• Desire - is just a wish on the part of the consumer to possess a
• Want - If the desire to possess a commodity is backed by the
purchasing power and the consumer is also willing to buy that
commodity, it becomes want.
• Demand – refers to consumer's desire to purchase goods and
services and willingness to pay a specific price for them over a
period of time. Quantity backed by purchasing power
• According to Prof. Benham,
• “The demand for anything at a given price is the amount of it which
will be bought per unit of time at that price.”
• Demand for a good is the amount of it that a consumer will purchase
at a various prices during a period of time.
Determinants of Demand
• i) Price of the commodity in question
• ii) Prices of other related commodities
• iii) Income of the consumers, and
• iv) Taste of the consumers.
• Demand function refers to the rule that shows how the quantity demanded depends upon above factors.
• A demand function can be shown as:
Dx = f (Px, Py,Pz, M, T)
Dx is quantity demanded of X commodity,
Px is the price of X commodity,
Py is the price of substitute commodity,
Pz is price of a complement good,
M stands for income,
T is the taste of the consumer.
Let us assume that the quantity demanded of a commodity X is D x, which depends only on its price P x, while other factors
It can be mathematically represented as: Dx = f (Px)
LAW OF DEMAND
• The inverse relationship between
the quantity of a commodity and
its price, given all other factors that
influence the demand remain
constant, is called ‘law of demand’.
• According to Samuelson: “ Law of
demand states that people will buy
more at lower prices and buy less
at higher prices, if other things
remains the same( ceteris paribus).
ASSUMPTIONS OF THE LAW
• According to Stigler and Boulding, the law of demand based on the
1. There should be no change in the income of consumers.
2. There should be no change in the taste and preferences of the consumer.
3. There should be no change in the prices of related goods.
4. There should be no change in the size of population.
5. Consumer is a rational consumer.
6. There should be no expectation of rise or fall in price of related goods in
7. There should be perfect competition in the market.
• Demand Schedule - It shows the relationship between price and
quantities demanded at different
• Demand curve is a graphical
presentation of demand schedule.
• The demand curve is a graph
that depicts the connection
between price and quantity
demanded by consumers. The
graph shows how the price of a
commodity or service varies as
the quantity demanded rises.
• Once plotted, the demand curve
slopes downward, from left to
right. As prices increase,
consumers demand less of a
good or service.
Why does a Demand Curve Slope Downwards?
• Substitution Effect
• Income Effect
• Price Effect
• Psychological effect
• Law of diminishing marginal utility
• New consumer
Exceptions to the law of demand
1. Prestigious goods: Veblen effect---According to Veblen (American
economist) some consumer measure the utility of commodity by its price,
they consider greater the price of a commodity, the greater its utility. So in
case of Veblen goods people buy more at higher prices just to show off their
status .for example, diamonds are considered prestige goods in the society
and for upper strata of a society the higher the price of diamond higher the
prestige value for them.
2. Giffen goods—Sir Robert Giffen observed that in case of inferior goods
with the fall in prices people buy less quantities of it, because they are ready
to purchase some superior goods as with the fall in price their Real income
increased. After the name of Sir Robert Giffen, such goods in whose case
there is a direct relationship are called Giffen goods.
3. Expectations—people will buy more even when there is increase in
prices , if they expect that price may rise in near future. Similarly they
will buy less even at lower prices if they expect that prices of
commodities goes down in near future. So that is the reason of upward
sloping of demand curve.
4. During war or emergency—during the period of war, people may
start buying for hoarding or building stocks even at higher prices. But in
case of depression, they will less even at lower prices.
5. Ignorance—some consumers think that more will be the price higher
will be the quality. Or sometimes they purchases good at higher prices
out of sheer ignorance
• CHANGE IN QUANTITY DEMANDED –
When the demand for a commodity changes because of the change in
its price, it is called ‘change in quantity demanded’.
This change is called Movement along the demand curve.
• CHANGE IN DEMAND –
when the change in demand is due to the factors other than its price
cause a change it is called ‘change in demand’.
This change is called Shift of demand curve.
Extension and Contraction in Demand or
Movement along demand curve.
It happens when reason of change in demand is price only.
Extension(expansion) - If a fall in the price causes the quantity
demanded to rises, it is called extension in demand.
Contraction - If with a rise in the price of a commodity, its quantity
demand falls, we call it contraction in demand.
Increase and decrease in demand curve or
Shift of demand curve
• When demand changes due to change in other factors instead of
price like fashion, taste and preference. It is increase or decrease in
• Increase in demand - (a) same price , more demand (b)More price,
• Decrease in demand—Demand can be decrease in two ways (a) Same
price ,less demand (b) Less price, same demand
Increase in Demand
• Same price, more demand
More price, same demand
Decrease in Demand
• Same price, less demand
• Less price, same demand
Factors for shift a demand curve
• 1) A rise in income of the consumer can enable him to demand more
of a commodity at a given price and a fall in income will generally
force him to curtail his demand.
• 2) A rightward shift in the demand curve can also take place because
of increase in price of a substitute. Similarly, a leftward shift in the
demand curve can be because of decrease in price of a substitute.
• 3) If the consumer develops a taste for a commodity, he may demand
more of it even if the price remains unchanged, shifting the demand
curve to the right. On the other hand, a leftward shift in the demand
curve can indicate that our consumer has started disliking the
• Supply refers to the quantity of a commodity that producers are willing to
sell at different prices per unit of time.
1) The supply of a commodity indicates the offered quantities. In fact,
current supply can be different from current production, the difference is
accounted for by the changes in the inventories or the stocks.
2) Like the demand, the supply is also with reference to the price at which
that quantity is supplied.
3) The supply is a flow. It has a time unit attached therewith. The supply has
to be per day/week or month.
Determinants of Supply
1) Price of the commodity supplied
2) The prices of factors of production or cost of production
3) Prices of other goods
4) The state of technology
5) Goals of the producer
THE LAW OF SUPPLY
• A producer aims to maximise profits, the difference between total revenue
and total cost. Profit = TR – TC
TR = Total Revenue (quantity x price).
TC = Total Cost (quantity x average cost) A higher price would mean more
The producer will supply more at a higher price. Similarly, a producer will
supply smaller quantity at a lower price.
This is a direct relationship between the price and the quantity supplied of a
commodity and is called the ‘Law of Supply’.
Thus, the supply function is:
S = f (P)
Exceptions to the Law of Supply
• Non-maximisation of profits
• Factors other than price not remaining constant
• A supply schedule shows quantities of a commodity that a seller is
willing to supply, per unit of time, at each price, assuming other
factors remaining constant.
The Supply Curve
• Here price is plotted on the Y-axis and
quantity supplied on X-axis.
• The supply curve S is a smooth curve
drawn through the five points a, b, c, d
and e. This curve shows the quantity of
pens offered for sale at each price.
• The supply curve (just like a demand
curve) can be linear straight line, or in the
shape of an upward slopping curve
• The supply curve has positive slope
• A rise in price results in greater quantities
in greater quantity supplied and lower
price results in lower quantity supplied
• CHANGES IN QUANTITY SUPPLIED –
There can be changes in the quantity offered for sale due to changes in
the price of the commodity only, all other factors remaining constant.
This is termed as change in quantity supplied and Movement along the
• CHANGE IN SUPPLY –
If supply of a commodity undergoes a change because of changes in
factors other than the price of the commodity, we call this change in
supply. It is shown by a shift in the position of the supply curve.
Movement along the supply curve
• A change in the price of good results
in a change in the quantity supplied
which will result in the movement
along the supply curve
• The change in quantity supplied can
be of two types,
• 1) When the price of a commodity
falls and its quantity supplied falls. It is
termed as ‘contraction of supply’.
• 2) When the price of a commodity
rises and its quantity supplied rises,
provided the law of supply applies, it
is termed as “extension of supply”.
Shift of the supply curve
• A decrease in supply: When the
quantity of a commodity supplied
declines, at the same price it is
referred to as a ‘decrease in
supply’. It implies a leftward shift of
the supply curve.
• An increase in supply: When the
quantity of a commodity supplied
increases, at the same price, it is
known as an increase in supply.
This is shown by a rightward shift
in the supply curve.
Why the Supply Curve Shifts?
• Change in the prices of other commodities
• Change in the prices of factors of production
• Change in technology
• Change or expectation of change in other factors
MEANING OF ELASTICITY
• The elasticity of a variable X with respect to some other variable Y shows
responsiveness or sensitivity of X to changes in Y.
• The elasticity of X with respect to Y is defined as the ratio of per cent change in X
to per cent change in Y.
• We can also write it as:
• So the elasticity of demand with respect to a change in their price will be:
• Where Q represents quantity of and P represents their price.
Elasticity of Demand
• ZERO ELASTICITY
A change in price has no impact
on the quantity demanded. Such a
commodity is, sometimes, called
an absolute necessity.
• Infinite Elasticity of Demand
A very small fall in price can lead
to an extremely large increase in
Concept of Elasticity of Demand
• Law of demand tells that a fall in price will lead to an increase in
quantity demanded and vice versa
• In addition to the direction of the change in quantity demanded,
managers are more interested in finding the magnitude of the change
or the degree of responsiveness of consumers to a change in any
determinants or variable
• To measure this, they use the concept of elasticity of demand.
Elasticity of demand measures how much the quantity demanded
changes with a given change in a particular determent of demand (
i.e. price of the item, change in consumers’ income, or change in price
of related product and advertisement etc.).
1. Price Elasticity of Demand
• The Price Elasticity of Demand is the ratio with which demand for a
product will contract or expand with rise or fall in its prices. It is
calculated as follow;
The price elasticity of demand falls into three categories:
1. Elastic demand
2. Unit elastic demand
3. Inelastic demand
There are two extreme cases:
4. Perfectly elastic demand
5. Perfectly inelastic demand
Methods of Measuring Price Elasticity of
1. Total Expenditure Method
2. Proportionate Method
3. Point Elasticity Method
4. Arc Elasticity Method
5. Revenue Method
1. Total Outlay Method
• Total outlay method of measuring price elasticity of demand was introduced by
Dr. Alfred Marshall. According to this method, the price elasticity of a product is
measured on the basis of the total amount of money spent (total expenditure) by
consumers on the consumption of that product.
• In this method, the total expenditure of consumers on the consumption of a
particular product before change in the price is compared with the total
expenditure of consumers after change in the price of that product. The total
expenditure after a given change in the price may be same as the earlier amount,
increase, or decrease.
• Total Outlay = Price X Quantity Demanded
• This can be expressed with
the help of a Chart.
2. Proportionate Method
• This method is also associated with the
name of Dr. Marshall. According to
this method, “price elasticity of
demand is the ratio of percentage
change in the amount demanded to the
percentage change in price of the
• It is also known as the Percentage
Method, Flux Method, Ratio Method,
and Arithmetic Method
3. Point Method
• the price elasticity of demand varies
at different points in the given demand
curve. Therefore, it is measured
separately at different points in the
given demand curve.
• The formula for calculating price
elasticity of demand through point
method is as follows:
• e = ∆Q/∆P * P/Q
• Linear Demand Curve:
Involves the determination of elasticity at any point
on a straight line.
• Non-Linear Demand Curve:
Involves determining the point elasticity of demand at
any given point by drawing a tangent. The tangent
drawn on a non-linear curve touches the curve at a
point where the elasticity of demand needs to be
determined. The tangent separates the demand curve
into two halves. The price elasticity of demand can be
determined by dividing the lower half of the demand
curve with the upper half of the demand curve.
4. Arc Elasticity Method
• While point elasticity
measures the price elasticity
of demand at a point on the
demand curve, arc elasticity
method measures the price
elasticity of demand between
any two points on the demand
5. Revenue Method
• Elasticity of demand can be measured with the
help of average revenue and marginal revenue.
Therefore, sale proceeds that a firm obtains by
selling its products are called its revenue.
However, when total revenue is divided by the
number of units sold, we get average revenue.
• On the contrary, when addition is made to the
total revenue by the sale of one more unit of
the commodity is called marginal revenue.
Therefore, the formula to measure elasticity of
demand can be written as,
• EA = A/ A-M
• Where Ed represents elasticity of
• A = average revenue and
• M = marginal revenue.
Determinants of Price Elasticity of Demand
1. The availability of close substitutes
2. The importance of the product's cost in one's budget
3. Number of uses of the good
4. Income of consumer
5. How high the price of the good is
6. Nature of the good
7. The period of time under consideration
8. Joint Demand
9. Time elapsed since a price change
2. Income Elasticity of Demand
• Income elasticity of demand
measures the percentage
change in a buyer's purchase of
a product as a result of a
percentage change in her/his
income. So income elasticity of
• Ey > 1, QD and income are directly related. This is a normal good and it is income
• 0< Ey< 1, QD and income are directly related. This is a normal good and it is
• Ey < 0, QD and income are inversely related. This is an inferior good
• Ey approaches 0, QD stays the same as income changes, indicating a necessity.
3. Cross Price Elasticity of Demand
• In the case of a product that has
a substitute (like oranges and
apples), the price change of one
product affects the demand for
the other. Cross price elasticity
of demand measures this effect.
So Cross elasticity of demand is;
• for substitute goods
• for complementary goods
Limitations of the Concepts of Elasticity of
• Irrelevant and Unreliable Data
• Unrealistic Assumption
Meaning of Elasticity of Supply :
• The elasticity of supply is the responsiveness of quantity supplied of a product to changes
in one of the variables on which supply depends. According to basic economic theory, the
supply of a commodity increases with a rise in price and decreases with a fall in price.
According to Bilas,
• “Elasticity of Supply is defined as the percentage change in quantity supplied divided by
percentage change in price.”
• It can be calculated by using the following formula:
• ES = % change in quantity supplied/% change in price
• ES = ∆Q/Q ÷ ∆P/P = ∆Q/∆P × P/Q
Degrees of elasticity of supply
Perfectly Elastic Supply
• The supply is said to be perfectly elastic
when a small rise in price would result in
supply to become infinite, while a small
fall in price would result in a fall in
supply to zero. It is also known as infinite
• This is shown by a straight line supply
curve parallel to the horizontal axis.
• For Example,
• Suppose the price of a commodity is
Rs.10 and its Supply is 50 units. As the
price increases to Rs.15, its supply
increases to infinity.
Perfectly Inelastic Supply
• When the supply doesn’t change with the
change in price(whether falling or rising),
the supply is said to be perfectly inelastic.
It means supply remains constant against
any value of price in the market. This is
represented by a straight line parallel to
the vertical axis.
• For example,
• Suppose the price of a commodity is Rs
10, and supply is 200 units. As the price
increases to Rs 20, the Supply remains
constant at 200 units. It implies that the
supply is perfectly inelastic.
Unitary Elastic Supply
• When the change in the supply of a
commodity is in the same ratio as
the change in its price, it is known
as unitary elastic supply.
• For Example,
• Suppose the price of a commodity
is Rs.50 and the quantity supplied
in a specific market is 200 units. As
the price increases to Rs.55, its
supply rises to 220 units. It implies
the unitary elastic supply.
• Relatively Elastic Supply occurs when the
proportionate change in supply is greater than
proportionate change in price. It means that there
will be a greater change in supply due to a small
change in price. It is also known as highly elastic
supply and more than unitary elastic supply.
• For Example,
• Suppose the price of a commodity is Rs50 and
quantity supplied is 200 units. As the price
increases to Rs55, its supply increases to 250
units. It implies the supply to be relatively
• The supply is said to be relatively inelastic when a proportionate
change in quantity supplied is less than proportionate change in
price. It means that greater change in price leads to a smaller
change in quantity supplied.
• For Example,
• Suppose the price of a commodity is Rs50 and quantity supplied is
200 units. As the price increases to Rs70, its supply increases to 220
units. It implies the supply to be relatively inelastic.
Measurement of elasticity of supply
• Following two methods of the measurement of elasticity of
supply are discussed:
(1) Percentage or Proportionate Method.
(2) Geometric or Diagrammatic Method.
.Proportionate or Percentage Method
• According to this method, the elasticity of supply
can be defined as the ratio between ‘percentage
change in quantity supplied’ and ‘a percentage
change in price’ of the commodity.
• Es= Percentage change in quantity
supplied/Percentage change in price
Geometric Method :
• Geometrically, the elasticity of supply
depends on the origin of the supply curve.
Assuming the supply curve to be a straight
line and positive sloped, the geometric
method measures the elasticity of supply
Factors affecting of elasticity supply
(1) Nature of the inputs used
(2) Natural constraints
(3) Risk taking
(4) Nature of the commodity
(5) Cost of production
(6) Time factor
(7) Technique of production
• In Demand estimating manager attempts to quantify the links or relationship between the level of
demand and the variables which are determinants to it and is generally used in designing pricing
strategy of the firm. In demand estimation manager analyse the impact of future change in price on
the quantity demanded. Firm can charge a price that the market will ready to wear to sell its
product. Over estimation of demand may lead to an excessive price and lost sales whereas under
estimates may lead to setting of low price resulting in reduced profits. In demand estimation data is
collected for short period usually a year or less and analysed in relation to various variables to
know the impact of each variables mainly the price on the demand behaviour of the customers. It is
for a short period.
Features of Demand Forecasting
• The main features of the demand forecasting are;
1. Demand Forecasting is a process to investigate and measure the forces that determine sales for existing and
2. It is an estimation of most likely future demand for a product under given business conditions.
3. It is basically an educated and well thought out guesswork in terms of specific quantities
4. Demand Forecasting is done in an uncertain business environment.
5. Demand Forecasting is done for a specific period of time (i.e. the sufficient time required to take a decision
and put it into action).
6. It is based on historical and present information and data.
7. It tells us only the approximate expected future demand for a product based on certain assumptions and
cannot be 100% precise.
Demand Forecasting Process
1. Specifying the objective of Demand Forecasting
2. Determining the nature of goods
3. Determining the time perspective
4. Determining the level of forecasting
5. Selection of proper method or technique of forecasting
6. Data Collection and modification
7. Data analysis and estimations