economics demand and supply analysis

1. Demand Analysis

2. Meaning:
Demand is a technical concept from economics.
Demand for a product implies
a) Desire to acquire it
b) Willingness to pay for it
c) Ability to pay for it

3. The demand for a product i.e., a commodity or service has no meaning unless it is
stated with perfect reference to the time, price, price of the related goods,
consumer income, taste & habits etc.
Hence, Demand refers to the quantities of goods that consumers are willing and
able to purchase at various prices during a given period of time.
To sum up the demand for a product is the desire for the product backed up by
willingness as well as ability to pay for it.

4. Determents of demand:
The different determinants of demand of a product X are
 Price of X (Px),
 Price of substitutes (Py),
 Price of complimentary products (Pz),
 Disposable Income of the consumer(I)
 Wealth of the consumer(W),
 Taste & Habits of the consumer(T&H),
 Advertisement about the product(A),
 Expectations (E),
 Number of potential customers (N) and
 Others(O).

5. Demand Function:
The demand function sets out the variables, which are believed to have an
influence on the demand for a particular product.ie, the functional
relationship between demand of a product and its various determinants is
know as demand function.
Mathematically,
Demand (D) = F(Px, Py, Pz ,I, W, T&H, A, E, N, O)

6. The demand schedule is a tabular statement of price and quantity relationship.
It is of two types
1) Individual demand schedule
2) Market demand schedule
Px(Rs) D1 D2 D3 TOTAL
5 10 8 3 21
4 15 12 6 33
3 20 16 9 45
2 25 20 12 57
1 30 25 15 70

7. Demand Curve:
If we plot demand schedules on graph paper by taking demand on X-axis and price on Y-
axis, we get a curve called demand curve. It may be for individual or market. A demand
curve is a graphic illustration of the relationship between price and the quantity
purchased at each price.

9. The Law of Demand:
The Law of Demand explains the functional
relationship between demand and price. The
law states that consumers are willing and able
to purchase more units of a good or service at
lower prices than at higher prices, other things
being equal. It means when price raises
demand contracts and when price falls demand
extends when other things being constant.
Hence Demand = F (P)

10. Why demand curve has negative slope or sloping downwards from left to right?
1) Income Effect
2) Substitution Effect
Exceptions of law of demand:
1) Necessities – Giffen’s paradox
2) Prestige goods
3) Speculation
4) Ignorance
Types of Demands:
1) Direct Demand and Derived Demand
2) Autonomous Demand and Induced Demand
3) New and Replace Demand
4) Perishable and Durable Demand
5) Short run and long run Demand
6) Company and Industry Demand

11. Elasticity of Demand:
The law of Demand explains only the functional relation between price and demand,
but it does not explain exact change in the demand. To explain exact change in demand
Prof. Marshall developed a concept know as Elasticity of demand.
Elasticity of demand explains
 Quantitative relationship between demand and price
 Measures Degree of change in demand

12. According to Economist Samuelson “Elasticity is degree of change in demand as a result
of change in price”
Elasticity is the percentage change in some dependent variable given a one-percent
change in an independent variable, ceteris paribus. If we let Y represent the dependent
variable, X the independent variable, and E the elasticity, then elasticity is represented
as
E = % change in Y / % change in X
(e) = δX/ δY * X/Y
Although economists use a great variety of elasticities, the following three deserve
particular attention. They are: Price Elasticity, Income Elasticity, and Cross-Price
Elasticity.

13. Price Elasticity of Demand:
Price elasticity of demand measures the responsiveness of the quantity sold to changes
in the product’s price, ceteris paribus. It is the percentage change in sales divided by a
percentage change in price. The notation Ep will be used.
If |ep | or |Ep |> 1, demand is elastic
If |ep | or |Ep| < 1, demand is inelastic
If |ep | or |Ep| = 1, demand is unitarily elastic
In general, three factors determine the price elasticity of demand. They are:
(1) Availability of substitutes,
(2) Proportion of income spent on good or service, and
(3) Length of time.

14. Income Elasticity :
The income elasticity of demand measures the responsiveness of sales to changes in
income, ceteris paribus. It is defined as the percentage change in sales divided by the
corresponding percentage change in income.
eI = δQ/ δI * I / Q
If eI or EI > 1, the good is income elastic.
If eI or EI < 1, the good is income inelastic.
If eI or EI = 1, the good is unitarily income elastic.

15. Cross-Price Elasticity:
The sales volume of one product may be influenced by the price of either substitute
or complementary products. Cross-price elasticity of demand provides a means to
quantify that type of influence. It is defined as the ratio of the percentage change in
sales of one product to the percentage change in price of another product.
ec = δQa/ δPb * Pb/Qa
If ec or Ec > 0, goods are substitutes.
If ec or Ec < 0, goods are complementary.
If ec or Ec = 0, goods are independent

16. Demand Forecasting:
what is the difference between demand estimation and demand forecasting?
 Estimation attempts to quantify the links between the level of demand and the
variables which determine it. A manager who wishes to know how the firm’s pricing
policy could be used to generate a given increase in demand would use an estimation
technique
 Forecasting attempts to predict the overall level of future demand rather than looking
at specific linkages. A manager who wishes to know how high demand is likely to be in
two years’ time might use a forecasting technique.
 In general, an estimation technique can be used to forecast demand, but a forecasting
technique cannot be used to estimate demand.

17. The significance of Demand or Sales Forecasting:
 Sales or demand constitute the primary source of revenue and sales gives rise to most of
the costs incurred for any corporate unit.
 Sales forecast is needed for Production planning, inventory planning, cost planning, profit
planning and so on.
 Production planning itself requires the support of men, materials, machines, money and so
on.
 Manpower planning, investment planning, working capital planning, financial planning etc
depends on sales forecast.
 Thus, demand forecasting is crucial for corporate planning.

18. Continue….
 Forecasting is Not to provide exact future data with precision but to bring out the
range of possibilities about future.
 It is not actual future but likely future.
 Do not eliminate risk and uncertainty but help to reduce degree of risk and
uncertainty.
 It is a kind of Guesstimate, sort of Approximation to reality, type of simulation
exercise, likely stage comes close to actual stage.
 Hence forecast is dependable.

19. Types of Forecasts:
1. Economic or Non-economic forecasts
2. Micro and macro-forecasts
3. Active and Passive forecasts
Extrapolation of previous years sales to yield likely demand for the coming years
known as Passive forecast.
By making changes in price, quality, promotional activities to know likely demand
known as Active forecast.

20. 4. Conditional and Non-conditional forecasts
 Estimation of likely impact of certain known or assumed changes in the independent
variable on the dependent variable is conditional forecasting.
 Estimation of the changes in the independent variables themselves is known as non-
conditional forecasting.
5. Short-run and long-run forecasts
 Short run forecasting is generally concerned with projections of established product
and are confined up to a year.
 Introduction of new product, involves long term forecast because we have to consider
long term changes in population, tastes and habits of the buyers, technology, product
cycle etc.

21. Steps in demand forecasting:
1. Nature of forecast
2. Nature of product
3. Determinants of demand
4. Analysis of determinants
5. Choice of techniques
6. Testing accuracy

22. Techniques of demand forecasting:
Broadly, to forecast demand for old or established product there are two methods
I Survey Methods
II Complex statistical Methods

23. Survey Methods:
In these methods consumers are contacted personally to disclose their future
purchase plans and demand will be forecasted. The important methods are
1. Complete enumeration survey
2. Sample survey method
3. Experts opinion poll method
4. consumers clinics or revealed preference method
5. Delphi technique

24. Delphi Technique
Delphi Technique can be illustrated by a simple example. Suppose that a panel of
six outside experts is asked to forecast a firm’s sales for the next year. Working
independently, two panel members forecast an 8 percent increase, three
members predict a 5 percent increase, and one person predicts no increase in
sales. Based on the responses of the other individuals, each expert is then asked
to make a revised sales forecast. Some of those expecting rapid sales growth
may, based on the judgments of their peers, present less optimistic forecasts in
the second iteration. Conversely, some of those predicting slow growth may
adjust their responses upward. However, there may also be some panel
members who decide that no adjustment of their initial forecast is warranted.

25. Assume that a second set of predictions by the panel includes one estimate of a 2
percent sales increase, one of 5 percent, two of 6 percent, and two of 7 percent. The
experts again are shown each other’s responses and asked to consider their forecasts
further. This process continues until a consensus is reached or until further iterations
generate little or no change in sales estimates.
The value of the Delphi technique is that it aids individual panel members in assessing
their forecasts. Implicitly, they are forced to consider why their judgment differs from
that of other experts. Ideally, this evaluation process should generate more precise
forecasts with each iteration.
One problem with the Delphi method can be its expense. The usefulness of expert
opinion depends on the skill and insight of the experts employed to make predictions

26. Complex statistical Methods
A) Mechanical Extrapolation or Trend Projection Method
These methods are based on analysis of past sales pattern. The important methods are
1. Free Hand Method
2. Semi average Method
3. Moving average Method
4. Least squares method or Trend projection through method of least square

27. B) Barometric Techniques or Lead-Lag indicators Method:
Barometric forecasting is based on the observed relationships between different
economic indicators. It is used to give the decision maker an insight into the direction
of likely future demand changes.
There are three different types of indicators.
1. Leading Indicators which run in advance of changes in demand for a particular
product.
Ex: An increase in the number of building permits granted which would lead to an
increase in demand for building-related products such as wood, concrete and so on,
Central bank interest policy, corporate profit after tax etc.

28. Continue….
2. Coincident Indicators which occur alongside changes in demand.
Ex: Retail sales, Rate of unemployment etc.
3. Lagging indicators which run behind changes in demand.
Ex: New industrial investment by firms, Commercial banks interest policy etc.

29. C) Econometric Methods:
Econometric is the use of economic theory, statistical analysis, and mathematical
models to determine relationship between a dependent and one or more independent
variables.
The econometric methods are broadly classified as
1) Regression Methods
2) Simultaneous equation methods

30. Regression Methods:
In the simple regression model, the dependent variable Y is related to only one
explanatory variable X, and the relation between X and Y is linear
Y = a +b(X)
If, for example, the firm had decided that the only variables affecting demand for a
particular product with its own price and advertising levels then the linear demand
function would be written as:
Q = a + b(P) + c(A)
Simultaneous equation method or Econometric model building:

31. Regression Technique assumes one way effect i.e., only independent variable
Effect on dependent variable but not vice versa.
Simultaneous equations model enables the forecaster to consider the simultaneous
interaction between dependent and independent variables.
Methods to forecast demand for new product:
Joel Dean suggested the following methods to forecast demand for new product:
1. Evolutionary Approach
2. Substitute Approach
3. Growth curve Approach
4. Opinion sale Approach
5. Sales experience Approach
6. Vicarious Approach

39. •Thank You