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Demand and supply functions
Concept of utility 
 Utility is a property common to all commodities and services desired 
by a person. It has no physical or material existence and so it is 
inherent in a commodity. 
 Any commodity which has a capacity to satisfy consumer want, it has 
utility. 
 Utility is subjective in nature. Utility has nothing to do with 
usefulness. Hence in economics, the concept of utility is legally, 
morally, socially and ethically neutral.
Approaches to utility 
• It argues that a consumer 
has the capacity to 
measure the level of 
satisfaction that she 
derives from 
consumption of a given 
quantity of a commodity. 
Cardinal 
Utility 
• It argues that a 
consumer cannot 
measure satisfaction 
numerically or 
subjectively instead 
consumer can rank the 
different baskets or 
bundles so as to 
choose the best basket. 
Ordinal
Marginal Utility& Total Utility 
 Marginal utility is the utility of last unit or addition to total 
utility by the consumption of one additional unit of commodity. 
 MU10 = TU10 – TU9 
 Total Utility- It is the sum of marginal utilities obtained from 
consumption of each successive unit of a commodity or service. 
If continuous units of a commodity 'X' are consumed, then 
 TUx = Σ MUx
Terms related to Utility 
 Initial Utility: 
The amount of satisfaction to be obtained from the consumption of very first 
unit of a commodity or service is called the initial utility e.g. the amount of 
satisfaction to be obtained from consumption of the first apple is units. It is 
called initial utility of the consumer. 
 Positive Utility: 
When a consumer consumes successive units of a commodity or service, its 
marginal utility decreases. The utility obtained from the consumption of all 
the units of a commodity or service before reaching the marginal utility equal 
to zero, is called positive utility. 
 Saturation Point: 
By the consumption of that unit of a commodity where the marginal utility 
drops down to zero, is called the saturation point.
Terms related to Utility 
 Negative Utility: 
By using the next unit of a commodity after saturation point, that 
unit gives negative satisfaction to the consumer and marginal utility 
becomes negative, it is known as negative utility. 
 Util: 
Although utility cannot be measured but in cardinal approach of 
consumer behavior, the term which is used as a unit of utility is 
known as Util and arithmetic numbers (1, 2, 3, .......) are used. For 
example X ate an apple and got 10 Util of utility.
Law of diminishing marginal utility 
 The law of diminishing marginal utility describes a familiar and 
fundamental tendency of human behavior. The law of diminishing 
marginal utility states that: 
 “As a consumer consumes more and more units of a specific 
commodity, the utility from the successive units goes on diminishing”. 
 Mr. H. Gossen, a German economist, was first to explain this law in 
1854. Alfred Marshal later on restated this law in the following words: 
 “The additional benefit which a person derives from an increase of his 
stock of a thing diminishes with every increase in the stock that 
already has”.
Schedule to law 
Unit Total Utility Marginal utility 
1 glass of water 20 20 
2 glass of water 32 12 
3 glass of water 40 8 
4 glass of water 42 2 
5 glass of water 42 2 
6 glass of water 39 -3
Marginal utility curve
Assumption of law 
 The law of diminishing marginal utility is true under certain assumptions. These assumptions are 
as under: 
(i) Rationality: In the cardinal utility analysis, it is assumed that the consumer is rational. He aims 
at maximization of utility subject to availability of his income. 
(ii) Constant marginal utility of money: It is assumed in the theory that the marginal utility of 
money based for purchasing goods remains constant. If the marginal utility of money changes 
with the increase or decrease in income, it then cannot yield correct measurement of the marginal 
utility of the good. 
(iii) Diminishing marginal utility: Another important assumption of utility analysis is that the 
utility gained from the successive units of a commodity diminishes in a given time period. 
(iv) Utility is additive: In the early versions of the theory of consumer behavior, it was assumed that 
the utilities of different commodities are independent. The total utility of each commodity is 
additive. 
U = U1 (X1) + U2 (X2) + U3 (X3)………. Un (Xn)
Assumption of law Conti… 
v) Consumption to be continuous: It is assumed in this law that the consumption of 
a commodity should be continuous. If there is interval between the consumption of 
the same units of the commodity, the law may not hold good. For instance, if you 
take one glass of water in the morning and the 2nd at noon, the marginal utility of 
the 2nd glass of water may increase. 
(vi) Suitable quantity: It is also assumed that the commodity consumed is taken in 
suitable and reasonable units. If the units are too small, then the marginal utility 
instead of falling may increase up to a few units. 
(vii) Character of the consumer does not change: The law holds true if there is no 
change in the character of the consumer. For example, if a consumer develops a 
taste for wine, the additional units of wine may increase the marginal utility to a 
drunkard. 
(viii) No change to fashion: Customs and tastes: If there is a sudden change in fashion 
or customs or taste of a consumer, it can than make the law inoperative. 
(ix) No change in the price of the commodity: there should be any change in the 
price of that commodity as more units are consumed.
Limitation to law 
 (i) Case of intoxicants: Consumption of liquor defies the low for a short 
period. The more a person drinks, the more likes it. However, this is truer 
only initially. A stage comes when a drunkard too starts taking less and 
less liquor and eventually stops it. 
 (ii) Rare collection: If there are only two diamonds in the world, the 
possession of 2nd diamond will push up the marginal utility. 
 (iii) Application to money: The law equally holds good for money. It is 
true that more money the man has, the greedier he is to get additional units 
of it. However, the truth is that the marginal utility of money declines with 
richness but never falls to zero.
Law of equi-marginal utility 
 The law of equi marginal utility was presented in 19th century by 
an Australian economists H. H. Gossen. It is also known as law of 
maximum satisfaction or law of substitution or Gossen‘s second 
law. A consumer has number of wants. He tries to spend limited 
income on different things in such a way that marginal utility of all 
things is equal. When he buys several things with given money 
income he equalizes marginal utilities of all such things. The law 
of equi marginal utility is an extension of the law of diminishing 
marginal utility. The consumer can get maximum utility by 
allocating income among commodities in such a way that last 
dollar spent on each item provides the same marginal utility.
Statement of law 
 “A person can get maximum utility with his given income when it 
is spent on different commodities in such a way that the marginal 
utility of money spent on each item is equal". 
 It is clear that consumer can get maximum utility from the 
expenditure of his limited income. He should purchase such 
amount of each commodity that the last unit of money spend on 
each item provides same marginal utility.
Assumption of law 
 There is no change in the prices of the goods. 
 The income of consumer is fixed. 
 The marginal utility of money is constant. 
 Consumer has perfect knowledge of utility obtained from goods. 
 Consumer is normal person so he tries to seek maximum 
satisfaction. 
 The utility is measurable in cardinal terms. 
 Consumer has many wants. 
 The goods have substitutes.
Schedule and explanation 
 The law of substitution can be explained with the help of an 
example. Suppose consumer has six dollars that he wants to spend 
on apples and bananas in order to obtain maximum total utility. 
The following table shows marginal utility (MU) of spending 
additional dollars of income on apples and bananas: 
Money ($) M.U. of apples M.U. of Bananas 
1 10 8 
2 9 7 
3 8 6 
4 7 5 
5 6 4 
6 5 3
 The above schedule shows that consumer can spend six dollars in different ways: 
 $1 on apples and $5 on bananas. The total utility he can get is: 
[(10) + (8+7+6+5+4)] = 40. 
 $2 on apples and $4 on bananas. The total utility he can get is: 
[(10+9) + (8+7+6+5)] = 45. 
 $3 on apples and $3 on bananas. The total utility he can get is: 
[(10+9+8) + (8+7+6)] = 48. 
 $4 on apples and $2 on bananas. This way the total utility is: 
[(10+9+8+7) + (8+7)] = 49. 
 $5 on apples and $1 on bananas. The total utility he can get is: 
[(10+9+8+7+6) + (8)] = 48. 
 Total utility for consumer is 49 utils that is the highest obtainable with expenditure of $4 
on apples and $2 on bananas. Here the condition MU of apple = MU of banana i.e 7 = 7 
is also satisfied. Any other allocation of the last dollar shall give less total utility to the 
consumer.
Manegerial Economics
Limitations 
 The law is not applicable in case of indivisible goods. The consumer is 
unable to divide the goods to adjust units of utility derived from 
consumption of goods. The law is not applicable in case of indivisible 
goods. The consumer is unable to divide the goods to adjust units of utility 
derived from consumption of goods. 
 There is no measurement of utility. It is psychological concept. It is not 
possible to express it into quantitative form. 
 The law does not hold well in case fashion and customs. The people like to 
spend money on birthdays, marriages and deaths. 
 The does not hold well in case of very low income. The maximization of 
utility is not possible due to low income.
Limitations continues….. 
 The law is not applicable in case of durable goods. The calculation of marginal utility of 
durable goods is impossible. 
 The law fails when goods of choice are not available. The consumer is bound to use 
commodity, which provides low utility due to non availability of goods having high utility. 
 There are certain lazy consumers. They do not care for maximum utility. The law fails to 
operate in case of laziness of consumers. They go on consuming goods with comparing 
utility. There is no measurement of utility. It is psychological concept. It is not possible to 
express it into quantitative form. The law does not hold well in case fashion and customs. 
The people like to spend money on birthdays, marriages and deaths. 
 It does not work when there are frequent prices changes. The consumer is unable to 
calculate utility of different commodities. Changing price levels create confusion in the 
minds of consumers.
Practical implications- 
 The law of equi marginal utility is helpful in the field of production. The 
producer has limited resources. He uses limited resources to purchase 
production factors. He tries to equalize marginal utility of all factors. He 
wishes to get maximum output and profit. 
 National income is distributed among factors of production according to this 
law. An entrepreneur can pay factors of production equal to marginal 
product measured in money terms. He will substitute one factor for another 
until marginal productivity of all factors is equal to prices of their services. 
 The law is used in the field of exchange. The people like to exchange a 
commodity having low utility with a commodity having high utility. There 
is maximum benefit from exchange of commodities. The law is helpful in 
exchange of wealth, trade, import and export
Practical implication continues…. 
 The law is applicable in consumption. A rational consumer tries to 
get maximum satisfaction when he spends his limited resources on 
various things. He tries to equalize weighted marginal utility of all 
the things. 
 The law is applicable in public finance. The government can spend 
its revenue to get maximum social advantage. The marginal utility 
of each dollar spent in one sector must be equal to marginal utility 
derived from all other sectors. 
 The law is helpful in prices. Due to scarcity of commodity its prices 
go up. The law tells us to use substitute commodity, which is less 
scarce. The result is that the price of commodity comes down.
Law of demand 
 In economic terminology the term demand conveys a wider and 
definite meaning than in the ordinary usage. Ordinarily demand 
means a desire, whereas in economic sense it is something more 
than a mere desire. 
 It is interpreted as a want backed up by the - purchasing power. 
 Further demand is per unit of time such as per day, per week etc. 
moreover it is meaningless to mention demand without reference 
to price. 
 “Demand for anything means the quantity of that commodity, 
which is bought, at a given price, per unit of time”.
Demand price relationship 
 This law explains the functional relationship between price of a 
commodity and the quantity demanded of the same. 
 It is observed that the price and the demand are inversely related 
which means that the two move in the opposite direction. 
 An increase in the price leads to a fall in the demand and vice 
versa. 
 “Other things being equal, the demand for a commodity varies 
inversely as the price”
Demand Schedule
Demand Curve
Assumptions of law 
 The law of demand in order to establish the price-demand 
relationship makes a number of assumptions as follows: 
 Income of the consumer is given and constant. 
 No change in tastes, preference, habits etc. 
 Constancy of the price of other goods. 
 No change in the size and composition of population. 
 These Assumptions are expressed in the phrase “other things 
remaining equal”.
Exceptions to law 
 Continuous changes in the price lead to the exceptional behavior. If the price 
shows a rising trend a buyer is likely to buy more at a high price for 
protecting himself against a further rise. As against it when the price starts 
falling continuously, a consumer buys less at a low price and awaits a further 
in price. 
 Giffen's Paradox describes a peculiar experience in case of inferior goods. 
When the price of an inferior commodity declines, the consumer, instead of 
purchasing more, buys less of that commodity and switches on to a superior 
commodity. Hence the exception. 
 Conspicuous Consumption refers to the consumption of those commodities 
which are bought as a matter of prestige. Naturally with a fall in the price of 
such goods, there is no distinction in buying the same. As a result the demand 
declines with a fall in the price of such prestige goods. 
 Ignorance Effect implies a situation in which a consumer buys more of a 
commodity at a higher price only due to ignorance.
Factors affecting demand 
 The law of demand, while explaining the price-demand relationship assumes other 
factors to be constant. In reality however, these factors such as income, population, 
tastes, habits, preferences etc., do not remain constant and keep on affecting the 
demand. As a result the demand changes i.e. rises or falls, without any change in 
price. 
 Income: The relationship between income and the demand is a direct one. It means 
the demand changes in the same direction as the income. An increase in income leads 
to rise in demand and vice versa. 
 Population: The size of population also affects the demand. The relationship is a 
direct one. The higher the size of population, the higher is the demand and vice versa. 
 Tastes and Habits: The tastes, habits, likes, dislikes, prejudices and preference etc. 
of the consumer have a profound effect on the demand for a commodity. If a 
consumers dislikes a commodity, he will not buy it despite a fall in price. On the 
other hand a very high price also may not stop him from buying a good if he likes it 
very much.
 Other Prices: This is another important determinant of demand for a 
commodity. The effects depends upon the relationship between the 
commodities in question. If the price of a complimentary commodity rises, 
the demand for the commodity in reference falls. 
 Advertisement: This factor has gained tremendous importance in the 
modern days. When a product is aggressively advertised through all the 
possible media, the consumers buy the advertised commodity even at a 
high price and many times even if they don’t need it. 
 Fashions: Hardly anyone has the courage and the desire to go against the 
prevailing fashions as well as social customs and the traditions. This factor 
has a great impact on the demand. 
 Imitation: This tendency is commonly experienced everywhere. This is 
known as the demonstration effects, due to which the low income groups 
imitate the consumption patterns of the rich ones. This operates even at 
international levels when the poor countries try to copy the consumption 
patterns of rich countries.
Variation and changes in demand 
 The law of demand explains the effect of only-one factor viz., price, on the 
demand for a commodity, under the assumption of constancy of other 
determinants. 
 In practice, other factors such as, income, population etc. cause the rise or 
fall in demand without any change in the price. These effects are different 
from the law of demand. 
 They are termed as changes in demand in contrast to variations in demand 
which occur due to changes in the price of a commodity. 
 In economic theory a distinction is made between 
 (a) Variations i.e. extension and contraction in demand due to price and 
 (b) Changes i.e. increase and decrease in demand due to other factors.
 Variations in demand refer to those which occur due to 
changes in the price of a commodity. 
 These are two types. 
 Extension of Demand: This refers to rise in demand due to 
a fall in price of the commodity. It is shown by a 
downwards movement on a given demand curve. 
 Contraction of Demand: This means fall in demand due to 
increase in price and can be shown by an upwards 
movement on a given demand curve.
Manegerial Economics
 Changes in demand imply the rise and fall due to factors 
other than price. 
 It means they occur without any change in price. They are of 
two types. 
 Increase in Demand: This refers to higher demand at the 
same price and results from rise in income, population etc., 
this is shown on a new demand curve lying above the 
original one. 
 Decrease in demand: It means less quantity demanded at 
the same price. This is the result of factors like fall in 
income, population etc. this is shown on a new demand lying 
below the original one.
Manegerial Economics
Concluding Remarks 
 The law of demand explains the functional relationship between 
price and demand. 
 In fact, the demand for a commodity depends not only on the price 
of a commodity but also on other factors such as income, 
population, tastes and preferences of the consumer. 
 The law of demand assumes these factors to be constant and states 
the inverse price-demand relationship. Barring certain exceptions, 
the inverse price- demand relationship holds good in case of the 
goods that are bought and sold in the market.
Concluding Remarks….. 
 The law of demand explains the direction of a change as it states 
that with a rise in price the demand contracts and with a fall in 
price it expands. However, it fails to explain the extent or 
magnitude of a change in demand with a given change in price. 
 In other words, the law of demand merely shows the direction in 
which the demand changes as a result of a change in price, but 
does not throw any light on the amount by which the demand 
will change in response to a given change in price. 
 Thus, the law of demand explains the qualitative but not the 
quantitative aspect of price- demand relationship.
Base for elasticity of demand 
 Although it is true that demand responds to change in price of a 
commodity, such response varies from commodity to commodity. 
 Some commodities are more responsive or sensitive to change in 
price while some others are less. The concept of the elasticity of 
demand has great significance as it explains the degree of 
responsiveness of demand to a change in price. 
 It thus elaborates the price-demand relationship. The elasticity of 
demand thus means the sensitiveness or responsiveness of demand 
to a change in price.
Elasticity of demand- 
 According to Marshall, “the elasticity (or responsiveness) of demand in 
a market is great or small accordingly as the demand changes (rises or 
falls) much or little for a given change (rise or fall) in price.” 
 Elasticity of demand is a measure of relative changes in the amount 
demanded in response to a small change in price. 
 The demand is said to be elastic when a small change in price brings 
about considerable change in demand. 
 On the other hand, the demand for a good is said to be inelastic when a 
change in price fails to bring about significant change in demand. 
 Ep = [Percentage change in quantity demanded / Percentage change 
in the price]
Price elasticity 
 The concept of price elasticity reveals that the degree of 
responsiveness of demand to the change in price differs from 
commodity to commodity. 
 Demand for some commodities is more elastic while that for certain 
others is less elastic. 
 Perfectly inelastic demand (ep = 0) 
 Relatively less elastic demand (e < 1) 
 Unitary elasticity (e = 1) 
 Relatively more elastic demand (e > 1) 
 Perfectly elastic demand (e = ∞)
 Perfectly inelastic demand (ep = 0) 
 This describes a situation in which demand shows no response to a change in price. In 
other words, whatever be the price the quantity demanded remains the same. 
 Relatively less elastic demand (e < 1) 
 In this case the proportionate change in demand is smaller than in price 
 Unitary elasticity demand (e = 1) 
 When the percentage change in price produces equivalent percentage change in 
demand. 
 Relatively more elastic demand (e > 1) 
 In case of certain commodities the demand is relatively more responsive to the change 
in price. It means a small change in price induces a significant change in, demand. 
 Perfectly elastic demand (e = ∞) 
 This is experienced when the demand is extremely sensitive to the changes in price. In 
this case an insignificant change in price produces tremendous change in demand.
Determinants of elasticity 
 Nature of the Commodity 
 Number of Substitutes Available 
 Number Of Uses 
 Possibility of Postponement of Consumption 
 Range of prices 
 Proportion of Income Spent
Quiz 
 Identify the elasticity of demand- 
 Food grains 
 Salt 
 Luxuries or comforts 
 Tea/coffee 
 Electricity 
 Milk 
 Coal in railways 
 Coal in household 
 Umbrella 
 Woolen clothes in rainy season 
 Consumer durables 
 Clothes for occassions
Income elasticity of demand 
 Demand for a commodity changes in response to a change in 
income of the consumer. 
 The income effect suggests the effect of change in income on 
demand. The income elasticity of demand explains the extent of 
change in demand as a result of change in income. 
 In other words, income elasticity of demand means the 
responsiveness of demand to changes in income. Thus, income 
elasticity of demand can be expressed as- 
 EY = [Percentage change in demand / Percentage change in 
income]
 Income Elasticity of Demand Greater than One: When the percentage change 
in demand is greater than the percentage change in income, a greater portion of 
income is being spent on a commodity with an increase in income- income 
elasticity is said to be greater than one. 
 Income Elasticity is unitary: When the proportion of income spent on a 
commodity remains the same or when the percentage change in income is equal 
to the percentage change in demand, EY = 1 or the income elasticity is unitary. 
 Income Elasticity Less Than One (EY< 1): This occurs when the percentage 
change in demand is less than the percentage change in income. 
 Zero Income Elasticity of Demand (EY=o): This is the case when change in 
income of the consumer does not bring about any change in the demand for a 
commodity. 
 Negative Income Elasticity of Demand (EY< o): It is well known that income 
effect for most of the commodities is positive. But in case of inferior goods, the 
income effect beyond a certain level of income becomes negative. This implies 
that as the income increases the consumer, instead of buying more of a 
commodity, buys less and switches on to a superior commodity. The income 
elasticity of demand in such cases will be negative.
Cross Elasticity of Demand 
 The concept of cross elasticity explains the degree of change in demand for X as, a 
result of change in price of Y. This can be expressed as: 
 EC = [Percentage Change in demand for X / Percentage change in price of Y] 
 The relationship between any two goods is of two types. – 
 The goods X and Y can be complementary goods (such as pen and ink) or 
substitutes (such as pen and ball pen). In case of complementary commodities, the 
cross elasticity will be negative. This means that fall in price of X (pen) leads to 
rise in its demand so also rise in t) demand for Y (ink). 
 On the other hand, the cross elasticity for substitutes is positive which means a fall 
in price of X (pen) results in rise in demand for X and fall in demand for Y (ball 
pen) 
 If two commodities, say X and Y, are unrelated there will be no change i. Demand 
for X as a result of change in price of Y. Cross elasticity in cad of such unrelated 
goods will then be zero.
Importance of Elasticity 
 The law of demand merely explains the qualitative relationship while the 
concept of elasticity of demand analyses the quantitative price-demand 
relationship. 
 The Pricing policy of the producer is greatly influenced by the nature of 
demand for his product. If the demand is inelastic, he will be benefited 
by charging a high price. If on the other hand, the demand is elastic, low 
price will be advantageous to the producer. The concept of elasticity 
helps the monopolist while practicing the price discrimination. 
 The price of joint products can be fixed on the basis of elasticity of 
demand. In case of such joint products, such as wool and mutton, cotton 
and cotton seeds, separate costs of production are not known. High price 
is charged for a product having inelastic demand (say cotton) and low 
price for its joint product having elastic demand (say cotton seeds).
Importance of Elasticity 
 The concept of elasticity of demand is helpful to the Government in fixing the prices of 
public utilities. 
 The Elasticity of demand is important not only in pricing the commodities but also in fixing 
the price of labour viz., wages. 
 The concept of elasticity of demand is very important in the field international trade. It 
helps in solving some of the problems of international trade such as gains from trade, 
balance of payments etc. policy of tariff also depends upon the nature of demand for a 
commodity. 
 The concept of elasticity of demand is useful to Government in formulation of economic 
policy in various fields such as taxation, international trade etc. 
 (a) The concept of elasticity of demand guides the finance minister in imposing the 
commodity taxes. He should tax such commodities which have inelastic demand so that the 
Government can raise handsome revenue. 
 (b) The concept of elasticity of demand helps the Government in formulating commercial 
policy. Protection and subsidy is granted to the industries which face an elastic demand.
Supply- Conceptual framework 
 Supply during a given period of time means the quantities of goods 
which are offered for sale at particular price. 
 Supply is a relative term. It is always referred to in relation to price 
and time. 
 Supply is what the seller is able and willing to offer for sale. 
 The law, reflects the general tendency of the sellers in offering their 
stock of a commodity for sale in relation to the varying price. 
 It is noted that usually sellers are willing to supply more as the price 
increases.
Statement of law- 
 Ceteris Paribus, the supply of a commodity expands(I.e. rises) 
with a rise in its price, and contracts (I.e. falls) with a fall in its 
price. 
 The law, thus, suggests that the supply varies directly with the 
changes in price. So, a larger amount is supplied at a higher price 
than at lower price in the market.
Schedule to law- 
Price Supply of 
Coffee 
1 6 
2 9 
3 12 
4 15 
5 18
Assumptions underlying the law 
 Cost of production in unchanged 
 No change in technique of production 
 Fixed scale of production 
 Government policies are unchanged 
 No change in transport costs 
 No speculation 
 The prices of other goods are held constant.
Extension/Contraction of supply
Supply shifters 
RATNEST
Manegerial Economics
 RESOURCE COST : 
 RESOURCE COST If resource cost decreases supply Increases [making 
more $] If resource cost increases supply Decreases [making less $] 
 ALTERNATIVE OUTPUT PRICE CHANGE : 
 ALTERNATIVE OUTPUT PRICE CHANGE One opportunity cost of 
producing eggs is not selling chickens. An increase in the price people are 
willing to pay for fresh chicken would make it more profitable to sell 
chickens and would thus increase the opportunity cost of producing eggs. It 
would shift the supply curve for eggs to the left, reflecting a decrease in 
supply. 
 TECHNOLOGICAL IMPROVEMENT : 
 TECHNOLOGICAL IMPROVEMENT An improvement in technology 
usually means that fewer and/or less costly inputs are needed. If the cost of 
production is lower, the profits available at a given price will increase, and 
producers will produce more. With more produced at every price, the supply 
curve will shift to the right, meaning an increase in supply
 NUMBER OF SUPPLIERS : 
 NUMBER OF SUPPLIERS A change in the number of sellers in an industry changes 
the quantity available at each price and thus changes supply. An increase in the 
number of sellers supplying a good or service shifts the supply curve to the right; a 
reduction in the number of sellers shifts the supply curve to the left 
 EXPECTATIONS : 
 EXPECTATIONS . If a change in the international political climate leads many 
owners to expect that oil prices will rise in the future, they may decide to leave their 
oil in the ground, planning to sell it later when the price is higher. Thus, there will be a 
decrease in supply; the supply curve for oil will shift to the left. 
 SUBSIDIES : 
 SUBSIDIES Free money from the government (subsidies) induces suppliers to supply 
more. 
 TAXES : 
 TAXES If business have their taxes decreased, it moves the supply curve to the right. 
If business have their taxes increased, it moves the supply curve to the left.
Demand forecasting 
 Demand forecasting is predicting the future demand for the firm’s 
product. 
 The knowledge about the future demand for the product helps a great 
deal in the following areas of business decision making. 
 Planning and scheduling production 
 Acquiring inputs 
 Making provisions for finances 
 Formulation of pricing strategy 
 Planning advertisement.
Steps involved- 
 Specifying the objective 
 Determining time perspective 
 Making choice of method for demand forecasting 
 Collection of data and data adjustment 
 Estimation and interpretation of result
Techniques 
Survey 
methods 
Statistical 
Methods 
Forecasting 
technique
Survey Methods 
• Complete enumeration 
• Sample survey 
• End-use method 
Consumer 
survey 
• Expert opinion 
• Market studies and 
experimentation. 
Opinion Poll

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Manegerial Economics

  • 1. Demand and supply functions
  • 2. Concept of utility  Utility is a property common to all commodities and services desired by a person. It has no physical or material existence and so it is inherent in a commodity.  Any commodity which has a capacity to satisfy consumer want, it has utility.  Utility is subjective in nature. Utility has nothing to do with usefulness. Hence in economics, the concept of utility is legally, morally, socially and ethically neutral.
  • 3. Approaches to utility • It argues that a consumer has the capacity to measure the level of satisfaction that she derives from consumption of a given quantity of a commodity. Cardinal Utility • It argues that a consumer cannot measure satisfaction numerically or subjectively instead consumer can rank the different baskets or bundles so as to choose the best basket. Ordinal
  • 4. Marginal Utility& Total Utility  Marginal utility is the utility of last unit or addition to total utility by the consumption of one additional unit of commodity.  MU10 = TU10 – TU9  Total Utility- It is the sum of marginal utilities obtained from consumption of each successive unit of a commodity or service. If continuous units of a commodity 'X' are consumed, then  TUx = Σ MUx
  • 5. Terms related to Utility  Initial Utility: The amount of satisfaction to be obtained from the consumption of very first unit of a commodity or service is called the initial utility e.g. the amount of satisfaction to be obtained from consumption of the first apple is units. It is called initial utility of the consumer.  Positive Utility: When a consumer consumes successive units of a commodity or service, its marginal utility decreases. The utility obtained from the consumption of all the units of a commodity or service before reaching the marginal utility equal to zero, is called positive utility.  Saturation Point: By the consumption of that unit of a commodity where the marginal utility drops down to zero, is called the saturation point.
  • 6. Terms related to Utility  Negative Utility: By using the next unit of a commodity after saturation point, that unit gives negative satisfaction to the consumer and marginal utility becomes negative, it is known as negative utility.  Util: Although utility cannot be measured but in cardinal approach of consumer behavior, the term which is used as a unit of utility is known as Util and arithmetic numbers (1, 2, 3, .......) are used. For example X ate an apple and got 10 Util of utility.
  • 7. Law of diminishing marginal utility  The law of diminishing marginal utility describes a familiar and fundamental tendency of human behavior. The law of diminishing marginal utility states that:  “As a consumer consumes more and more units of a specific commodity, the utility from the successive units goes on diminishing”.  Mr. H. Gossen, a German economist, was first to explain this law in 1854. Alfred Marshal later on restated this law in the following words:  “The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stock that already has”.
  • 8. Schedule to law Unit Total Utility Marginal utility 1 glass of water 20 20 2 glass of water 32 12 3 glass of water 40 8 4 glass of water 42 2 5 glass of water 42 2 6 glass of water 39 -3
  • 10. Assumption of law  The law of diminishing marginal utility is true under certain assumptions. These assumptions are as under: (i) Rationality: In the cardinal utility analysis, it is assumed that the consumer is rational. He aims at maximization of utility subject to availability of his income. (ii) Constant marginal utility of money: It is assumed in the theory that the marginal utility of money based for purchasing goods remains constant. If the marginal utility of money changes with the increase or decrease in income, it then cannot yield correct measurement of the marginal utility of the good. (iii) Diminishing marginal utility: Another important assumption of utility analysis is that the utility gained from the successive units of a commodity diminishes in a given time period. (iv) Utility is additive: In the early versions of the theory of consumer behavior, it was assumed that the utilities of different commodities are independent. The total utility of each commodity is additive. U = U1 (X1) + U2 (X2) + U3 (X3)………. Un (Xn)
  • 11. Assumption of law Conti… v) Consumption to be continuous: It is assumed in this law that the consumption of a commodity should be continuous. If there is interval between the consumption of the same units of the commodity, the law may not hold good. For instance, if you take one glass of water in the morning and the 2nd at noon, the marginal utility of the 2nd glass of water may increase. (vi) Suitable quantity: It is also assumed that the commodity consumed is taken in suitable and reasonable units. If the units are too small, then the marginal utility instead of falling may increase up to a few units. (vii) Character of the consumer does not change: The law holds true if there is no change in the character of the consumer. For example, if a consumer develops a taste for wine, the additional units of wine may increase the marginal utility to a drunkard. (viii) No change to fashion: Customs and tastes: If there is a sudden change in fashion or customs or taste of a consumer, it can than make the law inoperative. (ix) No change in the price of the commodity: there should be any change in the price of that commodity as more units are consumed.
  • 12. Limitation to law  (i) Case of intoxicants: Consumption of liquor defies the low for a short period. The more a person drinks, the more likes it. However, this is truer only initially. A stage comes when a drunkard too starts taking less and less liquor and eventually stops it.  (ii) Rare collection: If there are only two diamonds in the world, the possession of 2nd diamond will push up the marginal utility.  (iii) Application to money: The law equally holds good for money. It is true that more money the man has, the greedier he is to get additional units of it. However, the truth is that the marginal utility of money declines with richness but never falls to zero.
  • 13. Law of equi-marginal utility  The law of equi marginal utility was presented in 19th century by an Australian economists H. H. Gossen. It is also known as law of maximum satisfaction or law of substitution or Gossen‘s second law. A consumer has number of wants. He tries to spend limited income on different things in such a way that marginal utility of all things is equal. When he buys several things with given money income he equalizes marginal utilities of all such things. The law of equi marginal utility is an extension of the law of diminishing marginal utility. The consumer can get maximum utility by allocating income among commodities in such a way that last dollar spent on each item provides the same marginal utility.
  • 14. Statement of law  “A person can get maximum utility with his given income when it is spent on different commodities in such a way that the marginal utility of money spent on each item is equal".  It is clear that consumer can get maximum utility from the expenditure of his limited income. He should purchase such amount of each commodity that the last unit of money spend on each item provides same marginal utility.
  • 15. Assumption of law  There is no change in the prices of the goods.  The income of consumer is fixed.  The marginal utility of money is constant.  Consumer has perfect knowledge of utility obtained from goods.  Consumer is normal person so he tries to seek maximum satisfaction.  The utility is measurable in cardinal terms.  Consumer has many wants.  The goods have substitutes.
  • 16. Schedule and explanation  The law of substitution can be explained with the help of an example. Suppose consumer has six dollars that he wants to spend on apples and bananas in order to obtain maximum total utility. The following table shows marginal utility (MU) of spending additional dollars of income on apples and bananas: Money ($) M.U. of apples M.U. of Bananas 1 10 8 2 9 7 3 8 6 4 7 5 5 6 4 6 5 3
  • 17.  The above schedule shows that consumer can spend six dollars in different ways:  $1 on apples and $5 on bananas. The total utility he can get is: [(10) + (8+7+6+5+4)] = 40.  $2 on apples and $4 on bananas. The total utility he can get is: [(10+9) + (8+7+6+5)] = 45.  $3 on apples and $3 on bananas. The total utility he can get is: [(10+9+8) + (8+7+6)] = 48.  $4 on apples and $2 on bananas. This way the total utility is: [(10+9+8+7) + (8+7)] = 49.  $5 on apples and $1 on bananas. The total utility he can get is: [(10+9+8+7+6) + (8)] = 48.  Total utility for consumer is 49 utils that is the highest obtainable with expenditure of $4 on apples and $2 on bananas. Here the condition MU of apple = MU of banana i.e 7 = 7 is also satisfied. Any other allocation of the last dollar shall give less total utility to the consumer.
  • 19. Limitations  The law is not applicable in case of indivisible goods. The consumer is unable to divide the goods to adjust units of utility derived from consumption of goods. The law is not applicable in case of indivisible goods. The consumer is unable to divide the goods to adjust units of utility derived from consumption of goods.  There is no measurement of utility. It is psychological concept. It is not possible to express it into quantitative form.  The law does not hold well in case fashion and customs. The people like to spend money on birthdays, marriages and deaths.  The does not hold well in case of very low income. The maximization of utility is not possible due to low income.
  • 20. Limitations continues…..  The law is not applicable in case of durable goods. The calculation of marginal utility of durable goods is impossible.  The law fails when goods of choice are not available. The consumer is bound to use commodity, which provides low utility due to non availability of goods having high utility.  There are certain lazy consumers. They do not care for maximum utility. The law fails to operate in case of laziness of consumers. They go on consuming goods with comparing utility. There is no measurement of utility. It is psychological concept. It is not possible to express it into quantitative form. The law does not hold well in case fashion and customs. The people like to spend money on birthdays, marriages and deaths.  It does not work when there are frequent prices changes. The consumer is unable to calculate utility of different commodities. Changing price levels create confusion in the minds of consumers.
  • 21. Practical implications-  The law of equi marginal utility is helpful in the field of production. The producer has limited resources. He uses limited resources to purchase production factors. He tries to equalize marginal utility of all factors. He wishes to get maximum output and profit.  National income is distributed among factors of production according to this law. An entrepreneur can pay factors of production equal to marginal product measured in money terms. He will substitute one factor for another until marginal productivity of all factors is equal to prices of their services.  The law is used in the field of exchange. The people like to exchange a commodity having low utility with a commodity having high utility. There is maximum benefit from exchange of commodities. The law is helpful in exchange of wealth, trade, import and export
  • 22. Practical implication continues….  The law is applicable in consumption. A rational consumer tries to get maximum satisfaction when he spends his limited resources on various things. He tries to equalize weighted marginal utility of all the things.  The law is applicable in public finance. The government can spend its revenue to get maximum social advantage. The marginal utility of each dollar spent in one sector must be equal to marginal utility derived from all other sectors.  The law is helpful in prices. Due to scarcity of commodity its prices go up. The law tells us to use substitute commodity, which is less scarce. The result is that the price of commodity comes down.
  • 23. Law of demand  In economic terminology the term demand conveys a wider and definite meaning than in the ordinary usage. Ordinarily demand means a desire, whereas in economic sense it is something more than a mere desire.  It is interpreted as a want backed up by the - purchasing power.  Further demand is per unit of time such as per day, per week etc. moreover it is meaningless to mention demand without reference to price.  “Demand for anything means the quantity of that commodity, which is bought, at a given price, per unit of time”.
  • 24. Demand price relationship  This law explains the functional relationship between price of a commodity and the quantity demanded of the same.  It is observed that the price and the demand are inversely related which means that the two move in the opposite direction.  An increase in the price leads to a fall in the demand and vice versa.  “Other things being equal, the demand for a commodity varies inversely as the price”
  • 27. Assumptions of law  The law of demand in order to establish the price-demand relationship makes a number of assumptions as follows:  Income of the consumer is given and constant.  No change in tastes, preference, habits etc.  Constancy of the price of other goods.  No change in the size and composition of population.  These Assumptions are expressed in the phrase “other things remaining equal”.
  • 28. Exceptions to law  Continuous changes in the price lead to the exceptional behavior. If the price shows a rising trend a buyer is likely to buy more at a high price for protecting himself against a further rise. As against it when the price starts falling continuously, a consumer buys less at a low price and awaits a further in price.  Giffen's Paradox describes a peculiar experience in case of inferior goods. When the price of an inferior commodity declines, the consumer, instead of purchasing more, buys less of that commodity and switches on to a superior commodity. Hence the exception.  Conspicuous Consumption refers to the consumption of those commodities which are bought as a matter of prestige. Naturally with a fall in the price of such goods, there is no distinction in buying the same. As a result the demand declines with a fall in the price of such prestige goods.  Ignorance Effect implies a situation in which a consumer buys more of a commodity at a higher price only due to ignorance.
  • 29. Factors affecting demand  The law of demand, while explaining the price-demand relationship assumes other factors to be constant. In reality however, these factors such as income, population, tastes, habits, preferences etc., do not remain constant and keep on affecting the demand. As a result the demand changes i.e. rises or falls, without any change in price.  Income: The relationship between income and the demand is a direct one. It means the demand changes in the same direction as the income. An increase in income leads to rise in demand and vice versa.  Population: The size of population also affects the demand. The relationship is a direct one. The higher the size of population, the higher is the demand and vice versa.  Tastes and Habits: The tastes, habits, likes, dislikes, prejudices and preference etc. of the consumer have a profound effect on the demand for a commodity. If a consumers dislikes a commodity, he will not buy it despite a fall in price. On the other hand a very high price also may not stop him from buying a good if he likes it very much.
  • 30.  Other Prices: This is another important determinant of demand for a commodity. The effects depends upon the relationship between the commodities in question. If the price of a complimentary commodity rises, the demand for the commodity in reference falls.  Advertisement: This factor has gained tremendous importance in the modern days. When a product is aggressively advertised through all the possible media, the consumers buy the advertised commodity even at a high price and many times even if they don’t need it.  Fashions: Hardly anyone has the courage and the desire to go against the prevailing fashions as well as social customs and the traditions. This factor has a great impact on the demand.  Imitation: This tendency is commonly experienced everywhere. This is known as the demonstration effects, due to which the low income groups imitate the consumption patterns of the rich ones. This operates even at international levels when the poor countries try to copy the consumption patterns of rich countries.
  • 31. Variation and changes in demand  The law of demand explains the effect of only-one factor viz., price, on the demand for a commodity, under the assumption of constancy of other determinants.  In practice, other factors such as, income, population etc. cause the rise or fall in demand without any change in the price. These effects are different from the law of demand.  They are termed as changes in demand in contrast to variations in demand which occur due to changes in the price of a commodity.  In economic theory a distinction is made between  (a) Variations i.e. extension and contraction in demand due to price and  (b) Changes i.e. increase and decrease in demand due to other factors.
  • 32.  Variations in demand refer to those which occur due to changes in the price of a commodity.  These are two types.  Extension of Demand: This refers to rise in demand due to a fall in price of the commodity. It is shown by a downwards movement on a given demand curve.  Contraction of Demand: This means fall in demand due to increase in price and can be shown by an upwards movement on a given demand curve.
  • 34.  Changes in demand imply the rise and fall due to factors other than price.  It means they occur without any change in price. They are of two types.  Increase in Demand: This refers to higher demand at the same price and results from rise in income, population etc., this is shown on a new demand curve lying above the original one.  Decrease in demand: It means less quantity demanded at the same price. This is the result of factors like fall in income, population etc. this is shown on a new demand lying below the original one.
  • 36. Concluding Remarks  The law of demand explains the functional relationship between price and demand.  In fact, the demand for a commodity depends not only on the price of a commodity but also on other factors such as income, population, tastes and preferences of the consumer.  The law of demand assumes these factors to be constant and states the inverse price-demand relationship. Barring certain exceptions, the inverse price- demand relationship holds good in case of the goods that are bought and sold in the market.
  • 37. Concluding Remarks…..  The law of demand explains the direction of a change as it states that with a rise in price the demand contracts and with a fall in price it expands. However, it fails to explain the extent or magnitude of a change in demand with a given change in price.  In other words, the law of demand merely shows the direction in which the demand changes as a result of a change in price, but does not throw any light on the amount by which the demand will change in response to a given change in price.  Thus, the law of demand explains the qualitative but not the quantitative aspect of price- demand relationship.
  • 38. Base for elasticity of demand  Although it is true that demand responds to change in price of a commodity, such response varies from commodity to commodity.  Some commodities are more responsive or sensitive to change in price while some others are less. The concept of the elasticity of demand has great significance as it explains the degree of responsiveness of demand to a change in price.  It thus elaborates the price-demand relationship. The elasticity of demand thus means the sensitiveness or responsiveness of demand to a change in price.
  • 39. Elasticity of demand-  According to Marshall, “the elasticity (or responsiveness) of demand in a market is great or small accordingly as the demand changes (rises or falls) much or little for a given change (rise or fall) in price.”  Elasticity of demand is a measure of relative changes in the amount demanded in response to a small change in price.  The demand is said to be elastic when a small change in price brings about considerable change in demand.  On the other hand, the demand for a good is said to be inelastic when a change in price fails to bring about significant change in demand.  Ep = [Percentage change in quantity demanded / Percentage change in the price]
  • 40. Price elasticity  The concept of price elasticity reveals that the degree of responsiveness of demand to the change in price differs from commodity to commodity.  Demand for some commodities is more elastic while that for certain others is less elastic.  Perfectly inelastic demand (ep = 0)  Relatively less elastic demand (e < 1)  Unitary elasticity (e = 1)  Relatively more elastic demand (e > 1)  Perfectly elastic demand (e = ∞)
  • 41.  Perfectly inelastic demand (ep = 0)  This describes a situation in which demand shows no response to a change in price. In other words, whatever be the price the quantity demanded remains the same.  Relatively less elastic demand (e < 1)  In this case the proportionate change in demand is smaller than in price  Unitary elasticity demand (e = 1)  When the percentage change in price produces equivalent percentage change in demand.  Relatively more elastic demand (e > 1)  In case of certain commodities the demand is relatively more responsive to the change in price. It means a small change in price induces a significant change in, demand.  Perfectly elastic demand (e = ∞)  This is experienced when the demand is extremely sensitive to the changes in price. In this case an insignificant change in price produces tremendous change in demand.
  • 42. Determinants of elasticity  Nature of the Commodity  Number of Substitutes Available  Number Of Uses  Possibility of Postponement of Consumption  Range of prices  Proportion of Income Spent
  • 43. Quiz  Identify the elasticity of demand-  Food grains  Salt  Luxuries or comforts  Tea/coffee  Electricity  Milk  Coal in railways  Coal in household  Umbrella  Woolen clothes in rainy season  Consumer durables  Clothes for occassions
  • 44. Income elasticity of demand  Demand for a commodity changes in response to a change in income of the consumer.  The income effect suggests the effect of change in income on demand. The income elasticity of demand explains the extent of change in demand as a result of change in income.  In other words, income elasticity of demand means the responsiveness of demand to changes in income. Thus, income elasticity of demand can be expressed as-  EY = [Percentage change in demand / Percentage change in income]
  • 45.  Income Elasticity of Demand Greater than One: When the percentage change in demand is greater than the percentage change in income, a greater portion of income is being spent on a commodity with an increase in income- income elasticity is said to be greater than one.  Income Elasticity is unitary: When the proportion of income spent on a commodity remains the same or when the percentage change in income is equal to the percentage change in demand, EY = 1 or the income elasticity is unitary.  Income Elasticity Less Than One (EY< 1): This occurs when the percentage change in demand is less than the percentage change in income.  Zero Income Elasticity of Demand (EY=o): This is the case when change in income of the consumer does not bring about any change in the demand for a commodity.  Negative Income Elasticity of Demand (EY< o): It is well known that income effect for most of the commodities is positive. But in case of inferior goods, the income effect beyond a certain level of income becomes negative. This implies that as the income increases the consumer, instead of buying more of a commodity, buys less and switches on to a superior commodity. The income elasticity of demand in such cases will be negative.
  • 46. Cross Elasticity of Demand  The concept of cross elasticity explains the degree of change in demand for X as, a result of change in price of Y. This can be expressed as:  EC = [Percentage Change in demand for X / Percentage change in price of Y]  The relationship between any two goods is of two types. –  The goods X and Y can be complementary goods (such as pen and ink) or substitutes (such as pen and ball pen). In case of complementary commodities, the cross elasticity will be negative. This means that fall in price of X (pen) leads to rise in its demand so also rise in t) demand for Y (ink).  On the other hand, the cross elasticity for substitutes is positive which means a fall in price of X (pen) results in rise in demand for X and fall in demand for Y (ball pen)  If two commodities, say X and Y, are unrelated there will be no change i. Demand for X as a result of change in price of Y. Cross elasticity in cad of such unrelated goods will then be zero.
  • 47. Importance of Elasticity  The law of demand merely explains the qualitative relationship while the concept of elasticity of demand analyses the quantitative price-demand relationship.  The Pricing policy of the producer is greatly influenced by the nature of demand for his product. If the demand is inelastic, he will be benefited by charging a high price. If on the other hand, the demand is elastic, low price will be advantageous to the producer. The concept of elasticity helps the monopolist while practicing the price discrimination.  The price of joint products can be fixed on the basis of elasticity of demand. In case of such joint products, such as wool and mutton, cotton and cotton seeds, separate costs of production are not known. High price is charged for a product having inelastic demand (say cotton) and low price for its joint product having elastic demand (say cotton seeds).
  • 48. Importance of Elasticity  The concept of elasticity of demand is helpful to the Government in fixing the prices of public utilities.  The Elasticity of demand is important not only in pricing the commodities but also in fixing the price of labour viz., wages.  The concept of elasticity of demand is very important in the field international trade. It helps in solving some of the problems of international trade such as gains from trade, balance of payments etc. policy of tariff also depends upon the nature of demand for a commodity.  The concept of elasticity of demand is useful to Government in formulation of economic policy in various fields such as taxation, international trade etc.  (a) The concept of elasticity of demand guides the finance minister in imposing the commodity taxes. He should tax such commodities which have inelastic demand so that the Government can raise handsome revenue.  (b) The concept of elasticity of demand helps the Government in formulating commercial policy. Protection and subsidy is granted to the industries which face an elastic demand.
  • 49. Supply- Conceptual framework  Supply during a given period of time means the quantities of goods which are offered for sale at particular price.  Supply is a relative term. It is always referred to in relation to price and time.  Supply is what the seller is able and willing to offer for sale.  The law, reflects the general tendency of the sellers in offering their stock of a commodity for sale in relation to the varying price.  It is noted that usually sellers are willing to supply more as the price increases.
  • 50. Statement of law-  Ceteris Paribus, the supply of a commodity expands(I.e. rises) with a rise in its price, and contracts (I.e. falls) with a fall in its price.  The law, thus, suggests that the supply varies directly with the changes in price. So, a larger amount is supplied at a higher price than at lower price in the market.
  • 51. Schedule to law- Price Supply of Coffee 1 6 2 9 3 12 4 15 5 18
  • 52. Assumptions underlying the law  Cost of production in unchanged  No change in technique of production  Fixed scale of production  Government policies are unchanged  No change in transport costs  No speculation  The prices of other goods are held constant.
  • 56.  RESOURCE COST :  RESOURCE COST If resource cost decreases supply Increases [making more $] If resource cost increases supply Decreases [making less $]  ALTERNATIVE OUTPUT PRICE CHANGE :  ALTERNATIVE OUTPUT PRICE CHANGE One opportunity cost of producing eggs is not selling chickens. An increase in the price people are willing to pay for fresh chicken would make it more profitable to sell chickens and would thus increase the opportunity cost of producing eggs. It would shift the supply curve for eggs to the left, reflecting a decrease in supply.  TECHNOLOGICAL IMPROVEMENT :  TECHNOLOGICAL IMPROVEMENT An improvement in technology usually means that fewer and/or less costly inputs are needed. If the cost of production is lower, the profits available at a given price will increase, and producers will produce more. With more produced at every price, the supply curve will shift to the right, meaning an increase in supply
  • 57.  NUMBER OF SUPPLIERS :  NUMBER OF SUPPLIERS A change in the number of sellers in an industry changes the quantity available at each price and thus changes supply. An increase in the number of sellers supplying a good or service shifts the supply curve to the right; a reduction in the number of sellers shifts the supply curve to the left  EXPECTATIONS :  EXPECTATIONS . If a change in the international political climate leads many owners to expect that oil prices will rise in the future, they may decide to leave their oil in the ground, planning to sell it later when the price is higher. Thus, there will be a decrease in supply; the supply curve for oil will shift to the left.  SUBSIDIES :  SUBSIDIES Free money from the government (subsidies) induces suppliers to supply more.  TAXES :  TAXES If business have their taxes decreased, it moves the supply curve to the right. If business have their taxes increased, it moves the supply curve to the left.
  • 58. Demand forecasting  Demand forecasting is predicting the future demand for the firm’s product.  The knowledge about the future demand for the product helps a great deal in the following areas of business decision making.  Planning and scheduling production  Acquiring inputs  Making provisions for finances  Formulation of pricing strategy  Planning advertisement.
  • 59. Steps involved-  Specifying the objective  Determining time perspective  Making choice of method for demand forecasting  Collection of data and data adjustment  Estimation and interpretation of result
  • 60. Techniques Survey methods Statistical Methods Forecasting technique
  • 61. Survey Methods • Complete enumeration • Sample survey • End-use method Consumer survey • Expert opinion • Market studies and experimentation. Opinion Poll