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Me 3

  1. 1. DEMAND ANALYSISMeaning of DemandDemand implies 3 conditions :  Desire for a commodity or service  Ability to pay the price of it  Willingness to pay the price of it. Further demand has no meaning without reference to time period such as a week, a month ora year. The demand for a product can be defined as the “Number of units of an commodity thatconsumer will purchase at a given price during a specified period of time in the market.”Types of Demand Demand can be broadly classified into 3 types : They are,  Price Demand  Income Demand  Cross DemandLaw of Demand The law of demand expresses therelationship between the price & quantitydemanded .It says that demand varies inverselywith price.The Law can be stated in the following:“ Other things being equal, a fall in the price leads to expansion in demand and a rise in price leads tocontraction in demand.”Assumptions- Law Of Demand  Consumers Income remains Constant
  2. 2.  The Tastes & Preferences Of the Consumers remain the same  Prices of other related Commodities remain Constant  No new Substitutes are available for the Commodity.  Consumers do not expect further change in the price of the commodity.  The Commodity is not of Prestigious valueEg: Diamond  The size of population is constant  The rate of taxes remain the same  Climate & Weather Conditions do not change.DEMAND SCHEDULE  Individual Demand Schedule  Market Demand schedule1. Individual Demand Schedule: It is a list of various quantities of a commodity which an individual consumer purchases atdifferent prices at one instant of time. D= f (P) (or) D(x) = f(Px)
  3. 3. 2. Market Demand Schedule The market demand Schedule canbe obtained by adding all the individualDemand Schedules of Consumers in the market.Hypothetical market demand schedule is as follows:Hypothetical market demand schedule
  4. 4.  Giffen’s Paradox (Robert Giffen-Irish Economist) Veblen’s Effect (Thorstein Veblen – USA ) Price Illusion Fear of Future Rise in Prices Emergency Necessaries Conspicious Necessaries (More Noticeable)
  5. 5. Eg:- TV, Watch, Scooters, Car etc  Fear of Shortage  Ignorance  Speculation (Stock Market)Why does the demand curve slope downwards to right ORWhy does demand curve has a negativeslope?  Operation of the Law of Diminishing Marginal Utility  Income Effect  Substitution Effect  Different Uses  New BuyersCHANGES IN DEMANDA. Extension & contraction of demand: When demand changes due to change in the price of the commodity, it is a case of eitherextension or contraction of demand. The Law of demand relates to the Extension & Contraction ofDemand.
  6. 6. 2. Increase and decrease in demand: When demand changes, not due tochanges in the price of the commodity orservice but due to other factors on whichdemand depends.Eg:- Income, Population, Climate, Tastes & Habits etc.
  7. 7. 1. DETERMINANTS OF DEMAND Change in population 2. Change in climatic conditions 3. Change in Fashions 4. Change in tastes & Habits 5. Change in Quantity of money in circulation 6. Change in Distribution of income & wealth 7. 7. Availability of Substitutes 8. 8. Advertisements & Salesmanship 9. 9. Complementary Goods 10. 10. Technical ProgressDEMAND DISTINCTIONS “Demand distinctions may be defined as the difference in the forces acting on the demand fordifferent goods.”  Demand for Producer goods and Consumer Goods  Demand for Durable goods and Non-Durable Goods.
  8. 8.  Derived Demand and Autonomous Demand.  Industry Demand and Company Demand  Short run Demand And Longrun demand  Total Market demand & Market Segment DemandDETERMINANTS OF DEMAND (OR) FACTORS AFFECTING DEMAND (Refer: Lekhi&Agarwal- Business Economics)  Price of Commodity  Price of Related Goods  Income of the Consumer  Distribution of Wealth  Tastes & Habits  Population growth  State of Business (Business Cycle)  Government Policy  Advertisement  Level of TaxationFactors determining demand for different types of goods.  Three main types of goods:-1.Non durable consumer goods.2.Durable consumer goods.3.Producer goods or capital goods.1.Non durable consumer goods:- a) Purchasing powerb) Price
  9. 9. c) DemographyThus, demand for non durables can be expressed in the form of following formula: d= f( Y,P,D)Where ,d=demand,Y=disposable personal income ,P=price ,D=demography and f is the function.2.Durable consumer goods. Demand of such goods is two types a) Replacement demand- demand for a new product in place of an old one which is worn out orobsolete. b) Expansion demand-demand for additional units of the same product.Factors influencing expansion in demand.  Financial position of consumers.  Maintenance and operating costs.  Number of households.  Price and credit conditions.3.Producers’ goodsAlso called capital goods.Factors determining the demand for capital goods.  No. of industrial undertakings.  Profitability.  Ratio of production to capacity utilization.  Level of wage rates.  Growth prospects.  Price and quality of the produce.
  10. 10. ELASTICITY OF DEMANDElasticity of Demand  Elasticity of demand measures the responsiveness of demand for a commodity to a change in the variables confined to its demand.  For measuring the elasticity coefficient, a ratio is made of two variables, %change in quantity demanded % change in determinants of demandImportant Kinds of Elasticity of Demand 1. Price ED:e = % change in quantity demanded % change in price 2. Income ED:e = % change inquantity demanded % change in income3.Cross ED:e = % change in quantity demanded of X % change in price of Y 4. Advertising / Promotional ED: % change in sales % change in advertisement expenditureTypes of Income Elasticity of Demand 1. Negative Income Elasticity 2. Zero Income Elasticity 3. Income Elasticity Less Than One
  11. 11. 4. Unitary or Income Elasticity Of Demand is equal to 1. 5. Income Elasticity Greater Than OneFactors Influencing Elasticity of Demand orDeterminants of Price Elasticity of Demand 1. Nature of Commodity:  Necessaries --- inelastic  Comforts and Luxuries --- elastic 2. Availability of Substitute:  A commodity which has more substitutes the demand is ------ more elastic. Ex: Tea , Coffee, Milk ,Bournvitaetc, 3. No of users of a commodity:  More no of users ---elastic Ex: Electricity, Iron and Steel etc.  Only one use --- inelastic Ex: Printing machine , stitching machine
  12. 12. 4. Proportion of Income Spent on the Goods: Small proportion of income --- inelastic Ex: Salt, Match box, Postcard5. Habit: Ex: Coffee ,Tea --- inelastic6. Level of Income of the People: Rich People --- inelastic Poor People --- elastic7. Period of time: Short period --- inelastic Habit and prices of commodities do not change much. Long period --- elastic8. Durability of a commodity: Durable goods --- elastic Ex: fan, table, Chair Perishable goods --- inelastic Ex: Milk, flower9. Postponement of Purchase: Postponement --- elastic Ex: Fan, TV, Fridge Cannot be postponed --- inelastic Ex: Medicine, Rice, Wheat10. Level of Prices: High priced --- elastic Ex: Cars, TV , Air conditioners
  13. 13.  Low priced --- inelastic Ex: Newspaper, Nails, Needle MEASUREMENT OF PRICE ELASTICITY OF DEMAND Practical Application Uses Of Price Elasticity of Demand In Decision Making Ref: Jhingan & Stephen Pg: 81 D.M.MithaniPg: 157 1. To the businessmen 2. To the trade unions 3. In international trade 4. To the government5. Helpful in Adopting the Policy of Protection 6. In the declaring certain industries as public utilities Different Degrees of Price Elasticity of Demand 1. Perfectly Elastic Demand 2. Perfectly Inelastic Demand 3. Relatively Elastic demand 4. Relatively Inelastic Demand 5. Unitary Elastic Demand There are four methods of measurement of price elasticity of demand: 1. Mathematical (or) Ratio Method. 2. Total Outlay Method (or) Total Expenditure Method. 3. Point Method 4. Arc Method Mathematical Method Under this method price elasticity of demand is measured by using the formula given below:
  14. 14. PEd = % change in quantity demanded % change in the price = % change in Q % change in PPrice Elasticity of Demandis = 1 The Elasticity is equal to one when the demand changes by the same % as the price. Suppose the price has fallen by 20% and the quantity demanded has expanded by20%, as a result of fall in the price. The Elasticity of demand is = 1.
  15. 15. PEd = % change in demand =20% = 1 % change in price 20% PEd = 1Price Elasticity of Demand > 1 If the % change in demand is more than the % change in price, then the Elasticity is = >1. Ex: If the price falls by 20% and demand increases by 20%, then the elasticity is greaterthan one.PEd = 40% = 4 = 2 20% 2PEd> 1
  16. 16. Price Elasticity of demand <1 If the % change in demand is less than the % change in the price, then the Elasticity is< 1. Ex: If the price falls by 20% and the demand increases by only 10%, then the E is = ½i.e less than one. PEd = 10% =1 = 0.5 20% 2 PEd< 1Total Expenditure / Outlay Method By Prof . Marshall Under this method we measure the price elasticity of demand by examiningthe change in total expenditure as a result of change in the price and quantity demanded for acommodity. TE = Price / unit X Total quantity purchased
  17. 17. Following are the observations about the nature of PEd1. In first case , with every fall in price the TE goes on increasing. Therefore the PEd> 1.2. In second case, whatever may be the change in price the TE remains the same. Therefore the PEd = 1.3. In third case, with every fall in price the TE goes on decreasing. Therefore the PEd< 1
  18. 18. Point Method Prof . Marshall Point Ed = lower segment of the demand curve below the given point upper segment of the demand curve above the given pointor PE = L ; PE = point elasticity U L = lower segment U = upper segment
  19. 19. ARC METHODIn arc elasticity, the change in price is expressed asa proportion or average of the old price&theprevious quantity and the new quantity. Thus, the arc elasticity is called as averageelasticity.Any two points of the demand curve makes an arc. An arc is a curved line of a section ora segment of a demand curve. Arc elasticity is the elasticity at the mid point of an arc of ademandcurve.
  20. 20. DEMAND FORECASTING METHODSDemand ForecastingMeaning:Demand forecasting means estimating theexpected future demand for a product , related to aparticular period of time.Methods of forecasting:The methods of forecasting can be broadlyclassified into two categories. They are:1. Survey Method2. Statistical MethodSIGNIFICANCEOF DEMAND FORECASTINGSIGNIFICANCE OF SHORT TERM FORECASTING To prepare appropriate production schedule.
  21. 21.  Helping the firm in reducing costs of purchasing materials. To determine appropriate price policy. To fix sales targets and incentives. To evolve proper advertising policy. To forecast short term financial requirements.SIGNIFICANCE OF LONG TERM FORECASTING To plan for new units or to expand the existing units. To plan long term financial requirements. To plan man power requirements.LEVELS OF DEMAND FORECASTING 1. Macro level 2. Industry level 3. Firm levelCriteria of a good forecasting method. Accuracy Plausibility Simplicity Economy Availability Flexibility(A) Survey Method The survey method consists of two methods: Survey of experts opinion Survey of consumers intentions through direct interview with them. Experts Opinion Method (or) Collective Opinion Method This method is also known as Sales Force Composite Method.
  22. 22. Advantages: It is a simple method of forecasting. It involves minimum statistical work. It is less expensive. It is based on the first hand knowledge of the salesmen who are directly connected with the sales. 5. It is more useful for short term forecasting rather than long term forecasting. 6. It is particularly useful in forecasting the sales of new products. Disadvantages:1. It is subjective approach.2. The salesmen may underestimate the demand.3. The salesmen may not be able to judge the future trends in the economy and their impact on the sales of the product of the firm. (2) Direct Interview Method (or) Customers Interview Method Under this method ,consumers are directly interviewed to find out the future demand or demand trends for a product by a firm. They are three types of consumers’ interview: Complete Enumeration Method Sample Survey Method (Stratified = Society divided into different classes) End Use Method A. Complete Enumeration Method under this method ,almost all the consumers of the product are interviewed and are asked to inform about their future plan of purchasing the product in question. Advantages: This method is true from any bias of the salesmen ,as they only collect the information and aggregate it.
  23. 23.  This method seems to be ideal, since almost all the consumers using the product are contacted. Disadvantages:1. This method is however very costly and tedious.2. It is also too much time consuming, since every potential customer is to be interviewed.3. It would be very difficult and impractical if the consumers who are spread over the entire country are to be contacted. Hence this method is highly cumbersome in nature.B. Sample Survey Method: When the demand of consumers is very large this method is used by selecting a sample of consumers for interview . Advantages:1. This method is single and less costly and hence it is widely used.2. It is less time consuming ,since only a few selected consumers are contacted.3. 3. It is used to estimate short term demand by business firms, governments departments and household customers.4. 4. It is highly useful in case of new products.5. 5. This method is of greater use in forecasting where consumersbehaviour is subject to frequent changes.6. However the success if this method depends on the sincere co- operation of the selected consumers.7. 3. It is used to estimate short term demand by business firms, governments departments and household customers.8. 4. It is highly useful in case of new products.9. 5. This method is of greater use in forecasting where consumersbehaviour is subject to frequent changes.10. However the success if this method depends on the sincere co- operation of the selected consumers.
  24. 24. 11. End Use Method: Under this method, the sale of the product under consideration is projected on the basis of the demand survey’s of the industries using this given product or intermediate product. Advantages:1. This method is used to forecast the demand for intermediate products only.2. It is quite useful for industries which largely produces goods like aluminium, steel, etc. Disadvantages: The main limitation of this method is that , as the number of end- users of a product increases, it becomes more difficult to estimate demand under this method.(B) Statistical Method Under these methods, statistical or mathematical techniques are used to forecast the demand for a product in the long period. The following are the important statistical methods used in forecasting:1. Trend Projection Method2. Regression Method3. Barometric Method (1) Trend Projection Method This method is also known as Time Series Analysis. Time series refers to the data over a period of time. During this time period, fluctuations and turning points may occur in demand conditions .These fluctuations in demand occur due to the following four factors. They are: Secular Trends Seasonal Variations Cyclical Fluctuations Random Variations
  25. 25. Advantages :1. Trend projection method is quite popular in business forecasting, because it is a simple method.2. The use this method requires only the simple working knowledge of statistics.3. It is also less expensive , as its data requirements are limited to the internal records.4. This method yields fairly reliable estimates if future course of demand. Disadvantages:• The most important limitation of this method arises out of its assumption that the past rate of change in the dependent variable ( demand).• This method is not useful for short run forecasting and cyclical fluctuations.
  26. 26. • This method does not explain the relationship between dependent and independent variables. (2)Regression Method It combines the economic theory and statistical techniques of estimation. (2) Barometric Method This method is also known as Economic Indicators Method. Under this method , a few economic indicators become the basis for forecasting the sales of a company. Some of the most commonly used indicators are given below: Construction contracts Personal Income Automobile registration Limitations It is difficult to find out an appropriate economic indicator It is not suitable for new products as past data not available It is best suited where relationship of demand with a particular indicator is characterized by time-lag Significance of Demand Forecasting Production planning Sales Forecasting Control of business Inventory control Growth and Long term Investment Programs Stability Economic planning and Policy making
  27. 27.  SUPPLY ANALYSIS Meaning: Supply of a commodity may be defined as the quantity of that commodity which the sellers or producers are able and willing to offer for sale at a particular price during a certain period of time. For eg: At the price of Rs.10 per litre , diary farms’ daily supply of milk is 200 liters. Distinction between stock & supply Stock refers to total quantity of output kept in the warehouse which can be offered for sale in the market by the seller. On the other hand, the term supply refers to that part of the stock which is actually offered for sale in the market at a price per unit of time. Law of supply “ Other things remaining the same, the supply of a commodity expands (rises) with a rise in its price and contracts (falls) with a fall in its price.” Thus supply varies directly with the price. In other words, the relationship between supply & price is direct.
  28. 28. Assumptions underlining the Law of Supply:1. Cost of Production is Unchanged
  29. 29. 2. No Change in techniques of Production3. Fixed scale of Production4. Government policies are unchanged5. No change in Transport Cost6. The prices of related goods are constant INCREASE & DECREASE IN SUPPLY The 2 terms are introduced to explain the changes in Supply without any change in price are:1. Increase in Supply2. Decrease in Supply
  30. 30. Determinants of supply1.Price of the commodity2. Price of the related goods
  31. 31. 3. Cost of production4. Technology5. Natural factors6. Tax & subsidy7. Development of transport & communication8. Agreement among producers9. Future Expectations
  32. 32. 1. Factors determining Elasticity of Price of Commodity2. Cost of Production3. Price of Other Products4. Change in Technology
  33. 33. 5. Time Period6. Objective of the Firm7. Size of the Firm8. Imposition of Taxes9. Number of Producers10. Agreement among Producers11. Political Disturbances12. Mobility of factors of Production13. Availability of Markets14. Nature of Commodities (perishable & Durable goods)15. Improvement in the means of Communication16. Nature of production (paintings)