Demand, law of demand and demand forecasting

1. sabeshmanikandan@gmail.com
ANJAC
Demand
Analysis
Muthusamy Sabesh Manikandan
E1A01
Business Economics
Demand Analysis

2. Demand Analysis
Meaning – types – determinants
Demand
01 Meaning - Concept – Assumptions –
Schedule - Diagram
Law
02
Meaning – methods – Features
Forecasting
03 Forecasting of demand for new
products
Market Analysis
04

3. Introduction
Meaning, Concepts and Definitions

4. Demand: Definition
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
Demand
Demand in economics means demand
backed up by enough money to pay for the
good demanded
Stonier and Hague
The demand for anything at a given price is
the amount of it which will be sought per
unit of time at that price
Benham
The ability and willingness to buy specific
quantities of a good at alternative prices in a
given time period, ceteris paribus.
Bradley R. Schiller
an insistent and peremptory request, made
as of right
Dictionary

5. TYPES OF
DEMAND
01 Change in the demand for a
commodity due to change in its price
Price Demand
02
Change in the demand for a
commodity due to change in
income of a consumer
Income Demand
03 Change in the demand for a
commodity due to change in the price
of another commodity
Cross Demand

6. PriceDemand Price demand refers to the different
quantities of the commodity or service
which consumers will purchase at a given
time and at given prices, assuming other
things remaining the same.
Meaning
• price demand has inverse relation with the
price
• the quantity demanded is the function of
the price of the commodity
• income, taste, and prices of related
goods remain the same
Price
Demand

7. Incomedemand Income demand refers to the different
quantities of a commodity or service which
consumers will buy at different levels of
income.
Meaning
• the demand for a commodity increases as
the income of a person increases unless
the commodity happens to be an inferior
product
• assuming that other things remaining
constant.
Income
Demand

8. Income Demand
INFERIOR
GOODS
The demand may fall when the
income increases
SUPERIOR
GOODS
Income increases, the demand increases
and if income fall demand decreases

9. Crossdemand When the demand for a commodity
depends not on its price but on the
price of other related commodities.
Meaning
• closely connected or related goods which
are substitutes for one another
• in case of substitutes, when the price of
one related commodity rises, the demand
of the other related commodity increases
and vice-versa
Cross
Demand

10. Complementary
goods In the case of complementary goods
other things remaining the same. The
fall in the price of a commodity may
increase the demand for other
commodity and the rise in the price of a
commodity
Meaning
Complementary
goods

11. Directdemand Commodities or services which satisfy
our wants directly are said to have
direct demand.
Meaning
• all consumer goods satisfy our wants
directly
Direct
Demand

12. Deriveddemand Commodities or services demanded for
producing goods which satisfy our
wants directly are said to have derived
demand
Meaning
• Derived demand is a market demand for
a good or service that results from a
demand for a related good or service.
• Distinct components: raw materials,
processed materials, and labor.
• Together, these three components
create the chain of derived demand.
Derived
Demand

13. Jointdemand In finished products as in case of
bread, there is need for so many
things—the services of the flour mill,
oven, fuel, etc. The demand for them is
called joint demand
Meaning
• the construction of a house we require
land, labor, capital, organization and
materials like cement, bricks, lime, etc.
The demand for them is, thus, called a
‘joint demand
Joint
Demand

14. Compositedemand A commodity is said to have a
composite demand when its use is
made in more than one purpose
Meaning
• the demand for coal is composite demand
as coal has many uses—as fuel for a
boiler of a factory, for domestic fuel, for
oven for steam-making in railways engine,
etc
Composite
Demand

15. Individualdemand the quantity of a commodity that a
consumer is willing and able to buy, at
each possible price during a given
period of time
Meaning
• marginal valuation = price
Individual
Demand
• The individual demand for a good or a
service comes from the interactions of
desires with the budget set

16. Marketdemand the quantity of a commodity that all
consumers are willing and able to buy,
at each possible price during a given
period of time
Meaning
• the sum of the individual demand for a
product from buyers in the market
Market
Demand

17. Taste
Expectations
Price
Income
Related goods
Desire for this goods and other goods.
Expectations on future income, price and taste
etc.,
Price of the goods or services
Income of the consumer
The availability and price of the other goods
(substitute goods)
Determinants of Individual Demand

18. Expectations
Number of Buyers
Taste
Income
Other goods
Expectations on future income, price and taste etc.,
Number of buyers in the market
Desire for this goods and other goods.
Income of the consumer
The availability and price of the other goods
(substitute goods)
Determinants of Market Demand

19. Factors determining demand

20. Demand function: Individual
qD = f (price, income, prices of related
goods, tastes, expectations)
qD= f(Px, Yx, PSx,Tx, Ex …ɥ)
Demand function

21. Demand function: Market
mqD = f (price, income, prices of
related goods, tastes, expectations)
mqD= f(Px, Yx, PSx,Tx, Ex …ɥ)
Demand function

22. Law of Demand
Meaning–Concept–Assumptions–Schedule–Diagram

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24. Law of demand explains consumer choice
behavior when the price changes. In the
market, assuming other factors affecting
demand being constant, when the price of
a good rises, it leads to a fall in the
demand of that good
Law of Demand
The law of demand states
that other factors being
constant (cetris peribus),
price and quantity demand of
any good and service are
inversely related to each
other. When the price of a
product increases, the
demand for the same product
will fall
Definition

25. Alfred Marshall
The Marginalist
amount demanded
increases with a fall in
price vice versa
Ronald Ferguson
Economists
Quantity demanded
varies inversely
Paul Samuelson
Father of Modern Econ
omics
Buy more at lowest
price
Meet Our
Team
Lee Benham
Economist
Larger quanity
demanded at lower
price than a higher
price

26. Law of Demand
The greater the amount to be sold
the smaller must be the price
Definition people will buy more at lower prices and buy
less at higher prices, if other things remaining
the same.
Samuelson
amount demanded increases with a
fall in price and diminishes when price
increases.
Marshall
the quantity demanded varies inversely
with price
Ferguson
Usually a larger quantity of commodity
will demanded at lower price than a
higher price
Benham

27. LawofDemand A thing that is accepted as true or as
certain to happen, without proof
Assumption
• No change in price of related commodities
• No change in income of the consumer
• No change in taste and preferences,
customs, habit and fashion of the
consumer.
• No substitutes of the commodity.
Assumptions
• No expectation regarding future change
in price
• No change in size of population.

28. Demand CurveDemand Schedule
A table showing the
quantities of a good a
consumer is willing and
able to buy at
alternative prices in a
given time period,
ceteris paribus. .
Demand Schedule
Price / kg (in Rs.) Quantity
Demanded (in kg.)
1 600
2 400
3 300
4 200
5 100
Price
The graphical representation
of quantity demanded at
different prices
A tabular statement
of quantity demanded
at different prices
A curve describing the
quantities of a good a
consumer is willing and
able to buy at
alternative prices in a
given time period,
ceteris paribus
Graphic
presentation
Quantity demanded
Y
XO
Demand curve

29. Individual Demand
The different quantities
of a commodity
purchased by a person
at a different prices.
Demand Schedule
Price / kg (in
Rs.)
Quantity Demanded
(in kg.)
1 600
2 400
3 300
4 200
5 100
Price
Individual
Demand Individual
Demand
0
1
2
3
4
5
6
0 100 200 300 400 500 600 700
LAW OF DEMAND
Quantity Demanded

30. Market Demand
0
1
2
3
4
5
6
0 10 20 30 40
Demand of B
0
1
2
3
4
5
6
0 10 20 30 40 50
Demand of A
0
1
2
3
4
5
6
0 5 10 15 20 25
Demand of C
0
1
2
3
4
5
6
0 5 10 15 20 25
Demand of D
Demand of D

31. Market Demand
The total quantity of a
commodity purchased
by all the people in the
market at different
prices.
Market Demand
Price
Market
Demand Sum of all individual
demand
Price
Market Demand
TotalA B C D E
1 45 30 5 20 15 115
2 30 25 20 15 10 100
3 25 20 15 10 5 75
4 20 15 10 5 0 50
5 15 10 5 0 0 30
0
1
2
3
4
5
6
0 20 40 60 80 100 120 140
Market Demand [∑(A,B,C, D,)]
Market Demand [∑(A,B,C, D,)]

32. MovementsShifts
Movements along a
demand curve are a
response to price
changes for that good.
Shifts of the demand
curve occur when the
determinants of
demand changed
Demand curve due to
changes in tastes,
income, other goods or
expectation
Movements along a
given demand curve, in
response to price
changes of that goods.
Shift vs Movement
Changes
in
Demand
Changes
in quantity
demanded

33. Market Demand
The total quantity of a
commodity purchased
by all the people in the
market at different
prices.
Shift vs Movement
Shifts vs Movements
0
10
20
30
40
50
60
0 5 10 15 20 25
PRICE
QUANTITY DEMANDED
Initial Demand Post Demand 1 Post Demand 2
Shift in
Demand
Demand shifts when tastes,
income, other goods, or
expectations change
Movement in
Demand
Price
Initial
Demand
Post
Demand 1
Post
Demand 2
10 15 22 10
20 12 18 7
30 8 13 4
40 5 8 2
50 3 5 1

34. Why does demand curve slopes downwards?
Fall in the price of a good,
consumers real income or
purchasing power rises, so he
demands more units of the
goods
Income Effect
The consumer has more and
more of a good, its marginal
utility to him goes on declining
Law of Diminishing
Marginal Utility
When the price of a good
rises, consumer buys
more of substitute goods
Substitution Effect
New consumers afford the
commodity, when the price
of the commodity falls in
the market.
New Consumers

35. Exceptions
In case of basic necessities of
life such as salt, rice, medicine,
etc. the law of demand is not
applicable
Necessaries goods
If the commodity goes out of
fashion, people do not buy more
even if the price falls
Change in fashion
During the periods of economic
prosperity, people buy more
even when the prices rise.
Trade cycles
Cheaper varieties of goods like
low priced rice, low priced bread,
etc. are some examples of Giffen
goods
Giffen Goods
The higher the price of the
diamond the higher the prestige
value of it. Few goods like
diamond can be purchased only
by rich people
Veblen goods
when they expect further rise in price
of the commodity, they will buy more
even if the price is higher
Speculation / Price expectation

36. Demand Forecasting
Meaning – methods – Features

37. Demand
Forecasting
Demand
Analysis
Demand forecasting is an
“objective assessment of the
future course of demand”

38. Demand
Forecasting
Definition
According to Evan J. Douglas, “Demand
estimation (forecasting) may be defined as
a process of finding values for demand in
future time periods
According to Cundiff and Still, “Demand
forecasting is an estimate of sales during a
specified future period based on proposed
marketing plan and a set of particular
uncontrollable and competitive forces

39. Demand Forecasting
A forecasting is a prediction or
estimation of a given situation.
Demand estimation tries to find out
the present state of demand.
Demand forecasting predicts about
future trend of sales.
Forecasting cane be both physical
as well as financial in nature
Need

40. Forecasting
Active ForecastPassive forecast
Where forecasting is
done under the
condition of likely
future changes in the
action by the firm
Where predictions
about future is based
on the assumption
that the firm does not
change the course of
its actions.
Kinds

41. Objectives of Forecasting
Objectives and
purposes of forecasting
Demand forecasting provides an
insight into the organization’s capital
investment and expansion decisions
Refer to the forecasts that are
for a period of more than 10
years
Very Long period forecasting
Refer to the forecasts that are
for a period of 5-10 years and
based on scientific analysis and
statistical methods
Long term forecasting
Refer to the forecasts that are
generally for one year and
based upon the judgment of the
experienced staff
Short term forecasting

42. Objectives
Short term objectivesLong term Objectives
(a)To have efficient management of
inventories, ie., purchasing raw
material and the lowest price
(b)To have correct scheduling of
production to avoid overproduction
and under production
(c)To have profitable prize strategies
(d)
(e)To have effective sales strategies
(f) to have accurate financial
strategies to meet financial
requirements.
(g)Evolving a competent advertising
and promotion programme
(a)Planning of new unit or
expansion and
modernization of an
existing unit.
(b)Assessing long-term
financial needs
(c)Arranging manpower,
trained and skilled
labour and business
executives.
Demand forecasting

43. Steps involved in forecasting
02
03
04
Determining goods
Determining the nature
of goods under
consideration
Forecasting
tool
Selecting a
proper method
of forecasting
Results &
analysis
Interpretation of
results with
background factors
01
Identifying
objectives
Identification of the
objectives of a firm. STAGES

44. Demand forecasting is a proactive
process that helps in determining
what products are needed where,
when, and in what quantities
Proactive process
Determinants of
Demand
Forecasting

45. Factors Influencing Demand Forecasting
Types of
Goods
Competition
Level
Price of
Goods
Level of
Technology
Economic
Viewpoint
Factors
determining
Demand
Forecasting

46. Types of Consumer Goods
Durable
Consumer
goods
goods are those which can be
consumed more than once, over a
period of time.
Non-durable
Consumer
Goods
goods are those which are used for
production of other goods

47. Determinants of Forecasting
Competition Level
In a highly competitive market,
demand for products also
depend on the number of
competitors existing in the
market
In such a scenario, it is
difficult to estimate the
exact demand of
products
Risk

48. Determinants of Forecasting
Price of Goods
In a highly competitive market,
demand for products also
depend on the number of
competitors existing in the
market
it is difficult to estimate the
exact demand of products
Demand Estimation

49. Determinants of Forecasting
Level of Technology
If there is a rapid change in
technology, the existing
technology or products may
become obsolete
there is a high decline in the
demand of floppy disks with
the introduction of compact
disks (CDs) and pen drives
for saving data in computer.
For example

50. Determinants of Forecasting
Economic Viewpoint
Play a crucial role in obtaining
demand forecasts
if there is a positive
development in an economy,
such as globalization and high
level of investment, the
demand forecasts of
organizations would also be
positive
For example

51. Survey Method Statistical Method
Survey of
Buyers
Intension
Survey of
Sales
force
Census Method
Sample Method
Trend Projection
Method
Barometric
Technique
Simultaneous
Equations Method
Correlation and
Regression
Method
Expert Opinion
Method
Test Marketing
Controlled
Experiments
Judgmental
Approach
Other Methods

53. Demand
Forecasting
Random factors are those which are generally unpredictable such
as famine floods, earthquake etc.,
Random variations
Refers to the changes arising out of booms and depressions
Cyclical variation
Refers to the changes resulting from change in
climate, weather conditions or from changes in
the wake of festival.
Seasonal variations
Refers to the
changes that occur
as a result of general
tendency
Secular Trend
Trend Analysis

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55. Forecasting a new product (Methods)
It consists of projecting the demand for
a new product as an outgrowth and
evolution of an existing old product
The Evolutionary Approach
the new product is treated as a
substitute for the existing product or
service
Substitute Approach
the consumers’ reactions for a new
product are found out indirectly
through the specialised dealers who
are able to judge the consumers’
needs, tastes and preferences
Vicarious Approach
the demand for the new product is
estimated by offering the new product
for sale in a sample market
Sales Experience Approach
the demand is estimated by direct
enquiries from the ultimate
consumers.
Opinion-Poll Approach
It estimates the rate of growth and
potential demand for the new product
as the basis of some growth pattern of
an established product
Growth Curve Approach

56. Forecasting
Demand
y = 4.7429x - 9513.4
R² = 0.8352
0
10
20
30
40
50
60
70
80
90
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Sales in Thousands

57. Features of a Good Demand Forecasting
Yes?
Is it!?
How best?
Where?
It should give accurate result
Plausibility
Should be very simple and understandable
Simplicity
Less cost and economy one
Economy
Data must be easily available
Availability
Predict ?
Demand
forecasting
Since the future is uncertain, these forecasts may not be hundred
percent correct. But every firm tries to obtain the forecasts as
precisely as possible
Demand Forecasting
01
02
03
04

58. Features of a Good Demand Forecasting
What?
How?
True/False?
When?
It Stands for accuracy in demand prediction
Sharpness
Forecast should be comprehensive
comprehensiveness
Size of admissible hypothesis
Validity
Forecast with the upcoming trends
Timeline
Predict ?
Demand
forecast
A demand forecast is said to be good or efficient when the expected
market demand is very near or equal to the actual market demand
Demand Forecasting
05
06
07
08

59. Thank You
sabeshmanikandan@gmail.com
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