This document provides an introduction to consumer and producer behavior concepts. It discusses key terms like demand, supply, determinants of demand and supply, equilibrium price and quantity. It explains consumer choice is determined by factors like income, taste and price. Utility analysis is the cornerstone of understanding consumer behavior, with the goal of a rational consumer being to maximize utility subject to a budget constraint. Different types of demand and exceptions to the law of demand are also covered.

1. UNIT -2 CONSUMER AND
PRODUCER BEHAVIOUR

2. “Demand is the mother of
production”
“If you can’t pay for a thing, don’t buy it. if
you can’t get paid for it don’t sell it”
-Benjamin Franklin

3. INTRODUCTION
• MARKET
– It refers to the interaction between sellers and
buyers of a goods/service at a mutually agreed on
price.
• Success of any business is determined by the
extend and magnitude of demand and the
rate of growth of demand.
• So one must know about the demand and
supply concepts then how this bring out the
price determination in the market.

4. DEMAND
• In a day to day life we need various goods and
services.
• It said human wants are unlimited.
• DEMAND
– It is defined as the want, need or desire which is
backed by willingness and ability to buy a
particular commodity in a given period of time.
– It is the quantity of a commodity which
consumers are willing to buy at given price for a
particular unit of time(day/week/month)
– It is a effective desire as it is backed by
willingness to pay and ability to pay.

5. TYPES OF DEMAND
• Based on nature of commodity, time unit for
which it is demanded and relation between
two goods
– Direct and derived demand
– Recurring and replacement demand
– Complementary and competing demand
– Individual and market demand.

6. DIRECT AND DERIVED DEMAND
• DIRECT
– When a commodity is demanded for its own sake
by the final consumer it is known as consumer
goods(ALL HOUSE HOLD ITEMS) and its demand is
direct demand
• Example – FMCG , house hold items(TV ,
refrigerator…)
• DERIVED DEMAND
– When a commodity is demanded for using it
either as a raw material or as an intermediary for
value addition in any other good or in same good
is known as capital good and its demand is derived
demand
• Example – machineries

7. RECURRING AND REPLACEMENT
DEMAND
• Consumer goods are divided into consumable
and durable categories
• Consumable goods – Recurring demand
– The are consumed at frequent intervals
• Example – food items, petrol, soft drinks etc
– Consumers make purchases on short term basis so
pricing should done accordingly
• Durable goods- Replacement demand
– They are purchased to be used for long time
– Wear and tear of goods need replacement
• Example- TV, cars, mobile phones, capital goods(
machineries) etc.

8. COMPLEMENTARY AND COMPETING
DEMAND
• Goods which create joint demand are
complementary goods.
• Demand for one commodity depends upon demand
of another one.
– Example – automobiles/petrol, computer/software etc.
• Goods that compete with each other to satisfy any
particular wants are called competing demand
– Example – tea /coffee, sugar/sugar free

9. INDIVIDUAL AND MARKET DEMAND
• Demand for an individual consumer is
normally expressed as individual demand.
• The theory of demand is based on individual
demand.
• Demand by all consumers for its product is
known as market demand.
• Demand for the product produced by all the
firms in the industry is known as industry
demand

10. DETERMINANTS OF DEMAND
• Factors which determine the demand for any
product
– Price of the product(price has a negative effect on
demand)
– Income of the consumer(normal goods/inferior
goods)
• Normal goods(positive relation) inferior (negative relation)
– Price of related goods(substitute/complementary
products)
– Taste and preferences
– Advertising
– Consumers expectation of future income and price
– Population
– Growth of economy

11. DEMAND FUNCTION
• The relation between demand and its
determinants mathematically that relationship is
known as demand function.
• Demand for a product X
Dx=f (Px, Y, Po, T, A, Ef, N)
• Px – price of the commodity
• Y – income of the consumer
• Po – price of related goods
• T – taste and preference
• A – advertising
• Ef – future expectations
• N – population and economic growth
It is a multivariate demand function

12. LAW OF DEMAND
“Law of demand states that others things
remains constant(ceteris paribus) when the
price of a commodity rises the demand for the
commodity falls and when the price of a
commodity falls, the demand for that
commodity rises”
• The demand for the product is inversely
proportional to its price

13. …contd
• Demand is the negative function of price .
• So such a function can also be in the form of
an exact relation between demand and price,
either linear or non linear form.
• Linear demand function
Dx= a-bPx
a= constant
b= slope
• Non linear demand function
Log D= a- b Log P

14. .. contd
• The law can be understood with the help of
– Price effect
– Substitution effect
– Income effect
– Law of diminishing marginal utility
• As per law of diminishing marginal utility , the utility
derived from every next unit( marginal unit) of a
commodity consumed goes on falling

15. TEST FOR YOUR UNDERSTANDING
CASE ANALYSIS
Assume that there is a fruit seller who has 20 KG
of oranges to be sold and he wants to fix a
price. So that all apples are sold. There are 3
customers in the market and their individual
demand functions are
D1=35-1.0P
D2= 25-.5P
D3= 10 -1.5P
Determine the market demand for the fruit seller?
Find out the price at which he can sell all oranges?

16. DEMAND SCHEDULE AND DEMAND
CURVE
• Law of demand can be further explained with
the help of demand schedule and demand
curve.
Demand schedule
POINT ON DEMAND PRICE DEMAND
CURVE
A 20 50
B 25 40
C 30 30
d 35 20

17. DEMAND CURVE
• The demand curve shows the relation ship
between price of good and the quantity
demanded by consumers.
• The demand curve for firm is achieved by the
horizontal summation of individual demand
curves and that of the industry by adding
curves of all the firms.

18. …contd
X axis- quantity y axis- price
D
30
20
10
D
20 40 50

19. LINEAR DEMAND CURVE
X axis- quantity y axis- price
D
30
20
10
D
20 40 50

20. SHIFT IN DEMAND CURVE
• Shift of demand curve due to a change in any
of the factors other than price is a change in
demand.
• The movement along the same demand curve
is known as a contraction or expansion in
quantity demanded(due to fall or rise in
price).
• Where as shift of demand curve due to
change in any of factors other than price is
known as change in demand.

21. DEMAND SCHEDULE WITH INCOME
POINT ON PRICE DEMAND DEMAND
DEMAND CURVE (INCOME 20K/M) (INCOME 30K/M)
A 20 50 60
B 25 40 50
C 30 30 40
• Demand curve shifts to the right if income
rises and shifts to the left if income falls .

22. CHANGE IN DEMAND
X axis- quantity y axis- price
D D1
30
20
D1
10
D
D2
20 40 50

23. EXCEPTIONS TO THE LAW OF DEMAND
• There are few cases where the law does not
hold good. so therefore these are regarded as
exceptions to the law.
• These are goods demanded less at low price
and more at high price
• The exceptions cases for
– Giffen goods(direct price demand relationship)
• Examples…………………….?
– Snob appeal(consumer measures the satisfaction
not by utility value but by social status)
• Examples………………?

24. …contd
• Demonstration effect
– Influence of persons behavior by observing the
behavior of others.
• Future expectations of prices
– Panic buying – when people increase the purchase
of goods with the expectations that prices will rise
more in the future.
• Goods with no substitute
– Examples…….?

25. SUPPLY
Supply refers to the quantities of a good or
services that the seller is willing and able to
provide at a price at a given point of time,
other things are remain same(ceteris paribus)

26. DETERMINANTS OF SUPPLY
• Supply is positively related to price of the
commodity.
• Factors which determine the supply of the
product.
– Price of the commodity.
– Cost of production.
• Supply reduced if cost of production increases
– State of technology.
– Number of firms.
– Government polices.

27. SUPPLY FUNCTION
• The mathematical relation between supply
(dependent variable) and its determinants(
independent variable)the functional
representation is termed supply function.
• Thus the supply of product X(Sx) is afunction
of
– Price of the product(Px)
– Cost of the production( C )
– State of technology( T )
– Government policy ( G )
– Other factors ( N )
Sx = (Px,C,T,G,N)

28. …CONTD
• Similar to the demand function, a firm’s supply
function (Sx) for a good X can be simplified by
holding constant the values of all variables other
than price of the good
S=f(P)
• A linear supply function return in form of
Qs = c+d P
C- constant
d - slope

29. LAW OF SUPPLY
• The law of supply states that other things
remaining the same, the higher the price of a
commodity, the greater is the quantity
supplied.
• Higher price means higher revenue to the
supplier and high incentive to supply.
SUPPLY SCHEDULE
Point on supply curve Price supply
A 10 15
B 20 30
C 30 40
d 40 50

30. SUPPLY CURVE
X axis- quantity y axis- price
S
45
30
15
S
5 10 15

31. LINEAR SUPPLY CURVE
X axis- quantity y axis- price
S
45
30
15
S
5 10 15

32. SHIFT IN SUPPLY CURVE
• Change in quantity supplied refers to
movements along the same supply curve due
to change in the price of the commodity.
• Change in supply is associated with change in
factors like costs of production, technology
etc.
• Change in supply is a shift in the supply curve
upwards or down wards due to non price
determinant of supply.

33. ..contd
Point on Price Supply(old Supply(new
supply curve machine) machine)
A 10 15 20
B 20 30 35
C 30 40 45
d 40 50 55

34. SHIFT IN SUPPLY CURVE
X axis- quantity y axis- price
S1 S S2
30
20
10 S1
S S2
20 40 50

35. MARKET EQUILIBRIUM
• So far you know the price affects demand and
supply.
• But with this knowledge you determined the
price…………… NO
• The price is determined in the market by the
interaction of demand and supply.
• By taking market demand curve and market
supply curve we try to strike the equilibrium
price.
• In this where both the players (consumers and
producers are satisfied)

36. …contd
• Market equilibrium implies that there is
neither excess demand nor excess supply.
• Equilibrium in market occurs when the price is
reached where the demand for and supply of
a commodity are equal to each other.
Price Supply demand
15 10 40
20 15 35
25 30 30
30 40 25

37. MARKET EQUILIBRIUM-GRAPH
X axis- quantity y axis- price
S
E
30
D
30

38. … CONTD
• The point of intersection E shows equilibrium
price.(demand=supply)
• Any point above or below E will create
disequilibrium in the market and the two forces
of demand and supply will keep on changing till
the point on intersection is attained.
• At point E both buyers and sellers are satisfied.
• Since equilibrium demand matches a supply it
express in the mathematical notation of
• Qd(P)=Qs(P)

39. EXCESS SUPPLY
• The quantity supplied is more than quantity
demanded means excess supply.
• Example
– Price = 20
– Demand = 10
– Supply = 30
• Higher price consumers are willing to buy less
• It expressed in mathematically
• ES=Qs-QD

40. EXCESS SUPPLY-GRAPH
X axis- quantity y axis- price
S
20 E
D
10 30

41. EXCESS DEMAND
• The quantity demanded is more than quantity
supplied means excess demand.
• Example
– Price (low)=10
– Demand= 40
– Supply = 20
• It expressed in mathematically
• ED=Qd-Qs

42. EXCESS DEMAND-GRAPH
X axis- quantity y axis- price
S
E
10
D
20 40

43. CHANGES IN MARKET EQUILIBRIUM
• Comparative statics is the process of
comparison between two equilibrium
positions.
– Changes in demand.
– Changes in supply.

44. CHANGE IN DEMAND AT CONSTANT
SUPPLY
X axis- quantity y axis- price
S1
E1
P1
E
P*
D2
D1
Q* Q1 RISE IN EQUILIBRIUM PRICE AND
QUANTITY

45. CHANGE IN BOTH DEMAND AND
SUPPLY
X axis- quantity y axis- price
S1
S2
E
P*
E2
P2
D1
Q* Q2 DECREASE IN EQUILIBRIUM PRICE
AND QUANTITY

46. CHANGE IN SUPPLY AT CONSTANT
DEMAND
X axis- quantity y axis- price
S1
S2
E1
P1 E2
P2
D2
D1
Q1 Q2
THE INCREASE IN BOTH SUPPLY AND DEMAND WILL CAUSE SALES TO RISE. BUT THE EFFECT OF
PRICE CAN BE +,-,0 IS DEPENDING UPON EXTEWNT OF SHIFTS IN THE CURVES

47. CONSUMER PREFERENCE AND
CHOICES

48. CONSUMER CHOICE
Demand for a commodity is determined by
various factors including income and taste of
the consumer and price of the commodity.

53. UNDERLYING ASSUMPTIONS
• The explanation of consumers choices, tastes
and preferences rest on the following
assumptions
– Completeness
• Own preference or indifference between two products
– Transitivity
• Consumer preference always consistent
– No satiation
• More is always wanted
• If some is good more of the good is better.

54. UTILITY ANALYSIS
• Utility is the satisfaction a consumer derives out
of consumption of a commodity.
• It may also defined to be an attribute of a
commodity to satisfy a consumer wants.
• Utility analysis ids the corner stone of consumer
behavior.
• Mathematically we can express utility as the
function of the quantities of different
commodities consumed
– U=f(m1,n1,r1) (m1,n1,r1- quantities of different
commodities)

55. ….contd
“A rational consumer aims at maximizing
his/her utility from consumption of different
commodities subject to budget constraint”
Two types of utility analysis
– Cardinal utility analysis
• According to this utility is quantifiable in units
– Ordinal utility analysis
• According to this utility cannot be measured it can be
shown as high or less

56. CARDINAL UTILITY
• The economist like MARSHALL and JEVONS
opined that utility is measurable like any other
physical commodity and proposed UTILS as a
units.
• According to them utility is a cardinal concept
and we can assign number of utils to any
commodity.
• Utility is an additive we can add the utility of
commodities.

57. TOTAL UTILITY & MARGINAL UTILITY
• Total utility
• Refers to the sum total utility levels out of
each unit of a commodity consumed within a
given period of time. OR other words total
satisfaction from consumption.
• Marginal utility
• It is change in total utility due to a unit change
in the commodity consumed within a given
period of time. OR other words it is the total
utility of additional (nth) unit consumed of the
commodity.
MU= d TU/d Q

58. When a consumer continues to
have more and more units of a
commodity his total utility
increases, but his marginal utility
decreases

59. LAW OF DIMINISHING MARGINAL
UTILITY
• As per the law of diminishing marginal utility,
marginal utility for successive units consumed
goes on decreasing.
UNITS OF TOTAL UTILITY MARGINAL UTILITY
CONSUMPTION
0 0 -
1 20 20
2 35 15
3 45 10
4 56 5
5 56 0
6 50 -3

60. TOTAL AND MARGINAL UTILITY
CURVE
60
50
40
TU AND MU
30
20
10
0
-10
1 2 3 4 5 6
TOTAL UTILITY 20 35 45 56 56 50
MARGINAL UTILITY 20 15 10 5 0 -3

61. TOTAL UTILITY - CURVE
X AXIA – QUANTITY
Y AXIS- TU OF X
TU

62. MARGINAL UTILITY - CURVE
X AXIA – QUANTITY
Y AXIS- MU OF X
MU

63. LAW OF DIMINISHING MARGINAL
UTILITY- ASSUMPTIONS
• The unit of consumption must be standard one.
– Too large and too small not valid
• Consumption must be continuous.
• Multiple units of commodity should be
consumed.
– Not for durable goods
• The taste and preferences of the consumer
should remain unchanged during the course of
consumption
• The good/commodity should be normal nor
addictive in nature

64. LAW OF EQUIMARGINAL UTILITY
• In real life a consumer buys multiple
commodities at the same time to satisfy
diverse wants.
• The law of equimarginal utility explains how a
consumer would spend his income on
different commodities.
• As per the law of equimarginal utility,
marginal utilities of all commodities should
be equal.

65. ..contd
• ASSUMPTION
– The consumer has a fixed income
– Their purchase decision on the basis of price of
different commodities to be consumed.
• According to the law of equimarginal utility, a
consumer will maximize utility
• when the marginal utility of the last unit of
money spent on each commodity is equal to
marginal utility of the last rupee spent on any
other commodity

66. EQUIMARGINAL UTILITY - FORMULA
Mum = Mun = ……. =MU1
-------- ---------
Pm Pn

67. MARGINAL UTILITY AND
DEMAND CURVE
• The consumer would continue to consume
subsequent units of a commodity till the
marginal utility of the commodity is equal to
its own price.
• The marginal utility curve of commodity MU
is downward sloping.

68. MARGINAL UTILITY AND DEMAND
CURVE
X AXIS – QUANTITY
Y AXIS- PRICE
QA, QB,QC=
QUANTITY OF
PA COMMODITY
PB
PC PA,PB,PC= PRICE OF
THE COMMODITY
AT POINT C (MU=Pc)
QA QB QC AT POINT B(MU=PB)
AT POINT A(MU=PA)

69. INFERENCE FROM GRAPH
• The price goes on increasing the desired
consumption of the commodity for the
consumer goes on diminishing.
• This would lead us to the individual demand
curve of the commodity.

70. CONSUMER PREFERNCES
• Ordinal utility
– It avoid the physical measurements of utility
– EDGEWORTH AND FISHER
• According to ordinal utility theory utility
cannot be measured in physical units rather
the consumer can only rank utility derived
from various commodities.
• According to the ordinal utility approach
utility is not additive

71. INDIFFERENCE CURVE ANALYSIS
• In difference curve analysis was introduced by
J.R.HICKS AND R.G.D ALLEN .
• The crux of this analysis is that utility is
ordinally measurable.
• According to ordinal school, a consumer is
able to rank different combinations of the
commodities in order of preference or
indifference.

72. …contd
• We may define an indifference curve as the
locus of points which show the different
combinations of two commodities a
consumer is indifferent about.
• All the points in the curve render equal utility
to the consumer.
• The indifference curve is also known as an
isoutility

73. IN DIFFERNCE SCHEDULE
COMBINATION COFFEE PUFF TU
A 1 6 U
B 3 3 U
C 4 2 U
D 7 1 U
• All the different combinations render the
same level of utility namely U

74. INDIFFERENCE CURVE
7
6
5
4
COFFEE
3
2
1
0
1 3 4 7
PUFF

75. io- low satisfaction
i2,i3- HIGH
SATISFACTION
COMPARE TO io
i3
i2
i0 i1

76. PROPERTIES OF INDIFFERENCE CURVE
• Down ward sloping.
• Higher indifference curve represents high
utility.
• Indifference curve can never intersect.
• Convex to the orgin
– Two goods are not substitute to each other.

77. DIMINISHING MARGINAL RATE OF
SUBSTITUTION
• MRS is a proportion of one good that the
consumer would be willing to give up for
more or another.
• The marginal rate of substitution of M for N
(MRS mn)
– It would be the amount of commodity N that the
consumer would be willing to give up for
additional unit of M.
• MRS mn= -( ∆ N /∆M)
Why MRS has a negative sign(to increase consumption M
reduce consumption of N)

78. MRS -SCHEDULE
COMBINATION M N MRS
A 1 5 -
B 3 4 1.5
C 5 3 1
D 8 1 0.2

79. INDIFFERENCE CURVES – SPECIAL
TYPES
• (a)Negatively sloping linear indifference
curve
– M and N perfectly substitutes
• (b)Right angle indifference curve
– M and N are perfectly complements
• (c) Concave indifference curve
• (d) Positively sloping indifference curve
– For non good commodity(bad)
• Example – non healthy products

80. X axis- Q m
Y axis- Q n
a) b)
c) d)

81. CONSUMER’S INCOME
• Up to past we discussed about consumer
preference as one aspect of consumer
behavior.
• The second very important aspect namely
constraints to the consumer in satisfying his
wants.
• Such constraints include income of the
consumer and prices of the commodities in
the consumption basket

82. EXPLANATION
• Assume that the consumer spends all his
income on the two commodities M and N
• The price unit of M is Pm and N is P n.
• The income of the consumer is I
• We can express the budget constraint of the
consumer in the form of budget equation
• Pm x Q m + P n x Q n =I
• Q m and Q n are the quantities purchased of M and N

83. ..contd
• We can also deduce the quantities of the
commodities purchased from the budget
equation by algebraic treatment
• Q m = (I/Pm ) - ( P n/Pm ) x Q n
• Q n = (I/P n) - (Pm/P n) x Q n

84. BUDGET LINE- ( SAME CONCEPT OF
PPF)
XAXIS – QUANTITY OF M
YAXIS – QUANTITY OF N
A R- NOT ATAINABLE
S- NOT DESIRABLE
POINT ON LINE AB-
R FEASIBLE
S
B
SLOPE OF THE BUDGET LINE = Pm/Pn

85. SHIFT IN BUDGET LINE
X AXIS – QUANTITY OF M
Y AXIS QUANTITY OF N
A1
A’
A
A2
B2 B B1 B’

86. GRAPH- INTERPRETATION
• Line AB- initial budget line
• Consumer income raises (price of M and N
constant)
– Line AB Shift to A1 B1
• Consumer income downs(price of M and N
constant)
– Line AB Shift to A2 B2
• Price of M falls (price of N and consumer income
constant)
– Line AB Shift to A B’
• Price of N falls (price of M and consumer income
constant)
– Line AB Shift to A’ B

87. CONSUMER’S EQUILIBRIUM
• Consumer’s equilibrium is at the point where
the budget line is tangent to the highest
attainable indifference curve by the
consumer subject to budget constraint.
• The consumer equilibrium is understood by
combining the budget line and indifference
curve.

88. CONSUMER’S EQUILIBRIUM
X- AXIS – Q m
Y –AXIS – Q N
i0- low satisfaction
A i2,i3- high satisfaction
compare to i0
AB – BUDGET LINE
Qn i3
i2
i0 i1
Qm B

89. CONDITIONS FOR CONSUMER’S
EQUILIBRIUM
• The consumer spends all income in buying the
two commodities.
• Hence the point of equilibrium will always lie on
the budget line.
• The point of equilibrium will always be on the
highest possible indifference curve the consumer
can reach with the given budget line.
• At optimum bundle slope of indifference curve
should be equal to the slope of budget line.
• Mum/Mun = Pm/Pn

90. REVEALED PREFERENCE THEORY
• Samuelson introduced the term REVEALED
PREFERENCE.
• According to this theory the demand for a
commodity by a consumer can be ascertained
by observing the actual behavior of the
consumer in the market in various price and
income situations.
• The basic hypothesis of theory is choice
reveals preference

91. CONSUMER’S SURPLUS
• Consumers surplus is the difference between
the price consumer are willing to pay and
what they actually pay.
• Example
– Person X wanted to buy a shirt and had decided to
pay a maximum amount of Rs 1000 for it.
– But he got a shirt of choice for Rs 800 (full utility).
– The difference Rs 200 is person X surplus

92. CONSUMER SURPLUS - GRAPH
CONSUMER SURPLUS
P1-P*
D P2-P*
P1 A S
P2 B
P* E
S D
CONSUMER X AXIS – QUANTITY
SURPLUS Y AXIS - PRICE
TRIANGLE=
P*DE Q1 Q2 Q*

93. ELASTICITY OF DEMAND

94. INTRODUCTION
• Recall the law of demand.
• Please answer…….
– If price of the product increases by one unit. By
what proportion will quantity demanded
decrease?
• The law of demand gives only the direction of
change of quantity (according to price
changes) not the magnitude of such a change.
• In order to know the magnitude you need to
know the concept of elasticity of demand.

95. …contd
• In fact why only price? NO
– A firm need to know about the responsiveness of
demand for the commodity it produces to
changes in all the independent variables like
• Income, price, advertisement, substitute products etc,
that influence its demand
• Knowledge of elasticity would obviously help
firms in major policy decisions like pricing.

96. ELASTICITY OF DEMAND
• Elasticity of demand measures the degree of
responsiveness of quantity demanded of a
commodity to a given change in any of the
determinants of the demand.

97. ELASTICITY OF DEMAND
• Mathematically it means the percentage
change in quantity demanded of a
commodity to a percentage change in any of
the independent variables that determine
demand for the commodity.

98. TYPES OF ELASTICITY OF DEMAND
• We restrict to four but many types of elasticity of
demand as the number of determinants of
demand.
– Price elasticity
– Income elasticity
– Cross elasticity
– Promotional (advertising elasticity)
• In order to assess the impact of one variable we
assume other variables as constant(ceteris
paribus)

99. PRICE ELASTICITY OF DEMAND
• Price is considered to be most important
among all the independent variables that
affect demand for any product.
• So price elasticity of demand is important
among all other elasticity of demand.
• Price elasticity of demand measures the
proportionate change in quantity demanded
of a commodity to a given change in its price.

100. DEGREES OF ELASTICITY OF DEMAND
Is the elasticity of demand is same as slope of
demand curve?
………………………………………………answer…?

101. ..contd
• The demand curve will show different degree
of elasticity at its different points.
• It is commonly said that flatter the demand
curve higher is the elasticity and steeper the
demand curve lesser is the elasticity.

102. DIFFERENT DEGREES OF ELASTICITY
• Perfectly elastic demand
• Highly elastic demand
• Unitary elastic demand
• Relatively inelastic demand
• Perfectly inelastic demand

103. PERFECTLY ELASTIC DEMAND
• This is one extreme of the elasticity range.
• Elasticity = infinity ( ep=α).
• The perfectly elastic demand curve is
horizontal line parallel to quantity axis.
• Unlimited quantities of the commodity can be
sold at prevailing price.

104. PERFECTLY ELASTIC DEMAND CURVE
X axis- quantity y axis- price
D D
Q1 Q2

105. HIGHLY ELASTIC DEMAND
• When proportionate change in quantity
demanded is more than a given change in
price.
• It expressed in ep > 1
• It is a flattered demand curve.
• Example
– Luxury goods
• Small decrease in price from P1 to P2 leads to
greater increase in quantity demanded from
Q1to Q2

106. HIGHLY ELASTIC DEMAND CURVE
X axis- quantity y axis- price
D
P1
P2 D
Q1 Q2

107. UNITARY ELASTIC DEMAND
• When a given proportionate change in price
brings about an equal proportionate change in
quantity demanded.
• It expressed in ep = 1
• It is uncommon in real life.
• Demand curve with unit elasticity are shaped
like rectangular hyperbola.
• If the fall price is P1 – P2 results in equal
increase in quantity demanded equal to Q1 –
Q2

108. UNITARY ELASTIC DEMAND CURVE
X axis- quantity y axis- price
D
P1
P2
D
Q1 Q2

109. RELATIVELY IN ELASTIC DEMAND
• When change in quantity demanded is found
to be offset by change in its price, then the
commodity has a relatively in elastic demand.
• Proportionate change in commodity
demanded is less than proportionate change
in price
• It expressed in ep < 1
• This demand curve is steeper called
necessities
• Large decrease in price of the commodity P1
to P2 leads to small increase in demanded
quantity Q1 to Q2

110. RELATIVELY INELASTIC DEMAND
CURVE
X axis- quantity y axis- price
D
P1
P2
D
Q1 Q2

111. PERFECTLY IN ELASTIC DEMAND
• This is the other extreme of elasticity range.
• Elasticity is equal to zero ( ep = 0)
• In this case the quantity demanded of a
commodity remains same irrespective of any
change in price.
• This commodity are termed as neutral and
have vertical demand curve.
• Prices changes from P1 to P2 but quantity
demanded remain same at Q1.

112. PERFECTLY INELASTIC DEMAND
CURVE
X axis- quantity y axis- price
D
P1
P2
D
Q1

113. METHODS OF MEASURING ELASTICITY
• Ratio or percentage method
• Arc elasticity method
• Total out lay method

114. RATIO /PERCENTAGE METHOD
“In ratio method price elasticity of demand is
expressed as the ratio of proportionate
change in quantity demanded and
proportionate change in the price of the
commodity”

115. FORMULA- RATIO METHOD
PROPORTIONATE CHANGE IN QUANTITY DEMANDED OF
COMMODITY X
ep = -----------------------------------------------------------------------------
PROPORTIONATE CHANGE IN PRICE OF
COMMODITY X
(Q2 - Q1 ) / Q1
ep = ----------------------------------
(P2 - P1 ) / P1
Q1- ORGINAL QUANTITY DEMANDED P1 – ORGINAL PRICE LEVEL
Q2 - NEW QUANTITY DEMANDED P2 - NEW PRICE LEVEL

116. ARC ELASTICITY METHOD
• Arc elasticity is used as a measure incase the
available figures on price and quantity are
discrete.
• It is possible to isolate and calculate
incremental changes.
• This method is used when we want to
calculate price elasticity of demand between
any 2 points on demand curve.
• Arc elasticity measures elasticity at the
midpoint of an arc between any two points
on a demand curve.

117. FORMULA- ARC METHOD
(Q2 - Q1 ) /{ (Q1 +Q2)/2}
ep = ---------------------------------------------
(P2 - P1 ) /{ (P1+P2)/2}
Q1- ORGINAL QUANTITY DEMANDED P1 –
ORGINAL PRICE LEVEL
Q2 - NEW QUANTITY DEMANDED P2 - NEW PRICE
LEVEL

118. TOTAL OUT LAY METHOD
• It propose by marshall
“ According to total outlay method elasticity is
measured by comparing expenditure levels
before and after any change in price”

119. DETERMINANTS OF PRICE ELASTICITY
OF DEMAND

120. INCOME ELASTICITY OF DEMAND
“Income elasticity of demand measures the
degree of responsiveness of demand for a
commodity to a given change in consumer’s
income”
• When we measure the income elasticity of
demand we assume all other variables are
given ceteris paribus

121. FORMULA- INCOME ELASTICITY OF
DEMAND
PROPORTIONATE CHANGE IN QUANTITY DEMANDED OF
COMMODITY X
ep = -----------------------------------------------------------------------------
PROPORTIONATE CHANGE INCOME OF CONSUMER
(Q2 - Q1 ) / Q1
ep = ----------------------------------
(Y2 - Y1 ) / Y1
Q1- ORGINAL QUANTITY DEMANDED Y1 – INITIAL LEVEL OF INCOME
Q2 - NEW QUANTITY DEMANDED Y2 - NEW LEVEL OF INCOME

122. DEGREES OF INCOME ELASTICITY
• Income elasticity of demand also has similar
degrees of elasticity like price elasticity of
demand.
• Positive income elasticity.
– Example = normal good
• Zero income elasticity.
– No change in the demand for a commodity when
there is change in income (neutral goods – salt, match
box)
• Negative income elasticity
– The demand for particular product decreases when
income increases ( inferior good)

123. CROSS ELASTICITY OF DEMAND
“ Cross elasticity of demand of a commodity X
measures the degree of responsiveness of its
demand to a given change in the price of
another commodity Y”
• Cross elasticity of demand explains the
responsiveness of demand for one good to the
changes in price of another related good
• Two types
– Positive cross elasticity ( substitutes products -x and y)
– Negative cross elasticity ( complementary goods- x
and y)

124. FORMULA- CROSS ELASTICITY OF
DEMAND
PROPORTIONATE CHANGE IN QUANTITY DEMANDED OF
COMMODITY X
ep = -----------------------------------------------------------------------------
PROPORTIONATE CHANGE IN PRICE OF COMMODITY Y
(Q2x - Q1x ) / Q1x
ep = ----------------------------------
(P2 y - P1y ) / P1y
Q1x- ORGINAL QUANTITY DEMANDED P1y – INITIAL PRICE LEVEL OF
COMMODITY Y
Q2x - NEW QUANTITY DEMANDED P2y - NEW PRICE LEVEL OF
COMMOCITY Y

125. PROMOTIONAL ELASTICITY OF
DEMAND
“promotional elasticity of demand measures
the degree of responsiveness of demand to a
given change in advertising expenditure”
• Some goods(FMCG) are more responsive to
advertising than other ( capital goods).
• ea > 1 – firm should go for heavy expenditure
on advertisement.
• ea < 1 - firm should not spend too much on
advertisement.

126. FORMULA- PROMOTIONAL ELASTICITY
OF DEMAND
PROPORTIONATE CHANGE IN QUANTITY DEMANDED OF
COMMODITY X
ep = -----------------------------------------------------------------------------
PROPORTIONATE CHANGE IN ADVERTISING EXPENDITURE
(Q2 - Q1 ) / Q1
ep = ----------------------------------
(A2 - A1 ) / A1
Q1- ORGINAL QUANTITY DEMANDED A1 – INITIAL LEVEL OF
AD EXPENDITURE
Q2 - NEW QUANTITY DEMANDED A2 - NEW LEVEL OF
AD EXPENDITURE

127. IMPORTANCE OF ELASTICITY OF
DEMAND
DETERMINATION OF PRICE
BASIS OF PRICE
DISCRIMINATION
DETERMINATION OF REWARDS
OF FACTORS OF PRODUCTION
GOVERNMENT POLICIES AND
TAXATION

128. DEMAND FORECASTING

129. MEANING
“ Demand forecasting is an estimate of sales in
dollars or physical units for a specified future
period under a proposed marketing plan”
- American marketing association.
“Demand forecasting is the tool to
scientifically predict the likely demand of a
product in future”

130. DEMAND FORECASTING
• A forecast is a prediction or estimation of a
future situation, under given conditions.
Forecast
Passive forecasts Active forecasts

131. PURPOSE OF FORECASTING DEMAND
• Short Run Forecasts • Long Run Forecasts
• Decide on sales policy • Capital planning
• Decide on inventory • Installing production
level. capacity.
• Fixing suitable price. • Manpower planning.
• Deciding on • Financial planning.
Advertisements and
promotional matters.

132. STEPS INVOLVED IN FORECASTING.
• Identification of objective.
Step 1
• Determining the nature of goods under
Step 2 consideration.
• Selecting a proper method of forecasting.
Step 3
• Interpretation of results.
step4

133. LEVELS OF FORECAST
• Macro economic forecasting.
• Industry demand forecasting
• Firm demand forecasting
• Product line forecasting.
• Segment forecasting.
• New product forecasting.
• Types of commodities for which forecast is to be
undertaken
• Miscellaneous factors.

134. DETERMINANTS FOR CONSUMER
DURABLE GOODS
• Population
• Saturation limit of the market.
• Existing stock of the good.
• Replacement demand Vs new demand.
• Income levels of consumers
• Consumer credit outstanding.
• Tastes and scales of preference of consumers.

135. DETERMINANTS OF CONSUMER
GOODS
• Disposable Income.
• Price.
• Size & characteristics of population
• D = f(Yd,P,S)

136. DETERMINANTS FOR CAPITAL GOODS.
• Growth possibility of the industry of the particular firm.
• Norm of consumption of capital goods/unit of installed
capacity.
• Excess capacity in the industry.
• Forecast for consumer goods.
• Existing stock & its age distribution of the capital goods.
• Rate of obsolescence.
• Financial position of the company.
• Tax provisions on repurchase.
• Price of Substitute / complementary goods.

137. METHODS OF FORECASTING
Forecasting
Opinion polling methods Statistical Methods

138. Opinion polling Methods
Consumers survey Sales Force opinion Experts opinion Method
(Delphi Technique)
Complete enumeration Sample Survey & End use
survey Test marketing (Input-output method)

139. Stastical Methods
Mechanical Extrapolation Barometric Techiniques Regression method Econometric method
(Trend projection methohd (Simultaneous equation
method)
Fit ing Trend Time series Smoothing ARIMA Leading, Dif usion
line by analysis methods method Lagging & indices
observation (least squares Box-Jenkin Coincident
method) Technique indicators

140. METHODS
• Fitting trend by observation: Involves merely
the plotting of annual sales on a graph,
observing it and extrapolating it.
• Time Series analysis employing Least Square
Method: “Line of best fit” By statistical
methods a trend line is fitted and by
extrapolating the trend line for future we get
the forecasted sales.
– 1) linear trends
– 2) Non linear trends.

141. …CONTD
• Decomposing a time series: Composed of
trend, seasonal fluctuations, cyclical
movements and irregular variations – for a
long period of time.
• Smoothing methods: It attempts to cancel out
the effect of random variations on the values
of the series.
– 1) moving average
– 2) Exponential smoothing.

142. BAROMETRIC TECHNIQUE
• Leading series(indicators) : eg.A) Applications
for housing loans - Demand for construction
material. B) Birth rate – Demand for school
seats.
• Coincident series: GNP – Industrial
production.
• Lagging Series: Inventory – Consumer credit
outstanding.
• Diffusion indices indicators.

143. • Regression Equation method – Once the
variables are identified, they are expressed as
an equation.
• Econometric models : All economic and
demographic variables that influence a future
are taken into account and build a cause effect
relationship.

144. DEMAND FORECASTING OF NEW
PRODUCTS
• Survey of buyer’s intentions.
• Test marketing
• Life cycle segmentation analysis.
– Introduction.
– Growth
– Maturity
– Saturation.
– Decline.