ECONOMICS FOR BUSINESS

DECISIONS
Consumer Behaviour, Demand and Supply
Module-2
 Consumer Choice
 Demand for a commodity is determined by various factors, including

income and tastes of the consumer and price of the commodity.

 Given the prices of different commodities, consumers need to decide on

the quantities of these commodities according to their paying capacity and

tastes and preferences.
 Consumer preference is defined as the subjective tastes of
individual consumers, measured by their satisfaction with those items
after they've purchased them.
 This satisfaction is often referred to as utility. Consumer value can be

determined by how consumer utility compares between different items.

 Consumer choice- underlying assumptions

Completeness

Transitivity

Non-satiation
 Utility Analysis
Utility is the attribute of a commodity to satisfy or satiate a consumer’s wants.
Utility is the satisfaction a consumer derives out of consumption of a commodity.

Mathematically utility as the function of the quantities of different commodities consumed. If

an individual consumes quantity m1 of a commodity M, quantity n1 of N, and r1 of R, then
the utility function U of the consumer can be expressed as: U = f(m1, n1, r1)

A rational consumer aims at maximising his/her utility from consumption of different

commodities, subject to budget constraint

This has been an issue of concern to economists for long, and they have come up with
different views on such optimisation behaviour of consumers.
Primarily, these can be divided into cardinal utility analysis and ordinal utility analysis. The
cardinal school believes that utility is quantifiable in units, whereas the ordinal school
posits that utility cannot be measured, rather can be only shown as higher than or less than
ranks
 Utility Analysis
Cardinal Utility
According to cardinalists, utility is a cardinal concept, and we can
assign number of utils to any commodity
Total utility refers to the sum total of utility levels out of each unit of a
commodity consumed within a given period of time.

According to the cardinalists, utility is additive, i.e., we can add the

utility of commodities. Say for a particular consumer a banana can
have 2 utils, while a mango may have 3 utils. If an individual
consumes a mango and a banana, then, following the same example,
total utility derived by the consumer is equal to 2 + 3 = 5 utils.
 Utility Analysis
Total and Marginal Utility
Total utility (TU) refers to the sum total of utility levels out of each
unit of a commodity consumed within a given period of time, or in
other words, total satisfaction from consumption. Thus, if a
consumer has three apples, his total utility will be the sum of the
utility derived out of each apple.

Marginal utility (MU) is the change in total utility due to a unit

change in the commodity consumed within a given period of time.
In other words, marginal utility is the total utility of the additional
(or nth) unit consumed of the commodity.

In other words: MU = TUn – TUn–1

 Utility Analysis
Law of Diminishing Marginal Utility
As you consume more and more units of a commodity, total utility
would go on increasing, but only up to a certain point, beyond
which, if you continue to consume any subsequent unit, the total
utility will start decreasing.

 Total Utility is an aggregate measure of satisfaction gained from

consumption
whereas 
 Marginal Utility is a measure of the change in satisfaction gained
from consumption as a result
MU(x) of aTU(x –
= TU(x) – change1) in consumption.
 
Using calculus, we may express marginal utility as:
 Utility Analysis
Law of Diminishing Marginal Utility
Example:

 
 Utility Analysis
Law of Diminishing Marginal Utility
Assumptions
 The Unit of Consumption must be a Standard
 Consumption must be Continuous
 Multiple Units of the Commodity should be Consumed
 The Tastes and Preferences of the Consumer should Remain
Unchanged during the Course of Consumption
 The Good should be Normal and Not Addictive in Nature
 
 Utility Analysis
Law of Equimarginal Utility
The equi-marginal principle is based on the law of diminishing
marginal utility. The equi-marginal principle states that a consumer
will be maximizing his total utility when he allocates his fixed
money income in such a way that the utility derived from the last
unit of money spent on each good is equal. 

MUX/PX = MUY/PY .......= MUI

Where, MU is Marginal Utility and P is the price for the commodity

MUI is Marginal Utility of income
So long as MUY/PY is higher than MUX/PX, the consumer will go on
substituting Y for X until the marginal utilities of both X and Y are
equalized.
 Utility Analysis
Law of Equimarginal Utility
Example: the table below shows marginal utility schedule of X and Y
from the different units consumed. Let us also assume that prices of
X and Y are Rs. 4 and Rs. 5, respectively.
 Utility Analysis
Law of Equimarginal Utility
Observations from the previous example
 MUX/PX and MUY/PY are equal to 6 when 5 units of X and 3 units of
Y are purchased.
 By purchasing these combinations of X and Y, the consumer spends
his entire money income of Rs. 35 (= Rs. 4 x 5 + Rs. 5 x 3) and,
thus,
 gets maximum satisfaction [10 + 9 + 8 + 7 + 6] + [11 + 10 + 6] = 67
units.
 Purchase of any other combination other than this involves lower
volume of satisfaction.
 Utility Analysis
Marginal Utility and Demand
Curve
The marginal utility curve of
commodity MU is downward
sloping.
 For any given amount of income
when price of the commodity is P3,
the consumer would consume x3
quantity of the commodity.

When price increases to P2, the ratio MU / P would fall below MU2. The
consumer, thus, has to readjust consumption to ensure restoring of the
equality. Thus, the consumer would reduce the consumption of the good;
this will increase the marginal utility of the commodity until the new MU
P is again equal to MUI
Ordinal Utility: Modem economists, particularly Hicks gave ordinal
utility concept to analyze consumer preference.
 Ordinal Utility: Assumes that utility is expressible only in ordinal
terms. This implies that a consumer is only able to express his/her
preference for goods. Under ordinal utility, it is the ranking of
utility that is important, not its magnitude.

 The modern economists have discarded the concept of cardinal

utility and instead applied ordinal utility approach to study the
behavior of the consumers. 
 The modern economist, Hicks, in particular, have applied the
ordinal utility concept to study the consumer behavior. He
introduced a tool of analysis called “Indifference Curve” to
analyze the consumer behavior.
 Assumptions of Ordinal Utility Approach
 Rationality: It is assumed that the consumer is rational who aims at
maximizing his level of satisfaction for given income and prices of goods
and services, which he wish to consume. He is expected to take decisions
consistent with this objective.

 Ordinal Utility: The indifference curve assumes that the utility can only
be expressed ordinally. This means the consumer can only tell his order of
preference for the given goods and services.

 Transitivity and Consistency of Choice: The consumer’s choice is

expected to be either transitive or consistent. The transitivity of
choice means, if the consumer prefers commodity X to Y and Y to
Z, then he must prefer commodity X to Z.
 Assumptions of Ordinal Utility Approach
 Non satiety: It is assumed that the consumer has not reached the saturation point

of any commodity and hence, he prefers larger quantities of all commodities.

 Assumptions of Ordinal Utility Approach
 Diminishing Marginal Rate of Substitution (MRS): The marginal rate of

substitution refers to the rate at which the consumer is ready to substitute one
commodity (A) for another commodity (B) in such a way that his total
satisfaction remains unchanged.

The MRS is denoted as dB/dA. The ordinal approach assumes that dB/dA goes on
diminishing if the consumer continues to substitute A for B.

Combination A B MRS
1 1 6 -
2 3 3 1.5
3 4 2 1
 Indifference Curve

 People cannot really put a numerical value on their level of satisfaction.

However, they can, and do, identify what choices would give them more,
or less, or the same amount of satisfaction. An indifference curve shows
all combinations of goods that provide an equal level of utility or
satisfaction.
 If we plot the quantities of the two commodities on the two axes, then we

can draw a set of points that would represent alternative combinations of M

and N, between which the consumer would be indifferent. The curve
formed by joining such points is known as an indifference curve
 Indifference Curve
An indifference curve is the locus of points which show the
different combinations of two commodities a consumer is
indifferent about.
Since all these points render equal utility to the consumer, an
indifference curve is also known as an isoutility (“iso”
meaning equal) curve.

For example, consider the following schedule which shows a

hypothetical consumer’s indifference to a range of
combinations of just two items of clothing – woollen sweaters
(x) and cotton socks (y). Each combination yields the same
level of utility.
Indifference Curve
 Properties of Indifference Curves

 Downward Sloping: This property follows from assumption I. Indifference

curve being downward sloping means that when the amount of one good in the
combination is increased, the amount of the other good is reduced. This must be
so if the level of satisfaction is to remain the same on an indifference curve.
 Properties of Indifference Curves
Higher Indifference Curve Represents Higher Utility: An indifference curve placed
higher will represent higher level of utility.
 Consider indifference curves IC1 and IC2.IC2 is a higher indifference curve than
IC1. Combination Q has been taken on a higher indifference curve IC2 and
combination S on a lower indifference curve IC1.
 Combination Q on the higher indifference curve IC2 will give a consumer more
satisfaction than combination S on the lower indifference curves IC1 because the
combination Q contains more of both goods X and Y than the combination S.
Hence the consumer must prefer Q to S..
And by transitivity assumption, he will prefer
any other combination such as combination R
on IC2 (all of which are indifferent with Q) to
any combination on IC1 (all of which are
indifferent with S) We, therefore, conclude
that a higher indifference curve represents a
higher level of satisfaction and combinations
on it will be preferred to the combinations on
a lower indifference curve
 Properties of Indifference Curves
Indifference curves cannot intersect each other

 Two indifference curves are shown cutting each other at point C. Now take point on indifference

curve IC2 and point B on indifference curve IC1 vertically below A. Since an indifference curve
represents those combinations of two commodities which give equal satisfaction to the consumer the
combinations represented by points A and C will give equal satisfaction to the consumer because
both lie on the same indifference curve IC2.

Likewise, the combinations B and C will give equal satisfaction

to the consumer; both being on the same indifference curve IC 1.
If combination A is equal to combination C in terms of
satisfaction, and combination B is equal to combination C, it
follows that the combination A will be equivalent to B in terms
of satisfaction. But the Fig. show that this is absurd conclusion
since combination A contains more of good Y than combination
B, while the amount of good X is the same in both the
combinations. Utilities raised in these two combination are
different
 Properties of Indifference Curves
Indifference curves are convex to the origin

 In other words, the indifference curve is

relatively flatter in its right-hand portion and

relatively steeper in its left-hand portion
 This property of indifference curves follows

from assumption, which is that the marginal rate

of substitution of X for Y (MRSxy) diminishes as
more and more of X is substituted for Y.
 Indifference curve map

 We can also show different

indifference curves.
 All choices on 12 give the same

utility. But, it will be a higher net

utility than indifference curve 11.
 I4 gives the highest net utility.

Basically, 14would require higher

income than 11.
 Special Types of Indifference Curves
 For perfect substitutes: linear, downward
sloping

For perfect complements: right angled

 Concave indifference curves; in this case
the consumer is willing to give up more
and more units of one commodity for
additional units of the other.

Positively Upward sloping indifference curves.

This refers to a commodity which is a “bad ”
(not a “good ”), such as pollution, health hazards,
unemployment, etc. You can understand this
phenomenon with the help of the
environmentalists’ struggle with creation of dams,
local villagers’ struggle against SEZs, etc. Stated
in simple terms, creation of dam is necessary for
growth and development, but it inflicts serious
environmental problems
 Consumer’s Income and Budget Line
 Budget constraint includes income of the consumer and prices of the
commodities in the consumption basket.
 Let us now take you to the second very important aspect, namely
constraints to the consumer in satisfying his/her wants.
 We refer to this as the budget constraint to the consumer, as he has to
accept his/her income and prices of the commodities as given
 A budget line shows the combination of goods that can be afforded
with your current income.
 Consumer’s Income and Budget Line
 We start with the assumption that the consumer spends all of his/her
income on the two commodities Say M and N,

 .If the price per unit of M is PM and that of N is PN, and the income
of the consumer is I, then we can express the budget constraint of
the consumer in the form of a budget equation as:
PM*QM + PN*QN = I
where QM and QN are the quantities purchased of M and N. In other
words, consumer’s income equals the amount spent by the
consumer on purchasing commodities M and N.
 Consumer’s Income and Budget Line
We can also deduce the quantities of the
commodities purchased from the budget
equation by algebraic treatment, as
following:

QM = I/ PM – PN/PM*QN

QN = I/ PN – PM/PN*QM

The intercept on the X axis is equal to I / PM and that on the Y axis is

equal to I/PN. Given I, PM and PN, you can easily calculate the
values of QM and QN

Slope is Given by – ∆Y/ ∆ X

 Shifts in Budget Line

Any change in income of the consumer or price of the commodity(s)

would lead to a shift in the budget line.

Types of Shift
Upwards : We start with AB as the initial
budget line in Figure 3.8. Consider a
situation in which there is an increase in
the consumer’s income, prices of M
and N remaining constant. This would
lead to a shift in the budget line towards
the right, to say A1B1
 Shifts in Budget Line
Types of Shift
Downwards : The income of the
consumer goes down, the budget line
would shift to left, say A2B2.
 Shifts in Budget Line
Types of Shift
Swivelling :
 Consider another situation in which the
price of M falls, while price of N and
income of consumer remain same.
Now the budget line would swivel from
the point A towards the right, to say
AB’, because now the consumer can
buy more of M.
 if the price of N falls, without any
change in price of M and income of
consumer, The budget line would
swivel from the point B towards the
right, to say A’B, because now the
consumer can buy more of N.
 Consumer’s Equilibrium
Now the most important question
is how the consumer would reach
equilibrium point, i.e., where
satisfaction is highest given all
constraints.
Consumer’s equilibrium can be
understood by combining Budget
line and the indifference curve.
The consumer is able to maximise
utility at a point where the budget
line is tangent to an indifference
curve; this is the highest possible
curve attainable by the consumer,
subject to budget constraint
 Consumer’s Equilibrium
It is clear that feasible set is the
area OAB, and beyond line AB is
infeasible area; therefore IC4 is
beyond reach of the consumer.
You also know that more distant
is an indifference curve from
origin higher is the utility level.
Thus, equilibrium is attained at
point E where the budget line AB
is tangent to curve IC3 which is
highest attainable indifference
curve. The equilibrium quantities
of commodities M and N are QM
and QN.
 Consumer surplus
 Consumer surplus is the difference between the price consumers are
willing to pay and what they actually pay.

 For example, Rakesh wanted to buy a formal shirt and had decided to
pay a maximum amount of `1800 for it, but he got a shirt of choice for
`1650; the difference `1800 – 1650 = `150 is his consumer surplus.
 Consumer surplus
 In this diagram AB is a demand curve of
a consumer OR is the market price. The
price line is parallel to X axis because of
perfect competition. At point P the
marginal curve AB intersect the market
price curve OR. Thus for OQ quantity
the consumer derives utility as AOQP
where as he pays ROQP. Thus,
triangular area ARP is Consumer’s
Surplus.
 Quiz

Q: How would the budget line shift , When price of both

goods falls.

Ans. Moves upwards

 Practice Session

Assume Saumil’s income to be spent on M and N is `1000 a

month. Price per unit of M is Rs.10 and of N is Rs. 20. Shows
few possible combinations of these two commodities with
budget constraint of ` 1000.
 Solution
Using equation 2 , If quantity M is 0
Using the formula i.e. He spends all money (Rs. 1000)
on N then Quantity for N is 50,
similarly if he buy 20 units of M then
QM = I/ PM – PN/PM*QN------eq 1 using the same equation 2 the
quantity of N calculated will be 40
or
and so on .. As shown in the table .
The graph is also drawn and shown
QN = I/ PN – PM/PN*QM......eq2 below.

Combination Quantity of M Quantity of N Budget Line

A 0 50 60

50
B 20 40
40
C 40 30
30

D 60 20 20

E 80 10 10

0
F 100 0 0 20 40 60 80 100 120
Question: Total utility is given for every additional unit of the good consumed calculate the
marginal utility.
Solution: then Marginal utility is calculated for the good is calculated for every additional unit
consumed by using the formula- MU = TU n-TUn-1
1. At first no goods are consumed to the TU is 0 an d therefore MU is also zero
2. When the first unit is consumed the TU is 8 and marginal utility is given by MU = TU n-TUn-1
i.e. 8-0=8 as (TUn-1 is 0)
3. When the second unit is consumed the TU is 14 and marginal utility is given by MU = TU n-
TUn-1 i.e14-8=6 as (TUn-1 is 8)
And so on ......
For the last unit that is sixth unit the TU is 18 and marginal utility is given by MU = TU n-TUn-1 i.e
18-20=-2 as (TUn-1 is 20)
Question: What will the marginal rate of substitution (MRS) for a combination
of goods if it is considered that 20 more units of x is as good as 5 units of Y.

Solution: As we know Marginal rate of Substitution is given by ∆Y/ ∆X

Therefore: 5/20=1/4 i.e. 0.25

Question: What do you mean by marginal rate of substitution (MRS) of 6?

Solution: It means that, from the consumer’s point of view, 1 more unit of X is as
good as 6 more units of Y. As MRS is given by ∆Y/ ∆X
Question: Explain the meaning of Diminishing Marginal Rate of Substitution with
the help of a numerical example.
Solution: Marginal Rate of Substitution refers to the rate at which the consumer is
willing to sacrifice one good to obtain one more unit of the other good.
 Demand
 Demand is the quantity of a commodity which consumers are willing to buy at a
given price for a particular unit of time.

 Demand is defined as that want, need or desire which is backed by willingness

and ability to buy a particular commodity, in a given period of time.
 Types of Demand
 Direct and Derived Demand
 When a commodity is demanded for its own sake by the final consumer it is known as
consumer good and its demand is direct demand. Direct demand is also known as
autonomous demand. All household items like TV, Refrigerator, furniture, examples of
consumer goods.

 A capital good is demanded for using it either as a raw material or as an intermediary

and its demand is derived demand.
e.g. Machinery
 Recurring and Replacement Demand
Consumable goods have recurring demand; durable consumer goods are purchased to be
used for a long time but they need replacement.
 Types of Demand
 Complementary and Competing Demand
 Goods which create joint demand are complementary goods. e.g.Printer with ink, car
with petrol. Pen with ink.
 Goods that compete with each other to satisfy any particular want are called
substitutes. E.g. If you are thirsty you may prefer either coke or pepsi. You can prefer
either petrol or diesel car. Some goods are not so good substitutes e.g. Airways and
railways, car and motorbike, in such cases the marketers need to make categorization
that will help on deciding the price, advertising etc.

 Individual ,Market and industry Demand

 Demand for an individual consumer is individual demand. Demand by all the
consumer for its product is called as the market demand Industry demand is the
demand for the product produced by all the firms in the industry.
 Though the seller is not interested in the individual demand. the future planning,
economic planners and governments are interested in industry demand.
 Determinants of Demand

 Price of the Product: According to the law of demand, this implies an increase

in demand follows a reduction in price and a decrease in demand follows an

increase in the price of similar goods. The demand curve and the demand
schedule help determine the demand quantity at a price level.
 Income of the Consumers: Rising incomes lead to a rise in the number of goods

demanded by consumers. Similarly, a drop in income is accompanied by reduced

consumption levels. This relationship between income and demand is not linear in
nature. Marginal utility determines the proportion of change in the demand levels.
 Determinants of Demand
 Prices of related goods or services
Complementary products – As with income, the effect that this has on the amount that one is
willing and able to buy depends on the type of good we're talking about. Think about two
goods that are typically consumed together. For example, bagels and cream cheese. We call
these types of goods compliments. If the price of a bagel goes up, the Law of Demand tells
us that we will be willing/able to buy fewer bagels. But if we want fewer bagels, we will also
want to use less cream cheese (since we typically use them together). Therefore, an increase
in the price of bagels means we want to purchase less cream cheese. We can summarize this
by saying that when two goods are complements, there is an inverse relationship between the
price of one good and the demand for the other good.

Substitute Product – On the other hand, some goods are considered to be substitutes for one
another: you don't consume both of them together, but instead choose to consume one or the
other. For example, for some people Coke and Pepsi are substitutes (as with inferior goods,
what is a substitute good for one person may not be a substitute for another person). If the
price of Coke increases, this may make Pepsi relatively more attractive. The Law of Demand
tells us that fewer people will buy Coke; some of these people may decide to switch to Pepsi
instead, therefore increasing the amount of Pepsi that people are willing and able to buy. We
summarize this by saying that when two goods are substitutes, there is a positive relationship
between the price of one good and the demand for the other good.
 Determinants of Demand
 Tastes and Preferences: An important factor which determines demand for a
good is the tastes and preferences of the consumers for it. A good for which
consumers’ tastes and preferences are greater, its demand would be large and its
demand curve will lie at a higher level.
 People’s tastes and preferences for various goods often change and as a result
there is change in demand for them. The changes in demand for various goods
occur due to the changes in fashion and also due to the pressure of
advertisements by the manufacturers and sellers of different products.
 For example, a few years back when Coca Cola plant was established in New
Delhi demand for it was very small. But now people’s taste for Coca Cola has
undergone a change and become favour­able to it because of large advertisement
and publicity done for it.
 The result of this is that the demand for Coca-Cola has increased very much. In
economics we would say that the demand curve For Coca Cola has shifted
upward. On the contrary when any good goes out of fashion or people’s tastes
and preferences no longer remain favourable to it the demand for it decreases. In
economics we say that the demand curve for these goods will shift downward.
 Determinants of Demand
 Effect of Advertisement: Refers to one of the important factors of determining
the demand for a product. Effective advertisements are helpful in many ways,
such as catching the attention of consumers, informing them about the availability
of a product, demonstrating the features of the product to potential consumers,
and persuading them to purchase the product. Consumers are highly sensitive
about advertisements as sometimes they get attached to advertisements endorsed
by their favorite celebrities. This results in the increase demand for a product.
 Consumer’s Expectation of Future Income and Price: Another factor which
influences the demand for goods is consumers’ expectations with regard to future
prices of the goods. If due to some reason, consumers expect that in the near
future prices of the goods would rise, then in the present they would demand
greater quantities of the goods so that in the future they should not have to pay
higher prices.
 Similarly, when the consumers hope that in the future they will have good
income, then in the present they will spend greater part of their incomes with the
result that their present demand for goods will increase.
 Determinants of Demand
 Population: Acts as a crucial factor that affect the market demand of a product. If
the number of consumers increases in the market, the consumption capacity of
consumers would also increase. Therefore, high growth of population would
result in the increase in the demand for different products.
 Growth of Economy: Economy growth rate determine the future of business and
standard of living. If economy is growing . It will lead to the demand of the better
quality goods. Consumers will have higher paying capacity and willingness to
pay higher price for quality.
 Consumer credit: In recent times, availability of credit for purchasing the goods
is also considered as a important factor for determining the demand specially in
consumer goods. The availability of credit has changed the market structure and
lifestyle of salaried middle class people in India.
 Demand Function
Demand function shows the relationship between quantity demanded for a
particular commodity and the factors influencing it.
 Price of the commodity X (Px)
 Income of the consumer (Y)
 Price of the related (substitutes or complements) commodities (Po)
 Tastes and preferences of the consumer (T)
 Advertising (A)
 Future Expectations (Ef)
 Population and economic growth (N)
Dx = f(Px, Y, Po, T, A, Ef, N)........................ Eq 1
The above function may also be represented as:
Dx = a + b1P + b2Y + b3Po + b4T + b5A.............Eq 2
In the equation (2) ‘a’ is a constant and b1, b2, b3, b4,b5 are coefficient of each of the
determinant of demand.
 Law of demand
The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any
good and service are inversely related to each other. When the price of a product increases, the demand for
the same product will fall.

Dx = f(Px)

In other words it can be said that, Demand is a negative function of price

Law of demand explains consumer choice behavior when the price changes. In the market, assuming other
factors affecting demand being constant, when the price of a good rises, it leads to a fall in the demand of that
good. This is the natural consumer choice behavior. This happens because a consumer hesitates to spend
more for the good with the fear of going out of cash.

Diagram shows the demand curve which is

downward sloping. Clearly when the price of the
commodity increases from price p3 to p2, then its
quantity demand comes down from Q3 to Q2 and
then to Q3 and vice versa.
 Law of demand
linear demand function can be expressed as:
Dx = a – bPx
where a > 0, b > 0

In the linear demand function the intercept a, a constant, represents the level of
demand when price is zero. The slope b, another constant measures the change
in demand per unit change in price. Therefore if b=20 that means one unit
increase in price will result in fall in demand by 20 units.

Demand can also be non linear

D = aP–b

it can also be represented in log linear form

log D = a – b log P
where a > 0, b > 0
 Reasons for the law of demand
 Price effect

 Substitution Effect

 Income Effect

 Law of Diminishing Marginal Utility

 Practical problem
Q: Assume that there is a fruit seller who has 20 kgs of apples to be sold and he
want to fix a price so that all apples are sold. There were three customers in the
market and their individual demand functions are as below:
D1 =25-1.0P
D2 =20-0.5P
D3 =15-0.5P
Determine the market demand equation for the fruit seller. And find out the price at
which he can sell the apples.
 Solution
Market demand is sum of individual demand
Therefore DM = D1+ D2+ D3

DM = (25-1.0P)+ (20-0.5P) +(15-0.5P)

DM = 60-2.0P........................eq 1
As he want to sell 20 kgs of apples therefore we can say that demand for market is 20.
substituting the value in eq 1
20= 60-2.0 P
20-60 = -2.0 P
-40 = -2.0P
P = 20
Respective D1 =25-1.0*20 = 5
D2 =20-0.5*20 = 10
D3 =15-0.5*20 = 5
 Demand Schedule
It is a statement in the form of a table that shows the different quantities in demand
at different prices. There are two types of Demand Schedules:
 Individual Demand Schedule
 Market Demand Schedule

 Individual Demand Schedule: It is a demanding schedule that depicts the

demand of an individual customer for a commodity in relation to its price. Let us
study it with the help of an example.

The above schedule depicts the individual demand

Price per unit of Quantity demande
schedule. We can see that when the price of the
commodity X d of commodity X
commodity is ₹100, its demand is 50 units. (Px) (Dx)
Similarly, when its price is ₹500, its demand
100 50
decreases to 10 units.
Thus, we can conclude that as the price falls the 200 40
demand increases and as the price raises the demand 300 30
decreases. Hence, there exists an
inverse relationship between the price and quantity 400 20
demanded. 500 10
 Individual Demand Curve: It is a graphical representation of the individual
demand schedule. The X-axis represents the demand and Y-axis represents the
price of a commodity.

The above demand curve shows the demand for

Gasoline. When the price of gasoline is $3.5 per
litre, its demand is 50 litres and when the price
is $0.5 per litre, its demand is250 litres.

Slope of demand curve is given by

Change in price/Change in Quantity

i.e. Slope = ∆P/∆Q

 Market Demand Schedule
It is a summation of the individual demand schedules and depicts the demand of
different customers for a commodity in relation to its price. Let us study it
with the help of an example.

The above schedule shows the market demand

for commodity X. When the price of the
commodity is ₹100, customer A demands 50
units while the customer B demands 70 units. Quantity Quantity
Price per
demanded demanded Market
Thus, the market demand is 120 units. unit of
by by Demand     
commodity
Similarly, when its price is ₹500, Customer A X
consumer A consumer B QA + QB
(QA) (QB)
demands 20 units while customer B demands
30 units.
Thus, it’s market demand decreases to 40 units. 100 50 70 120
Thus, we can conclude that whether it is the 200 40 60 100
individual demand or the market demand, the
300 30 50 80
law of demand governs both of them.
Market Demand Curve 400 20 40 60
It is a graphical representation of the market 500 10 30 40
demand schedule. The X-axis represents the
market demand in units and Y-axis represents
the price of a commodity.
 Shift in Demand Curve
A shift in demand means at the same price, consumers wish to buy more. A
movement along the demand curve occurs following a change in price.
Movement along the demand curve
A change in price causes a movement along the demand curve. It can either be
contraction (less demand) or expansion/extension. (more demand)

Contraction in demand. An increase in

price from $12 to $16 causes a movement
along the demand curve, and quantity
demand falls from 80 to 60. We say this is
a contraction in demand

Expansion in demand. A fall in price

from $16 to $12 leads to an expansion
(increase) in demand. As price falls,
there is a movement along the demand
curve and more is bought.
A change in price doesn’t shift the demand curve –
we merely move from one point of the demand curve
to another.
 Shift in Demand Curve
A shift in the demand curve occurs when the whole demand curve moves to the right or left.
For example, an increase in income would mean people can afford to buy more widgets
even at the same price.
The demand curve could shift to the right for the following reasons:
 The good became more popular (e.g. fashion changes or successful advertising campaign)
 The price of a substitute good increased.
 The price of a complement good decreased.
 A rise in incomes
 Seasonal factors.

For Example : 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.
ORIGINAL
PRICE (£) Qd NEW Qd
1.1 0 100
1 100 200
90 200 300
80 300 400
70 400 500
60 500 600
50 600 700
40 700 800
30 800 900
 Shift in Demand Curve
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.
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.

ORIGINAL
PRICE (£) NEW Qd
Qd
1.1 0  
1 100  
90 200 100
80 300 200
70 400 300
60 500 400
50 600 500
40 700 600
30 800 700
 Exceptions to the Law of Demand
 Giffen Goods: Giffen Goods is a concept that was introduced by Sir Robert
Giffen. These goods are goods that are inferior in comparison to luxury goods.
However, the unique characteristic of Giffen goods is that as its price increases, the
demand also increases. And this feature is what makes it an exception to the law of
demand.
e.g. The Irish Potato Famine is a classic example of the Giffen goods concept. Potato
is a staple in the Irish diet. During the potato famine, when the price of potatoes
increased, people spent less on luxury foods such as meat and bought more
potatoes to stick to their diet. So as the price of potatoes increased, so did the
demand, which is a complete reversal of the law of demand.
 Veblen Goods (Snob Appeal ): The second exception to the law of demand is the
concept of Veblen goods. Veblen Goods is a concept that is named after the
economist Thorstein Veblen, who introduced the theory of
“conspicuous consumption“. According to Veblen, there are certain goods that
become more valuable as their price increases. If a product is expensive, then its
value and utility are perceived to be more, and hence the demand for that product
increases.
e.g. this happens mostly with precious metals and stones such as gold and diamonds
and luxury cars such as Rolls-Royce. As the price of these goods increases, their
demand also increases because these products then become a status symbol.
 Exceptions to the Law of Demand
 The expectation of Price Change: In addition to Giffen and Veblen goods,
another exception to the law of demand is the expectation of price change. There
are times when the price of a product increases and market conditions are such
that the product may get more expensive. In such cases, consumers may buy more
of these products before the price increases any further. Consequently, when the
price drops or may be expected to drop further, consumers might postpone the
purchase to avail the benefits of a lower price. For instance, in recent times, the
price of onions had increased to quite an extent. Consumers started buying and
storing more onions fearing further price rise, which resulted in increased
demand.
 Necessary Goods and Services: Another exception to the law of demand is
necessary or basic goods. People will continue to buy necessities such as
medicines or basic staples such as sugar or salt even if the price increases. The
prices of these products do not affect their associated demand.
 Change in Income: Sometimes the demand for a product may change according
to the change in income. If a household’s income increases, they may purchase
more products irrespective of the increase in their price, thereby increasing the
demand for the product. Similarly, they might postpone buying a product even if
its price reduces if their income has reduced. Hence, change in a consumer’s
income pattern may also be an exception to the law of demand.
 Exceptions to the Law of Demand
 Demonstration Effect: Demonstration effect is the influence on a person’s
behaviour by observing the behaviour of others.
 Goods with No Substitutes: e.g. Petrol, diesel, people have no option but to buy
them.
 Supply
Supply refers to the quantities of a good or service that the seller is willing and able
to provide at a price, at a given point of time, ceteris paribus.

Supply is the willingness and ability of producers to create goods and services to
take them to market. Supply is positively related to price given that at higher
prices there is an incentive to supply more as higher prices may generate
increased revenue and profits.
 Determinants of Supply
 Price of the Commodity: The most obvious one of the determinants of supply is

the price of the product/service. With all other parameters being equal, the supply
of a product increases if its relative price is higher. A firm provides goods or
services to earn profits and if the prices rise, the profit rises too.
 Cost of Production: Supply is reduced if the cost of production rises. If there is a

rise in the price of a particular factor of production, then the cost of making goods
that use a great deal of that factors experiences a huge increase. the change in
the price of one factor of production causes changes in the relative profitability of
different lines of production. This causes producers to shift from one line to
another, leading to a change in the supply of goods.
 Determinants of Supply
 State of Technology: Technological innovations and inventions tend to make it

possible to produce better quality and/or quantity of goods using the same resources.
Therefore, the state of technology can increase or decrease the supply of certain
goods.
 Government Policy: Commodity taxes like excise duty, import duties, GST, etc.

have a huge impact on the cost of production. These taxes can raise overall costs.
Hence, the supply of goods that are impacted by these taxes increases only when the
price increases. On the other hand, subsidies reduce the cost of production and
usually lead to an increase in supply.
 Number of sellers: More sellers in the market increase the market supply.

 Natural Factor: The factors like weather conditions, flood, drought, pests, etc. also

affect the supply of goods. When these factors are favourable the supply will increase.
 Supply Function
It explains the relationship between the supply of a commodity and the factors
determining its supply. We can better represent the supply function in the form of
the following equation:
Sx = f (Px, PI, T, W, GP)
Where,
Sx = supply of commodity x
Px = Price of commodity x
PI = Price of inputs
T = Technology
W = Weather conditions
GP = Government Policy
 Law of Supply
Law of supply states that other factors remaining constant, price and quantity supplied
of a good are directly related to each other. In other words, when the price paid by
buyers for a good rises, then suppliers increase the supply of that good in the market.
Law of supply depicts the producer behavior at the time of changes in the prices of
goods and services. When the price of a good rises, the supplier increases the supply
in order to earn a profit because of higher prices.

The diagram shows the supply curve that is upward

sloping (positive relation between the price and the
quantity supplied). When the price of the good was
at P3, suppliers were supplying Q3 quantity. As the
price starts rising, the quantity supplied also starts
rising.
 Supply Schedule and Supply Curve
Supply schedule shows a tabular representation of law of supply. It presents the
different quantities of a product that a seller is willing to sell at different price
levels of that product.

A supply schedule can be of two types:

 Individual Supply Schedule

 Market Supply Schedule

 Individual Supply Schedule: Refers to a supply schedule that represents the
different quantities of a product supplied by an individual seller at different
prices.

 Market Supply Schedule: Refers to a supply schedule that represents the

different quantities of a product that all the suppliers in the market are willing to
supply at different prices. Market supply schedule can be drawn by aggregating
the individual supply schedules of all individual suppliers in the market.
 Supply Curve
The graphical representation of supply schedule is called supply curve. In a graph,
price of a product is represented on Y-axis and quantity supplied is represented on
X-axis. Supply curve can be of two types, individual supply curve and market
supply curve. Individual supply curve is the graphical representation of individual
supply schedule, whereas market supply curve is the representation of market
supply schedule.

The supply curve is showing a straight line and an upward

slope. This implies that the supply of a product increases
with increase in the price of a product.

The slope of market supply curve can be obtained by

calculating the supply of the slopes of individual
supply curves. Market supply curve also represents the
direct relationship between the quantity supplied and
price of a product.
 Shifts in supply
The position of a supply curve will change following a change in one or more of
the underlying determinants of supply. For example, a change in costs, such as a
change in labour or raw material costs, will shift the position of the supply curve.
 If the supply curve shifts to the right, this is an increase in supply; more is
provided for sale at each price
 If the supply curve moves inwards, there is a decrease in supply meaning that less
will be supplied at each price

Rising costs: If costs rise, less can be produced

at any given price, and the supply curve will
shift to the left.

Falling costs: If costs fall, more can be

produced, and the supply curve will shift to the
right.
 Shifts in supply
 Government taxes and subsidies and regulations
i. Indirect taxes cause an increase in production costs - an inward shift of supply
ii. Subsidies bring about a fall in supply costs – an outward shift of supply
iii. Regulations increase production costs – an inward shift of supply

 Changes in climate in agricultural industries

 For commodities such as coffee, oranges and wheat, the effect of climatic
conditions can exert a great influence on market supply.
 Favourable weather will produce a bumper harvest and will increase supply. (An
outward shift)
 Unfavourable weather conditions including the effects of drought will lead to a poorer
harvest, lower yields and therefore a decrease in supply (inward shift)
 Because commodities are often used as ingredients in the production of other products,
a change in the supply of one can affect the supply and price of another product. Higher
coffee prices for example can lead to an increase in the price of coffee-flavoured cakes.
 Shifts in supply
 The number of producers in the market and their objectives
 The number of sellers in an industry affects market supply
 When new businesses enter a market, supply increases causing downward
pressure on price. If the existing businesses decide to move away from
maximising their profits towards seeking a higher share of the market, then
total supply available at each price will increase – the market supply curve will
shift outwards.
 Market equilibrium
 The weekly demand and supply schedule for a brand of soft drink at various
prices (between 0p and 80p) is shown below.

PRICE (p) Quantity supplied Quantity demanded

80 2000 0
70 1800 200
60 1600 400
50 1400 600
40 1200 800
30 1000 1000
20 800 1200
10 600 1400
0 400 1600

As can be seen, this market will be in equilibrium at a price of 30p per soft drink. At this
price the demand for drinks by students equals the supply, and the market will clear.
1000 drinks will be offered for sale at 30p and 1000 will be bought – there will be no
excess demand or supply at 30p.
At Equilibrium Qd (P) = Qs (P)
When the supply and demand curves intersect, the market is in equilibrium.  This is
where the quantity demanded and quantity supplied are equal.  The corresponding price
is the equilibrium price or market-clearing price, the quantity is the equilibrium
quantity
 Excess Supply
If the price is ₹30, the consumers demand 15 thousand cups, given the demand curve
DD price the suppliers are willing to supply 45 thousand cups, given the supply
curve SS. The quantity supplied is more than the quantity demanded (45>15) this is
because at a higher price consumers are willing to buy less, while suppliers are
willing to sell more. Excess supply can be mathematically expressed as:

ES = Qs – Qd
 Excess Demand
On the other hand, if price is low, say ₹ 15, quantity demanded is 50, given by the
demand curve DD, while quantity supplied is 10, given the supply curve SS,
thus, supply is not enough to meet the demand. Excess demand (ED) can be
mathematically expressed as:
ED = Qd – Qs
 Price Adjustment Mechanism
 If the quantity supplied is greater than the quantity demanded, there is excess
supply at a price ₹ 30, because of this surplus, consumers will bid down the
market price. As the market price decreases, the quantity demanded will increase
and quantity supplied will decrease until it becomes equal to the quantity
demanded. This adjustment continues till the equilibrium is reached, where the
surplus is eliminated and market equilibrium is established

 Similarly, in the excess demand situation, consumers compete with each other to
buy the good at this price, the demand will push the price up, including suppliers
to supply more of the product. The process of price adjustment again continues
till the market equilibrium is attained.
 Problem
Suppose the demand equation for wrist watch by beyond time inc. For the year 2006
is given by Qd = 1000-P, and the supply equation is given by Qs = 100+4P.
I. What is equilibrium price?
II. What is the excess demand and supply if price is (a) 500 and (b) 100 ?
 Problem

Soln: I. At equilibrium quantity demanded (Qd) = quantity supplied (Qs)

so, 1000 - P = 100 + 4P
The equilibrium Price is P = 180

II. a. When the price is 500, Qd = 1000-500 = 500, Qs = 100+4(500) = 2100

Therefore , excess supply = 2100 – 500 = 1600
II. b. When the price is 100, Qd = 1000 – 100 = 900, Qs = 100 + 4(100) = 500
Therefore, excess demand = 900 – 500 = 400
 Changes in equilibrium
Changes in the underlying factors that affect demand and supply will cause shifts in
the position of the demand or supply curve at every price. Whenever this
happens, the original equilibrium price will no longer equate demand with supply,
and price will adjust to bring about a return to equilibrium. This process of
comparison between two equilibrium situations is called as Comparative statics
There are four basic causes of a price change:

• Demand shifts to the right:

An increase in demand shifts the demand curve
to the right, and raises price and output.

•Demand shifts to the left

A decrease in demand shifts the demand curve
to the left and reduces price and output.
 Changes in equilibrium
 Supply shifts to the right
An increase in supply shifts the supply curve to the
right, which reduces price and increases output.

•Supply shifts to the left

A decrease in supply shifts the supply curve
to the left, which raises price but reduces
output.
 Changes in equilibrium
 The entry and exit of firms
 In a competitive market, firms may enter or leave with little difficulty. Firms may
be attracted into a market for a number of reasons, but particularly because of the
expectation of profit. This causes the market supply curve to shift to the right.
Rising prices may provide a sufficient incentive and provide a signal to potential
entrants to enter the market.
 There is a chain reaction, starting with an increase in demand, from D to D1.
This raises price to P1, which provides the incentive for existing firms to supply
more, from Q to Q1. The higher price also provides the incentive for new firms
to enter, and as they do the supply curve shifts from S to S1.

A market where prices are rising provides the

best opportunity for the entrepreneur. 
Conversely, lower prices encourage firms to
leave the market.
Increase in both supply and demand will cause the
sales to rise, but the effect on price can be
positive, negative or equal to zero depending on
the extent of the shifts in the curves.
 Problem
The quantity demanded of good X depends upon the price of X (P x), monthly
income of consumers (Y), and the price of a related good Y (PY). Demand for
good X (Dx) is given by equation: DX = 1500 – 10PX + 4Y – 15PY.

1. Find the demand equation for good X in terms of the price for X (P X), when Y
is ₹ 500 and PY is ₹ 60.

2. The supply function of the good X (Sx) is given by the equation: Sx =800+2 Px.
Find the equilibrium price and quantity.
 Problem
Soln:
1. Substituting the value of the monthly income (y) and the price of the related
good (Py), we can formulate the demand function as:
DX = 1500 – 10PX + 4Y – 15PY = 1500 – 10PX + 4(500) – 15(60) = 2600 – 10PX
2. Given the supply function as SX = 800+2 Px, equilibrium occurs when demand
and supply are equal, i.e. Dx = Sx
Thus, 2600 – 10PX = 800+2PX PX = 150
The equilibrium quantity is Dx = 2600 – 10PX = 2600 – 10(150) = 1100

Thus, The equilibrium price =150 and equilibrium quantity = 1100

 Elasticity of Demand
Elasticity of demand measures the degree of responsiveness of the quantity demanded
of a commodity to a given change in any of the determinants of demand.

Price elasticity of demand

Price elasticity of demand measures the proportionate change in quantity demanded of

a commodity to a given change in its price.

Various degrees of elasticity of demand are

 Perfectly Elastic Demand

 Perfectly Inelastic Demand

 Unitary Elasticity of Demand

 Elastic Demand

 Inelastic Demand
 Perfectly Elastic Demand:
A demand is perfectly elastic when a small increase in the price of a good its
quantity to zero. Perfect elasticity implies that individual producers can sell all
they want at a ruling price but cannot charge a higher price. If any producer tries
to charge even one penny more, no one would buy his product. People would
prefer to buy from another producer who sells the good at the prevailing market
price.

It shows that the demand curve DD/ is a

horizontal line which indicates that the
quantity demanded is extremely (infinitely)
response to price. Even a slight rise in price
(say $4.02), drops the quantity demanded of
a good to zero. The curve DD/ is infinitely
elastic. This elasticity of demand as such is
equal to infinity.
 Perfectly Inelastic Demand:
When the quantity demanded of a good dose not change at all to whatever change in
price, the demand is said to be perfectly inelastic or the elasticity of demand is
zero.

 As shown in fig. rise in price from OA to OC or

fall in price from OC to OA causes no change
(zero responsiveness) in the amount demanded.

Ed =  0
       Δp
 
Ed = 0
 
  Unitary Elasticity of Demand:
When the quantity demanded of a good changes by exactly the same percentage as
price, the demand is said to has a unitary elasticity.

One or a one percent change in price causes a

response of exactly a one percent change in the
quantity demand.
In this figure (6.3) DD/ demand curve with unitary
elasticity shows that as the price falls from OA to
OC, the quantity demanded increases from OB to
OD. On DD/ demand curve, the percentage change
in price brings about an exactly equal percentage in
quantity at all points a, b. The demand curve of
elasticity is, therefore, a rectangular hyperbola.
 
Ed = %∆q
      %∆p
 
 Ed = 1
 Elastic Demand

If a one percent change in price causes greater than a one percent change in quantity demanded of
a good, the demand is said to be elastic. For example, if price of a good change by 10% and
it brings a 20% change in demand, the price elasticity is greater than one.
Ed = 20%
      10%
 Ed = 2

In figure (6.4) DD/ curve is relatively elastic along its

entire length. As the price falls from OA to OC, the
demand of the good extends from OB to ON i.e., the
increase in quantity demanded is more than
proportionate to the fall in price.
 
Ed  = %∆q
        %∆p
 
Ed > 1
 Inelastic Demand:
When a change in price causes a less than a proportionate change in quantity demand,
demand is said to be inelastic.
The elasticity of a good is here less than I or less than unity. For example, a 30%
change in price leads to 10% change in quantity demanded of a good, then: 
Ed = 10%
     30%
Ed = 1
     3
Ed < 1

In figure (6.5) DD/ demand curve is relatively

inelastic. As the price fall from OA to OC, the
quantity demanded of the good increases from OB
to ON units. The increase in the quantity demanded
is here less than proportionate to the fall in price.
 Elasticity of Supply
Elasticity of supply can be measured on the very same lines as we measured the
elasticity of demand. Elasticity of supply can either be equal to unity or greater
than unity or less than unity.
Equal to Unity: If a, change in the quantity supplied, and a change in the price vary
in equal proportion, the ratio will be equal to one and the elasticity of supply will
be equal to unity.

Price ($) Quantity Supplied (Kg)

1 10
2 20
3 30
 Greater than Unity:  

If a change of 1 percent in price leads to more than 1 percent change in supply, the
elasticity is said to be greater than unity.

Price ($) Quantity Supplied (Kg)

1 10
2 25
3 45

Less than Unity:
If a 1 percent change in price is accompanied by less than 1 percent change in
supply, the elasticity of supply is said to be less than unity.

Price ($) Quantity Supplied (Kg)

1 10
2 15
3 17
 Demand Forecasting

Demand forecasting is a combination of two words; the first one is Demand and another
forecasting. Demand means outside requirements of a product or service. In
general, forecasting means making an estimation in the present for a future occurring event.

It is a technique for estimation of probable demand for a product or services in the future. It is

based on the analysis of past demand for that product or service in the present market
condition. Demand forecasting should be done on a scientific basis and facts and events
related to forecasting should be considered.

Therefore, in simple words, we can say that after gathering information about various aspect of
the market and demand based on the past, an attempt may be made to estimate future
demand. This concept is called forecasting of demand.

For example, suppose we sold 200, 250, 300 units of product X in the month of January,
February, and March respectively. Now we can say that there will be a demand for 250 units
approx. of product X in the month of April, if the market condition remains the same.
 Significance of Demand Forecasting
 Fulfilling objectives of the business

 Preparing the budget

 Taking management decision

 Evaluating performance etc.

 Classification of Business Forecasting
 Economic Forecasting: these forecasting are related to the broader macro-

economic and micro-economic factors prevailing in the current business

environment. It includes forecasting of inflation rate, interest rate, GDP, etc. at the
macro level and working of particular industry at the micro level.
 Demand Forecast: organization conduct analysis on its pre-existing database or

conduct market survey as to understand and predict future demands. Operational

planning is done based on demand forecasting.
 Technology Forecast: this type of forecast is used to forecast future technology

upgradation.
 Timeline of Business Forecasting

 Long Term Forecast: This type of forecast is made for a time frame of more

than three years. These types of forecast are utilized for long-term strategic
planning in terms of capacity planning, expansion planning, etc.
 Mid-Term Forecast: This type of forecast is made for a time frame from three

months to three years. These types of forecasts are utilized production and layout
planning, sales and marketing planning, cash budget planning and capital budget
planning.
 Short Term Forecast: This type of forecast is made of a time frame from one

day to three months. These types of forecasts are utilized for day to day
production planning, inventory planning, workforce application planning, etc.
 General Methods of Forecasting

Qualitative Techniques
 They are based on expert or informed opinion regarding future product demands

 This information is intuitive and based on subjective judgment.

 Qualitative techniques include gathering information from customer focus

groups, groups of experts, think tanks, research groups, etc.

 Survey of Buyer’s-Intentions: This is a short-term method of knowing and estimating

customer’s demand. This is direct method of estimating demand of customers as to

what they intend to buy for the forthcoming time—usually a year.
 Collective Opinion or Sales Force Competitive Method: Under this method, the

salesman are nearest persons to the customers and are able to judge, their minds and
market. They better understand the reactions of the customers to the firms products and
their sales trends. The estimates of the different salesmen are collected and estimates
sales are predicted. These estimates are revised from time to time with changes in sales
price, product, designs, publicity programmes, expected changes in competition,
purchasing power, income distribution, employment and population.
 Executive Judgment Method: Under this method opinions are sought from the

executives of different discipline i.e., marketing, finance, production etc. and estimates
for future demands are made. Thus, this is a process of combining, averaging or
evaluating in some other way the opinions and views of the top executives.
 Economic Indicators

This method has its base for demand forecasting on few economic indicators:
 Construction contracts: For demand towards building materials sanctioned for

Cement.
 Personal Income: Towards demand of consumer goods.

 Agricultural Income: Towards demand of agricultural imports instruments, fertilisers,

manner etc.
 Automobiles Registration: Towards demand of car parts and petrol.

These and other economic indicators are given by specialised organisation. The
analyst should establish relationship between the sale of the product and the
economic indicators to project the correct sales and to measure as to what extent
these indicators affect the sales. To establish relationship is not an easy task
especially in case of New Product where there is no past records.
 Primary Economic Indicator

Gross Domestic Product (GDP): Stock Market Performance

Retail Sales Figures

Building Permits and Housing Starts

Level of Manufacturing Activity

Inventory Balances

GDP Growth

Income and Wage Growth/Decline

Unemployment Rate

CPI (Inflation)

Interest Rates (risking/falling)

Corporate Profits
 Expert’s Opinions: Under this method expert’s opinions are sought from

specialists in the field, outside the organisations or the organisation collects

opinions from such specialists; views of expert’s published in the newspaper and
journals for the trade, wholesalers and distributors for the company’s products,
agencies and professional experts. These opinions and views are analysed and
deductions are made therefrom to arrive at the figure of demand forecasts.
Delphi Method: The Delphi technique was developed at RAND Corporation in the 1950s. Delphi method is a

group (members) process and aims at achieving an collective opinion of the members on the subject. Herein

experts in the field of marketing research and demand forecasting are engaged in

analyzing economic conditions

carrying out sample surveys of market

conducting opinion polls

Based on the above, demand forecast is worked out in following steps:

Co-ordinator sends out a set of questions in writing to all the experts co-opted on the panel who are requested

to write back a brief prediction.

Written predictions of experts are collated, edited and summarized together by the Co-ordinator.

Based on the summary, Co-ordinator designs a new set of questions and gives them to the same experts who

answer back again in writing.

Co-ordinator repeats the process of collating, editing and summarizing the responses.

Steps 3 and 4 are repeated by the Co-ordinator to experts with diverse backgrounds until consensus is reached.
 Quantitative methods
 Trend Projection or Time Trend of the Time Series:

This technique assumes that whatever past years demand pattern will be continued
in the future also. Basing on the historical data that means previous year’s data is
used to predict the demand for the future. In this trend projection method,
previous year’s data is presented on the graph and future demand is estimated.
 Quantitative methods
 Regression Analysis

Past data is used to establish a functional relationship between two variables. For Example, demand for consumer
goods has a relationship with income of Individuals and family; demand for tractors is linked to the agriculture
income and demand for cement, bricks etc. are dependent upon value of construction contracts at any time.
Forecasters collect data and build relationship through co-relation and regression analysis of variables.

 Econometric Models

Econometric models are more complex and comprehensive as this model uses mathematical and statistical tools
to forecast demand. This model takes various factors which affect the demand. For example, demand for
passenger transport is not only dependent upon the population of the city, geographical area, industrial units,
their location etc.

It is not easy to locate one single economic indicator for determining the demand forecast of a product.
Invariably, a multi-factor situation applies Econometric Models, although complex, are being increasingly
used for market analysis and demand forecasts.
 Quantitative methods
 Simple Average Method

Among the quantitative techniques for demand analysis, simple Average Method is
the first one that comes to one's mind. Herein, we take simple average of all past
periods - simple monthly average of all consumption figures collected every
month for the last twelve months or simple quarterly average of consumption
figures collected for several quarters in the immediate past. Thus,