Elasticity between two points on the demand curve is known as Arc elasticity
• In order to find elasticity between the points X and Y
(Q2-Q1) (P1-P2)
• Ep = ÷
(Q2+Q1) (P1+P2)

Point P Q
 X 8 10

Y 4 30

( 30 - 10 ) ( 8 - 4 )
• Ep = ÷ =1.5
(30+10) (8+4)
Income Elasticity of Demand
• Apart from the price, income is also a determinant of demand
• The degree of responsiveness of quantity demanded of commodity to a change in
consumer’s income keeping other factors constant
• Relationship between demand and income is positive in nature
Percentage change in quantity demanded
• Income Elasticity =
Percentage change in income
• Zero income Elasticity
• Change in income does not make any change in quantity demanded
• Ex- Salt
• Negative Income Elasticity
• Increase in consumer’s income leads to a reduction in quantity demanded
• Ex- Inferior goods
• Positive Income Elasticity
• When income increases, quantity demanded of a commodity increases
• Ex- Luxury good
Cross Elasticity of Demand
• Degree of responsiveness of quantity demanded to a change in price of another
good
% change in quantity demanded of good A
• Ec =
% change in price of good B
• Ec of demand is positive for substitute goods (Fish and Meat)
• Ec of demand is negative for complementary goods (Petrol and Petrol cars)
Importance of Elasticity
• Pricing decision and marketing strategies
• Effect of price change on change in revenue
• If demand is elastic, then increase in price would result in a decline in revenues
 • If demand is inelastic, then reduction in price would result in a decline in total
revenues
• If demand is inelastic, increase in price leads to increase in total revenue
• Helpful in demand forecasting
Demand Forecasting
• Forecast is an estimation of prediction of future
• Demand forecasting (a field of predictive analytics) is the process of predicting
demand for a product
• Qualitative and Quantitative methods
1. Qualitative - expert opinion and information gathered from the field
2. Quantitative- data from historical sales data and statistical techniques
Criteria of a good Forecasting
1. Simplicity: Avoid complex and difficult statistical methods
2. Cost and benefits trade off: Costs do not exceed the benefits and should be
Economically effective
3. Durability: Usable for longer time period
4. Accuracy: Near to actual market demand
Ex- difference between increase in sales and increase in 20% sales
5. Flexibility: Adaptable to any kind of changes
6. Availability of data: Adequate and up-to-date data available
Objectives & Significance
• To make decision under uncertainty
• Avoid over production and under production
• To develop pricing policy
• To set sales target
• Expansion
• Manpower planning
• Essential for planning, scheduling production, purchase of raw material
Techniques of Demand Forecasting
I. Opinion Polling Method
 • Opinion polls are designed to represent the opinions of a population by
conducting a series of questions and then extrapolating generalities
• Use opinions of those who possess knowledge of the market, such as
professional marketing experts and consultants, sales force
1. Consumers’ Survey Method
2. Sales Force Opinion Method
3. Delphi Method
1. Consumers’ Survey Method
• Involves direct interview of the potential consumers
• Consumers are simply contacted by the interviewer and asked how much
they would be willing to purchase of a given product
Complete Enumeration Survey/Census
• All potential users of the product are contacted and enquired about future
plan of purchasing the product
• Quantities indicated by all the consumers are added to obtain the
probable demand for the product
• This can be done where consumers are concentrated on one region
• Costly in terms of money and time
• Not a reliable method
Sample Survey and Test Marketing
• Potential consumers are selected from the relevant market using sampling
• Either by personal interview or mailing questionnaire to consumers
• On the basis of information obtained, the probable demand is estimated
• Simple, less expensive, fairly reliable estimate
End Use
 List of several users of the product under forecasting is prepared first,
who are then asked about their individual purchasing patterns
 Suitable for Industrial Products such as raw materials or intermediary
products because unlike consumer goods these are limited
2. Sales Force Opinion Method
 Sales representatives are in close touch with the consumers
 They know future purchase plans of consumers, reaction and response
  Requests feedback directly from sales representatives, asking them to
estimate future sales and predict future demand
3. Delphi Method
 An extension of the simple expert opinion poll method
 A process used to arrive at a group opinion or decision by surveying a
panel of experts
 Experts respond to several rounds of questionnaires and the responses
are aggregated and shared with the group after each round
 Final forecast is done based on consensus of the experts
II. Statistical Method
 Use of historical data and cross section data
 Scientific, establish relationship between dependent and independent
variables
 Free from bias and subjectivity, reliable and inexpensive
i. Trend Projection Method
ii. Barometric Method
iii. Regression Method
iv. Econometric Method
1. Trend Projection Method
 Determine the trend of consumption by analysing the past consumption
statistics and projecting future trend by extrapolating the trend
 Future is predicted based on the assumption that variables in the past
trends will continue to do so in the future in the same manner as they did
in past
Graphical
 Graph of time-series of demand over a period of time
 Time is on X-axis and demand on Y-axis
 Plot the values of demand for a period of years
 Line drawn to join the plots, which indicate the trend in demand
2. Barometric Method
 Follows the method meteorologists use in weather forecasting
 Forecast weather condition based on the movement of mercury in the
barometer
  In this approach, construct index of relevant economic indicators and
forecast future trends on the basis of movements in the index of economic
indicators
3. Regression Method
 Statistical tool of establishing an unknown value from the known value of
the independent variable
4. Econometric Method
 Combination of economic theories and statistical tool to estimate
economic variables
 More reliable forecast
Least Square & Regression Equation
• Sales data of ABC Co are given below. Find the trend values using LSM and
estimate the sales in 2024 and 2025.

Sales
45
40
35
30
25
20
15
10
5
0
2018.5 2019 2019.5 2020 2020.5 2021 2021.5 2022 2022.5 2023 2023.5
• Regression Equation: Yc = a+b.X

• a=
∑Y =
155
= 31
N 5

• b=
∑ ( XY ) = 40 = 4
∑ X 2 10
Supply
• Total amount of a specific good or service that is available to consumers
• Supply is what the seller is able and willing to offer for sale
• Willingness to supply depends on the difference between seller’s reserve price
and market price
• MP > RP, then more quantity will be offered
• MP < RP, then seller refuses to sell
• Reserve Price is the lowest price at which a seller is willing to sell
Determinants of Supply
• Price of the good
  When the price of the good is high, the suppliers are willing to sell more
• Price of related goods
 Price of complementary goods- supply also increase
 Price of the substitutes increases their supply also increases (Rice and
wheat)
 This results in a decrease in the supply of goods
• Factors of production
 When the price of inputs is low, the cost of production is also low
 Supply increases
• Firm Goals
 Aggressive policy
 Profit maximization
• State of Technology
 Sophisticated technology reduces cost of production
 Supply increases
• Government Policy
 Tax, policy, business environment
• Expectations
 Future prices increase expectation- Hoarding
 This will result in a decrease in the supply of goods
• Number of Firms
 Higher the number of firms , increase in supply of goods
Law of Supply
• All other factors being constant, as the price of a good or service increases, the
quantity that suppliers offer will increase and vice versa
• This is because higher the price of the good, the greater the profits and supply
increases
• The law of supply says that as the price of an item goes up, suppliers will attempt
to maximize their profits by increasing the number of items for sale
• Positive relationship between supply and price
• Supply curve is an upward sloping curve towards right
Supply Curve

Expansion and Contraction of Supply Curve

• Expansion of Supply
 Law states change in prices leads to change in supply
 When prices increase, supply increases
• Contraction of Supply
 When prices decrease, supply decreases
• This is because there is a direct relation between price and supply

Shift in Supply Curve

• Shift in supply curve occurs when the change in supply is not because of price
but because of other determinants
• Eg- Use of sophisticated technology
• In such cases supply curve shift towards right or left
• This is known as Shift in supply Curve
Elasticity of Supply
• Elasticity of supply refers to the relative responsiveness of supply curve in
relation to price
• It is the percentage change in supply as a result of one percent change in price
Percentage change ∈quantity supplied
Es =
Percentage change∈ price
Degree of Elasticity
1. Perfectly Elastic Supply (Es=∞)
• When there is a minor change in price leads to an infinite change in quantity
supplied
• Extreme case of elasticity

2. Perfectly Inelastic Supply (Es=0)

• If the quantity supplied for a commodity does not change in spite of an increase
or decrease in its price
3. Unitary Elastic Supply (Es=1)
• Percentage change in quantity supplied is equal to the percentage change in price
• Price elasticity of a supply is equal to one

4. Relatively Elastic Supply (Es>1)

• When the percentage change in quantity supplied is greater than the percentage
change in price

5. Relatively Inelastic Supply (Es<1)

• Percentage change in price produces relatively less percentage change in supply
• Elasticity is less than one