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UNIT-II

DEMAND AND SUPPLY ANALYSIS

Introduction & Meaning:

Demand in common parlance means the desire for an object. But in economics
demand is something more than this. According to Stonier and Hague, “Demand in
economics means demand backed up by enough money to pay for the goods
demanded”. This means that the demand becomes effective only it if is backed by the
purchasing power in addition to this there must be willingness to buy a commodity.

Thus demand in economics means the desire backed by the willingness to buy a
commodity and the purchasing power to pay. In the words of “Benham” “The demand
for anything at a given price is the amount of it which will be bought per unit of time
at that Price”. (Thus demand is always at a price for a definite quantity at a specified
time.) Thus demand has three essentials – price, quantity demanded and time.
Without these, demand has to significance in economics.

LAW of Demand:

Law of demand shows the relation between price and quantity demanded of a
commodity in the market. In the words of Marshall, “the amount demand increases
with a fall in price and diminishes with a rise in price”.

A rise in the price of a commodity is followed by a reduction in demand and a fall in

price is followed by an increase in demand, if a condition of demand remains constant.

The law of demand may be explained with the help of the following demand schedule.

Demand Schedule.

Price of Appel (In. Rs.) Quantity Demanded

10 1
8 2
6 3
4 4
2 5

When the price falls from Rs. 10 to 8 quantity demand increases from 1 to 2. In the
same way as price falls, quantity demand increases on the basis of the demand
schedule we can draw the demand curve.

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Price

The demand curve DD shows the inverse relation between price and quantity demand
of apple. It is downward sloping.

Assumptions:

Law is demand is based on certain assumptions:

1. This is no change in consumers taste and preferences.

2. Income should remain constant.
3. Prices of other goods should not change.
4. There should be no substitute for the commodity
5. The commodity should not confer at any distinction
6. The demand for the commodity should be continuous
7. People should not expect any change in the price of the commodity

Exceptional demand curve:

Some times the demand curve slopes upwards from left to right. In this case the
demand curve has a positive slope.

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Price

When price increases from OP to Op1 quantity demanded also increases from to OQ1
and vice versa. The reasons for exceptional demand curve are as follows.

1. Giffen paradox:

The Giffen good or inferior good is an exception to the law of demand. When the price
of an inferior good falls, the poor will buy less and vice versa. For example, when the
price of maize falls, the poor are willing to spend more on superior goods than on
maize if the price of maize increases, he has to increase the quantity of money spent
on it. Otherwise he will have to face starvation. Thus a fall in price is followed by
reduction in quantity demanded and vice versa. “Giffen” first explained this and
therefore it is called as Giffen’s paradox.

2. Veblen or Demonstration effect:

‘Veblan’ has explained the exceptional demand curve through his doctrine of
conspicuous consumption. Rich people buy certain good because it gives social
distinction or prestige for example diamonds are bought by the richer class for the
prestige it possess. It the price of diamonds falls poor also will buy is hence they will
not give prestige. Therefore, rich people may stop buying this commodity.

3. Ignorance:

Sometimes, the quality of the commodity is Judge by its price. Consumers think that
the product is superior if the price is high. As such they buy more at a higher price.

1. Speculative effect:

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If the price of the commodity is increasing the consumers will buy more of it because
of the fear that it increase still further, Thus, an increase in price may not be
accomplished by a decrease in demand.

5. Fear of shortage:

During the times of emergency of war People may expect shortage of a commodity.
At that time, they may buy more at a higher price to keep stocks for the future.

2. Necessaries:

In the case of necessaries like rice, vegetables etc. people buy more even at a higher
price.

Factors Affecting Demand:

There are factors on which the demand for a commodity depends. These factors are
economic, social as well as political factors. The effect of all the factors on the amount
demanded for the commodity is called Demand Function.
These factors are as follows:

1. Price of the Commodity:

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

2. Income of the Consumer:

The second most important factor influencing demand is consumer income. In fact,
we can establish a relation between the consumer income and the demand at different
levels of income, price and other things remaining the same. The demand for a normal
commodity goes up when income rises and falls down when income falls. But in case
of Giffen goods the relationship is the opposite.

3. Prices of related goods:

The demand for a commodity is also affected by the changes in prices of the related
goods also. Related goods can be of two types:

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(i). Substitutes which can replace each other in use; for example, tea and coffee are
substitutes. The change in price of a substitute has effect on a commodity’s
demand
in the same direction in which price changes. The rise in price of coffee shall
raise
the demand for tea;

(ii). Complementary foods are those which are jointly demanded, such as pen and ink.
In
such cases complementary goods have opposite relationship between price of one
commodity and the amount demanded for the other. If the price of pens goes up,
their demand is less as a result of which the demand for ink is also less. The price
and demand go in opposite direction. The effect of changes in price of a
commodity on
amounts demanded of related commodities is called Cross Demand.

4. Tastes of the Consumers:

The amount demanded also depends on consumer’s taste. Tastes include fashion,
habit, customs, etc. A consumer’s taste is also affected by advertisement. If the taste
for a commodity goes up, its amount demanded is more even at the same price. This
is called increase in demand. The opposite is called decrease in demand.

5. Wealth:

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

6. Population:

Increase in population increases demand for necessaries of life. The composition of

population also affects demand. Composition of population means the proportion of
young and old and children as well as the ratio of men to women. A change in

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composition of population has an effect on the nature of demand for different

commodities.

7. Government Policy:

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

8. Expectations regarding the future:

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

9. Climate and weather:

The climate of an area and the weather prevailing there has a decisive effect on
consumer’s demand. In cold areas woolen cloth is demanded. During hot summer
days, ice is very much in demand. On a rainy day, ice cream is not so much demanded.

10. State of business:

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

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DEMAND AND SUPPLY ANALYSIS

Elasticity of demand explains the relationship between a change in price and

consequent change in amount demanded. “Marshall” introduced the concept of
elasticity of demand. Elasticity of demand shows the extent of change in quantity
demanded to a change in price.

In the words of “Marshall”, “The elasticity of demand in a market is great or small

according as the amount demanded increases much or little for a given fall in the price
and diminishes much or little for a given rise in Price”

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

In-elastic demand: If a big change in price is followed by a small change in

demanded then the demand in “inelastic”.

Types of Elasticity of Demand:

There are three types of elasticity of demand:

1. Price elasticity of demand

2. Income elasticity of demand
3. Cross elasticity of demand

1. Price elasticity of demand:

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Marshall was the first economist to define price elasticity of demand. Price elasticity
of demand measures changes in quantity demand to a change in Price. It is the ratio
of percentage change in quantity demanded to a percentage change in price.

Proportionate change in the quantity demand of commodity

Price elasticity = ------------------------------------------------------------------
Proportionate change in the price of commodity
There are five cases of price elasticity of demand

A. Perfectly elastic demand:

When small change in price leads to an infinitely large change is quantity demand, it
is called perfectly or infinitely elastic demand. In this case E=∞

The demand curve DD1 is horizontal straight line. It shows the at “OP” price any
amount is demand and if price increases, the consumer will not purchase the
commodity.

B. Perfectly Inelastic Demand

In this case, even a large change in price fails to bring about a change in quantity
demanded.

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When price increases from ‘OP’ to ‘OP’, the quantity demanded remains the same. In
other words the response of demand to a change in Price is nil. In this case ‘E’=0.

C. Relatively elastic demand:

Demand changes more than proportionately to a change in price. i.e. a small change
in price loads to a very big change in the quantity demanded. In this case
E > 1. This demand curve will be flatter.

When price falls from ‘OP’ to ‘OP’, amount demanded in crease from “OQ’ to “OQ1’
which is larger than the change in price.

D. Relatively in-elastic demand.

Quantity demanded changes less than proportional to a change in price. A large

change in price leads to small change in amount demanded. Here E < 1. Demanded
carve will be steeper.

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When price falls from “OP’ to ‘OP1 amount demanded increases from OQ to OQ1,
which is smaller than the change in price.

E. Unit elasticity of demand:

The change in demand is exactly equal to the change in price. When both are equal
E=1 and elasticity if said to be unitary.

When price falls from ‘OP’ to ‘OP1’ quantity demanded increases from ‘OP’ to ‘OP1’,
quantity demanded increases from ‘OQ’ to ‘OQ1’. Thus a change in price has resulted
in an equal change in quantity demanded so price elasticity of demand is equal to
unity.

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2. Income elasticity of demand:

Income elasticity of demand shows the change in quantity demanded as a result of a

change in income. Income elasticity of demand may be slated in the form of a formula.

Proportionate change in the quantity demand of commodity

Income Elasticity = ------------------------------------------------------------------
Proportionate change in the income of the people

Income elasticity of demand can be classified in to five types.

A. Zero income elasticity:

Quantity demanded remains the same, even though money income increases.
Symbolically, it can be expressed as Ey=0. It can be depicted in the following way:

As income increases from

OY to OY1, quantity demanded never changes.

B. Negative Income elasticity:

When income increases, quantity demanded falls. In this case, income elasticity of
demand is negative. i.e., Ey < 0.

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When income
increases from OY to
OY1, demand falls from OQ to OQ1.

c. Unit income elasticity:

When an increase in income brings about a proportionate increase in quantity

demanded, and then income elasticity of demand is equal to one. Ey = 1

When income increases from OY to OY1, Quantity demanded also increases from OQ
to OQ1.
d. Income elasticity greater than unity:

In this case, an increase in come brings about a more than proportionate increase in
quantity demanded. Symbolically it can be written as Ey > 1.

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It shows high-income elasticity of demand. When income increases from OY

to OY1, Quantity demanded increases from OQ to OQ1.

E. Income elasticity leas than unity:

When income increases quantity demanded also increases but less than
proportionately. In this case E < 1.

An increase in income from OY to OY, brings what an increase in quantity demanded

from OQ to OQ1, But the increase in quantity demanded is smaller than the increase
in income. Hence, income elasticity of demand is less than one.
3. Cross elasticity of Demand:

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A change in the price of one commodity leads to a change in the quantity demanded
of another commodity. This is called a cross elasticity of demand. The formula for
cross elasticity of demand is:

Proportionate change in the quantity demand of commodity “X”

Cross elasticity = -----------------------------------------------------------------------
Proportionate change in the price of commodity “Y”

a. In case of substitutes, cross elasticity of demand is positive. Eg: Coffee and Tea

When the price of coffee increases, Quantity demanded of tea increases. Both are
substitutes.

Price of Coffee

b. Incase of compliments, cross elasticity is negative. If increase in the price of one

commodity leads to a decrease in the quantity demanded of another and vice versa.

When price of car goes up from OP to OP!, the quantity demanded of petrol decreases
from OQ to OQ!. The cross-demanded curve has negative slope.

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c. In case of unrelated commodities, cross elasticity of demanded is zero. A

change in the price of one commodity will not affect the quantity demanded of another.

Quantity demanded of commodity “b” remains unchanged due to a change in the price
of ‘A’, as both are unrelated goods.

Factors influencing the elasticity of demand

Elasticity of demand depends on many factors.

1. Nature of commodity:

Elasticity or in-elasticity of demand depends on the nature of the commodity i.e.

whether a commodity is a necessity, comfort or luxury, normally; the demand for
Necessaries like salt, rice etc is inelastic. On the other band, the demand for comforts
and luxuries is elastic.

2. Availability of substitutes:

Elasticity of demand depends on availability or non-availability of substitutes. In case

of commodities, which have substitutes, demand is elastic, but in case of commodities,
which have no substitutes, demand is in elastic.

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3. Variety of uses:

If a commodity can be used for several purposes, than it will have elastic demand. i.e.
electricity. On the other hand, demanded is inelastic for commodities, which can be
put to only one use.

4. Postponement of demand:

If the consumption of a commodity can be postponed, than it will have elastic demand.
On the contrary, if the demand for a commodity cannot be postpones, than demand
is in elastic. The demand for rice or medicine cannot be postponed, while the demand
for Cycle or umbrella can be postponed.

5. Amount of money spent:

Elasticity of demand depends on the amount of money spent on the commodity. If the
consumer spends a smaller for example a consumer spends a little amount on salt
and matchboxes. Even when price of salt or matchbox goes up, demanded will not
fall. Therefore, demand is in case of clothing a consumer spends a large proportion of
his income and an increase in price will reduce his demand for clothing. So the demand
is elastic.

6. Time:

Elasticity of demand varies with time. Generally, demand is inelastic during short
period and elastic during the long period. Demand is inelastic during short period
because the consumers do not have enough time to know about the change is price.
Even if they are aware of the price change, they may not immediately switch over to
a new commodity, as they are accustomed to the old commodity.

7. Range of Prices:

Range of prices exerts an important influence on elasticity of demand. At a very high

price, demand is inelastic because a slight fall in price will not induce the people buy
more. Similarly at a low price also demand is inelastic. This is because at a low price
all those who want to buy the commodity would have bought it and a further fall in
price will not increase the demand. Therefore, elasticity is low at very him and very
low prices.

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 BEFA UNIT II
Proportionate change in advertisement costs
𝐐𝟐 −𝐐𝟏
𝐐𝟏
𝐄𝐀 = 𝐀 𝟐 −𝐀 𝟏 Q1 = Old demand
𝐀𝟏
Q2 = New demand
A1 = Old advertisement cost
A2 = New advertisement cost
Advertisement Demand
cost
Rs.1 Lakh 10 Lakh units
Rs. 2 Lakh 30 Lakh units

MEASUREMENT OF ELASTICITY OF DEMAND

1) Point Elasticity of Demand:

Point elasticity is the price elasticity o f demand at a specific point on the
demand curve instead of over a range of it. A demand curve does not
have the same elasticity throughout its entire length. In general,
elasticity differs at different points on a given demand curve. Point
elasticity does not hold good in the case of perfectly elastic and perfectly
inelastic. In these cases, the demand curves possess a single elasticity
throughout its entire length.
It can be observed that elasticity at point C where the demand curve
touches the X axis is equal to zero and at point D where the demand
curve meets the price axis, the elasticity is infinity. At mid point P, the
elasticity is equal to one. At all the points between P and C, the elasticity
is greater than zero and less than one and at all the points between P and D, the elasticity is higher than
one and less than infinity. Thus the range of values of elasticity is between zero and infinity.

The following graph simplifies the concept of point elasticity. To

calculate point elasticity at any point on the demand curve, the
below equation is used. We take mid - point of the demand curve as
point C where elasticity is one. When we move to the right direction
from point C, elasticity of demand decreases i.e., E <1 and elasticity
of demand increases i.e., E>1, when we move to the left direction
from the point C.

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The elasticity at point C can be calculated as:
Ed = CE/CA = 40/40 = 1
Elasticity at point D can be calculated as under:
Ed = DE/DA = 20/60 = 0.33 ( E<1)
Elasticity at point B can be calculated as under:
Ed = BE/BA = 60/20 = 3 (E>1)
Elasticity at point A can be calculated as under:
Ed = AE/A = 80/0 = ∞
Elasticity at point E can be calculated as under:
Ed = E/EA = 0/80 = 0

2) Arc Elasticity or Mid–Point Method:

Arc elasticity of demand is the average elasticity over a segment of the demand curve. In point elasticity,
we find elasticity on straight line demand curve. We cannot always find a demand curve in the form of
straight line. A demand curve is not linear. So, how do we find elasticity on such a curve?. What we do is
that we have to identify two points, say point A and point B and then draw a chord (a straight line joining
two points on a curve) between these two points. Join these two points with a straight line. What happens
is we get a straight line with arc (a part of a curve). Now, how do we find elasticity between these two
points?. We have a formula for that: The following graph presents the clear meaning of the arc elasticity.

FACTORS AFFECTING ELASTICITY OF DEMAND

Elasticity of demand depends on many factors.

1. Nature of commodity:

Elasticity or in-elasticity of demand depends on the nature of the commodity i.e. whether a commodity is
a necessity, comfort or luxury, normally; the demand for Necessaries like salt, rice etc is inelastic. On the
other band, the demand for comforts and luxuries is elastic.

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Importance of Elasticity of Demand:

The concept of elasticity of demand is of much practical importance.

1. Price fixation:

Each seller under monopoly and imperfect competition has to take into account
elasticity of demand while fixing the price for his product. If the demand for the
product is inelastic, he can fix a higher price.

2. Production:

Producers generally decide their production level on the basis of demand for the
product. Hence elasticity of demand helps the producers to take correct decision
regarding the level of cut put to be produced.

3. Distribution:

Elasticity of demand also helps in the determination of rewards for factors of

production. For example, if the demand for labour is inelastic, trade unions will be
successful in raising wages. It is applicable to other factors of production.

4. International Trade:

Elasticity of demand helps in finding out the terms of trade between two countries.
Terms of trade refers to the rate at which domestic commodity is exchanged for
foreign commodities. Terms of trade depends upon the elasticity of demand of the two
countries for each other goods.

5. Public Finance:

Elasticity of demand helps the government in formulating tax policies. For example,
for imposing tax on a commodity, the Finance Minister has to take into account the
elasticity of demand.

6. Nationalization:

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The concept of elasticity of demand enables the government to decide about

nationalization of industries.

Demand Forecasting

Introduction:

The information about the future is essential for both new firms and those planning to
expand the scale of their production. Demand forecasting refers to an estimate of
future demand for the product.

It is an ‘objective assessment of the future course of demand”. In recent times,

forecasting plays an important role in business decision-making. Demand forecasting
has an important influence on production planning. It is essential for a firm to produce
the required quantities at the right time.

It is essential to distinguish between forecasts of demand and forecasts of sales. Sales

forecast is important for estimating revenue cash requirements and expenses.
Demand forecasts relate to production, inventory control, timing, reliability of forecast
etc. However, there is not much difference between these two terms.

Types of demand Forecasting:

Based on the time span and planning requirements of business firms, demand
forecasting can be classified in to 1. Short-term demand forecasting and
2. Long – term demand forecasting.

1. Short-term demand forecasting:

Short-term demand forecasting is limited to short periods, usually for one year. It
relates to policies regarding sales, purchase, price and finances. It refers to existing
production capacity of the firm. Short-term forecasting is essential for formulating is
essential for formulating a suitable price policy. If the business people expect of rise
in the prices of raw materials of shortages, they may buy early. This price forecasting
helps in sale policy formulation. Production may be undertaken based on expected
sales and not on actual sales. Further, demand forecasting assists in financial
forecasting also. Prior information about production and sales is essential to provide
additional funds on reasonable terms.

2. Long – term forecasting:

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 BEFA UNIT II
2. It is undertaken in an uncertain atmosphere.
3. A forecast is made for a specific period of time which would be sufficient to take a decision and put it
into action.
4 .It is based on historical information and the past data.
5 .It tells us only the approximate demand for a product in the future.
6 .It is based on certain assumptions.
7 .It cannot be 100% precise as it deals with future expected demand
Demand forecasting is the activity of estimating the quantity of a product or service that consumers will
purchase. Demand forecasting involves techniques including both informal methods, such as educated
guesses, and quantitative methods, such as the use of historical sales data or current data from test
markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity
requirements, or in making decisions on whether to enter a new market.

STEPS IN DEMAND FORECASTING

1. Determining the objectives

The first step in this regard is to consider the objectives of sales forecasting carefully.

2. Period of forecasting

Before taking up forecasting, the company has to decide the period of forecasting — Whether it is a short-
term forecast or long-term research.

3. Scope of forecast

The next step is to decide the scope of forecasting— Whether it is for the products, or for a particular area
or total industry or at the national/international level.

4. Sub-dividing the task

Sub-dividing the task into homogeneous groups, according to product, area, activities or consumers. The
figure of sales forecasting shall be the sum total of the sales forecasts of all the groups.

5. Identify the variables

The different variables or factors affecting the sales should be identified so that due weight age may be
given to those different factors.

6. Selecting the method

Appropriate method of sales forecasting is selected by the company taking into account all the relevant
information, purpose of forecasting and the degree of accuracy required.

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7. Collection and analysis of data

Necessary data for the forecast are collected, tabulated, analyzed and cross-checked. The data are
interpreted by applying the statistical or graphical techniques, and then to draw necessary deductions
there from.

8. Study of correlation between sales forecasts and sales promotion plans

Making the forecast reliable, the sales promotion plans such as advertising, personal selling and other
sales programmes should be reviewed. A study of correlation between sales forecasts and sales promotion
plans should be made in order to establish their role in promoting the sales.

9. Competitors activities

Volume of sales of a company is largely affected by the activities of competitors and, therefore, the
forecaster must also study the competitors‘ activities, policies, programmes and strategies.

10. Preparing final sales forecasts

The preliminary sales forecasts figure should be reviewed and final sales forecast figures should be
arrived at after making all adjustments.

11. Evaluation and adjustments

The figures of final sales forecasts form the basis for the operations of the company in the next period.
The actual sales performance in the forthcoming period should be reviewed and evaluated from time to
time viz, monthly, quarterly, half-yearly or yearly and so on. The forecast figures should be revised in the
light of difficulties experienced during actual performance. At the end of the forecast period, actual
performance should be reviewed and rectified while forecasting the demand for the next period.

METHODS OF FORECASTING:

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Several methods are employed for forecasting demand. All these methods can be grouped under survey
method, statistical method and other methods. Survey methods and statistical methods are further
subdivided in to different categories.

I. Survey Method:
A. Survey of buyers intention:

To anticipate what buyers are likely to do under a given set of circumstances, a most useful source of
information would be the buyers themselves. It is better to draw a list of potential buyers. Approach each
buyer to ask how much does he plans to buy of the given product at a given point of time under particular
conditions.

1. Census method:

If the company wishes to elicit the opinion of all the buyers, this method is called census method. This
method is not only time-consuming but also costly. Suppose there are 10,000 buyers for a particular
product. if the company gets the opinion of all these ten thousand customers, this method is known as
census method.

2. Sample method:

If the company selects a group of buyers who can represent the whole population, this method is called
the sample method. A survey of buyers based on sample basis can be completed faster with relatively
lower cost. Normally a questionnaire is designed to elicit the information. There are specialized
organizations to collect the information from the potential buyers, ex: ORG-Marg. Etc.

B. Sales force opinions:

The sales people are those who are in constant touch with the main and large buyers of a particular
market, and hence they constitute anther valid source of information about the likely sales of a product.
the sales force is capable of assessing the likely reactions of the customers of their territories quickly,
given the company‘s strategy. It is less costly as the survey can be conducted instantaneously through
telephone, fax or video-conference, and so on. The data thus collected, forms another valid source of
reliable information.

II. Statistical Methods:

Statistical method is used for long run forecasting. In this method, statistical and mathematical techniques
are used to forecast demand. This method relies on post data.

A. Trend projection methods

1. Trend line by observation:

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This method of forecasting trend is elementary, easy and quick as it involves merely the plotting the
actual sales data on a chart and then estimating just by observation where the trend line lies. The line can
be extended towards a future period and corresponding sales forecast read from the graph.

2. Least squares method:

Here, certain statistical formulas are used to find the trend line which best fits the available data. It is
assumed that there is a proportional change in sales over period of time. In such a case, the trend line
equation is in linear form.

The estimating linear trend equation of sales is written as: S = x + y(T), where x and y have been
calculated form past data, S is sales and T is the year number for which the forecast is made. To find the
values of x and y, the following equations have to be used.

ΣS = Nx + yΣT
ΣST = xΣT + yΣT 2
Where S is the sales; T is the year number, N= number of years.

3. Times series analysis:

Time series forecasting is the use of a model to predict future values based on previously observed values.
The first step in making estimates for the future consists of gathering information from the past. In this
connection one usually deals with statistical data which are collected, observed or recorded at successive
intervals of time. Such data are generally referred to as time series. Thus when we observe numerical data
at different points of time the set of observations is known as time series. It may be noted that any or all
of the components may be present in any particular series. The components are Secular trend(Long term
trend), Seasonal trend , Cyclical trend (periods in the business cycle such as prosperity, decline,
depression, improvement), Irregular trend(also called as erratic or accidental or random variations in
business). From the following equation future sales can be measured. The constants T,S,C,I. are
calculated from past data.
Y = Future sales
T = Secular trend
Y=T+ S+ C+ I S = Seasonal trend
C = Cyclical trend
4. Moving average method: I = Irregular trend

This method considers that the average of past events determine the future events. As the name itself
suggests, under this method, the average keeps on moving depending up on the number of years selected.
This method is easy to compute.

5. Exponential Smoothing

It is the most popular technique used for short-run forecasts. Unlike in moving average method, in this
method, all time periods are given varying weights. Recent values are given higher weights and distance
past values are given lower values. The reason is that the recent past reflects more in nearest future.

The following formula is used for exponential smoothing.

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If α is higher, higher weight is given to the most recent information. α is calculated on the basis of
past data. If there were fluctuations in past data, the α value is high.
C. Barometric techniques:

Under the barometric technique, one set of data is used to predict another set. In other words, to forecast
demand for a particular product or service, use some other relevant indicator (which is known as
barometer) of future demand. Ex: The demand for cable TV may be linked to the number of new houses
occupied in a given area or demand for new houses in a particular area.

D. Correlation and Regression method:

Correlation and regression methods are statistical techniques. Correlation describes the degree of
association between two variables such as sales and advertisement expenditure. When the two variables
tend to change together, then they are said to be correlated. The extent to which they are correlated is
measured by correlation coefficient. Of these two variables, one is dependent variable and the other is
independent. If the high values of one variable are associated with the high values of another, they are
said to be positively correlated. Similarly, if the high values of one variable are associated with the low
values of another, then they are said to be negatively correlated. Correlation coefficient ranges between
+1 and -1. When the correlation coefficient is zero, it indicates that the variables under study are not
related at all.

In regression analysis, an equation is estimated which ‗best fits‘ in the sets of observations of dependent
variables and independent variables. The best estimate if the true underlying relationship between these
variables is thus generated. The dependent (unknown) variable is then forecast based on this estimated
equation, for a given value of the independent (known) variable. With the help of the following equation
future sales can be calculated. Y = Dependent variable
X = Independent variable
Y = a + bX a & b = Constants

a & b values can be calculated with the following equations.

ΣY = Na + bΣX
ΣXY = aΣX + bΣX 2
III. Other Methods
a) Experts opinion:

Well-informed persons are called experts. Experts constitute yet another source of information. These
persons are generally the outside experts and they do not have any vested interests in the results of a
particular survey.

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b) Test marketing:

It is likely that opinions given by buyers, salesmen or other experts may be, at times, misleading. This is
the reason why most of the manufacturers favour to test their product or service in a limited market as
test-run before they launch their products nationwide. Based on the results of test marketing, valuable
lessons can be learnt on how consumers react to the given product and necessary changes can be
introduced to gain wider acceptability. To forecast the sales of a new product or the likely sales of an
established product in a new channel of distribution or territory, it is customary to find test marketing in
practice.

c) Controlled experiments:

Controlled experiments refer to such exercises where some of the major determinants of demand are
manipulated to suit to the customers with different tastes and preferences, income groups, and such
others. It is further assumed that all other factors remain the same. In this method, the product is
introduced with different packages, different prices in different markets or same markets to assess which
combination appeals to the customer most.

d) Judgment approach:

When none of the above methods are directly related to the given products or services, the management
has no alternative other than using its own judgment.

SUPPLY

In economics, we have two forces: the producer, who makes things, and the consumer, who buys
them. Supply is the producer's willingness and ability to supply a given good at various price points,
holding all else constant. An increase in price will increase producers' revenues, so they'll be willing to
supply more; a decrease in price will reduce revenues, and so producers will supply less.

LAW OF SUPPLY

Definition: 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.

In the Words of Dooley, ―The law of supply states that other things remaining the same, higher the prices
the greater the quantity supplied and lower the prices the smaller the quantity supplied‖.

Assumption of the Law :

1. It is assumed that incomes of buyers and sellers remain constant.
2. It is assumed that the tastes and preferences of buyers and sellers remain constant.
3. Cost of all the factors of production is also assumed to be constant.
4. It is also assumed that the level of technology remains constant.
5. It is also assumed that the commodity is divisible.
6. Law of supply states only a static situation.

Description: Law of supply depicts the producer behavior at the time of changes in the prices of goods

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and services. When the price of a good rises, the supplier increases the supply in order to earn a profit
because of higher prices.

Price (Rs) Quantity Supplied

2 0
4 3
6 6
8 9

The above 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 P4, suppliers were supplying Q3 quantity. As
the price starts rising, the quantity supplied also starts rising.

SUPPLY FUNCTION

The supply function is the mathematical expression of the relationship between supply and those factors
that affect the willingness and ability of a supplier to offer goods for sale.

SX = Supply of goods X

PX = Price of goods X

PF = Factor input employed (used) for production.

· Raw material
· Human resources
· Machinery

O = Factors outside economic sphere.

T = Technology.

t = Taxes.

S = Subsidies

There is a functional (direct) relationship between price and supply.

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DETERMINANTS OF SUPPLY

1. Number of Sellers

Greater the number of sellers, greater will be the quantity of a product or service supplied in a market and
vice versa. Thus increase in number of sellers will increase supply and shift the supply curve rightwards
whereas decrease in number of sellers will decrease the supply and shift the supply curve leftwards. For
example, when more firms enter an industry, the number of sellers increases thus increasing the supply.

2. Prices of Resources

Increase in resource prices increases the production costs thus shrinking profits and vice versa. Since
profit is a major incentive for producers to supply goods and services, increase in profits increases the
supply and decrease in profits reduces the supply. In other words supply is indirectly proportional to
resource prices. Increase in resource prices reduces the supply and the supply curve is shifted leftwards
whereas decrease in resource prices increases the supply and the supply curve is shifted rightwards.

3. Taxes and Subsidies

Taxes reduces profits, therefore increase in taxes reduce supply whereas decrease in taxes increase
supply. Subsidies reduce the burden of production costs on suppliers, thus increasing the profits.
Therefore increase in subsidies increase supply and decrease in subsidies decrease supply.

4. Technology

Improvement in technology enables more efficient production of goods and services. Thus reducing the
production costs and increasing the profits. As a result supply is increased and supply curve is shifted
rightwards. Since technology in general rarely deteriorates, therefore it is needless to say that
deterioration of technology reduces supply.

5. Suppliers' Expectations

Change in expectations of suppliers about future price of a product or service may affect their current
supply. However, unlike other determinants of supply, the effect of suppliers' expectations on supply is
difficult to generalize. For example when farmers suspect the future price of a crop to increase, they will
withhold their agricultural produce to benefit from higher price thus reducing the supply. In case of
manufacturers, when they expect the future price to increase, they will employ more resources to increase
their output and this may increase current supply as well.

6. Prices of Related Products

Firms which are able to manufacture related products (such as air conditioners and refrigerators) will the
shift their production to a product the price of which increases substantially related to other related
product(s) thus causing a reduction of supply of the products which were produced before. For example a
firm which produces cricket bats is usually able to manufacture hockey sticks as well. When the price of

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hockey sticks increases, the firm will produce more hockey sticks and less cricket bats. As a result, the
supply of cricket bats will be reduced.

7. Prices of Joint Products

When two or more goods are produced in a joint process and the price of any of the product increases, the
supply of all the joint products will be increased and vice versa. For example, increase in price of meat
will increase the supply of leather.

ADDITIONAL IMPORTANT INFORMATION

TYPES OF DEMAND

1. Consumer goods demand Vs Producer goods demand

Consumer goods are those goods which satisfy the human needs. These goods are available for
ultimate consumption and give direct satisfaction. Ex: Rice, Bread, Apple etc.
Producer goods are those goods which are used to produce consumer goods and these goods give
indirect satisfaction to consumers.
2. Autonomous demand Vs Derived demand
The direct demand for goods and services is called as autonomous demand. It is independent demand.
Ex: The demand for college is autonomous demand.
The demand for goods whose demand depends upon the demand of main goods is called as derived
demand. Ex: The demand for canteen food is derived demand. Because, if there is no demand for
college, there will be no demand for canteen food.
3. Durable goods demand Vs Perishable goods demand
Durable goods are those goods which give services for longer period. Ex: TV. Computer, Furniture
etc.
Perishable goods are those goods whose life may be in hours or days. Ex: Milk, Bread, Fish etc.
4. Firm demand Vs Industry demand
The firm is a single business unit. The quantity of goods demanded by a single firm is called firm
demand.
Industry refers to the group of companies producing similar goods. The quantity demanded by industry
(all companies) is called industry demand. Ex: Demand for computers by one college is called firm
demand. Demand for computers by all colleges is called industry demand.
5. Short – run demand Vs Long – run demand
Short – run refers to shorter duration. In short-run, additional changes cannot be initiated in terms of
expansion of the business. In this period, the firm can adjust their production by changing variable
factors such as materials and labor. Fixed factors such as capital, technology etc, cannot be changed.
The long-run is a period relatively long so that all factors of production including capital can be
adjusted to meet the market requirements.
6. New demand Vs Replacement demand
New demand refers to the demand for the new products and it is the addition to the existing stock.
In replacement demand, the item is purchased to maintain the asset in good condition.
Ex: The demand for car is new demand and the demand for spare part is called replacement demand.
7. Total Market demand Vs Segment Market demand

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