Introduction

“ Demand for a commodity refers to the quantity of the commodity which an individual
consumer or a household is willing to purchase per unit at a particular price.”

Demand for a commodity implies:-

a. Desire of the consumer to but the product.

b. His willingness to buy the product.

c. Sufficient purchasing power in his possession to buy the product.

1) Price of the commodity:- For a normal good the price of the a commodity & its demand
vary inversely, determinants other then price of the commodity remaining constant. For E.g.
consumer buy more of the commodity when its price declined & vice-versa. A fall in the
price of a normal product leads to rise in consumer’s purchasing power, therefore he/she
buy more of it (Substitution effect). An increase in price will reduce his purchasing power &
there by reducing demand for the commodity (Income effect)
2) Income of the consumer:- When there is increase in income, a household buy increased
amount of most of the commodities in his consumption bundle. Normally both the quantity
demanded of a good & income of household move in the same direction (OA Curve). In
certain commodities, the amount demanded increase with an increase income, but beyond
certain level of income, the amount demanded of the goods remain unchanged even when
income increases (OB Curve). For e.g. Fruits ,vegetables etc. There are still some other
commodities, where beyond a point, the amount demanded decreases with an increase in
income & increase with decrease in income (OC Curve).

Engle was the first person to study the relationship between income & quantity demand for
inferior and normal goods. Therefore the curves reflecting the relationship between income
& demand (other things remaining constant) are called “EAGLE CURVES”

3) Prices of Related Goods:- When a change in the price of one commodity influences the
demand of the other commodity, we say that the two commodities are related. They are of
two types: SUBSTITUES & COMPLIMENTS.

Substitutes:- When the price of one commodity & the quantity demanded of the other
commodity move in the same direction (i.e. both increase or decrease together) they are
called substitutes. For Ex Tea & Coffee, Rail & road Services.

Compliments:- When the price of one commodity & quantity demanded of the other
commodity move in opposite direction, then they are called as complimentary to each
other. For Ex tea & sugar, petrol & automobiles.
4) Taste & Preferences:- The change in taste & preference of a consumer in favor of the
commodity results in greater demand for the commodity. If this change is against the
commodity it results in a smaller demand for the commodity. Ex If jeans catch the taste of
consumers, its demand increases to greater extent. Opposite will be case if jeans go out of
fashion.

5) Expectations:- In case the consumer expects a higher income in future, he spends more
at present & thereby the demand of the goods increases. Opposite will be the case if he
expects lower income in future.

If the consumer expect future prices of the goods to increase, he would rather likely to
buy the commodity now then later. This will increase the demand for the product. Opposite
holds good when it is expected that prices in future will come down.

Demand Function

“ A mathematical expression of the relationship between quantity demanded of the

Individual Demand Function

When the relationship between quantity demanded of the commodity & its determinants
related to the demand by an individual consumer, it is known as “Individual demand
Function”

Market Demand Function

the demand of the market, it is known as “ Market demand Function”

Demand Function

Mathematically expressed these two demand function would be as follows,

Individual Demand Function:-

Qdx=f( Px, YP1,……,Pn-1,T,A,Ey,Ep,u)

Qdx= refers to the quantity demanded of product X.

Px= refers to the price of the product X.

Y= refers to the level of household income.

P1,……, Pn-1= refers to the prices of all “related” products in economy. (related products
include substitutes & compliments)

T= refers to the taste of the consumer.

A= refers to advertising.

Ey= refers to consumers expected future income.

Ep= refers to consumers’ expectations about future price.

u=refers to all those determinants which are not covered in the list of determinants given
above.

Market Demand Function:-

Qdx=f( Px, YP1,……,Pn-1,T,A,Ey,Ep,P,D,u)

Qdx= refers to the quantity demanded of product X.

Px= refers to the price of the product X.

Y= refers to the level of household income.

P1,……,Pn-1= refers to the prices of all “related” products in economy. (related products
include substitutes & compliments)
T= refers to the taste of the consumer.

A= refers to advertising.

Ey= refers to consumers expected future income.

Ep= refers to consumers expectations about future price.

u=refers to all those determinants which are not covered in the list of determinants given
above.

P= refers to population (Which reflect the market size)

D= refers to distribution of consumers in various categories depending on income, age, sex

By both demand function equation, the following is the analysis.

1) The price of compliments has negative relationship with demand for X.

2) The price of substitutes, consumer expects to have higher income, consumer expects
price of the good X to rise in future have positive relationship with quantity
demanded.

3) Income of consumer, taste & preferences and distribution of consumer can have
either negative or positive relationship with quantity demanded.

Law of Demand & Demand Schedule

I. Substitution effect of the price change

II. Income effect of a price change.

Demand Schedules:-

“ A demand schedule at any particular time refers to the series of quantities the consumer
is prepared to but at its different prices.”

If the demand schedule is for an individual consumer then it is known as “INDIVIDUAL

Generally the demand curve slope down from left to right. There are several reasons for
that. The main are as follows.

1. The Law of diminishing Marginal Utility is at the root of the law of demand. The law
of diminishing marginal utility states that as one goes on consuming more & more
 units of a commodity, it’s utility to him goes on diminishing. An individual consumer
comes to an equilibrium where marginal utility is equal to price.

2. A commodity tends to be put to more use when it becomes cheaper. The existing
buyers will purchase more & new customers entry the market. There will be an
extension to demand when price falls.

3. A fall in price of the superior goods will lead to a rise in the consumers real income.
With this the consumer will buy more & vice-versa. The consequent increase or
decrease in a consumers demand for the good under this consideration may be
attributed to income effect.

4. Reason for downward movement of a demand curve lies in the substitution effect
also. A fall in the price of the good, while the prices of its substitutes remain
unchanged, will attract the buyers to demand more of it & vice-versa.

Demand Forecasting

“Demand forecasting is a prediction or estimation of a future situation, under given

Demand forecasting is different from Demand Estimation. In demand forecasting, it predicts

Forecasting can be both physical as well as financial in nature.

Categories of Demand Forecasting

Demand forecast are broadly classified into two categories.

1) Passive forecast:- Where prediction about the future is based on the assumption
that the firm does not change the course of its action.

2) Active Forecast:- Where forecasting is done under the conditions of likely changes in
the actions by the firm.
Linear Method

This technique is most widely used in practice. It is a statistical method. In this analysis there
is only one independent variable: time. This system of forecasting is called “native”,
because it does not explain the reason for the changes: it merely states the data & its
changes are function of time only.
The linear trend least square method is a procedure for fitting a line to a set of observed
data points (sales over time) such that:

i. The sum of deviations of actual & computed value of sales equals zero.

ii. The sum of squares of deviation of actual & computed values of sales is least from
the estimated trend line. (Hence it is called least square method).

Linear trend is used to fit a straight line trend. It is represented by equation

Sales = a + b (year number)

S = a + b.T

Where a and b are constants representing the intercept & slope respectively of the
straight line..

To find the value of a and b the following 2 equations are used

∑S=Na + b ∑T

∑ST = a ∑T + b ∑T²
Supply

Definition “ Supply of a commodity refers to the various quantities of the commodity

Supply is related to scarcity. It is only the scared goods will have supply price. The goods
which are freely available have no supply price.

Determinants of Supply

Sx= f “( Px,Py,Pz……….., Pᶠ, O, T)

Sx = Amount supplied of good X,

Px = Price of Good X,

Py,Pz…= Price of other goods in market,

Pᶠ = Price of factors of production needed to produce good X,

O = Objectives of the producer,

T = state of technology used by producer to produce good X.

Determinants of Supply

The following are the determinants of supply.

i. Price of the good.

ii. Prices of other goods,

iii. Prices of factors of production,

iv. Producers objective,

v. State of technology.