Module 2

Demand and Supply Analysis

 Meaning of Demand
Demand is an economic principle that describes a
consumer's desire and willingness to pay a price for a specific
good or service.
Or
Demand is the amount of goods that consumers or buyers are
willing and capable to buy for a specific price in a specific
time period while everything else remains the same.
 From Managerial Economics point of view

Demand

Desire for a Ability to buy Willingness At a given In the given

commodity it to pay for it price time
 Factors affecting demand/
Demand determinants
• Price
• Income
• Taste and Preferences
• Population
• Price of substitutes and complementary
goods
• Innovation
• Advertisement
• Quality
 Types of demand
• Negative demand
It is a type of demand which is created if the product is disliked in
general.
• Unwholesome demand
Customer should not desire the product, yet the customer wants the
product badly.
• Latent Demand
• Declining demand
• Irregular demand
 Forms of demand
• Individual and market demand
• Organization and Industry Demand:
• Autonomous and Derived Demand:
• Demand for Perishable and Durable
Goods
The law of demand
 Statement of the law
Law of demand states that other things being equal, the demand for a
product is inversely proportional to the price of the product.
In other words, the demand is higher at lower prices and lower at
higher prices under the assumption of ceteris paribus.
 Assumptions
• No change in consumer income
• No change in consumer preferences
• No change in fashion
• No change in prices of related goods
• No expectations of future price changes or
shortages
 Demand Schedule

A tabular statement of price/quantity relationship

Price per unit (in Rs.) Quantity demanded in

units
6 0
5 10
4 20
3 30
2 40
1 50
 Demand Curve

4
Price

0
0 10 20 30 40 50
Quantity
Exceptions to the law of demand
• Giffen goods
In economics, a giffen good is an inferior good with the unique
characteristic that an increase in price actually increases the
quantity of the good that is demanded. This provides the unusual
result of an upward sloping demand curve.
Example:
• Example of a Giffen good is offered by a 2007 study by Harvard
economists Robert Jensen and Nolan Miller. Jensen and Miller
conducted a field experiment in two provinces in China – Hunan,
where rice is a dietary staple, and Gansu, where wheat is the staple.
Randomly selected households in both provinces were
given vouchers that subsidized their purchase of the staple food.

• The economists found strong evidence of Giffen behavior exhibited

by Hunan households with respect to rice. Lowering the price of rice
through the subsidy caused reduced demand by households for rice,
while increasing the price (by removing the subsidy) had the
opposite effect.
• Veblen Effect/ Snob appeal
• Ignorance
It is a actor that induces customer to purchase more of the
commodity at a higher price. This is especially so when the
consumer is haunted by the phobia that a high-priced commodity is
better in quality than a low-priced one.
• Speculation / Future changes in prices:
Households also act as speculators. When the prices are rising
households tend to purchase large quantities of the commodity out
of the apprehension that prices may still go up. When prices are
expected to fall further, they wait to buy goods in future at still lower
prices. So quantity demanded falls when prices are falling.
• Change in fashion and styles
Demand for goods or services is highly dependent upon
existing fashion. People don’t like to purchase them,
demand for such goods decreases
• Emergencies
Emergencies like war, famine etc. negate the operation of the law of
demand. Households accentuate scarcities and induce further price
rises by making increased purchases even at higher prices during
such periods.
Elasticity of Demand
 Meaning
The extent of change in demand due to change
in any of the determinants or the responsiveness
of demand to the change in the determinants
(price, income, advertisement etc)
 Different elasticity of Demand
• Price Elasticity
• Income Elasticity
• Advertisement Elasticity
Price Elasticity
 1.Perfectly Elastic Demand (E=Infinity)

Small change in price leads to major change

in demand
Perfectly Inelastic Demand (E=0)
Change in price has no effect on demand
Relatively Elastic Demand (E>1)
Demand increases more than price
decrease
Relatively Inelastic Demand(0<E<1)
Demand increase is less than the price
decrease
Unitary Elastic demand(E=1)
 Change in Demand
Extension and Contraction
Extension in Demand

More units are demanded at a lower price

Contraction in Demand

Less units of the commodity are demanded

at a higher price
 Shift in Demand
Increase and Decrease in Demand
 Increase in Demand
When more units are demanded at a same price
or the same quantity is demanded at a higher
price
 Decrease in Demand
Less units of the commodity are demanded at
the same price, or the same quantity is
demanded at a lower price
 Reasons
• Change in fashion
• Change in climate
• Change in population
• Change in income
• Substitutes
• Advertisement
 Demand Forecasting
Demand Forecasting refers to the process of predicting
the future demand for the firm’s product. In other words,
demand forecasting is comprised of a series of steps
that involves the anticipation of demand for a product in
future
 Purposes of demand forecasting

• Fulfilling objectives
• Preparing the budget
• Stabilizing employment and production
• Expanding organizations
• Taking Management Decisions
• Evaluating Performance
 Methods of
Demand
forecasting

Survey Statistical
Methods Methods

Consumer Trend
Opinion Poll
survey projection Barometric
methods
methods method

• Expert opinion
•Complete Enumeration method
method • Delphi method
•Sample survey • Market studies
•End-use method and experiments
 Survey Methods

Consumer Survey Method is one of the techniques of

demand forecasting that involves direct interview of the
potential consumers.

• Complete Enumeration Method: Under this method, a forecaster

contact almost all the potential users of the product and ask them about their
future purchase plan.
• Sample Survey: The sample survey method is often used when the target
population under study is large. Only the sample of potential consumers is
selected for the interview.
• End Use Method: It is also called as the User Expectation Method, the
list of several users of the product under forecasting is prepared first, who
are then asked about their individual purchasing patterns and then from such
information the complete product demand forecast is ascertained.
 Opinion Poll Methods
The Opinion Poll Methods are used to collect opinions of those
who possess the knowledge about the market, such as sales
representatives, professional marketing experts, sales executives
and marketing consultants.
• Expert-Opinion Method: Companies with an adequate network
of sales representatives can capitalize on them in assessing the
demand for a target product in a particular region or locality that they
represent.
• Delphi Method: The Delphi method is the extension of the expert
opinion method wherein the divergent expert opinions are
consolidated to estimate a future demand.
• Market Studies and Experiments: Another alternative method to
collect information regarding the current as well as future demand
for a product is to conduct market studies and experiments on the
consumer behaviour
 Statistical Methods
1.Trend Projection Method
• Least Square Method
• Moving Averages

2.Barometric Method: This method was developed

to forecast the trend in the overall economic
activities.
 Trend Projection Sums
1. Estimate the sales for next 5 years if
company’s sales data by using past 5
years data
Year 2008 2009 2010 2011 2012

Sales 45 52 48 55 60
2. Estimate the sales for the year 2008,
2009 and 2010 on the basis of previous
years.
Year 2003 2004 2005 2006 2007

Sales 70 74 80 86 90
 3. Estimate the production for the next 5
years on the basis of past 6 years

Year 2004 2005 2006 2007 2008 2009

Production 79 87 106 111 117 130
 4.Estimate the value for the year 2006,
2007, 2008 & 2009 by using least squares
method
Year 2000 2001 2002 2003 2004 2005
Production 16 20 18 15 18 21
 Supply
Supply is a fundamental economic concept that describes the total
amount of a specific good or service that is available to consumers.
Or
Supply of a commodity refers to the quantity of a product which a
seller is willing and able to sell at a given price per unit of time
Determinants or Factors affecting supply

• Goals or objectives of the firm

• Price
• Price of other commodities
• Prices of factors of production
• Technology
Law of Supply
 Statement
All other factors being equal,(Ceteris Peribus) as the
price of a good or service increases, the quantity of
goods or services that suppliers offer will increase, and
vice versa.
Supply schedule
Supply Curve
Exceptions to the Law of Supply
• Auction Sale
• Fear of further fall in price
Thank You