MBA

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Business economics (1)
“Economics is the science which studies human behavior as a
relationship between given ends and scarce means which have
alternative uses.”…
Economics is the study of given ends and scarce
means. ... First is Robbins' famous all-encompassing definition
of economics that is still used to define the subject today:
“Economics is the science which studies human behavior as a
relationship between given ends and scarce means which have
alternative uses.”…
What is economics in simple words?
In its most simple and concise definition, economics
is the study of how society uses its limited resources.
Economics is a social science that deals with the production,
distribution, and consumption of goods and services. ...
Macroeconomics - the branch of economics that studies the
overall working of a national economy
An economy is the system according to which the
money, industry, and trade of a country or region are organized.
A country's economy is the wealth that it gets from
business and industry.
Economy is the use of the minimum amount of
money, time, or other resources needed to achieve something, so
that nothing is wasted.
Careful management of resources to avoid
unnecessary expenditure or waste; thrift

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What is economics? Definition and principles
What Is Economics?
Economics is the science of analyzing the production,
distribution, and consumption of goods and services. In other
words, what choices people make and how and why they make
them when making purchases.
The study of economics can be subcategorized into
microeconomics and macroeconomics. Microeconomics is the
study of economics at the individual or business level; how
individual people or businesses behave given scarcity and
government intervention. Microeconomics includes concepts
such as supply and demand, price elasticity, quantity demanded,
and quantity supplied. Macroeconomics is the study of the
performance and structure of the whole economy rather than
individual markets. Macroeconomics includes concepts such as
inflation, international trade, unemployment, and national
consumption and production.
What is barter system in economics?
A barter system is an old method of exchange.
This system has been used for centuries and long before money
was invented. People exchanged services and goods for other
services and goods in return. ... The value of bartering items
can be negotiated with the other party.

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What is Laissez faire leadership?
Freedom for followers to make decisions
Group members expected to solve problems on their own
Classical Economics Classical economics is widely regarded as
the first modern school of economic thought. Its major
developers include Adam Smith, Jean-Baptiste Say, David
Ricardo, Thomas Malthus and John Stuart Mill.
Classical Economics Classical economics is widely
regarded as the first modern school of economic thought. It
refers to work done by a group of economists in the eighteenth
and nineteenth centuries. They developed theories about the way
markets and market economies work. The study was primarily
concerned with the dynamics of economic growth. It stressed
economic freedom and promoted ideas such as laissez-faire and
free competition. Economic thought until the late 1800’s. Adam
Smith’s Wealth of Nations, published in 1776 can be used as the
formal beginning of Classical Economics but it actually it
evolved over a period of time and was influenced by
Mercantilist doctrines, Physiocracy, the enlightenment, classical

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liberalism and the early stages of the industrial revolution.
Classical economics is widely regarded as the first modern
school of economic thought. Its major developers include Adam
Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and
John Stuart Mill.
Macroeconomic Viewpoints: Classical Keynesian Monetarist
New Classical New Keynesian
Classical Economics: Laissez - Faire
Real GDP (Real gross domestic product (GDP) is an inflation-
adjusted measure that reflects the value of all goods and services
produced by an economy in a given year, expressed in base-year
prices, and is often referred to as "constant-price," "inflation-
corrected" GDP or "constant dollar GDP) is determined by
aggregate supply The equilibrium price level is determined by
the money supply. Full employment is the norm Supply creates
its own demand the classical view prevailed before the Great
Depression.
Neoclassical economics is an approach to
economics focusing on the determination of goods, outputs, and
income distributions in markets through supply and demand.
This determination is often mediated through a hypothesized
maximization of utility by income-constrained individuals and
of profits by firms facing production costs and employing
available information and factors of production, in accordance
with rational choice theory.

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Neoclassical economics
An approach to economics
1) Focus on the determination of goods, outputs ,and income
distributions in markets through supply and demand
2) An individual’s rationality and his ability to maximize
profit
The Classical Model Real GDP is determined
by aggregate supply the price level is determined by
aggregate demand.
Classical Theory Neoclassical Theory
Is the accumulation and
allocation of surplus output
,and therefore their emphasis
was on production and on the
factors that influence the
supply of goods
Focuses on individual choice,
which unavoidable reflects
subjective preferences and
beliefs, and the allocation of
given resources among
alternative uses.
Classical theory paid
comparatively little attention to
choices of individuals
As neoclassical economists
theorize it ,is the aggregate end
product of individuals
The classical economists have
made consistent efforts the
explains the rise of the
capitalist mode of production
in terms of historical analysis.
Neoclassical theory are
expressed in mathematical
models which exclude the
concept of history

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Classical theory of economics
CLASSICAL THEORY OF ECONOMICS
1) What is Macroeconomics?
Macroeconomics is a branch of economics dealing with
the performance, structure, behavior, and decision- making
of the whole economy. This includes a national, regional,
or global economy. With microeconomics,
macroeconomics is one of the two most general fields
in economics.
2) Classical Theory of Economics
A theory of economics, especially directed toward
macroeconomics, based on the unrestricted workings of
markets and the pursuit of individual self interests.
Classical economics relies on three key assumptions--
flexible prices, Says law, and saving- investment equality--
in the analysis of macroeconomics.
3) History of Classical Theory of Economics Classical
economics can trace its roots to Adam Smith in 1776.
In The Wealth of Nations Adam Smith presented a
comprehensive analysis of economic phenomena based on
the notions of free markets and actions guided by
individual self interests in a laissez faire environment.

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Three Key Assumptions
1) Flexible Prices.
2) Says Law.
3) Saving-Investment Equality.
4) A Perfect World…
1) Efficiency.
2) Full Employment.
5) Says Law According to Says Law, when an economy
produces a certain level of real GDP, it also generates the
income needed to purchase that level of real GDP. In other
words, the economy is always capable of demanding all of
the output that its workers and firms choose to produce.
Hence, the economy is always capable of achieving the
natural level of real GDP.
6) Contrast between Classical and Keynesian Economics
1) Unemployment.
2) Says Law of Market.
3) Equality between Saving and Investment. Money and
Prices.
a) Demand for Money.
b) Short and Long Run Analysis. Role of State in Achieving
High Level of Income and
c) Employment.
d) General versus Special Theory

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Adam Smith was an 18th-century philosopher
renowned as the father of modern economics, and a major
proponent of laissez-faire economic policies. ... Read on to learn
about how this Scottish philosopher argued against mercantilism
to become the father of modern free trade and the creator of the
concept now known as GDP
Theory of Growth
Adam Smith • 16 June 1723 • Born in Scotland • Was Scottish
moral philosopher • Considered to be Father of Economics •
Smith began delivering public lectures in 1748 in University of
Edinburgh • in 1762, the University of Glasgow conferred on
Smith the title of Doctor of Laws (L.L.D).).
His Book: An Inquiry into Nature and Causes of the Wealth of
Nations (1776) • He wanted to examine: – Why some countries
are richer and some poorer? – What are the basic economic
factors that can increase the wealth of an economy? Wealth of a
country is not gold as assumed by Mercantilists or agriculture as
assumed by Physiocrats.
According to Adam Smith: – Wealth of an economy is the
value of its Total Output – includes industrial and agricultural
output. – Growth increases wealth by increasing total output,
income and wealth and standard of living. • How can growth
increase ? If inputs increase, output will also increase. Three
factors (inputs) land, labour and capital owned by landlords,
workers and capitalists.
Assumptions: Supply of land cannot increase – it is finite •
Labour is available in infinite quantity, so wage rate is at
subsistence • Labour productivity increases through

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1. Division of labour
2. Increase in K/L
3) Investment is endogenous –determined by savings
4) Market economy with Prefect Competition
5) Diminishing Returns
6) Laissez faire,
7) invisible hand allocates resources
Specialization of Labour • Labour specialization increases
output, by increasing productivity of labour • this leads to
increasing returns to scale. So growth is self-reinforcing • He
gives the example of a pin factory: – If each worker produces
entire pin, O/L is low, one worker produces only 20 pins a day
But if there is specialization, with 18 sub processes, output per
man increases to 4800 pins a day .
Labour specialization increases output because: – Skill
increases with repetition – Time is saved – The worker can
innovate and improve his performance • But increase in Labour
specialization depends on demand (Market) for the product. So
Adam Smith states: “Division of labour must always be limited
by the extent of the market”
Capital Accumulation It is crucial for economic growth • As
capital increases, capital per man (K/L) also increases, leading
to increase in labour productivity and growth • Investment →
Capital formation • Only Capitalist class invests – Workers
receive subsistence wages, cannot save – Landlords only
consume, not save
The Virtuous Cycle • Capital Accumulation increases K/L •
Higher productivity of labour with higher K/L • Higher
productivity leads to higher incomes • Higher income leads to
increased demand and bigger markets • Leads to specialization
of labour with more division of labour • But more division of

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labour leads on to higher productivity • This is Smith’s Virtuous
Circle
Smith’s Virtuous Cycle of Growth Increase in K/L Division of
Labour Increase in Output, income Increase in Investment
Market Increases
Stationary Stage Although there are increasing returns to
labour specialization, growth cannot go on forever. This is
because:
1. Competition for labour increases, as K accumulation
increases
2. Employment increases and total wage payment increases
3. Profits decrease, investment falls and growth levels fall
4. Ultimately, rate of growth becomes Zero
5. This is the Stationary State.
Features: – No increase in investment – No increase in output –
Zero growth – No increase in wage rate – No increase in
standard of living
Criticism • Adam Smith was a pioneer in Economics • Crude
theory of growth, profits and investment
a) Neglects the growth of agriculture
b) Based on “Iron Law” of wages
c) Stationary state – ignores the role of technical progress
Adam Smith study of wealth of nation, it generation and
spending.
Economic is a social science of human behaviors

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Central problems of economy
Some of the central problems that are faced by every economy
of a country are as follows: Production, distribution and
disposition of goods and services are the basic economic
activities of life. In the course of these activities, every society
has to face scarcity of resources
The Basic Problem - Scarcity. Scarcity, or limited resources, is
one of the most basic economic problems we face. We run into
scarcity because while resources are limited, we are a society
with unlimited want
a) Human wants are unlimited
b) Resources are limited
c) Resources have alternative purpose
d) What to produce and what quantity
e) How to produce the commodity
f) For whom to produce
The economic problem – sometimes called basic or central
economic problem – asserts that an economy's finite resources
are insufficient to satisfy all human wants and needs. It assumes
that human wants are unlimited, but the means to satisfy human
wants are limited. The economic problem is the problem of
rational management of resources or the problem of optimum
utilization of resources. It arises because resources are scarce
and resources have alternative uses
Three questions arise from this:
1. What to produce?
2. How to produce? &
3. For whom to produce?
4. What to produce?
5. 'What and how much will you produce?'

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This question lies with selecting the type of supply and the
quantity of the supply, focusing on efficiency.
e.g. "What should I produce more; laptops or tablets?"
How to produce? Capital goods or consumer goods
'How do you produce this?' This question deals with the assets
and procedures used while making the product, also focusing on
efficiency.
e.g. "Should I hire more workers, or do I invest in more
machinery?"
For whom to produce?
'To whom and how will you distribute the goods?' and 'For
whom will you produce this for?' arises from this question. This
question deals with distributing goods that have been produced,
focusing on efficiency and equity.
e.g. "Do I give more dividends to stock holders, or do I increase
worker wages?"
Economics revolve around these fundamental economic
problems.
What do you mean by consumer?
Definition.
An individual who buys products
or services for personal use and not for manufacture or resale. A
consumer is someone who can make the decision whether or
not to purchase an item at the store, and someone who can be
influenced by marketing and advertisements. in other words
consumer is who consuming the product

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Customer
In sales, commerce and economics, a customer
(sometimes known as a client, buyer, or purchaser) is the
recipient of a good, service, product or an idea - obtained from a
seller, vendor, or supplier via a financial transaction or exchange
for money or some other valuable consideration
What defines a customer?
Definition of customer. : Someone who buys goods or
services from a business. : A person who has a particular
quality.
Economics is the social science that
studies the production, distribution, and consumption of goods
and services. Economics focuses on the behavior and
interactions of economic agents and how economies work
What is economics?
Economics is the
study of how individuals, families, businesses, and societies use
limited resources to fulfill their unlimited wants

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Economics is the study of how individuals,
Governments, Businesses and other organizations make choices
that effect the allocation and distribution of resources
Socioeconomics (also known as social economics)
is the social science that studies how economic activity affects
and is shaped by social processes. In general it analyzes how
societies progress, stagnate, or regress because of their local or
regional economy, or the global economy.
What is the economic definition of capital?
In finance and accounting, capital generally refers to
financial wealth especially that used to start or maintain a
business. In classical economics, capital is one of the four
factors of production. The others are land, labor and
organization.
Mixed economy
A mixed economy is variously defined as an
economic system blending elements of market economies with
elements of planned economies, free markets with state
interventionism, or private enterprise with public enterprise.
There is no single definition of a mixed economy, but rather two
major definitions The first of these definitions refers to a
mixture of markets with state interventionism, referring to
capitalist market economies with strong regulatory oversight,
interventionist policies and governmental provision of public
services. The second definition is apolitical in nature and
strictly refers to an economy containing a mixture of private
enterprise with public enterprise

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A mixed economy is a system that combines
characteristics of market, command and traditional economies. It
benefits from the advantages of all three while suffering from
few of the disadvantages.
A mixed economy has three of the following characteristics of a
market economy.
1) First, it protects private property.
2) Second, it allows the free market and the laws of supply
and demand to determine prices.
3) Third, it is driven by the motivation of the self-interest of
individuals.
A mixed economy has some characteristics of a command
economy in strategic areas. It allows the federal government to
safeguard its people and its market. The government has a large
role in the military, international trade and national
transportation.
The government’s role in other areas depends upon the priorities
of the citizens. In some, the government creates a central plan
that guides the economy. Other mixed economies allow the
government to own key industries. These include aerospace,
energy production, and even banking. The government may also
manage health care, welfare, and retirement programs.
Most mixed economies retain characteristics of a traditional
economy. But those traditions don't guide how the economy
functions. The traditions are so ingrained that the people aren’t
even aware of them. For example, they still fund royal families.
Others invest in hunting and fishing.

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Advantages
A mixed economy has all the advantages of a market economy.
First, it distributes goods and services to where they are most
needed. It allows prices to measure supply and demand.
Second, it rewards the most efficient producers with the highest
profit. That means customers get the best value for their dollar.
Third, it encourages innovation to meet customer needs more
creatively, cheaply or efficiently.
“Mixed economy is that economy in which both government
and private individuals exercise economic control.”
It is a golden mixture of capitalism and socialism.
Under this system there is freedom of economic activities and
government interferences for the social welfare. Hence it is a
blend of both the economies. The concept of mixed economy is
of recent origin.
The developing countries like India have adopted
mixed economy to accelerate the pace of economic
development. Even the developed countries like UK, USA, etc.
have also adopted ‘Mixed Capitalist System’. According to Prof.
Samuelson, “Mixed economy is that economy in which both
public and private sectors cooperate.” According to Murad,
“Mixed economy is that economy in which both government
and private individuals exercise economic control.”

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Mixed economy has following main features:
1) Co-existence of Private and Public Sector:
Under this system there is co-existence of public and
private sectors. In public sector, industries like defense, power,
energy, basic industries etc., are set up. On the other hand, in
private sector all the consumer goods industries, agriculture,
small-scale industries are developed. The government
encourages both the sectors to develop simultaneously.
2) Personal Freedom:
Under mixed economy, there is full freedom of choice
of occupation, although consumer does not get complete liberty
but at the same time government can regulate prices in public
interest through public distribution system.
3) Private Property is allowed:
In mixed economy, private property is allowed.
However, here it must be remembered that there must be equal
distribution of wealth and income. It must be ensured that the
profit and property may not concentrate in a few pockets.
4) Economic Planning:
In a mixed economy, government always tries to
promote economic development of the country. For this purpose,
economic planning is adopted. Thus, economic planning is very
essential under this system.
5) Price Mechanism and Controlled Price:
Under this system, price mechanism and regulated
price operate simultaneously. In consumer goods industries price
mechanism is generally followed. However, at the time of big
shortages or during national emergencies prices are controlled
and public distribution system has to be made effective.

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6) Profit Motive and Social Welfare:
In mixed economy system, there are both profit
motive like capitalism and social welfare as in socialist
economy.
7) Check on Economic Inequalities:
In this system, government takes several measures
to reduce the gap between rich and poor through progressive
taxation on income and wealth. The subsidies are given to the
poor people and also job opportunities are provided to them.
Other steps like concessions, old age pension, free medical
facilities and free education are also taken to improve the
standard of poor people. Hence, all these help to reduce
economic inequalities.
8) Control of Monopoly Power:
Under this system, government takes huge
initiatives to control monopoly practices among the private
entrepreneurs through effective legislative measures. Besides,
government can also fake over these services in the public
interest.
Types of Mixed Economy:
The mixed economy may be classified in two categories:
a) Capitalistic Mixed Economy:
In this type of economy, ownership of various
factors of production remains under private control. Government
does not interfere in any manner. The main responsibility of the
government in this system is to ensure rapid economic growth
without allowing concentration of economic power in the few
hands.

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b)Socialistic Mixed Economy:
Under this system, means of production are in the
hands of state. The forces of demand and supply are used for
basic economic decisions. However, whenever and wherever
demand is necessary, government takes actions so that basic idea
of economic growth is not hampered.
However, this system is again sub-divided into two parts:
a) Liberal Socialistic Mixed Economy:
Under this system, the government interferes to bring
about timely changes in market forces so that the pace of rapid
economic growth remains uninterrupted.
b) Centralized Socialistic Mixed Economy:
In this economy, major decisions are taken by central
agency according to the needs of the economy.
Decision-making
In psychology, decision-making (also spelled
decision making and decisionmaking) is regarded as the
cognitive process resulting in the selection of a belief or a course
of action among several alternative possibilities. Every decision-
making process produces a final choice, which may or may not
prompt action.
Decision-making is the process of identifying and
choosing alternatives based on the values, preferences and
beliefs of the decision-maker. .In other words decision making is
the gathering information from the best alternatives.
Five ways to improve decision making
1) Consider what is at stake
2) Assemble facts
3) Identify alternatives
4) Explore pros, cons and risks
5) Choose best path, take action.

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Scope of management economic
Scope of Managerial Economics.
Scope of Managerial Economics. Demand analysis and
forecasting. When a business manager decides to venture into a
business, the very first thing he needs to find out is the nature
and amount of demand for the product, both at present and in the
future
1) Demand analysis and forecasting
2) Help to analysis the Cost Analysis
3) Production and supply analysis
4) Pricing decisions, Policies and practices
5) Profit management. Help the management to control profit
and
6) Capital Management
We need to take fundamental concept business decision
1) Opportunity cost
In microeconomic theory, the opportunity cost,
also known as alternative cost, is the value of a choice, relative
to an alternative. When an option is chosen from two mutually
exclusive alternatives, the opportunity cost is the "cost" incurred
by not enjoying the benefit associated with the alternative choice
.The willingness of the sacrifice of the particular manager
Capitalism is an economic system based on the
private ownership of the means of production and their
operation for profit. Characteristics central to capitalism include
private property, capital accumulation, wage labor, voluntary
exchange, a price system, and competitive markets
Socialism is a range of economic and social
systems characterized by social ownership and workers' self-
management of the means of production as well as the political

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theories and movements associated with them. Social ownership
can be public, collective or cooperative ownership, or to citizen
ownership of equity Fourth, it automatically allocates capital to
the most innovative and efficient producers. They, in turn, can
invest the capital in more businesses like them
What is a Mixed economy?
Mixed economy is the
combination of capitalism and socialism. Under the mixed
economy, the advantages of both capitalism and socialism are
incorporated and at the same time their evils are avoided.
Under mixed economy, both the private and
the public sectors function side by side. The Government
directs economic activity towards certain socially important
areas of the economy and the balance is subject to the operation
of the price mechanism.
The public and private sectors work in a co-
operative manner to attain the social objectives under a common
economic plan.
The private sector constitutes an important part
of the mixed economy and considered as an important
instrument of economic growth. India is regarded as the best
example of a mixed economy in the world.

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Incremental principle
Incremental cost may be defined as the change
in total cost resulting from a particular decision. Incremental
revenue is the change in total revenue resulting from a particular
decision. The incremental principle may be stated as follows:
A decision is a profitable one if— a) it increases revenue more
than cost.
Change in total cost resulting from a particular
decision may be record as incremental cost
Profit management
A carefully considered profit management strategy
will help your property optimize channels, attract the right
customers, and simply put, make more money. Booking Suite’s
revenue management solutions are designed to help partners get
the right data they need to accurately analyze channels and
pricing.
a) The concept of profit management dictates all functions
and processes within an organization
b) And extending from organization into its suppliers and
customers, impacts profitability and continuously needs
measurement and review to optimize performance and
result.
Profit= Revenue-costs
After planning profit successfully, an organization
needs to control profit. Profit control involves measuring the
gap between the estimated level and actual level of profit
achieved by an organization. If there is any deviation, the
necessary actions are taken by the organization.

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What is profit planning?
Profit planning is the set of actions taken to achieve
a targeted profit level. These actions involve the development of
an interlocking set of budgets that roll up into a master budget.
Profit planning is accomplished by preparing
numerous budgets, which, when brought together, form an
integrated business plan known as a master budget.
The Basic Framework of Budgeting a budget is a
detailed quantitative plan for acquiring and using financial and
other resources over a specified forthcoming time period. The
act of preparing a budget is called budgeting. The use of budgets
to control an organization’s activity is known as budgetary
control. Budgeting helps managers make decisions about
resources needed and financial results expected for the coming
period. Budgets are used to control activities of an organization
because they set out a plan for the entire organization.
Planning and Control Planning – involves developing
objectives and preparing various budgets to achieve these
objectives. Control – involves the steps taken by management
that attempt to ensure the objectives are attained. To be
effective, a good budgeting system must provide for both
planning and control. Good planning without effective control is
time wasted.
Production Planning and control

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Fundamental Concepts in Decision
Fundamental Concepts in Decision Making
1) Incremental Reasoning
2) Opportunity Cost
3) Contribution
4) Time Perspective
5) Time Value of Money and
6) Risk and Uncertainty
1) Incremental Reasoning
a) Most important
b) Most frequently used
c) Incremental Reasoning involves estimating the impact
of decision alternatives.
Incremental Reasoning •
Basic Concepts in Incremental Reasoning are:
a) Incremental Cost
Change in total cost due to change in level of
output
b) Incremental Revenue – Change in total revenue due to
change in level of output
2) Opportunity Cost •
Opportunity Cost is the benefit or revenue foregone by
perusing one course of action rather than another.
Opportunity Cost of the funds in one’s own business is the

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amount of interest which could have been earned had these
funds been invested in the next best channel of investment
The opportunity cost of using an idle machine is zero
3) Contribution •
Contribution=Variable cost – Sales
Unit Contribution is the per unit difference of incremental
revenue from incremental cost. Sales Variable cost
Contribution
4) Time Perspective
a) Economics
Short Run
Period within which some of the inputs cannot be
altered.
Long Run
Period within which all the inputs can be altered.
5) Time Perspective
Managerial Economics
Short period - immediate future
Long period – remote future
A decision should take into account both the short run and long
run effects on revenue and cost so as to maintain a right balance
between long run and short run perspective.

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6) Time Value of Money
The time value of money is the idea that money available at the
present time is worth more than the same amount in the future
due to its potential earning capacity.
a) Risk and uncertainty
b) Opportunity cost
7) Risk and Uncertainty
Risk are known unknowns. If you’re planning to
pick up a friend from the airport, the probability that their
flight will arrive several hours late is a Risk – you know in
advance that the arrival time can change, so you plan
accordingly. Uncertainty is unknown unknowns. You may
be late picking up your friend from the airport because a
meteorite demolishes your car an hour before you planned
to leave for the airport. Who could predict that? You can’t
reliably predict the future based on the past events in the
face of Uncertainty
The incremental concept is closely related to the marginal costs
and marginal revenues of economic theory. Incremental
concept in managerial economics involves two important
activities which are as follows:
1. Estimating the impact of decision alternatives on costs and
revenues.
2. Emphasizing the changes in total cost and total cost and
total revenue resulting from changes in prices, products,
procedures, investments or whatever may be at stake in the
decision.

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The two basic components of incremental reasoning are as
follows:
1. Incremental cost: Incremental cost may be defined as the
change in total cost resulting from a particular decision.
2. Incremental revenue: Incremental revenue means the
change in total revenue resulting from a particular decision.
Incremental cost may be defined as the change in
total cost resulting from a particular decision. Incremental
revenue is the change in total revenue resulting from a particular
decision. The incremental principle may be stated as follows:
A decision is a profitable one if
a) It increases revenue more than cost
b) it decreases some costs to a greater extent than it increases
others
c) it increases some revenues more than it decreases others and
d) it reduces cost more than revenues.
Incremental Principle
It involves estimating the impact of decision
alternative on cost and revenues, emphasizing the change in the
total cost and total revenue resulting from changes in prices,
products, procedures, investments or whatever may be the
conditions.
The incremental principle may be stated as under
“A decisions is obviously profitable one if
1) It increases revenue more than cost.
2) It decreases some costs to a greater extent than it
increases others.

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3) It increases some revenue more than it decreases
others.
Marginal revenue
In microeconomics, marginal revenue is the
additional revenue that will be generated by increasing product
sales by one unit. It can also be described as the unit revenue the
last item sold has generated for the firm
What is a marginal principle?
Marginal means additional, marginal principle studies
the effect of changes due to one additional unit. It's a micro
economical concept.
Marginal Utility - it is the additional utility derived from
additional unit of consumption (consumption is ideally assumed
consumption and not real, since utility is before consumption)
Marginal Production - it is the additional unit produced due to
an additional unit of input.
Marginal Cost - the additional cost incurred due to an
additional unit produced.
Marginal Revenue - the additional revenue derived from an
additional unit sold
Marginalism principle is used for taking various micro
economical decisions such as, at what price a product needs to
be sold, how much units needs to be produced, what would be
the impact of cost and such other things.
Equimarginal principle
Allocating of resources among the alternatives is
known as equimarginal principle
The equimarginal principle states that consumers
will choose a combination of goods to maximize their total
utility .This will occur where

29. 29
Marginal Utility of A = Marginal Utility of A
Price of A Price of B
The consumer will consider both the marginal utility MU of
goods and the price
In effect, consumer is evaluating the MU/price
This is known as the marginal utility of expenditure on each
item of good.
Example of marginal utility for Goods A and B
Units MU good A MU Good B
1 40 22
2 32 20
3 24 18
4 16 16
5 8 14
6 0 12
 Suppose the price of good A and good B was £1.
 Then the optimum combination of goods would be quantity
of 4.
 Because at quantity of 4 – 16/£1 = 16/£1
Example 2:
Suppose the price of Good A is now £4 and the price of good B
is £2.

30. 30
We divide the MU by the price. This give us:
Units MU A/ £4 MU B /£2
1 10 11
2 8 10
3 6 9
4 4 8
5 2 7
6 0 6
In this case, the consumer is in equilibrium when buying
 2 units of A (MU A/Price A = 8)
 4 units of B (MU/ B / price B =8)
Assumptions of marginal utility theory
 Consumers are rational
 Utility can be described in cardinal terms (e.g. monetary
units)
 Constant prices and incomes.
 Goods can be split up into small units
Marginal utility and diminishing marginal returns
For most goods, we expect to see diminishing marginal returns.
This means the marginal utility of the fifth good tends to be
lower than the marginal utility of the first good. The more we
buy, the less total utility increases.

31. 31
Principle of time perspective. Principle: “a
decision by the firm should take into account of both short-run
and long-run effects on revenues and cost & maintain the right
balance between the long run and short run. ... Short-run refers
to a time period in which some factors are fixed while others are
variable.
In psychology, the discounting principle refers to
how someone attributes a cause to an eventual outcome.
Discounting in psychology is sometimes intertwined with the
augmentation principle, which takes the discounting principle
evaluation and then adjusts choices based this
What is discounting principle in managerial economics?
The principle involved in the above discussion is
called the discounting principle and is stated as follows: “If a
decision affects costs and revenues at future dates, it is
necessary to discount those costs and revenues to present values
before a valid comparison of alternatives is possible.
Discounting Principle
The concept of discounting future is based on
the fundamental fact that a rupee now is worth more than a
rupee earned a year after. The concept of discounting future is
based on the fundamental fact that, a rupee earned now is worth
more than the rupee earned a year after, even if there will be a
certain future return, yet it must be discounted because to wait
for future implies a sacrifice for the present. Unless these returns
are discounted to find their present worth, it is not possible to
judge whether or not it is worth undertaking the investment
today. Discounting the future value with the present value

32. 32
Scarcity principle
The scarcity principle is an economic theory in
which a limited supply of a good, coupled with a high demand
for that good, results in a mismatch between the desired supply
and demand equilibrium. In pricing theory, the scarcity principle
suggests that the price for a scarce good should rise until
equilibrium is reached between supply and demand. However,
this would result in the restricted exclusion of the good only to
those who can afford it. If the scarce resource happens to be
grain, for instance, individuals will not be able to attain their
basic needs.
An economic theory which states that limited supply, combined
with high demand, equals a lack of pricing equilibrium.
Typically, demand and supply will gravitate prices to a stable
balance; however, scarcity of a good or service changes the way
buyers will value the purchase, thus leading to new market
conditions. Excess demand of a particular product is known as
Scarcity
Optimal allocation of resources
what is meant by allocation of resources?
Definition of Resource Allocation.
Resource allocation is a process and strategy involving a
company deciding where scarce resources should be used in the
production of goods or services. A resource can be considered
any factor of production, which is something used to produce
goods or services

33. 33
What is efficient allocation of resources?
An efficient allocation of resources is: That
combination of inputs, outputs and distribution of inputs, outputs
such that any change in the economy can make someone better
off (as measured by indifference curve map) only by making
someone worse off (pareto efficiency).
Analysis of how scarce
resources ('factors of production') are distributed among
producers, and how scarce goods and services are apportioned
among consumers. This analysis takes into consideration the
accounting cost, economic cost, opportunity cost, and other
costs of resources and goods and services. Allocation of
resources is a central theme in economics (which is essentially a
study of how resources are allocated) and is associated with
economic efficiency and maximization of utility.
Principle of risk and uncertainty
Economic risk is the chance of loss because all
possible outcomes and their probability of happening are
unknown. ... Uncertainty exists when the outcomes of
managerial decisions cannot be predicted with absolute accuracy
but all possibilities and their associated probabilities are known.
What is the meaning of risk and uncertainty?
Risk. ... Uncertainty is a potential,
unpredictable, and uncontrollable outcome; risk is a
consequence of action taken in spite of uncertainty. Risk
perception is the subjective judgment people make about the
severity and probability of a risk, and may vary person to
person.

34. 34
What is the difference between risk and uncertainty?
Difference between Risk and Uncertainty. ... In
risk you can predict the possibility of a future outcome while in
uncertainty you cannot predict the possibility of a future
outcome. Risk can be managed while uncertainty is
uncontrollable. Risks can be measured and quantified while
uncertainty cannot.
These principles of management serve as a
guideline for decision-making and management actions. They
are drawn up by means of observations and analyses of events
that managers encounter in practice. Henri Fayol was able to
synthesize 14 principles of management after years of study.
14 Principles of Management of Henri Fayol
14 principles of Management are statements that
are based on a fundamental truth. These principles of
management serve as a guideline for decision-making and
management actions. They are drawn up by means of
observations and analyses of events that managers encounter in
practice. Henri Fayol was able to synthesize 14 principles of
management after years of study.
What are management principles?
The Principles of Management are the essential,
underlying factors that form the foundations of successful
management. ... Unity of Command - This principle states that
each subordinate should receive orders and be accountable to
one and only one superior.
1. Division of Work
In practice, employees are specialized in
different areas and they have different skills. Different levels of

35. 35
expertise can be distinguished within the knowledge areas (from
generalist to specialist). Personal and professional developments
support this. According to Henri Fayol specialization promotes
efficiency of the workforce and increases productivity. In
addition, the specialization of the workforce increases their
accuracy and speed. This management principle of the 14
principles of management is applicable to both technical and
managerial activities.
2. Authority and Responsibility
In order to get things done in an organization,
management has the authority to give orders to the employees.
Of course with this authority comes responsibility. According to
Henri Fayol, the accompanying power or authority gives the
management the right to give orders to the subordinates. The
responsibility can be traced back from performance and it is
therefore necessary to make agreements about this. In other
words, authority and responsibility go together and they are two
sides of the same coin.
3. Discipline
This third principle of the 14 principles of
management is about obedience. It is often a part of the core
values of a mission and vision in the form of good conduct and
respectful interactions. This management principle is essential
and is seen as the oil to make the engine of an organization run
smoothly.
4. Unity of Command
The management principle ‘Unity of command’
means that an individual employee should receive orders from
one manager and that the employee is answerable to that
manager. If tasks and related responsibilities are given to the
employee by more than one manager, this may lead to confusion

36. 36
which may lead to possible conflicts for employees. By using
this principle, the responsibility for mistakes can be established
more easily.
5. Unity of Direction
This management principle of the 14 principles
of management is all about focus and unity. All employees
deliver the same activities that can be linked to the same
objectives. All activities must be carried out by one group that
forms a team. These activities must be described in a plan of
action. The manager is ultimately responsible for this plan and
he monitors the progress of the defined and planned activities.
Focus areas are the efforts made by the employees and
coordination.
6. Subordination of Individual Interest
There are always all kinds of interests in an
organization. In order to have an organization function well,
Henri Fayol indicated that personal interests are subordinate to
the interests of the organization (ethics). The primary focus is on
the organizational objectives and not on those of the individual.
This applies to all levels of the entire organization, including the
managers.
7. Remuneration
Motivation and productivity are close to one another as far as
the smooth running of an organization is concerned. This
management principle of the 14 principles of management
argues that the remuneration should be sufficient to keep
employees motivated and productive. There are two types of
remuneration namely non-monetary (a compliment, more
responsibilities, credits) and monetary (compensation, bonus or
other financial compensation). Ultimately, it is about rewarding
the efforts that have been made.

37. 37
8. The Degree of Centralization
Management and authority for decision-making
process must be properly balanced in an organization. This
depends on the volume and size of an organization including its
hierarchy.
Centralization implies the concentration of decision making
authority at the top management (executive board). Sharing of
authorities for the decision-making process with lower levels
(middle and lower management), is referred to as
decentralization by Henri Fayol. Henri Fayol indicated that an
organization should strive for a good balance in this.
9. Scalar Chain
Hierarchy presents itself in any given organization.
This varies from senior management (executive board) to the
lowest levels in the organization. Henri Fayol ’s “hierarchy”
management principle states that there should be a clear line in
the area of authority (from top to bottom and all managers at all
levels). This can be seen as a type of management structure.
Each employee can contact a manager or a superior in an
emergency situation without challenging the hierarchy.
Especially, when it concerns reports about calamities to the
immediate managers/superiors.
10. Order
According to this principle of the 14 principles of
management, employees in an organization must have the right
resources at their disposal so that they can function properly in
an organization. In addition to social order (responsibility of the
managers) the work environment must be safe, clean and tidy.

38. 38
11. Equity
The management principle of equity often
occurs in the core values of an organization. According to Henri
Fayol, employees must be treated kindly and equally.
Employees must be in the right place in the organization to do
things right. Managers should supervise and monitor this
process and they should treat employees fairly and impartially.
12. Stability of Tenure of Personnel
This management principle of the 14
principles of management represents deployment and managing
of personnel and this should be in balance with the service that
is provided from the organization. Management strives to
minimize employee turnover and to have the right staff in the
right place. Focus areas such as frequent change of position and
sufficient development must be managed well.
13. Initiative
Henri Fayol argued that with this
management principle employees should be allowed to express
new ideas. This encourages interest and involvement and creates
added value for the company. Employee initiatives are a source
of strength for the organization according to Henri Fayol. This
encourages the employees to be involved and interested.
14. Esprit de Corps
The management principle ‘esprit de corps’
of the 14 principles of management stands for striving for the
involvement and unity of the employees. Managers are
responsible for the development of morale in the workplace;
individually and in the area of communication. Esprit de corps
contributes to the development of the culture and creates an
atmosphere of mutual trust and understanding.

39. 39
In conclusion on the 14 Principles of management
The 14 principles of management can be used to manage
organizations and are useful tools for forecasting, planning,
process management, organization management, decision-
making, coordination and control.
Although they are obvious, many of these matters are still used
based on common sense in current management practices in
organizations. It remains a practical list with focus areas that are
based on Henri Fayol ’s research which still applies today due to
a number of logical principles.
Marginal Principle
The percentage change in the total output
signifying of managerial economic in decision making
1) Production decision
2) Inventory decision
a) LIFO
b) FIFO
c) JIT(Just in time)
Cost decision
Marketing decision
1) Cost decision
Good and services will least cost (economically)
The importance of the cost information in making
decisions. The cost information system plays an important
role in every organization within the decision-making
process. An important task of management is to ensure the
control over operations, processes, activity sectors, and not
ultimately on costs.

40. 40
2) Marketing decision
Marketing decisions include promotion decisions
which are important content of the marketing mix in
which different aspects of marketing communication
occurs. The information about the product is communicated
with an objective to produce positive customer response
3) Investment decision
Where to investment
The Investment Decision relates to the decision made by
the investors or the top level management with respect to
the amount of funds to be deployed in the investment
opportunities. Simply, selecting the type of assets in which
the funds will be invested by the firm is termed as the
investment decision.
4) Personal decision or HR
Making decisions is basically a step-by-step process built
on a strong foundation of personal values that are
influenced by the family, mentoring adults, friends and
peers, life experiences and societal mores. Although values
are essentially an individual's own choice, they are heavily
influenced by others.
Human Resources Decisions to Avoid. Human
Resources (HR) is an integral element of business
operations and directly impacts the long-term success or
failure of a company. ... However, when poor HR decisions
are made, it can create a host of issues and compliance
concerns, which put a business at unnecessary risk
Utility want satisfying capacity
Business economics is a field in applied economics which

41. 41
uses economic theory and quantitative methods to analyze
business enterprises and the factors contributing to the diversity
of organizational structures and the relationships of firms with
labour, capital and product markets.
Demand
Demand is the quantity of a good that consumers
are willing and able to purchase at various prices during a given
period of time. The relationship between price and quantity
demanded is also known as demand curve. Desire back by the
willingness to pay and the ability to pay a commodity
Demand curve
In economics, the demand curve is the graph
depicting the relationship between the price of a certain
commodity and the amount of it that consumers are willing and
able to purchase at any given price. It is a graphic representation
of a market demand schedule. The demand curve for all
consumers together follows from the demand curve of every
individual consumer: the individual demands at each price are
added together, assuming independent decision-making.
Demand curves are used to estimate behaviors in
competitive markets, and are often combined with supply curves
to estimate the equilibrium price (the price at which sellers
together are willing to sell the same amount as buyers together
are willing to buy, also known as market clearing price) and the
equilibrium quantity (the amount of that good or service that
will be produced and bought without surplus/excess supply or
shortage/excess demand) of that market. In a monopolistic
market, the demand curve facing the monopolist is simply the
market demand curve.

42. 42
Demand curves are usually considered as theoretical
structures that are expected to exist in the real world, but real
world measurements of actual demand curves are difficult and
rare
DETERMINANTS OF DEMAND. When price
changes, quantity demanded will change. That is a movement
along the same demand curve. When factors other than price
changes, demand curve will shift.
When factors other than price changes, demand
curve will shift. These are the determinants of the demand curve.
1. Income: A rise in a person's income will lead to an increase
in demand (shift demand curve to the right), a fall will lead to a
decrease in demand for normal goods.
Determinants of Demand
When price changes, quantity demanded will
change. That is a movement along the same demand curve.
When factors other than price changes, demand curve will shift.
These are the determinants of the demand curve.
1. Income: A rise in a person’s income will lead to an increase
in demand (shift demand curve to the right), a fall will lead to a
decrease in demand for normal goods. Goods whose demand
varies inversely with income are called inferior goods (e.g.
Hamburger Helper).
2. Consumer Preferences: Favorable change leads to an
increase in demand, unfavorable change lead to a decrease.
3. Number of Buyers: the more buyers lead to an increase in
demand; fewer buyers lead to decrease.

43. 43
4. Price of related goods:
a. Substitute goods (those that can be used to replace each
other): price of substitute and demand for the other good are
directly related.
Example: If the price of coffee rises, the demand for tea should
increase.
b. Complement goods (those that can be used together): price of
complement and demand for the other good are inversely
related.
Example: if the price of ice cream rises, the demand for ice-
cream toppings will decrease.
5. Expectation of future:
a. Future price: consumers’ current demand will increase if they
expect higher future prices; their demand will decrease if they
expect lower future prices.
b. Future income: consumers’ current demand will increase if
they expect higher future income; their demand will decrease if
they expect lower future income.
Demand drives economic growth. Businesses want to
increase demand so they can improve profits. Governments
and central banks boost demand to end recessions. They slow
it during the expansion phase of the business cycle to combat
inflation. If you offer any paid services, even you try to
raise demand for them.
What drives demand? In economics, there are five determinants
of individual demand and a sixth for aggregate demand.
The Five Determinants of Demand
The five determinants of demand are:
1. The price of the good or service.
2. Income of buyers.

44. 44
3. Prices of related goods or services. These are either
complementary, those purchased along with a particular good
or service, or substitutes, those purchased instead of a certain
good or service.
5) Tastes or preferences of consumers.
6) Expectations. These are usually about whether the price
will go up.
For aggregate demand, the number of buyers in the market is the
sixth determinant.
Demand Equation or Function
This equation expresses the relationship between demand and its
five determinants:
qD = f (price, income, prices of related goods, tastes,
expectations)
It says that the quantity demanded of a product is a function of
five factors: price, income of the buyer, the price of related
goods, the tastes of the consumer, and any expectation the
consumer has of future supply, prices, etc.
How Each Determinant Affects Demand
You can understand how each determinant affects
demand if you first assume that all the other determinants don't
change. That principle is called ceteris paribus or “all other
things being equal.” So, ceteris paribus, here's how each element
affects demand.
Price. The law of demand states that when prices rise, the
quantity of demand falls. That also means that when prices drop,
demand will grow. People base their purchasing decisions on
price if all other things are equal. The exact quantity bought for
each price level is described in the demand schedule. It's then
plotted on a graph to show the demand curve.

45. 45
The demand curve only shows the relationship
between the price and quantity. If one of the other determinants
changes, the entire demand curve shifts.
If the quantity demanded responds a lot to price,
then it's known as elastic demand. If the volume doesn't change
much, regardless of price, that's inelastic demand.
Income. When income rises, so will the quantity demanded.
When income falls, so will demand. But if your income doubles,
you won't always buy twice as much of a particular good or
service. There's only so many pints of ice cream you'd want to
eat, no matter how wealthy you are. That's where the concept
of marginal utility comes into the picture. The first pint of ice
cream tastes delicious. You might have another. But after that,
the marginal utility starts to decrease to the point where you
don't want any more.
Prices of related goods or services. The price of
complementary goods or services raises the cost of using the
product you demand, so you'll want less. For example, when gas
prices rose to $4 a gallon in 2008, the demand for Hummers fell.
Gas is a complementary good to Hummers. The cost of driving a
Hummer rose along with gas prices.
The opposite reaction occurs when the price of a substitute rises.
When that happens, people will want more of the good or
service and less of its substitute. That's why Apple continually
innovates with its iPhones and iPods. As soon as a substitute,
such as a new Android phone, appears at a lower price, Apple
comes out with a better product. Then the Android is no longer
a substitute.

46. 46
Tastes. When the public’s desires, emotions, or preferences
change in favor of a product, so does the quantity demanded.
Likewise, when tastes go against it, that depresses the amount
demanded. Brand advertising tries to increase the desire for
consumer goods. For example, Buick spent millions to make
you think its cars are not only for older people.
Expectations. When people expect that the value of something
will rise, they demand more of it. That explains the
housing asset bubble of 2005. Housing prices rose, but people
bought more because they expected the price to continue to go
up. Prices increased even more until the bubble burst in 2006.
Between 2007 and 2011, housing prices fell 30 percent. But the
quantity demanded didn't grow. Why? People expected prices to
continue falling. Record levels of foreclosures entered the
market due to the subprime mortgage crisis.
Demand didn't increase until people expected future prices
would, too.
Number of buyers in the market. The number of consumers
affects overall, or “aggregate,” demand. As more buyers
enter the market, demand rises. That's true even if prices don't
change. That was another reason for the housing bubble. Low-
cost and sub-prime mortgages increased the number of people
who could afford a house. The total number of buyers in the
market expanded. This increased demand for housing. When
housing prices started to fall, many realized they couldn't afford
their mortgages. At that point, they foreclosed.
That reduced the number of buyers and drove down demand.

47. 47
Climatic condition
If a change of climatic change demand
decreases / increase (e.g. - Schoolbags)
Climate or weather conditions demand for certain products is
determined by climatic or weather conditions. For example, in
summer, there is a greater demand for cold drinks, fans ,
cookers, etc Similarly, demand for umbrellas and rain coast is
seasonal
Customer expansion means creating extra value by
making existing customers buy more or increasing the usage of
a product or service. › Expansion usually lowers the number of
leaving customers. › Existing customers are often more willing
to buy and they can be served at a lower cost than new
customers
Shows the amount of a good that will be purchased at alternative
prices.
Law of Demand
The demand curve is downward sloping
Price
D
Quantity
Objectives of demand analysis
1) Demand forecasting
2) Production Planning
3) Sales Forecasting
4) Control of business

48. 48
5) Inventory control (Raw material ) etc
6) Growth and long term investment of business
7) Investment programs
1) Demand forecasting
Demand is a most important aspect for a business
for achieving its objectives. Many decisions of business depend
on demand like production, sales, staff requirement etc ...
Demand forecasting reduces risk related to business activities
and helps it to take efficient decisions
What is demand forecasting and its methods?
The first approach involves forecasting demand by
collecting information regarding the buying behavior of
consumers from experts or through conducting surveys. On the
other hand, the second method is to forecast demand by using
the past data through statistical techniques.
Definition:
Demand Forecasting is a systematic and scientific
estimation of future demand for a product. Simply, estimating
the sales proceeds or demand for a product in the future is called
as demand forecasting.
The methods of forecasting can be classified into two broad categories:

49. 49
1. Survey Methods: Under the survey method, the consumers
are contacted directly and are asked about their intentions
for a product and their future purchase plans. This method
is often used when the forecasting of a demand is to be
done for a short period of time. The survey method
includes:
a) Consumer Survey Method
b) Opinion Poll Methods
2. Statistical Methods: The statistical methods are often used
when the forecasting of demand is to be done for a longer
period. The statistical methods utilize the time-series
(historical) and cross-sectional data to estimate the long-
term demand for a product. The statistical methods are used
more often and are considered superior than the other
techniques of demand forecasting due to the following
reasons:
a) There is a minimum element of subjectivity in the
statistical methods.
b) The estimation method is scientific and depends on the
relationship between the dependent and independent
variables.
c) The estimates are more reliable
d) Also, the cost involved in the estimation of demand is the
minimum.

50. 50
The statistical methods include:
a) Trend Projection Methods
b) Barometric Methods
c) Econometric Methods
These are the different kinds of methods available for demand
forecasting. A forecaster must select the method which best
satisfies the purpose of demand forecasting.
Price is the most important determinants of demands
Law of demands
The relationship between the price of the commodity and
its demand for a particular period is called law of demands
In microeconomics, the law of demand states that,
"conditional on all else being equal, as the price of a good
increases (↑), quantity demanded decreases (↓); conversely, as
the price of a good decreases (↓), quantity demanded increases
(↑)".In other words, the law of demand describes an inverse
relationship between price and quantity demanded of a good.
Alternatively, other things being constant, quantity demanded of
a commodity is inversely related to the price of the commodity.
For example, a consumer may demand 2 kilograms of apples at
Rs 70 per kg; he may, however, demand 1 kg if the price rises to
Rs 80 per kg. This has been the general human behavior on
relationship between the price of the commodity and the
quantity demanded. The factors held constant refer to other
determinants of demand, such as the prices of other goods and

51. 51
the consumer's income. There are, however, some possible
exceptions to the law of demand, such as Giffen goods and
Veblen goods. "
Demand Curve
In economics, the demand curve is the graph
depicting the relationship between the price of a certain
commodity and the amount of it that consumers are willing and
able to purchase at any given price. It is a graphic representation
of a market demand schedule. The demand curve for all
consumers together follows from the demand curve of every
individual consumer: the individual demands at each price are
added together, assuming independent decision-making.
Demand curves are used to estimate behaviors in
competitive markets, and are often combined with supply curves
to estimate the equilibrium price (the price at which sellers
together are willing to sell the same amount as buyers together
are willing to buy, also known as market clearing price) and the
equilibrium quantity (the amount of that good or service that
will be produced and bought without surplus/excess supply or
shortage/excess demand) of that market. In a monopolistic
market, the demand curve facing the monopolist is simply the
market demand curve.
Demand curves are usually considered as
theoretical structures that are expected to exist in the real world,
but real world measurements of actual demand curves are
difficult and rare.

52. 52
Graphical representation of price of the
commodity and the demand is said to be demand curve
Expectations of law of demands are for the inferiors good and
prestigious good (salt,car,BMW)
The Law of expectation is always working. ...
“Erickson's Law of Expectation simply states that 85% of what
you expect to happen … Will. He also states that it doesn't play
favorites, so it doesn't matter if you are expecting negative or
positive things to happen – The Law of Expectation stays true
Change in demand describes a change or shift in a
market's total demand. Change in demand is represented
graphically in a price vs. quantity plane, and it is a result of
more or fewer entrants into the market and changes in consumer
preferences. The shift can either be parallel or nonparallel.

53. 53
1) Movement along demand curve
2) Shift in demand curve
Movement in demand curve
Change in demand due to a particular change in
price of the commodity is known as movement along demand
curve
1) Expansion of demand
2) Contraction of demand
1) Expansion in demand refers to a rise in the quantity
demanded due to a fall in the price of commodity, other
factors remaining constant. ADVERTISEMENTS: i. It
leads to a downward movement along the same demand
curve.

54. 54
2) Contraction of demand
Extension and contraction of demand. The demand for a
commodity changes due to a change in price. It is called
extension and contraction of demand. When there is
decrease in price of commodity there is in increase in
demand of that commodity.

55. 55
Movement along a demand curve
It refers to change in quantity demanded due
to change in price in the same demand schedule .When
price falls, then quantity demanded increases causing
movement down the demand curve .in the following
digram1 ,Movement from point A to B on demand curve
d1,Implies the quantity demanded increases due to fall in
price. This is called expansion of demand or increase in
quantity demand or movement along the demand curve. On
the other hand. In dgram2, movement from point E to point
F on demand curve d2.implies decline in quantity
demanded due to an increase in price. This is called
contraction of demand or decrease in quantity demand or
movement along the same demand curve.
Shifting of demand curve/change in demand:
It is refers to increase or decrease in demand at the same
price due to change in other demands of the demand curve.
In such a case a shift takes place in the demand curve .An

56. 56
increases in demand takes place due to following reasons
1) When consumer income rises:
2) The fashion for a good increases or
3) Tastes and preferences become more favorable for the
good.
4) Price of the substitutes of the good in question have
risen.
What is {term}? Change In Demand
Change in demand describes a change or shift in a
market's total demand. Change in demand is represented
graphically in a price vs. quantity plane, and it is a result of
more or fewer entrants into the market and changes in consumer
preferences. The shift can either be parallel or nonparallel.
BREAKING DOWN Change In Demand
The price vs. quantity plane graphs what happens to
the price and quantity of a good based on changes in supply
and/or demand. Quantity is represented on the horizontal X-axis,
with price represented on the vertical Y-axis. The supply and
demand curves form an X on the graph, with supply pointing
upward and demand pointing downward. Drawing straight lines
from the intersection of these two curves to the X and Y axes

57. 57
yields price and quantity levels based on current supply and
demand.
Consequently, a positive change in demand amid
constant supply shifts the demand curve to the right, the result
being an increase in price and quantity. A negative change in
demand shifts the curve left, and price and quantity both fall.
Parallel vs. Nonparallel Change in Demand
A parallel shift in demand means that there is no
change in the elasticity of demand for the given market, but a
nonparallel shift means there has been a change in elasticity.
For example, if there is a perceived increase in the
price of gasoline, then there will be a decrease in the demand for
SUVs, ceteris paribus. This shift is likely to be parallel, as those
who are still in the market for SUVs are still as sensitive to price
increases in the prices of SUVs as before the perceived increase
in gasoline prices occurred.
A parallel demand change can also be the case
for a good that is price inelastic, such as insulin. Those who are
diabetic prioritize the purchase of insulin regardless of its price
because the drug is vital to their health and well-being. An
uptick in the rate of diabetes results in higher demand for

58. 58
insulin, its price having a negligible effect on the demand
equation.
A nonparallel change in demand might occur
when, over time, a discretionary good is considered a necessity.
This phenomenon occurred for cellphones during the 1990s and
2000s. When the technology was new, consumers were highly
sensitive to its price, and most cellphone buyers were affluent.
As of 2018, a top-end cellphone costs more than the most
expensive models in the 1990s; however, regardless of the price,
a typical consumer prioritizes the purchase of a cellphone.
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What are the reasons why demand curve increase or
decrease?
Decreases in demand. Conversely, demand can
decrease and cause a shift to the left of the demand curve for a
number of reasons, including a fall in income, assuming a good
is a normal good, a fall in the price of a substitute and a rise in
the price of a complement.
Shifts in demand
The position of the demand curve will shift to
the left or right following a change in an underlying determinant
of demand.
Increases in demand are shown by a shift to the
right in the demand curve. This could be caused by a number
of factors, including a rise in income, a rise in the price of a

59. 59
substitute or a fall in the price of a complement.
Demand schedule
A shift in demand to the right means an increase in
the quantity demanded at every price. For example, if drinking
cola becomes more fashionable demand will increase at every
price.
PRICE (£) ORIGINAL Qd NEW Qd
1.10 0 100
1.00 100 200
90 200 300
80 300 400
70 400 500
60 500 600
50 600 700
40 700 800
30 800 900
Increases in demand
An increase in demand can be illustrated by a shift in the
demand curve to the right.

60. 60
Decreases in demand
Conversely, demand can decrease and cause a
shift to the left of the demand curve for a number of reasons,
including a fall in income, assuming a good is a normal good, a
fall in the price of a substitute and a rise in the price of a
complement.
Demand schedule
For example, if the price of a substitute, such as fizzy orange,
falls, then less cola is demanded at each price, as consumers
switch to the substitute.
PRICE (£)
ORIGINAL
Qd
NEW Qd
1.10 0
1.00 100
90 200 100
80 300 200
70 400 300
60 500 400
50 600 500
40 700 600
30 800 700

61. 61
Decreases in demand are shown by a shift of the demand curve
to the left.
The change in demand due to non change mater such
as income, taste and preference and price of related good is
known as shift in demand curve
Expansion of demand
Expansion in demand refers to a rise in the quantity
demanded due to a fall in the price of commodity, other factors
remaining constant. ADVERTISEMENTS: i. It leads to a
downward movement along the same demand curve.

62. 62
Expansion movement due to the expansion
when price increases the demand will decrease; the upward
movements due to the contraction when price decrease the
demand will increase
What is the difference between increase in demand and
extension in demand?
Difference between extension of demand and
increase in demand. Extension of demand refers to increase
in quantity demanded due to decrease in own price of the
commodity while increase in demand refers to increase in
quantity demanded even when own price of the commodity is
constant.
What is increase demand?
Changes in the prices of other goods can increase or
decrease demand. A good that causes an increase in the
demand for another good when its price increases is called a
“substitute good.” A good that causes a decrease in the demand
for another good when its price increases is called a
“complementary good.”

63. 63
Y D D1
D2
Price Downward Upward
P ----------
D1
D2
D3
Q X
Quantity
The price will remains constant
Shifting –Right increase the demand
Shifting –Left –decrease the demand
Change in demand with change in price is called the law of
demands.
In microeconomics, the law of demand states
that, "conditional on all else being equal, as the price of a good
increases (↑), quantity demanded decreases (↓); conversely, as
the price of a good decreases (↓), quantity demanded increases
(↑)".In other words, the law of demand describes an inverse
relationship between price and quantity demanded of a good.
Alternatively, other things being constant, quantity demanded of
a commodity is inversely related to the price of the commodity.
For example, a consumer may demand 2 kilograms of apples at
Rs 70 per kg; he may, however, demand 1 kg if the price rises to
Rs 80 per kg. This has been the general human behavior on
relationship between the price of the commodity and the
quantity demanded. The factors held constant refer to other
determinants of demand, such as the prices of other goods and

64. 64
the consumer's income. There are, however, some possible
exceptions to the law of demand, such as Giffen goods and
Veblen goods.
Price elasticity of demand
Price elasticity of demand (PED or Ed) is a
measure used in economics to show the responsiveness, or
elasticity, of the quantity demanded of a good or service to a
change in its price when nothing but the price changes. More
precisely, it gives the percentage change in quantity demanded
in response to a one percent change in price.
The "Law of Demand" is one of the most
important applied theories used in macroeconomics. It is
pronounced by a Neo-Classical Economist, Alfred Marshall in
his book "Principle of Economics". The "Law of Demand" is
based on the functional relationship between price and quantity
demand. There is an inverse relationship between price and
quantity demand.
Alfred Marshall defines it as "Other things
remaining the same, the amount demanded increases with a fall

65. 65
in price and diminishes with a rise in price."
Prof. Ferguson says, "According to the law of
demand, the quantity demand varies inversely with price."
According to the Marshall, "Higher the price,
lower the demand and lower the price, higher the demand."
It means the demanded quantity increases with the fall in price
and diminishes with the rise in price. Thus, there is an inverse
relation between price and demand for a commodity. This law
can be expressed in demand function as D = f (P). Where,
D = Demand for a commodity
f = function
P = Price of the commodity
This law is based on the following assumptions:
No change in income of consumer
No change in taste and preference of the consumer
No change in fashion and technology
No change in price of substitution and complementary goods
No change in population size
We can clarify the law of demand more clearly with the help of
following demand schedule and curve:
Price (Rs)
Quantity Demand
(Kg)
50 100
40 200
30 300
20 400
10 500

66. 66
The above demand schedule shows that when the
price increases, demand decreases but when the price of the
commodity decreases, the demand for the commodity increases.
When the price of the commodity is Rs.50, the demand quantity
is 10kg and when the price decreases to 40, 30, 20 and 10, the
demand quantity also increases to 200, 300, 400 and 500
respectively. Therefore, when the price falls, demand for the
commodity increases and vice versa.
fig. Demand Curve
The demand curve is the graphical representation of price and
demand for a commodity. In the above diagram, the X-axis
represents quantity demanded and the Y-axis represents the
price of a commodity. When the price of the commodity is
Rs.10, then the demand is 500kg and when the price rises to
Rs.20, the demand falls that is 400kg. Similarly, when the price
increases from Rs.20, Rs.30, Rs.40 and Rs.50, the quantity
demanded falls from 400, 300, 200 to 100kg. This shows the
inverse relationship between price and demand. Thus, the
demand curve DD is downward sloping curve.

67. 67
EXCEPTION OR LIMITATIONS OF THE LAW OF
DEMAND
Price or Shortage Expectation
When the consumer feels that a certain commodity is
going to be a shortage in near future or price is going to rise,
they demand more goods and services at present price at a high
amount for the future references.
Goods for Basic Needs
Law of demand is not applicable in a case of basic or
necessary goods. The demand for necessary goods such as salt,
medicine, etc. remains unchanged at all level of price i.e.
whether the price rises or falls, it does not bring any changes in
demand.
Change in Population
The next exception of the Law of Demand is a change
in population. As there is an increase in population, it increases
quantity demanded at the higher price. Likewise, as there is
drastic fall in population due to any natural disaster or war,
quantity demand falls even though there may be fall in price.
Cultural and Religious Factors
If the goods are related to the cultural and religious
factors, then the Law of Demand does not hold true.
Giffen Goods
Those inferior goods whose quantity demanded
increases with a rise in price and decreases with the fall in price
are called giffen goods. It is also against the law of demand.
Ignorance
If the consumers are ignorant about the market price,
then they can purchase more units of goods at the higher price.
Under such condition, the law of demand does not hold true.

68. 68
DERIVATIONOF INDIVIDUAL DEMAND CURVE
The quantity demanded by an individual consumer from the
market at a given price at a particular time period is called
individual demand. A schedule prepared on the basis of different
units demanded by a consumer at a various price in a fixed time
period is known as individual demand schedule. Individual
demand curve can be derived with the help of the following
schedule:
Price in Rs Quantity purchased (units)
2 100
4 80
6 60
8 40
10 20
The above table shows the quantity demand of a commodity by
a single consumer at various prices. When the price increases
from Rs.2 to Rs.4, the demand decreases from 100 units to 80
units. Similarly, the price increases further to Rs.6, Rs.8 and
Rs.10, the quantity demand decreases from 60 to 40 to 20 units
respectively. This shows the inverse relation between price and
quantity demand of a commodity.

69. 69
The above figure, the individual demand curve shows the
quantity demanded and prices of a commodity of a single
consumer is shown on X-axis and Y-axis respectively. When the
price is Rs.2 the consumer demanded 100 units of a commodity.
And when the price rises to 4, 6, 8 and 10, the demand goes on
decreasing to 80, 60, 40 and 20. Thus, the individual demand
schedule shows the opposite relationship between price and
demand.
DERIVATIONOF MARKET DEMAND CURVE
Market demand is the sum of demand schedule of all individuals
at a particular time. Market demand schedule shows the various
quantities of a product that all individuals are willing to pay and
able to purchase from the market at various prices during a
given period of time. Market demand schedule is prepared after
deriving the total demand at different prices. The following table
shows the market demand schedule:
Price (in Rs)
Individual demands (Kg) Total market demand
(Kg)A B
10 0 2 2
8 1 4 5
6 2 6 8

70. 70
4 4 8 12
2 6 10 16
From the above table, we can assume the quantity demanded by
various consumers at a various price. At Rs.10 per kg, the
demand of A and B is 0kg and 2 kg. So, the total demand is 2kg.
When the price decreases to Rs.8, the demand of consumers
increases to 1kg and 4 kg. Total demand is 5kg. Finally, when
the price falls to Rs.2 per kg, the quantity demanded rise up to
6kg and 10kg (total 16kg) by both consumer. This shows the
market demand increases as the price of the commodity
decreases.
When this schedule is converted into a figure it is called market
demand curve.
In the above figure, the X-axis represents the quantity demanded
and the Y-axis shows the price of a commodity. DDA and DDB
are the individual demand curve for the consumer A and B. The
market demand curve DDM is derived by the horizontal addition
of individual demand DDA and DDB. In market demand curve
DDM, when the price is Rs.10 per kg aggregate demand is 2kg.
Similarly, when the price is Rs 2 per kg, aggregate demand is
16kg.

71. 71
Price Elasticity of Demand
Degree of responsiveness of quantity
demanded with respect to change in price
Elasticity (e) =Change in demand =▲d *100%
Change in price ▲P
Elasticity (e) =Change in quantity=▲d *100%
Change in price ▲P
E=▲d *100%
▲P
Degree of price electricity
On the basis of degree of quantity changes
1) If the % of change in demand is greater the % change
of price
(Flatter toward X axis)
▲d>▲p
E >1
5 Degrees of Price Elasticity of Demand
Dr. Marshall has pro-founded the concept of price
elasticity of demand. In simple words, price elasticity of demand
is the ratio of percentage change in quantity demanded to the
percentage change in price.
In other words, price elasticity of demand is a
measure of the relative change in quantity purchased of a good

72. 72
in response to a relative change in its price. It is thus, rate at
which the demand changes to the given change in prices.
So, we can say that it is the rate or the degree of
response in demand to the change in price.
Therefore, the co-efficient of price elasticity of demand can
be written as below:
Definitions:
The concept of price elasticity of demand has been defined
by different economies as under:
“Elasticity of demand may be defined as the percentage change
in quantity demanded to the percentage change in-price.”
“Elasticity of demand is the ratio of relative change in quantity
to relative change in Price.”
“The elasticity of demand for a commodity is the rate at which
quantity bought change the price change.”
“The elasticity of demand is a measure of the relative change in
quantity to a relative change in price”.
“Elasticity of demand measures the responsiveness of demand to
changes in price”.

73. 73
Degrees of Price Elasticity:
Different commodities have different price
elasticity’s. Some commodities have more elastic demand while
others have relative elastic demand. Basically, the price
elasticity of demand ranges from zero to infinity. It can be equal
to zero, less than one, greater than one and equal to unity.
“The elasticity or responsiveness of demand in a market is great
or small according as the amount demanded increases much or
little for a given fall in price and diminishes much or little for a
given rise in price”.
▲p=10%
▲q=30%
E=30/10
e>1
However, some particular values of elasticity of demand
have been explained as under:
1. Perfectly Elastic Demand:
Perfectly elastic demand is said to happen when a
little change in price leads to an infinite change in quantity
demanded. A small rise in price on the part of the seller reduces
the demand to zero. In such a case the shape of the demand
curve will be horizontal straight line as shown in figure 1.

74. 74
The figure 1 shows that at the ruling price OP, the demand is
infinite. A slight rise in price will contract the demand to zero. A
slight fall in price will attract more consumers but the elasticity
of demand will remain infinite (ed=∞). But in real world, the
cases of perfectly elastic demand are exceedingly rare and are
not of any practical interest.
When a small change in price lead to an infinite change in
demand
2. Perfectly Inelastic Demand:
Perfectly inelastic demand is opposite to perfectly
elastic demand. Under the perfectly inelastic demand,
irrespective of any rise or fall in price of a commodity, the
quantity demanded remains the same. The elasticity of demand
in this case will be equal to zero (ed = 0).

75. 75
In diagram 2 DD shows the perfectly inelastic
demand. At price OP, the quantity demanded is OQ. Now, the
price falls to OP1, from OP, the demand remains the same.
Similarly, if the price rises to OP2 the demand still remains the
same. But just as we do not see the example of perfectly elastic
demand in the real world, in the same fashion, it is difficult to
come across the cases of perfectly inelastic demand because
even the demand for, bare essentials of life does show some
degree of responsiveness to change in price.
Whenever may be the changes in price the quantity demand is
unaffected
e=0
Factors determines the price elasticity’s of demand
Factors determining the price elasticity of demand are influence
by several factors
1) Nature of good
(Luxury)
2) Availability of substitution
3) Income of the customer and purchasing power of the
customer
4) Price of goods
5) Time period
3. Unitary Elastic Demand:
The demand is said to be unitary elastic when a
given proportionate change in the price level brings about an
equal proportionate change in quantity demanded. The
numerical value of unitary elastic demand is exactly one i.e.
Marshall calls it unit elastic.

76. 76
In figure 3, DD demand curve represents unitary elastic demand.
This demand curve is called rectangular hyperbola. When
price is OP, the quantity demanded is OQ. Now price falls to
OP1 the quantity demanded increases to OQ2. The area OQRP
= area OPSQ2 in the fig. denotes that in all cases price elasticity
of demand is equal to one.
▲d=▲p
E=1
4. Relatively Elastic Demand:
Relatively elastic demand refers to a situation in
which a small change in price leads to a big change in quantity
demanded. In such a case elasticity of demand is said to be more
than one (ed > 1). This has been shown in figure 4.
In fig. 4, DD is the demand curve which indicates that when

77. 77
price is OP the quantity demanded is OQ1. Now the price falls
from OP to OP1, the quantity demanded increases from OQ1 to
OQ2 i.e. quantity demanded changes more than change in price.’
5. Relatively Inelastic Demand:
Under the relatively inelastic demand, a given
percentage change in price produces a relatively less percentage
change in quantity demanded. In such a case elasticity of
demand is said to be less than one (ed < 1). It has been shown in
figure 5.
All the five degrees of elasticity of demand have been shown in
figure 6. On OX axis, quantity demanded and on OY axis price
is give
It shows:
1. AB — Perfectly Inelastic Demand
2. CD — Perfectly Elastic Demand
3. EG — Less than Unitary Elastic Demand
4. EF — Greater Than Unitary Elastic Demand
5. MN — Unitary Elastic Demand.
% change in demand is less when % change in price
▲p=20%
▲d=10%
▲d<▲p

78. 78
e<1
e=10/20=0.5, e<1
Cross electricity of demand
Change in demand, demand of those goods due to
change in price of another goods
= % change in demand of goods “A”
% Change of price of another goods “B”
Income elasticity of demand
% change in quantity demand with respect to the
% change in income of customers
Income elasticity of demand measures the
responsiveness of the quantity demanded for a good or service to
a change in income. It is calculated as the ratio of the percentage
change in quantity demanded to the percentage change in
income.
The proportionate change in quantity demanded for a goods due
to the proportionate change in consumer's income is called
income elasticity of demand. Income elasticity is usually
symbolized by 'Ey' and written as:
Ey = %of change in demand
% of change in income
Ey =ΔQ *100%
Q
Δy*100%
y
i.e. Ey=ΔQ *y
Δy q
Where,

79. 79
Ey = Income elasticity demand
Δ = Small Change
Q = Quantity
y = Income
DEGREE / TYPES OF INCOME ELASTICITY OF
DEMAND
There are three types of income elasticity of demand. They are
as follow:
1) Positive Income Elasticity (Ey>0)
If the quantity demand for a
commodity increases with the increase in consumer's income
and decreases with the decrease in income of the consumer is
known as positive income elasticity. Hence, there is a positive
relation between income and demand. In that case, the value of
elasticity remains greater than zero.
Under positive income elasticity of
demand, there are three types of demand. They are:
i) Income Elasticity of Demand is greater than unity (Ey>1)
If the proportionate change in quantity demanded
is more than the proportionate change in the consumer's income,
then it is called income elasticity greater than unity.

80. 80
Fig: Income Elasticity of Demand is greater than unity.
ii) Income Elasticity of Demand is equal to unity (Ey=1)
If the proportionate change in quantity demanded
is equal to the proportionate change in the consumer's income,
then it is called income elasticity equal to unity.
iii) Income Elasticity of Demand is less than unity (Ey<1)
If the proportionate change in quantity demanded is
less than the proportionate change in the consumer's income,
then it is called income elasticity less than unity.
2) Negative Income Elasticity (Ey<0)
If the quantity demand for a goods increase with the
decrease in consumer's income & vice versa, then it is called
negative income elasticity.

81. 81
Fig: Negative income elasticity demand
In the given figure, quantity demanded is measured along OX-
axis & consumer's income is measured along OY-axis. D1D is
the demand curve which is negatively sloped. Here, when the
consumer's income increases from OY to OY1, demand for
goods decreases from OQ to OQ1.
3) Zero Income Elasticity of Demand (Ey=0)
If the quantity demanded for a goods does not change with the
change in consumer's income, then it is called zero income
elasticity of demand.
Fig: Zero income elasticity demand
In the given figure, quantity demanded is measured along OX-
axis & consumer's income is measured along OY-axis. D1D is

82. 82
the demand curve which is perfectly inelastic. Here, whatever be
the consumer's income be i.e. OY, OY1 or OY2 quantity
demanded is same as OQ.
CROSS ELASTICITY OF DEMAND (Exy)
If the proportionate change in quantity demanded of goods due
to the proportionate change in the price of a related good (i.e.
substitute goods or complementary goods), is called cross
elasticity of demand. Cross elasticity of demand is symbolized
by 'Exy' and written as:
Where,
Exy = cross elasticity demand between X and Y
Δ = Small Chnage
Qx = Quantity demand of Y goods
Py = Price of Y goods
DEGREE / TYPES OF CROSS ELASTICITY OF
DEMAND
There are two types of cross elasticity of demand described
below:
i) Positive cross elasticity (Exy>0)
Positive cross elasticity of demand is only applied in the case of
substitute goods like coffee and tea. If the increase in price of
another substitute goods and vice versa, then it is called positive

83. 83
cross elasticity of demand. Hence, the increases in the price of a
commodity result to the rise in a quantity demand of a substitute
good.
Fig: Positive cross elasticity demand
In the given figure, quantity demand of coffee is measured along
OX-axis and price of tea is measured along OY-axis. When the
price of tea increases from OP to OP1, the quantity demand for
coffee also increases from OQ to OQ1. Hence, the DD1 is the
positive cross demand curve sloping upward to the right.
ii) Negative cross elasticity (Exy<0)
Negative cross elasticity of demand is only applied in the case of
complementary goods like petrol & car. If the quantity
demanded for a goods increase with the decrease in price of
other complementary goods and vice versa, then it is called
negative cross elasticity of demand. Hence, the rise in the price
of commodity results to decreases in quantity demands of
complementary goods.

84. 84
Fig: Negative cross elasticity demand
In the given figure, quantity demand of pen is measured along
OX-axis and price of ink is measured along OY-axis. When the
price of ink increases from OP to OP1, the quantity demand of a
pen decreases from OQ to OQ1. Hence, DD1 is the negative
cross elasticity demand curve sloping downward to the right.
Zero Cross Elasticity of Demand:
Zero cross-elasticity of demand can be defined as change in
price of 'Y' does not affect to quantity demanded for 'X'.
In the above figure, quantity demanded for goods X
is measured along ox-axis & price of goods y is measured along
oy-axis. when price of y changes quantity demanded for y
remains constant. Hence, in case of zere cross elasticity of
demand, deamnd curve becomes vertocal straight line parallel to
oy-axis.

85. 85
Demand schedule and demand curve
The demand curve is a graphical representation
depicting the relationship between a commodity's different price
levels and quantities which consumers are willing to buy. The
curve can be derived from a demand schedule, which is
essentially a table view of the price and quantity pairings that
comprise the demand curve.
What's the difference between demand schedule and curve?
The demand schedule and demand curve are complementary
ways of examining the relationship between price and quantity
demanded. ... The individual rows in the demand schedule,
showing specific price points and quantity demanded, provide
the coordinates to be plotted on the graph.

86. 86
Demand Schedule: are of two types
1) Individual Demand Schedule
2) Market Demand S

87. 87
Demand schedule is a tabular statement showing
various quantities of a commodity being demanded at various
levels of price, during a given period of time. It shows the
relationship between price of the commodity and its quantity
demanded.
A demand schedule can be determined both for
individual buyers and for the entire market. So, demand
schedule is of two types:
1. Individual Demand Schedule
2. Market Demand Schedule
a) Individual demand schedule is the quantity demand by an
individual
b) Market demand schedule is the quantity demand by the
market
1. Individual Demand Schedule:
Individual demand schedule refers to a tabular
statement showing various quantities of a commodity that a
consumer is willing to buy at various levels of price, during a
given period of time. Table 3.1 shows a hypothetical demand
schedule for commodity ‘x’.
Table 3.1: Individual Demand Schedule
Price. (in Rs.) Quantity Demanded of
commodity x (in units)
5 1
4 2
3 3
2 4
1 5
As seen in the schedule, quantity demanded of ‘x’ increases with
decrease in its price. The consumer is willing to buy 1 unit at Rs.

88. 88
5. When price falls to Rs. 4, demand rises to 2 units.
A ‘Demand Schedule’ states the relationship between two
variables: price and quantity. It shows that more is demanded at
lower prices than at higher prices – just as you will probably buy
more DVD’s when they are offered at a price less than the
normal price.
Market Demand Schedule:
Market demand schedule refers to a tabular
statement showing various quantities of a commodity that all the
consumers are willing to buy at various levels of price, during a
given period of time. It is the sum of all individual demand
schedules at each and every price.
Market demand schedule can be expressed as:
Where Dm is the market demand and DA + DB
+…………………. are the individual demands of Household A,
Household B and so on.
Let us assume that A and B are two consumers for
commodity x in the market. Table 3.2 shows that market
demand schedule is obtained by horizontally summing the
individual demands:
Table 3.2: Market Demand Schedule
Price
(Rs.)
Individual Demand (in
units)
Market Demand (in
units) {DA + DB}
Household A (DA) Household
B (DB)
5 1 2 1 +2 = 3
4 2 3 2 + 3 = 5
3 3 4 3 + 4 = 7
2 4 5 4 + 5 = 9
1 5 6 5 + 6=11

89. 89
As seen in Table 3.2, market demand is obtained by adding
demand of households A and B at different prices. At Rs. 5 per
unit, market demand is 3 units. When price falls to Rs. 4, market
demand rises to 5 units. So, market demand schedule also shows
the inverse relationship between price and quantity demanded.
Demand forecasting
Demand forecasting is a field of predictive analytics
which tries to understand and predict customer demand to
optimize supply decisions by corporate supply chain and
business management
Demand forecasting is a systematic process that
involves anticipating the demand for the product and services of
an organization in future under a set of uncontrollable and
competitive forces.
Study of the past and present for the feature
demands
What is demand forecasting and its importance?
Demand is a most important aspect for a business for
achieving its objectives. Many decisions of business depend on
demand like production, sales, staff requirement etc ... Demand
forecasting reduces risk related to business activities and helps
it to take efficient decisions.

90. 90
Market demand schedule
In economics, a Market Demand Schedule is a
tabulation of the quantity of a good that all consumers in a
market will purchase at a given price. Generally, there is an
inverse relationship between the price and the quantity
demanded. The graphical representation of a demand schedule is
called a demand curve.
Significant of demand forecasting
Demand is a most important aspect for a business for
achieving its objectives. Many decisions of business depend on
demand like production, sales, staff requirement etc ... Demand
forecasting reduces risk related to business activities and helps
it to take efficient decisions.
Importance of demand forecasting
a) Crucial to supplier ,manufacturer or retailer
b) Business decisions
c) Planning for future finished goods
d) Accurate demand forecasts lead to efficient
operations
e) Improve quality and effectiveness of product
Significance of demand forecasting
a) Production planning
b) Sales Forecasting
c) Control of business
d) Inventory control
e) Growth and long term investment program
f) Economic Planning and policy making
g) Fulfilling objectives
h) Preparing budget