The document explains fundamental economic concepts including desire, want, demand, and supply, detailing how demand is influenced by various factors such as price, income, and consumer preferences. It elaborates on the law of demand, its exceptions, and the mechanisms of demand and supply functions, as well as elasticity and its various types. Additionally, the document covers shifts in demand and supply curves, factors affecting them, and methods for measuring elasticity.

1. MODULE 2

2. INTRODUCTION
Desire - is just a wish on the part of the consumer to possess a commodity.
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

3. 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.

5. 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.

6. DEMAND FUNCTION
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)
where,
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 are constant.
It can be mathematically represented as: Dx = f (Px)

7. LAW OF DEMAND
MEANING
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’.
DEFINITION
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).

8. ASSUMPTIONS OF THE LAW
According to Stigler and Boulding, the law of demand based on the following
assumptions:
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 future.
7. There should be perfect competition in the market.

9. DEMAND SCHEDULE
Demand Schedule - It shows the relationship between price and quantities demanded
at different
Demand Schedule

10. DEMAND CURVE
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.

11. WHY DOES A DEMAND CURVE SLOPE DOWNWARDS?
Substitution Effect
Income Effect
Price Effect
Psychological effect
Law of diminishing marginal utility
New consumer

12. 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.

13. 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

14. CHANGE IN DEMAND AND SUPPLY

15. CHANGE IN DEMAND

16. 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.

17. 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.

18. EXTENSION OF DEMAND
Price (per Unit) Quantity Demanded
5 14
4 16
3 18
2 20

19. CONTRACTION IN DEMAND
Price (per Unit) Quantity Demanded
2 20
3 28
4 16
5 14
Demand

20. 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 demand.
Increase in demand - (a) same price , more demand (b)More price, same demand
Decrease in demand—Demand can be decrease in two ways (a) Same price ,less
demand (b) Less price, same demand

21. INCREASE IN DEMAND
Same price, more demand
More price, same demand

22. DECREASE IN DEMAND
Same price, less demand
Less price, same demand

23. 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 commodity.

24. SUPPLY
Supply refers to the quantity of a commodity that producers are willing to sell at
different prices per unit of time.
Features:
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.

25. 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

26. 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 profits.
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)

27. EXCEPTIONS TO THE LAW OF SUPPLY
Non-maximisation of profits
Factors other than price not remaining constant

28. SUPPLY SCHEDULE
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.

29. 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 convex downwards.
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

30. 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 supply curve
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.

31. 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”.

32. 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.

33. 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

34. ELASTICITY

35. 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.
Symbolically:
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.

36. 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.

37. Infinite Elasticity of Demand
A very small fall in price can lead to an
extremely large increase in quantity
demanded.

38. 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.).

39. 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;

40. 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

43. METHODS OF MEASURING PRICE ELASTICITY OF
DEMAND
1. Total Expenditure Method
2. Proportionate Method
3. Point Elasticity Method
4. Arc Elasticity Method
5. Revenue Method

44. 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

45. This can be expressed with the help
of a Chart.

46. 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
commodity.”
It is also known as the Percentage
Method, Flux Method, Ratio
Method, and Arithmetic Method

47. 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

48. 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
curve.

49. 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 demand,
A = average revenue and
M = marginal revenue.

50. 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

51. 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 demand is

52. CHARACTERISTICS
Ey > 1, QD and income are directly related. This is a normal good and it is income
elastic.
0< Ey< 1, QD and income are directly related. This is a normal good and it is
income inelastic.
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.

53. 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

54. LIMITATIONS OF THE CONCEPTS OF ELASTICITY
OF DEMAND
Irrelevant and Unreliable Data
Unrealistic Assumption

55. ELASTICTIY OF SUPPLY

56. 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.
Definition:
According to Bilas,
“Elasticity of Supply is defined as the percentage change in quantity supplied
divided by percentage change in price.”

57. It can be calculated by using the following formula:
ES = % change in quantity supplied/% change in price
Symbolically,
ES = ∆Q/Q ÷ ∆P/P = ∆Q/∆P × P/Q

58. DEGREES OF ELASTICITY OF SUPPLY
1.Perfectly elastic
2.Perfectly inelastic
3.Unitary elastic
4.Relatively elastic
5.Relatively inelastic

59. 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 elasticity.
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.

60. 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.

61. 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.

62. 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 elastic.

63. INELASTIC SUPPLY
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.

64. 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.

65. 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

66. 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 as follows:

67. 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

68. DEMAND FORECASTING

69. MEANING
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.

70. 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 new products.
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.

71. 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

72. METHODS OF DEMAND FORECASTING

74. ORDINARY LEAST SQUARE METHOD
Regression Analysis is a statistical technique that studies the relation between
independent variable and dependent variable. The data collected is represented on
a scatter plot and these scatter plot of points are translated are translated into
demand equation.
It helps to find the regression equation that best fits the observed data.
The technique that regression analysis uses to minimize the error term is called the
OLS – ORDINARY LEAST SQUARE MODEL

75. TREND ANALYSIS AND TREND PROJECTION
Classical method of business forecasting
Relies on time series data
The trend projection method is used under the assumption that the factors responsible
for the past trends, will continue to play their part in future in the same manner and
to the same extent as they did in the past
Technique of trend projection based on Time Series data –
LEAST SQUARE METHOD/STRAIGHT LINE METHOD