DEMAND ANALYSIS

The economics meaning of demand refers-A buyers

desire for a product in the market backed by the ability
and willing to pay for its price.

DEFINITION
The demand for a product refers to the amount of it
which will be bought per unit of time at a particular price.
 DEMAND ANALYSIS
Consumer demand for a product may be viewed at two
levels:
Individual demand
Market demand

Individual demand refers to the demand for a commodity

from the individual point of view.
Market demand for a product refers to the total demand of
all the buyers taken together.
 DEMAND ANALYSIS
Factors influencing individual
demand:
Price
Income
Tastes, habits and preferences
People with different tastes and habits
have different preferences for different
goods
Relative prices of other goods
Relative prices of other goods-substitute
and complimentary products
 DEMAND ANALYSIS
Consumers expectations
Advertisement effect
Factors influencing market demand:
Price of the product
Distribution of income and wealth in the community
Communitys common habits and scale of preferences
General standards of living and spending habits of the
people
 DEMAND ANALYSIS
Number of buyers in the market and the growth
of population
Age structure and sex ratio of the population
Future expectations
Level of taxation and tax structure
Inventions and innovations
Fashions
Climate or weather conditions
Customs
Advertisement and sales propaganda
 DEMAND ANALYSIS
A demand function in mathematical terms expresses the
functional relationship between the demand for the
product and its various determining variables.
Using the symbolic notations, we may express the demand
function as follows:
Dx = f ( Px, Ps, Pc, Yd, T, A, N, u )
Where x-commodity
Dx-the amount demanded for the commodity x
Px-price of x
Ps and Pc price of the substitute and
complimentary goods
 DEMAND ANALYSIS

Yd-the level of disposable income with the buyers

T-change in buyers tastes and preferences
A-advertisement expenditure
N-changes in number of buyers
u-other unknown determinants of the demand for
commodity x
 DEMAND ANALYSIS
The law of demand
Statement of the law of demand
The higher the price of a commodity, the
smaller is the quantity demanded and lower the
price, larger the quantity demanded.
CETERIS PARIBUS
In other words, when the price of a commodity
increases its demand decreases and when the
price of a commodity decreases its demand
increases
 DEMAND ANALYSIS
DEMAND CURVE
P 44
R
P I
R C 3
I E
C 2
E
P 1
R

10 20 30 40
DEMAND
 DEMAND ANALYSIS
Law of demand is conditional and always stated with other
things being equal. It relates to the change in price only,
assuming other determinants of demand to be constant.
Assumptions underlying the law of demand:
No change in consumers income
No change in consumers preferences
No change in the fashion
No change in the price of related goods
 DEMAND ANALYSIS
No expectation of future price changes or shortages
No change in age structure and sex ratio of population
No change in the range of goods available to consumers

No change in the distribution of income and wealth of the

community
No change in government policy
No change in weather conditions
 DEMAND ANALYSIS
Exceptions to the law of demand:
Sometimes, it may be observed, very rarely, that a fall in
price, demand also falls and with a rise in price,
demand also rises. cases in which this tendency is
observed are referred to as Exceptions to the general
law of demand.
Y
D

P2

P1
D

Q1 Q2 X
 DEMAND ANALYSIS
Giffen goods:
cheap potatoes, cheap bread, vegetable oil etc.,
in place of good potatoes, cake, pure ghee.
Articles of snob appeal:
Used to show the status symbol-diamonds.
Speculation:
Stock exchange market-buy more shares when
their prices are rising.
Consumers psychological bias or Illusion:
When the customer is wrongly biased against the
quality of a commodity with the price changes.
 DEMAND ANALYSIS

Extension and Contraction of demand:

When there is a fall in price, the quantity demanded will
increase and when there is a rise in price the quantity
demanded will decrease. This increase and decrease in
demand is named as Extension and Contraction of
demand.
DEMAND ANALYSIS
 DEMAND ANALYSIS

Types of demand:
Demand for Consumers Goods and Producers Goods.
Demand for Perishable Goods and Durable Goods.
Autonomous Demand and Company Demand.
Industry Demand and Long-Run Demand.
Short Run Demand and Company Demand.
Joint Demand and Composite Demand.
Price Demand, Income Demand and Cross Demand.
 DEMAND ANALYSIS

Elasticity of demand:

= percentage change in quantity demanded

percentage change in determinant of demand

Types of elasticity of demand:

Price elasticity
Income elasticity of demand
Cross elasticity of demand
 DEMAND ANALYSIS
Price elasticity:
The co- efficient of price elasticity (e) is measured
as:

e= The percentage change in quantity demanded

The percentage change in price

e= The proportional change in quantity demanded

The proportional change in price
 DEMAND ANALYSIS

Types of Price elasticity of demand:

Perfectly Price Elastic Demand
Perfectly Price Inelastic Demand
Relatively Price Elastic Demand
Relatively Price Inelastic Demand
Unitary elastic Demand
 DEMAND ANALYSIS

Perfectly Price Elastic Demand:

An endless demand at the given price is the case of
Perfectly Price Elastic Demand. The numerical co-
efficient of Perfectly Price Elastic Demand is infinity
(e=). Y

P D e=
D

X
 DEMAND ANALYSIS

Perfectly Price Inelastic Demand:

When the demand for a commodity shows no response at
all to a change in price i., e whatever change in price, the
demand remains the same, it is Perfectly Price Inelastic
Demand, value is (e=0).
Y e=0 D
P1

P2

P3
D

X
 DEMAND ANALYSIS

Relatively Price Elastic Demand:

When the quantity demanded changes by a larger
percentage than the change in price is Relatively Price
Elastic Demand. Its value lies between one and infinity.
Y
D
P1

e>1
P2

D D

M M X
1
 DEMAND ANALYSIS
Relatively Price Inelastic Demand:
When the quantity demanded changes by a smaller
percentage than the change in price is Relatively Price
Inelastic Demand. Its value lies between zero and one.

D
Y

P1

e<1
P2
D

M1 M2

X
 DEMAND ANALYSIS

Unitary elastic Demand:

When the quantity demanded changes by exactly the same
percentage as the price is Unitary elastic Demand. Its
value is equal to one.
D
Y

P1

P2
D

M1 M2 X
 DEMAND ANALYSIS
Income elasticity:
The co- efficient of income elasticity (e) is
measured as:

e= The percentage change in quantity demanded

The percentage change in income

e= The proportional change in quantity demanded

The proportional change in income
 DEMAND ANALYSIS

Types of Income elasticity of demand:

Unitary Income Elasticity of Demand
Income Elasticity of Demand greater than unity
Income Elasticity of Demand less than unity
Zero Income Elasticity of Demand
Negative Income Elasticity of Demand
 DEMAND ANALYSIS

Unitary Income Elasticity of Demand:

When the percentage change in demand is equal to
percentage change in income, the demand is Unitary
Income Elasticity of Demand. Thus e=1.
Ex- Commodities of normal type.
Y D1

e=1

X
 DEMAND ANALYSIS

Income Elasticity of Demand greater than unity :

When the percentage change in demand is greater than
the percentage change in income, the demand is Income
Elasticity of Demand greater than unity. Thus e>1.
Ex- Commodities such as T.V. sets, cars etc
Y

D2

e>1

X
 DEMAND ANALYSIS

Income Elasticity of Demand less than unity:

When the percentage change in demand is less than the
percentage change in income, the demand is Income
Elasticity of Demand less than unity. Thus e<1.
Ex- Commodities such as food grains.
Y D3

e<1

X
 DEMAND ANALYSIS
Zero Income Elasticity of Demand:
When the income change in any direction or proportion but
carries no effect on demand, so that the quantity
demanded remains unchanged, the income is Zero
Income Elasticity of Demand. Thus e=0.
Ex- Commodities such as salt, match-box etc
Y D4

e=0

X
 DEMAND ANALYSIS
Negative Income Elasticity of Demand:
When an increase in income causes a decrease in the
demand for a commodity, the demand is said to be
Negative Income Elasticity of Demand. Thus e<0.
Ex- Commodities such as jowar,bajra etc are inferior goods.
D4
Y

e<0

X
 DEMAND ANALYSIS

Cross Elasticity:
The co- efficient of income elasticity (e) is
measured as:

e= The percentage change in demand for X

The percentage change in price of Y
e= The proportional change in demand for X
The proportional change in price of Y
 DEMAND ANALYSIS

A positive cross elasticity of demand indicates that the two

products are substitutes, since an increase or decrease
in the price of one causes an increase or decrease in the
quantity demanded of the other.

A negative cross elasticity of demand indicates that the two

products are complementary to each other, since an
increase or decrease in the price of one leads to a
contraction or extension in demand for the other
 DEMAND ANALYSIS

SUBSTITUTES COMPLEMENTARY UNRELATED

D2 Y D3
Y D1 Y
PRICE OF Y

e =0
e xy < 0 xy
e xy > 0

X X X

DEMAND FOR COMMODITY X

 DEMAND ANALYSIS

Uses of Elasticity of Demand for Managerial Decision

Making :
To Businessmen
To the Government and Finance Minister
In International Trade
To policy Makers
To Trade Unionists
 DEMAND ANALYSIS

Measurement of Elasticity of Demand :

There are three different methods of measuring price
elasticity of demand
Ratio method to measure co-efficient of price elasticity
Total revenue method
Point method
 DEMAND ANALYSIS
Advertising and promotional elasticity of
demand:

e= the percentage change in sales

the percentage change in advertisement
expenditure and other promotional efforts
(or)
e= the proportionate change in sales
the proportionate change in advertisement
expenditure and other promotional efforts
e= % Q
% A
 DEMAND ANALYSIS

Calculate Advertising and promotional elasticity of demand

for the given data:
A1=50000 A2=60000
Q1=80000 Q2=90000
 DEMAND ANALYSIS
DEMAND FORECASTING:
Meaning:
Demand forecasting means expectation about the future
course of the market demand for a product. It is based
on the statistical data about past behavior and empirical
relationships of the demand determinants.
Demand forecasting may be undertaken at the following
levels:
MICRO LEVEL
INDUSTRY LEVEL
MACRO LEVEL
 DEMAND ANALYSIS

Significance:
Production planning.
Sales forecasting.
Control of business.
Inventory control.
Growth and long-term investment programmes.
Stability.
Economic planning and policy making.
 DEMAND ANALYSIS
Short-term and long-term forecasting:

Short-term forecasting:
-The firm is primarily concerned with the optimum
utilization of its existing production capacity.
Evolving a sales policy.
Determining pricing policy.
Evolving a purchase policy.
Fixation of sales target.
Determining short-term financial planning.
 DEMAND ANALYSIS

Long-term forecasting:
- The firm is primarily concerned with the scale of
operations or the production capacity may be expanded
or reduced.
Business planning.
Manpower planning.
Long-term financial planning.
 DEMAND ANALYSIS

General approach to demand forecasting:

Specification of objectives.
Identification of demand determinants.
Qd = f( P,Y,D)
Choice of methods of forecasting.
Interpretation.
 DEMAND FORECASTING METHODS

Survey Method Statistical Method

Expert opinion Direct interview Trend Regression Barometric

method method projection method method
(Collective opinion) method (Economic

indicator
method)

Complete Sample survey End User

enumeration method method
method
 (A) Survey Method
The survey method consists of two
methods:
Survey of experts opinion
Survey of consumers intentions through
direct interview with them.
 (1) Experts Opinion Method (or)
Collective Opinion Method
This method is also known as Sales
Force Composite Method.
Advantages:
1. It is a simple method of forecasting.
2. It involves minimum statistical work.
3. It is less expensive.
4. It is based on the first hand knowledge of
the salesmen who are directly connected
with the sales.
 Contd
5. It is more useful for short term forecasting rather
than long term forecasting.
6. It is particularly useful in forecasting the sales of
new products.
Disadvantages:
1. It is subjective approach.
2. The salesmen may underestimate the
demand.
3. The salesmen may not be able to judge the
future trends in the economy and their impact
on the sales of the product of the firm.
 (2) Direct Interview Method (or)
Customers Interview Method
Under this method ,consumers are
directly interviewed to find out the future demand
or demand trends for a product by a firm. They
are three types of consumers interview:
Complete Enumeration Method
Sample Survey Method
(Stratified = Society divided into different
classes)
End Use Method
 Continued
A. Complete Enumeration Method
under this method ,almost all the
consumers of the product are interviewed and
are asked to inform about their future plan of
purchasing the product in question.
Advantages:
This method is true from any bias of the
salesmen ,as they only collect the information
and aggregate it.
This method seems to be ideal, since almost all
the consumers using the product are
contacted.
 Contd
Disadvantages:
1. This method is however very costly and
tedious.
2. It is also too much time consuming, since
every potential customer is to be interviewed.
3. It would be very difficult and impractical if the
consumers who are spread over the entire
country are to be contacted.
Hence this method is highly
cumbersome in nature.
 Contd
B. Sample Survey Method:
When the demand of consumers is very large
this method is used by selecting a sample of consumers
for interview .
Advantages:
1. This method is single and less costly and hence it
is widely used.
2. It is less time consuming ,since only a few selected
consumers are contacted.
 Contd
3. It is used to estimate short term demand
by business firms, governments departments
and household customers.
4. It is highly useful in case of new products.
5. This method is of greater use in forecasting
where consumers behaviour is subject to
frequent changes.
However the success if this method
depends on the sincere co-operation of the
selected consumers.
 Contd
Disadvantages:
1. This method is less reliable , because it does
not give opinion of all the consumers.
2. A sudden change in the price of the product in
future may upset the calculations of
consumers.
3. The rich consumers may not bother to fill the
details in the questionnaire.
These are the practical problems faced
in using this method to forecast demand.
 Contd
C. End Use Method:
Under this method, the sale of the
product under consideration is projected
on the basis of the demand surveys of
the industries using this given product or
intermediate product.
 Contd
Advantages:
1. This method is used to forecast the demand
for intermediate products only.
2. It is quite useful for industries which largely
produces goods like aluminium, steel, etc.
Disadvantages:
The main limitation of this method is that , as
the number of end- users of a product
increases, it becomes more difficult to estimate
demand under this method.
 (B) Statistical Method
Under these methods, statistical or
mathematical techniques are used to forecast
the demand for a product in the long period. The
following are the important statistical methods
used in forecasting:
1. Trend Projection Method
2. Regression Method
3. Barometric Method
 (1) Trend Projection Method
This method is also known as Time Series
Analysis.
Time series refers to the data over a period
of time. During this time period, fluctuations
and turning points may occur in demand
conditions .These fluctuations in demand occur
due to the following four factors. They are:
Secular Trends
Seasonal Variations
Cyclical Fluctuations
Random Variations
Table - Sales of Transistors for 5 years

YEAR SALES in
lakhs of Rs

1991 50

1992 60

1993 55

1994 70

1995 75
 DIAGRAMATIC REPRESENTATION
Y
75

70 Trend line

65

60 Sales curve

55

50

0 X
91 92 93 94 95
 Contd
Advantages :
1. Trend projection method is quite popular in
business forecasting, because it is a simple
method.
2. The use this method requires only the simple
working knowledge of statistics.
3. It is also less expensive , as its data
requirements are limited to the internal
records.
4. This method yields fairly reliable estimates if
future course of demand.
 Contd
Disadvantages:
The most important limitation of this method
arises out of its assumption that the past rate of
change in the dependent variable ( demand).
This method is not useful for short run
forecasting and cyclical fluctuations.
This method does not explain the relationship
between dependent and independent variables.
 (2)Regression Method
It combines the economic theory and
statistical techniques of estimation.
 (3) Barometric Method
This method is also known as
Economic Indicators Method. Under this
method , a few economic indicators become the
basis for forecasting the sales of a company.
Some of the most commonly used
indicators are given below:
Construction contracts
Personal Income
Automobile registration
 Contd
Limitations
It is difficult to find out an appropriate
economic indicator
It is not suitable for new products as past
data not available
It is best suited where relationship of
demand with a particular indicator is
characterized by time-lag
 Significance of Demand
Forecasting
Production planning
Sales Forecasting
Control of business
Inventory control
Growth and Long term Investment
Programs
Stability
Economic planning and Policy making