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Gramothan, Ramnagaria, Jagatpura, Jaipur-302017, INDIA

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Lecture 9: Demand-Types of Demand, Determinants of Demand, Demand

Function.
Demand
Demand in common parlance means the desire for an object. But in economics demand is
something more than this. According to Stonier and Hague, “Demand in economics means
demand backed up by enough money to pay for the goods demanded”. This means that the
demand becomes effective only it if is backed by the purchasing power in addition to this
there must be willingness to buy a commodity.
Every want supported by the willingness and ability to but constitutes demand for a particular
product or services. In other words, if I want a car and I cannot pay for it, there is no demand
for the car from my side.
A product or services is said to have demand when three conditions are satisfied:
 Desire on the part of the buyer to buy.
 Willingness to pay for it.
 Ability to pay the specified price for it.

The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good,
the less people will demand that good.
In other words, the higher the price, the lower the quantity demanded. The amount of a good
that buyers purchase at a higher price is less because as the price of a good goes up, so does
the opportunity cost of buying that good.
As a result, people will naturally avoid buying a product that will force them to forgo the
consumption of something else they value more. The chart below shows that the curve is a
downward slope
Table 9.1 Demand Schedule
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Fig.9.1 – Demand Curve

From the above table it is clear that as price of Mangoes rises from Rs.1 to Rs.2 demand falls
from 25 to 20. When the price of Mangoes rises to Rs.5 quantity demand falls to 5 Mangoes.
In the same way as price rises, quantity demand falls on the basis of demand schedule. We
can draw a demand curve from the above Demand Schedule as follows.

In the above Diagram, demand is shown on OX –axis and price is shown on OY-axis.
DD is the demand curve.
The demand curve DD shows the inverse relation between price and quantity demand of
Mangoes.
The demand curve slopes downward from left to right.

Assumptions Of Law Of Demand

Law of Demand is based on the following assumptions. The Law will hold well only if the
following assumptions are fulfilled.

 That the tastes and fashions of the people remain unchanged.

 That the people’s income remains unchanged / constant.
 That the prices of related goods remain unchanged / same.
 That there are no substitutes for the commodity in the market.
 That the commodity is not the one which has prestige value such as diamonds etc.
 That the demand for the commodity should be continuous.
 That the people should not expect any change in the price of the commodity
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Types of Demand:
a) Direct and indirect demand:
 Producers’ goods and consumers’ goods: demand for goods that are directly used
for consumption by the ultimate consumer is known as direct demand. (Example:
Demand for T shirts)
 On the other hand demand for goods that are used by producers for producing
goods and services. (Example: Demand for cotton by a textile mill)

b) Derived demand and autonomous demand:

 When a produce derives its usage from the use of some primary product it is
known as derived demand. (Example: demand for tyres derived from demand for
car)
 Autonomous demand is the demand for a product that can be independently used.
(Example: demand for a washing machine)

c) Durable and non durable goods demand:

 Durable goods are those that can be used more than once, over a period of time
(Example: Microwave oven).
 Non durable goods can be used only once (Example: Band-aid)

d) Firm and industry demand:

 Firm demand is the demand for the product of a particular firm. (Example: Dove
soap)
 The demand for the product of a particular industry is industry demand (Example:
demand for steel in India)

e) Total market and market segment demand:

 A particular segment of the markets demand is called as segment demand
(Example: demand for 21 laptops by engineering students).
 The sum total of the demand for laptops by various segments in India is the total
market demand. (Example: demand for laptops in India)

f) Short run and long run demand:

 Short run demand refers to demand with its immediate reaction to price changes
and income fluctuations.
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 Long run demand is that which will ultimately exist as a result of the changes in
pricing, promotion or product improvement after market adjustment with sufficient
time.

g) Joint demand and Composite demand:

 When two goods are demanded in conjunction with one another at the same time to
satisfy a single want, it is called as joint or complementary demand. (Example:
demand for petrol and two wheelers)
 A composite demand is one in which a good is wanted for several different uses.
(Example: demand for iron rods for various purposes)

h) Price demand, income demand and cross demand:

 Demand for commodities by the consumers at alternative prices is called as price
demand.
 Quantity demanded by the consumers at alternative levels of income is income
demand.
 Cross demand refers to the quantity demanded of commodity ‘X’ at a price of a
related commodity ‘Y’ which may be a substitute or complementary to X.

Determinants of Demand:
There are so many factors on which the demand for a commodity depends. These factors are
Economic, Social as well as Political factors. The affect of all these factors on the amount of
demanded for the commodity is called Demand Function. The following are some of the
factors that cause a change in demand other than price factor.

a) Price of the Commodity: The most important factor affecting on demand is the price
of the commodity. The amount of the commodity demanded at a particular price is
more popularly called price demand. The relation between price and demand is called
the Law of Demand. It is not only the existing price but also expected changes in
price, which affect demand.

b) Prices of Related Goods

 Change in the Prices of Substitutes: In case of substitutes like tea and coffee an
increase in price of one commodity leads to an increase in the demand for other
commodity and vice versa. The rise in price of coffee shall raise the demand for tea.
 Change in the Prices of Complementary: In case of complementariness like car and
petrol a fall in price of one commodity leads to an increase in the demand for other
commodity and vice versa.
If the price of pens goes up, their demand is less as a result of which the demand for
ink is also less. The price and demand go in opposite direction. The effect of changes
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in price a commodity on amounts demanded of related commodities is called cross

demand.

c) Income of the Consumer:

The third most important factor influencing demand is consumer income. In fact we
can establish a relationship between the consumer income and demand at different
levels of income, price and other things remaining same. The demand for a normal
commodity goes up and falls down when income rises and falls down. But in case of
Giffen goods the relationship is opposite. Demand always changes with a change in
the incomes of the people. When income increases then demand for commodity
increases and vice versa.

d) Tastes and Fashions of Consumers:

The fourth most important factor influencing demand is consumers‟ tastes and
fashions. The demand also depends on consumer's taste. Tastes include fashion, habit,
customs etc. A customer taste is also affected by advertisement. If the taste for a
commodity goes up, its amount demanded is more even at the same price. This is
called increase in demand. The opposite is called decrease in demand. A change in the
tastes and fashions brings about a change in demand for a commodity. When
commodity goes out of fashion, the demand for it will decrease even though the price
remains the same. Demand curve shifts to the left.

e) Affect of Wealth:
The amount demanded of the commodity is also affected by the amount of wealth as
well as its distribution. When the wealth of the people is more, demand for the normal
commodities is also more. If wealth is more equally distributed, the demand for
necessaries and comforts is more. On the other hand, if some people are rich, while
the majorities are poor, the demand for luxuries is generally higher.

f) Change in Population:
Increase in population increases demand for necessaries of life. The compositions of
population also affect demand. Composition of population means the proportion of
young and old and children as well as the ratio of men and women. A change in
composition of population has an effect on the nature of demand for different
commodities. A change in size as well as composition of population will affect the
demand for certain commodities. For example: An increase in size of population will
increase the demand for food grains. Similarly, an increase in percentage of women
increases the demand for bangles and sarees.
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g) Changes in Climate and Weather:

Demand always changes with a change in weather or climate even though price
remains unchanged. In summer the demand for cool drinks increases and in winter it
decreases. The climate of an area and the weather prevailing there has a decisive
effect on consumer’s demand. In cold areas woollen cloth is demanded. During hot
summer days, ice is very much in demand. On a rainy day, ice cream is not so much
demanded.

h) Changes in Government Policy:

Government policy affects the demand for commodities through taxation. Taxing a
commodity increases its price and demand goes down. Similarly, financial help from
government increases the demand for a commodity while lowering its price.

i) Expectations Regarding the Future:

If consumers expect changes in price of commodity in future, they will change the
demand at present even when the present price remains the same. Similarly, if
consumers expect their incomes to rise in the near future they may increase the
demand for a commodity just now.

j) State of Business:
The level of demand for different commodities also depends upon the business
conditions in the country. If the country is passing through boom conditions, there
will be a marked increase in demand. On the other hand, the level of demand goes
down during depression conditions

k) Advertisement:
Advertisement has become the most popular means in changing the demand for a
commodity in the modern world. By a regular advertisement the preference of the
consumers can be influenced.

l) Technical Progress:
Due to technical progress new commodities will enter into the market and demand for
the old commodities will decrease. For example, Due to the introduction of electronic
watches the demand for ordinary watches has decreased.
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DEMAND FUNCTION:
Demand function -- a behavioural relationship between quantity consumed and a person's
maximum willingness to pay for incremental increases in quantity. It is usually an inverse
relationship where at higher (lower) prices, less (more) quantity is consumed. Other factors
which influence willingness-to-pay are income, tastes and preferences, and price of
substitutes.

Individual Demand function

𝑄𝑑𝑥 = ƒ(𝑃𝑥, 𝑌, 𝑃1 … … 𝑃𝑛 − 1, 𝑇, 𝐴 , 𝐸𝑦, 𝐸𝑝, 𝑢)
Where
𝑄𝑑𝑥 = 𝑞𝑢𝑎𝑛𝑡i𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 ƒ𝑜𝑟 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 X
𝑃𝑥 = 𝑝𝑟i𝑐𝑒 𝑜ƒ 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
𝑌 = 𝑙𝑒𝑣𝑒𝑙 𝑜ƒ ℎ𝑜𝑢𝑠𝑒ℎ𝑜𝑙𝑑 i𝑛𝑐𝑜𝑚𝑒
𝑃1 … . 𝑃𝑛 − 1 = 𝑝𝑟i𝑐𝑒 𝑜ƒ 𝑎𝑙𝑙 𝑡ℎ𝑒 𝑜𝑡ℎ𝑒𝑟 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠 𝑇
= 𝑡𝑎𝑠𝑡𝑒𝑠 𝑜ƒ 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟
𝐴 = 𝑎𝑑𝑣𝑒𝑟𝑡i𝑠i𝑛𝑔
𝐸𝑦 = 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟‘𝑠 𝑒xpected future income
𝐸𝑝 = 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟‘𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 ƒ𝑢𝑡𝑢𝑟𝑒 𝑝𝑟i𝑐𝑒
𝑈 = 𝑎𝑙𝑙 𝑡ℎ𝑜𝑠𝑒 𝑑𝑒𝑡𝑒𝑟𝑚i𝑛𝑎𝑛𝑡𝑠 𝑡ℎ𝑎𝑡 𝑎𝑟𝑒 𝑛𝑜𝑡 𝑐𝑜𝑣𝑒𝑟𝑒𝑑 i𝑛 𝑡ℎ𝑒 𝑙i𝑠𝑡 𝑑𝑒𝑡𝑒𝑟𝑚i𝑛𝑎𝑛𝑡𝑠

Market Demand function

𝑄𝑑𝑥 = ƒ(𝑃𝑥, 𝑌, 𝑃1 … … 𝑃𝑛 − 1, 𝑇, 𝐴 , 𝐸𝑦, 𝐸𝑝, 𝑃, 𝐷, 𝑢)
𝑄𝑑𝑥, 𝑃𝑥, 𝑌, 𝑃1 … 𝑃𝑛 − 1, 𝑇, 𝐴, 𝐸𝑦, 𝐸𝑝, 𝑈 are the same as the individual demand function
𝑃 = 𝑝𝑜𝑝𝑢𝑙𝑎𝑡i𝑜𝑛
𝐷 = 𝑑i𝑠𝑡𝑟i𝑏𝑢𝑡i𝑜𝑛 𝑜ƒ 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟𝑠 i𝑛 𝑣𝑎𝑟i𝑜𝑢𝑠 𝑐𝑎𝑡𝑒𝑔𝑜𝑟i𝑒𝑠 𝑠𝑢𝑐ℎ 𝑎𝑠 i𝑛𝑐𝑜𝑚𝑒, 𝑎𝑔𝑒, 𝑠𝑒𝑥 𝑒𝑡𝑐.

NG/MEFA/Lecture 9
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Lecture 10: Elasticity of Demand.

Elasticity of Demand:
Elasticity of demand explains the relationship between a change in price and consequent
change in amount demanded. “Marshall” introduced the concept of elasticity of demand.
Elasticity of demand shows the extent of change in quantity demanded to a change in price.
In the words of “Marshall”, “The elasticity of demand in a market is great or small
according as the amount demanded increases much or little for a given fall in the price and
diminishes much or little for a given rise in Price”.

Elastic demand:
A small change in price may lead to a great change in quantity demanded. In this case,
demand is elastic.

Inelastic demand:
If a big change in price is followed by a small change in demanded then the demand in
“inelastic”.

Types of Elasticity of Demand:

There are four types of elasticity of demand:
a) Price elasticity of demand.
b) Income elasticity of demand.
c) Cross elasticity of demand.
d) Advertising elasticity of demand

Price elasticity of demand:

Elasticity of demand in general refers to price elasticity of demand. In other words, it refers to
the quantity demanded of a commodity in response to a given change in price. Price elasticity
is always negative which indicates that the customer tends to buy more with every fall in the
price, the relationship between the price and the demand is inverse.

Proportionate change in the quantity demand of commodity "X"

Price elasticity =
Proportionate change in the price of commodity "X"
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(Q2 − Q1)/ Q1
Edp =
(P2 - P1) /P1
Where:
Q1 = quantity demand price before change
Q2 = quantity demand price after change
P1 = price before change
P2 = price after change

Income elasticity of demand:

Income elasticity of demand refers to the quantity demand of a commodity in response to a
given change in income of the consumer.

Proportionate change in the quantity demand of commodity

Income Elasticity =
Proportionate change in the income of the people

(Q2 − Q1)/ Q1
EdI =
(I2 - I1) /I1
Where
Q1 = quantity demand price before change
Q2 = quantity demand price after change
I1 = income before change
I2 = income after change

Cross elasticity of demand:

The proportionate change in quantity demanded of a commodity due to change in price of
another commodity (like the substitute or the complementary good) is called as cross
elasticity of demand
The positive coefficient of cross elasticity shows that the given commodities are substitutes.
Negative cross elasticity shows that the given commodities are complementary to each other.
And when it is zero, then the given commodities are unrelated to each other
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Proportionate change in the quantity demand of commodity "X"

Cross Elasticity =
Proportionate change in the price of complementary commodity "Y"

(Q2 − Q1)/ Q1
Edc =
(P2 - P1) /P1

Where:
Q1 = quantity demand price of commodity before change
Q2 = quantity demand price of commodity after change
P1 = price of complementary commodity before change
P2 = price of complementary commodity after change

Advertising elasticity of demand:

It refers to increase in the sales revenue because of change in the advertising expenditure. In
other words, there is a direct relationship between the amount of money spent on advertising
and its impact on sales. Advertising elasticity is always positive.

Proportionate change in the quantity demand of commodity

Advertising Elasticity =
Proportionate change in advertisement costs.

(Q2 − Q1)/ Q1
EdA =
(A2 - A1) /A1

Where:
Q1 = quantity demand price before change
Q2 = quantity demand price after change
A1 = advertising before change
A2 = advertising after change
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Measurement of Elasticity of Demand

a) Perfect elasticity of demand
b) Perfect inelasticity of demand
c) Relative elasticity of demand
d) Relative inelasticity of demand
e) Unity elasticity of demand

Perfect Elasticity of Demand:

When any quantity can be sold at a given price, and when there is no need to reduce price, the
demand is said to be perfectly elastic. In such cases, even a small increase in price will lead to
complete fall in demand.

Fig. 10. 1 - Perfect Elasticity of Demand

Perfect Inelasticity of Demand:

When a significant degree of change in price leads little or no change in the quantity
demanded, then the elasticity is said to be perfectly inelastic. In other words, the demand is
said to be perfectly inelastic when there is no change in the quantity demanded even though
there is a big change in the price.

Fig. 10. 2 - Perfect Inelasticity of Demand

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Relative Elasticity of Demand:

The demand is said to be relatively elastic when the change in demand is more than the
change in the price.

Fig. 10. 3 - Relative Elasticity of Demand

Relative Inelasticity of Demand: The demand is said to be relatively inelastic when the
change in demand is less than the change in the price.

Fig. 10. 4 - Relative Inelasticity of Demand

Unity Elasticity:
The elasticity in demand is said to be unity when the change in demand is equal to the change
in price.
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Fig. 10. 5 - Unity Elasticity

Significance of Elasticity of Demand

a) Price of factors of production:
The factors of production are land, labour, capital, organizations and technology. These have
a cost; we have to pay rent, wages, interest, profits and price for these factors of production.

b) Price fixation:
The manufacturer can decide the amount of price that can be fixed for his product based on
the concept of elasticity, if there is no competition, in other words in the case of a monopoly,
the manufacture is free to fix his price as long as it does not attract the attention of the
government, when there are close substitutes, the product is such that its consumption can be
postponed, it cannot be put to alternative uses and so on, then the price of the product cannot
be fixed very highly.

c) Government policies:
 Tax policies: government extensively depends on this concept to finalize its polices
relating to taxes and revenues. Where the product is such that the people cannot postpone
its consumptions, the government tends to increase its, price, such as petrol and diesel,
cigarettes, and so on.
 Raising bank deposits: if the government wants to mobilize larger deposits from the
consumer it proposes to raise the rates of fixed deposits marginally and vice versa.
 Public utilities: government uses the concept of elasticity in fixing charges for the public
utilities such as elasticity tariff, water charges, ticket fare in case of road or rail transport
.
d) Forecasting demand:
Income elasticity is used to forecast demand for a particular product or services. The demand
for the products can be forecast at a give income level.
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The trader can estimate the quantity of goods to be sold at different income levels to
realize the targeted revenue.

e) Planning the levels of output and price:

The knowledge of price elasticity is very useful to producers. The producer can evaluate
whether a change in price will bring in adequate revenue or not. In general, for items whose
demand is elastic, it would benefit him to charge relatively low price. On the other hand, if
the demand for the product is inelastic, a little higher price may be helpful to him to get huge
profits without losing sales.
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Lecture 11: Demand Forecasting –Purpose, Methods and Determinants.

Demand Forecasting:
Demand forecasting refers to an estimate of future demand for the product. It is an objective
assessment of the future course of demand, in recent times, forecasting plays an important
role in business decision – making. The survival and prosperity of a business firm depend on
its ability to meet the consumer’s needs efficiently and adequately. Demand forecasting has
an important influence on production planning. It is essential for a firm to produce the
required quantities at the right time.
It is also essential to distinguish between forecasting of demand and forecast of sales, sales
forecasts are important for estimating revenue, cash requirements and expenses whereas,
demand forecasting relate to production, inventory control, timing, reliability of forecast etc.
however, there is not much difference between these terms.

Methods of Demand Forecasting:

1. Survey methods.
2. Statistical methods.
3. Expert opinion methods.
4. Test marketing.
5. Controlled experiments.
6. Judgmental approach

a) Survey Methods:
Survey method is one of the most common and direct methods of forecasting demand in
the short term. This method encompasses the future purchase plans of consumers and
their intentions. In this method, an organization conducts surveys with consumers to
determine the demand for their existing products and services and anticipate the future
demand accordingly. There are three techniques of survey.

 Experts’ Opinion Poll:

Refers to a method in which experts are requested to provide their opinion about the
product. Generally, in an organization, sales representatives act as experts who can assess
the demand for the product in different areas, regions, or cities.
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Sales representatives are in close touch with consumers; therefore, they are well aware of
the consumers’ future purchase plans, their reactions to market change, and their
perceptions for other competing products. They provide an approximate estimate of the
demand for the organization’s products. This method is quite simple and less expensive.

 Delphi Method:
It refers to a group decision-making technique of forecasting demand. In this method,
questions are individually asked from a group of experts to obtain their opinions on
demand for products in future. These questions are repeatedly asked until a consensus is
obtained.
In addition, in this method, each expert is provided information regarding the estimates
made by other experts in the group, so that he/she can revise his/her estimates with
respect to others’ estimates. In this way, the forecasts are cross checked among experts to
reach more accurate decision making.
Ever expert is allowed to react or provide suggestions on others’ estimates. However, the
names of experts are kept anonymous while exchanging estimates among experts to
facilitate fair judgment and reduce halo effect.
The main advantage of this method is that it is time and cost effective as a number of
experts are approached in a short time without spending on other resources. However,
this method may lead to subjective decision making.

 Market Experiment Method:

It involves collecting necessary information regarding the current and future demand for
a product. This method carries out the studies and experiments on consumer behaviour
under actual market conditions. In this method, some areas of markets are selected with
similar features, such as population, income levels, cultural background, and tastes of
consumers.

The market experiments are carried out with the help of changing prices and expenditure,
so that the resultant changes in the demand are recorded. These results help in forecasting
future demand.

b) Statistical Methods:
Statistical method is used for long run forecasting. In this method, statistical and
mathematical techniques are used to forecast demand. This relies on past data. These are four
methods
 Trend projection method:
These are generally based on analysis of past sales patterns.
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These methods dispense with the need for costly market research because the necessary
information is often already available in company files. This method is used in case the sales
data of the firm under consideration relate to different time periods, i.e., it is a time–series
data. There are five main techniques of mechanical extrapolation.
 Trend line by observation:
This method of forecasting trend is elementary, easy and quick. It involves merely the
plotting of actual sales data on a chart and them estimating just by observation where the
trend line lies. The line can be extended towards a future period and corresponding sales
forecast is read form the graph.
 Least squares methods:
This technique uses statistical formulae to find the trend line which best fits the available
data. The trend line is the estimating equation, which can be used for forecasting demand by
extrapolating the line for future and reading the corresponding values of sales on the graph.
 Time series analysis:
In this technique the surveys or market tests are costly and time – consuming, statistical and
mathematical analysis of past sales data offers other methods to prepare the forecasts, that is,
time series analysis.
 Moving average method:
This method considers that the average of past events determines the future events. In other
words, this method provides consistent results when the past events are consistent and
unaffected by wide changes.
 Exponential smoothing:
This is a more popular technique used for short run forecasts. This method is an improvement
over moving averages method, unlike in moving averages method, all time periods here are
given varying weight, that is , value of the given variable in the recent times are given higher
weight and the values of the given variable in the distant past are given relatively lower
weights for further processing.

 Barometric Technique:
Simple trend projections are not capable of forecasting turning points. Under Barometric
method, present events are used to predict the directions of change in future. This is done
with the help of economics and statistical indicators. Those are
Construction Contracts awarded for building materials.
 Personal income.
 Agricultural Income.
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 Employment.
 Gross national income.
 Industrial Production.
 Bank Deposits etc.
 Simultaneous equation method:
In this method, all variable are simultaneously considered, with the conviction that every
variable influence the other variables in an economic environment. Hence, the set of
equations equal the number of dependent variable which is also called endogenous variables.
 Correlation and regression methods:
Correlation and regression methods are statistical techniques. Correlation describes the
degree of association between two variables such as sales and advertisement expenditure.
When the two variables tend to change together, then they are said to be correlated.

c) Expert opinion methods:

Well informed persons are called experts; experts constitute yet another source of
information. These persons are generally the outside experts and they do not have any vested
interest in the results of a particular survey. As assumed that expert is good at forecasting and
analysis the future trend in a given product or service at a given level of technology. The
service of an expert could be advantageously used when a firm uses general economic
forecasting or special industry fore casting prepared outside the firm.
d) Test marketing:
It is likely that opinions given by buyers, salesman or other experts may be, at times,
misleading. This is the reason why most of the manufactures favour to test their product or
service in a limited market as test – run before they launch their product nationwide.
e) Controlled experiments:
Controlled experiment refer to such exercise where some of the major determinants of
demand are manipulated to suit to the customers with different tastes and preferences, income
groups, and such others, it is further assumed that all other factors remain the same.
f) Judgmental approach:
When none of the above methods are directly related to the given product or service, the
management has no alternative other than using its own judgment. Even when the above
methods are used, the forecasting process is supplemented with the factor of judgment for the
following reasons.
 Historical data for significantly long period is not available.
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 Turning point in terms of policies or procedures or causal factors cannot be precisely

determined.
 Sale fluctuations are wide and significant.
 The sophisticated statistical techniques such as regression and so on, may not cover
all the signing.

Factors Governing Demand Forecasting

a) Functional nature of demand:
Market demand for a particular product or service is not a single number but it is a function
of a number of factors, for instance, higher volumes of sales can be realized with higher
levels of advertising or promotion efforts.
b) Types of forecasting:
Based on the period under forecast, the demand forecast can be of two types
i.Short – run forecasting.
ii.Long – run forecasting.
Short run forecasts cover a period of one year whereas long run forecasting any period
ranging from one year to 20 years.
c) Forecasting level:
The forecasting level may be at the firm level, industry level, national level, and global level.
 Firm level:
Firm level means estimating the demand for the products and services offered by a single
firm.
 Industry level:
The aggregate demand estimated for the good and service of all the firms constitutes the
industry level forecast. The total estimate of different trade associations can also be view as
industry level forecast.
 National level:
National level forecasting is for the whole economy, national level forecasts are worked out
based on the levels of income, savings of the consumers.
 Global level:
Globalization and deregulation, the entrepreneurs have started exploring the foreign markets
for which the global level forecasts are utilized.
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d) Degree of orientation:
Demand forecasts can be worked out based on total sales or product or service wise sales for
a given time period. Forecasting in terms of total sales can be viewed as general forecast
whereas product or service – wise or region or customer segment – wise forecast is referred is
referred to as specific forecast.
e) New product:
It is relatively easy to forecast demand for established products or products which are
currently in use. The new product in consideration can be analyzed as a substitute for some
existing product. Assess the demand through a sampled or total survey of consumers‟
intentions over the new product features and price.
f) Nature of good:
The goods are classified into producer goods, consumer goods, consumer durables and
services. The patterns of forecasting in each of these differ.
g) Degree of competition:
There may be a single trader or a few traders depending upon the nature of goods and
services.
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Lecture 12: Supply-determinants of supply, supply function, Elasticity of

supply

Meaning Of Supply
Supply of a commodity refers to the various quantities of the commodity which a seller is
willing and able to sell at different prices in a given market at a point of time, other things
remaining the same. Supply is what the seller is able and willing to offer for sale. The
Quantity supplied is the amount of a particular commodity that a firm is willing and able to
offer for sale at a particular price during a given time period.

Determinants Of Supply
1. The cost of factors of production: Cost depends on the price of factors. Increase in
factor cost increases the cost of production, and reduces supply.
2. The state of technology: Use of advanced technology increases productivity of the
organization and increases its supply.
3. External factors: External factors like weather influence the supply. If there is a flood,
this reduces supply of various agricultural products.
4. Tax and subsidy: Increase in government subsidies results in more production and
higher supply.
5. Transport: Better transport facilities will increase the supply.
6. 6. Price: If the prices are high, the sellers are willing to supply more goods to increase
their profit.
7. 7. Price of other goods: The price of other goods is more than ‘X’ then the supply of
‘X’ will be increased.

Supply Function
𝑆𝑥 = ƒ(𝑃𝑥, 𝑃𝑦, 𝑃𝑧, .......... ; 𝑃ƒ , 𝑂, 𝑇)
𝑆𝑥 = 𝐴𝑚𝑜𝑢𝑛𝑡 𝑠𝑢𝑝𝑝𝑙i𝑒𝑑 𝑜ƒ 𝑔𝑜𝑜𝑑 𝑥
𝑃𝑥 = 𝑃𝑟i𝑐𝑒 𝑜ƒ 𝑔𝑜𝑜𝑑 𝑥
𝑃𝑦 , 𝑃𝑧 = 𝑃𝑟i𝑐𝑒𝑠 𝑜ƒ 𝑜𝑡ℎ𝑒𝑟 𝑔𝑜𝑜𝑑𝑠 i𝑛 𝑡ℎ𝑒 𝑚𝑎𝑟𝑘𝑒𝑡
𝑃ƒ = 𝑃𝑟i𝑐𝑒𝑠 𝑜ƒ ƒ𝑎𝑐𝑡𝑜𝑟𝑠 𝑜ƒ 𝑝𝑟𝑜𝑑𝑢𝑐𝑡i𝑜𝑛
𝑂 = 𝑜𝑏j𝑒𝑐𝑡i𝑣𝑒 𝑜ƒ 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑟
𝑇 = 𝑆𝑡𝑎𝑡𝑒 𝑜ƒ 𝑡𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦 𝑢𝑠𝑒𝑑 𝑏𝑦 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑟 𝑡𝑜 𝑝𝑟𝑜𝑑𝑢𝑐𝑒 𝑔𝑜𝑜𝑑 𝑥
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Elasticity Of Supply
It is responsiveness of producers to changes in the price of their goods or services. As a
general rule, if prices raise so does the supply.
Elasticity of supply is measured as the ratio of proportionate change in the quantity supplied
to the proportionate change in price. High elasticity indicates the supply is sensitive to
changes in prices, low elasticity indicates little sensitivity to price changes, and no elasticity
means no or zero relationship with price. It is also called price elasticity of supply.
Price elasticity of supply measures the relationship between change in quantity supplied and a
change in price. The formula for price elasticity of supply is:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 i𝑛 q𝑢𝑎𝑛𝑡i𝑡𝑦 𝑠𝑢𝑝𝑝𝑙i𝑒𝑑 / 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 i𝑛 𝑝𝑟i𝑐𝑒.

Kinds Of Supply Elasticity

a) Price elasticity of supply:

Price elasticity of supply measures the responsiveness of changes in quantity supplied
to a change in price.

b) Perfectly inelastic:
If there is no response in supply to a change in price then (Es = 0).

c) Inelastic supply:
The proportionate change in supply is less than the change in price (Es =0-1)

d) Unitary elastic:
The percentage change in quantity supplied equals the change in price (Es=1)

e) Elastic:
The change in quantity supplied is more than the change in price (Ex= 1- ∞)

f) Perfectly elastic:
Suppliers are willing to supply any amount at a given price (Es=∞)
The major determinants of elasticity of supply are availability of substitutes in the
market and the time period, Shorter the period higher will be the elasticity.
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FACTORS THAT DETERMINE ELASTICITY OF SUPPLY

The value of price elasticity of supply is positive, because an increase in price is likely to
increase the quantity supplied to the market and vice versa. The elasticity of supply depends
on the following factors:

a) SPARE CAPACITY
How much spare capacity a firm has - if there is plenty of spare capacity, the firm
should be able to increase output quite quickly without a rise in costs and therefore
supply will be elastic

b) STOCKS
The level of stocks or inventories - if stocks of raw materials, components and
finished products are high then the firm is able to respond to a change in demand
quickly by supplying these stocks onto the market - supply will be elastic

c) EASE OF FACTOR SUBSTITUTION

Consider the sudden and dramatic increase in demand for petrol canisters during the
recent fuel shortage. Could manufacturers of cool-boxes or producers of other types of
canister have switched their production processes quickly and easily to meet the high
demand for fuel containers?
If capital and labour resources are occupationally mobile then the elasticity of supply
for a product is likely to be higher than if capital equipment and labour cannot easily
be switched and the production process is fairly inflexible in response to changes in
the pattern of demand for goods and services.

d) TIME PERIOD
Supply is likely to be more elastic, the longer the time period a firm has to adjust its
production. In the short run, the firm may not be able to change its factor inputs. In
some agricultural industries the supply is fixed and determined by planting decisions
made months before, and climatic conditions, which affect the production, yield.
Economists sometimes refer to the momentary time period - a time period that is short
enough for supply to be fixed i.e. supply cannot respond at all to a change in demand.