Law of Demand

Namrata K
Demand indicates how much of a product
consumers are both willing and able to buy
at each possible price during a given
period, other things remaining constant.

Demand for a commodity refers to desire to

buy a commodity backed by the desire and
willingness to spend.
 Willingness to Ability to
purchase at various purchase at
prices during a various prices
given period of time during a given
period of time.
Demand is the ability and willingness to buy
specific quantity of good at an alternative prices
in a given time period ceteris paribus.
-[Link]

•Quantity demanded is the amount (number of units) of a

product that a household would buy in a given time period
if it could buy all it wanted at the current market price.
Determinants of Demand
•The price of the product in question.
•The income available to the household.
•The prices of related products available to the
household.
•The household’s tastes and preferences.
•The household’s expectations about future income,
wealth, and prices.
•The household’s amount of accumulated wealth.
• Size and composition of population
•The price of the product with other things constant demand varies
indirectly, which happens due to income and substitution effect.

• Price of related commodities i.e. complementary goods moves in different

direction while substitutes move in same direction. Like price of pen goes
down, demand of pen increases and so as demand for ink also increases.
While as in case of substitute products (If a rise (or fall) in the price of one
commodity leads to an increase (or decline) in the demand for another commodity) ,
when price of tea decreases demand for coffee decreases.
•The level of income of household increases the quantity demanded increases. It has
an exception of inferior goods as level of income increases the quantity demanded
decreases. (like unbranded items).

• Tastes: When there is a change in the tastes of consumers in favour of a

commodity, say due to fashion, its demand will rise, with no change in its price, in the
prices of other commodities, and in the income of the consumer. On the other hand, a
change in tastes against a commodity leads to a fall in its demand, other factors
affecting demand remaining unchanged.
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:

1. Individual Demand Schedule

2. Market Demand Schedule
The above table shows that when the price of
say, orange, is Rs. 5 per unit, 100 units are de-
manded. If the price falls to Rs.4, the demand
increases to 200 units. Similarly, when the price
declines to Re.1, the demand increases to 600
units. On the contrary, as the price increases
from Re. 1, the demand continues to decline
from 600 units.

In the figure, point P of the demand curve DD1

shows demand for 100 units at the Rs. 5. As the
price falls to Rs. 4, Rs. 3, Rs. 2 and Re. 1, the
demand rises to 200, 300, 400 and 600 units
respectively. This is clear from points Q, R, S,
and T. Thus, the demand curve DD1 shows
increase in demand of orange when its price
falls. This indicates the inverse relation
between price and demand.
Demand Function:
A function can be defined as a mathematical expression that states a
relationship between two or more variables containing cause and effect
relationship. Similarly, demand function refers to the relationship between
the quantity demanded (dependent variable) and the determinants of
demand for a product (independent variables). In other words, demand
function states the influence of various factors of demand, such as price,
customer’s income and habits, and standard of living, on the demand of a
product.

In the short run, the demand function states the relationship between
the aggregate demand of a product and the price of the product, while
keeping other determinants of demand at constant.
Demand Function:
Dx = a – b (Px)

Where a = constant (represents total demand at zero price)

b = ∆D/∆P (constant, which represents the change in Dx produced by Px)

On the other hand, in the long run, demand function shows a relationship
between the aggregate demand of a product and a number of determinants of
demand, such as price, consumer’s income, standard of living, and price of
substitutes.
The law of demand states that all conditions being equal, as the price of a
product increases, the demand for that product will decrease. Consequently,
as the price of a product decreases, the demand for that product will increase.
For instance, a consumer may buy two dozens of bananas if the price is
Rs.50. However, if the price increases to Rs.70, then the same consumer
may restrict the purchase to one dozen. Hence, the demand for the bananas,
in this case, was reduced by one dozen. Therefore, the law of demand
defines an inverse relationship between the price and quantity factors of a
product.
Thus, there exists an inverse relationship between price and quantity
demanded of a commodity. The functional relationship between price and
quantity demanded can be represented as Dx = f(Px).
According to Robertson, “Other things being equal, the lower the price at which a
thing is offered, the more a man will be prepared to buy it.”

In the words of Marshall, “The greater the amount to be sold, the smaller must be
the price at which it is offered in order that it may find purchasers; or in other
words, the amount demanded increases with a fall in price and diminishes with a
rise in price.”

According to Ferguson, “Law of Demand, the quantity demanded varies inversely

with price.”

D = f(P)

Where D= Demand, P= Price, f = Functional Relationship

In the law of demand, other factors of demand (except price) should be kept constant as
the demand is subject to various influences.
The graph shows the demand curve shifts from D1 to D2, thereby
demonstrating the inverse relationship between the price of a
product and the quantity demanded.
 The demand curve slopes up from left to right, i.e., it has a positive slope.
Under certain circumstances, consumers buy more when the price rises .
Many causes are attributed to an upward sloping demand curve.
Exceptions to the Law (i) War:If shortage is feared in anticipation of war, people may start buying
of Demand: for building stocks or for hoarding even when the price rises.

(ii) Depression: During a depression, the prices of commodities are very low
and the demand for them is also less. This is because of the lack of
purchasing power with consumers.

(iii) Ignorance or Brand Loyalty Effect: Consumers buy more at a higher

price under the influence of the “ignorance effect”, due to deceptive packing,
label, etc. or creating love for the brand and pride in possession.

(iv) Speculation:Marshall mentions speculation as one of the important

exceptions to the downward sloping demand curve. When a group unloads a
great quantity of a thing on to the market, the price falls and the other group
begins buying it. When it has raised the price of the thing, it arranges to sell a
great deal quietly. Thus when price rises, demand also increases.
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.

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.

Demonstration Effect: If consumers are affected by the principle of conspicuous

consumption, they will like to buy more of those commodities which confer distinction
on the possessor, when their prices rise.
Exceptions to the Law of Demand
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. And 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.

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.
Exceptions to the Law of 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.

The demand for the commodity increases with the rise in income
and vice versa, Thus, the income demand curve ID has a positive
slope. But this slope is in the case of normal goods.
 Cross Demand:
Let us now take the case of related goods and how the change in the price of one
affects the demand of the other. This is known as cross demand and is written as D = f (pr).
Related goods are of two types, substitutes and complementary. In the case of substitute or
competitive goods, a rise in the price of one good A raises the demand for the other good B, “the
price of В remaining the same.
The opposite holds in the case of a fall in the price of A when the demand
for В falls.

In case the two goods are complementary or jointly demanded, a rise in the price of one good A
will bring a fall in the demand for good B. Conversely, a fall in the price of A will raise the
demand for B.
Causes of Downward Sloping of Demand Curve

● Law of diminishing the marginal utility

● Substitution effect
● Income effect
● New buyers
● Old buyers
1. Law of diminishing the marginal utility
The law of diminishing marginal utility states that with each increasing quantity of the
commodity, its marginal utility declines.

For example, when a person is very hungry the first chapatti that he eats will give him
the most satisfaction. As he will consume more chapattis, his level of satisfaction will
diminish.

Thus, when the quantity of goods is more, the marginal utility of the commodity is less.
Thus, the consumer is not willing to pay more price for the commodity and its demand
will decline.

Also, when the price of the commodity is low, its demand increases.

Hence, the demand curve slopes downwards from left to right.

2. Substitution effect
Let us understand this with an example. Tea and coffee are substitute goods. If
the price of tea rises, consumers will shift to coffee.

This will decrease the demand for tea and increase the demand for coffee. Thus,
the demand curve of tea will slope downwards.

3. Income effect
Income effect refers to the change in the real income or the purchasing power of
the consumers. When the price level falls the purchasing power of the
consumer’s increases and they buy more goods.

Similarly, when the price level rises, the purchasing power of the consumer’s
decreases and they buy less quantity of goods.
4. New buyers
Due to the fall in the prices of a commodity new buyers get attracted towards it
and buy it. Thus, this increases the demand for the commodity.

5. Old buyers
When the prices of the goods fall the old buyers tend to buy more goods than
usual thereby increasing its demand. This causes the downward sloping of
demand curve.
The Law of demand is based on the Law of Diminishing Marginal Utility. According to this
law, when a consumer buys more units of a commodity, the marginal utility of the
commodity continues to decline. Therefore, the consumer will buy more units of that
commodity only when its price falls. This proves that the demand will be more at a lower
price and it will be lesser at a higher price. That is why the demand curve is downward
sloping.

2) When the price of a commodity falls new consumers start consuming it, as a result the
demand increases .On the contrary, with the increase in the price of the product, many
consumers will either reduce or stop its consumption. This will result in the fall of demand.
Thus, due to the price effect consumers consume more or less of a commodity, the demand
curve slopes downward.

3) When the price of a commodity falls the real income of the consumers increases because he
has to spend less in order to buy the same quantity. On the contrary, with rise in the price of
the commodity, the real income of the consumer falls. This is called the income effect. With
fall in price of the commodity the consumer buys more of it and also spends a portion of the
4) The other effect of a change in the price of a commodity is the substitution effect. With
the fall in the price of a commodity, the price of substitute remaining the same, consumers
will buy more of this commodity rather than the substitute. As a result the demand will
increase .On the contrary, with the rise in the price of the commodity under consideration its
demand will fall, given the price of the substitute. For instance, with the fall in price of tea,
the price of coffee remaining unchanged the demand for tea will increase. On the contrary
with the increase in the price of tea the demand for tea will fall and the demand for coffee
will increase.

5) There are different uses of certain commodities and services that are responsible for the
negative slope of the demand curve. With the increase in the price of such products, they
will be used only for more important uses and their demand will fall. On the contrary, with
the fall in price, they will be put to various uses and their demand will rise. For instance ,
with the increase in electricity charges ,power will be used primarily for domestic lighting ,
but if the charges are reduced , people will use power for cooking , heaters etc
6) There are different income groups in every society but a majority is in the low income
group. Ordinary people buy more when price falls and less when price rises. The rich do
not have any effect on the demand curve because they are capable of buying the same
quantity even at a higher price.

7) There is a tendency to satisfy unsatisfied wants. Each person has some unsatisfied
wants. When the price of a good such as apple falls, the demand for it will increase as
people who were earlier not able to buy apples can now buy. Due to this behaviour of
human beings, the demand curve slopes downward .
Movement of the Demand Curve
When there is a change in the quantity demanded of a particular commodity, because of a
change in price, with other factors remaining constant, there is a movement of the quantity
demanded along the same curve.

The important aspect to remember is that other factors like the consumer’s income and
tastes along with the prices of other goods, etc. remain constant and only the price of the
commodity changes.

In such a scenario, the change in price affects the quantity demanded but the demand
follows the same curve as before the price changes. This is Movement of the Demand
Curve. The movement can occur either in an upward or downward direction along the
demand curve.

We know that if all other factors remain constant, then an increase in the price of a
commodity decreases its demand. Also, a decrease in the price increases the demand. So,
what happens to 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.
The shift of the Demand Curve
When there is a change in the quantity demanded of a
particular commodity, at each possible price, due to a
change in one or more other factors, the demand curve
shifts. The important aspect to remember is that other
factors like the consumer’s income and tastes along
with the prices of other goods, etc., which were
expected to remain constant, changed.

In such a scenario, the change in price, along with a

change in one/more other factors, affects the quantity
demanded. Therefore, the demand follows a different
curve for every price change.

This is the Shift of the Demand Curve. The demand

curve can shift either to the left or the right, depending
on the factors affecting it.
A shift in the demand curve displays changes in
demand at each possible price, owing to change in one
or more non-price determinants such as the price of
related goods, income, taste & preferences and
expectations of the consumer. Whenever there is a shift
in the demand curve, there is a shift in the equilibrium
point also. The demand curve shifts in any of the two
sides:

● Rightward Shift: It represents an increase in

demand, due to the favourable change in non-price
variables, at the same price.
● Leftward Shift: This is an indicator of a decrease
in demand when the price remains constant but
owing to unfavourable changes in determinants
The shift of the 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 increases.
● The price of a complement good decreased.
● A rise in incomes (assuming the good is a
normal good, with positive YED)
● Seasonal factors.
Key Differences Between Movement and Shift in Demand Curve

1. When the commodity experience change in both the quantity demanded and
price, causing the curve to move in a specific direction, it is known as
movement in demand curve. On the other hand, When, the price of the
commodity remains constant but there is a change in quantity demanded due
to some other factors, causing the curve to shift in a particular side, it is
known as shift in demand curve.
2. Movement in demand curve, occurs along the curve, whereas, the shift in
demand curve changes its position due to the change in the original demand
relationship.
3. Movement along a demand curve takes place when the changes in quantity demanded are
associated with the changes in the price of the commodity. On the contrary, a shift in
demand curve occurs due to the changes in the determinants other than price i.e. things that
determine buyer’s demand for a good rather than good’s price such as Income, Taste,
Expectation, Population, Price of related goods, etc.

4. Movement along demand curve is an indicator of overall change in the quantity

demanded. As against this, a shift in the demand curve represents a change in the demand
for the commodity.

5. Movement of the demand curve can either be upward or downward, wherein the upward
movement shows a contraction in demand, while downward movement shows expansion in
demand. Unlike, shift in the demand curve, can either be rightward or leftward. A rightward
shift in the demand curve shows an increase in the demand, whereas a leftward shift
indicates a decrease in demand.
 BASIS FOR
MOVEMENT IN DEMAND CURVE SHIFT IN DEMAND CURVE
COMPARISON

Meaning Movement in the demand curve is The shift in the demand curve is when,
when the commodity experience the price of the commodity remains
change in both the quantity demanded constant, but there is a change in
and price, causing the curve to move in quantity demanded due to some other
a specific direction. factors, causing the curve to shift to a
particular side.
Basis Movement along Demand Curve Shift in Demand Curve

What is it? Change along the curve. Change in the position of the curve.

Determinant Price Non-price

Indicates Change in Quantity Demanded Change in Demand

Result Demand Curve will move upward or Demand Curve will shift rightward or
downward. leftward.
Elasticity is a concept in economics that talks about the effect of change in one economic
variable on the other.

Elasticity of Demand, on the other hand, specifically measures the effect of change in an
economic variable on the quantity demanded of a product. There are several factors that
affect the quantity demanded for a product such as the income levels of people, price of the
product, price of other products in the segment, and various others.

Demand for a good is said to be “elastic” if a small change in price causes people to
demand a lot more or a lot less of the good. Demand for a good is “inelastic” if a small
change in prices causes people to make no change or almost no change in how much they
demand of that good.

On the basis of different factors affecting the quantity demanded for a product, elasticity of
demand is categorized into mainly three categories: Price, Income & Cross elasticity.
“Elasticity of demand is the responsiveness of the quantity demanded of a
commodity to changes in one of the variables on which demand depends. In other
words, it is the percentage change in quantity demanded divided by the percentage
in one of the variables on which demand depends.”

The variables on which demand can depend on are:

● Price of the commodity

● Prices of related commodities

● Consumer’s income, etc.
Price Elasticity
The price elasticity of demand is the response of the quantity demanded to change in the
price of a commodity. It is assumed that the consumer’s income, tastes, and prices of all
other goods are steady. It is measured as a percentage change in the quantity demanded
divided by the percentage change in price. Therefore, Any change in the price of a
commodity, whether it’s a decrease or increase, affects the quantity demanded for a
product. For example, when there is a rise in the prices of pens, the quantity demanded goes
down.

This measure of responsiveness of quantity demanded when there is a change in price is

termed as the Price Elasticity of Demand (PED). The mathematical formula given to
calculate the Price Elasticity of Demand is:

PED = % Change in Quantity Demanded % / Change in Price

Price Elasticity
It is measured as a percentage change in the quantity demanded divided by the
percentage change in price. This measure of responsiveness of quantity demanded
when there is a change in price is termed as the Price Elasticity of Demand (PED). The
mathematical formula given to calculate the Price Elasticity of Demand is:
Income Elasticity of Demand (YED)

The income levels of consumers play an important role in the quantity demanded for a
product. The Income Elasticity of Demand, also represented by YED, refers to the sensitivity
of quantity demanded for a certain good to a change in real income (the income earned by
an individual after accounting for inflation) of the consumers who buy this good, keeping all
other things constant. Degree of responsiveness of quantity demanded to change in income
only. It is positive when quantity demanded increases with increase in income while negative
if it decreases with increase in income. This is the case in inferior goods.

The income elasticity of demand is the degree of responsiveness of the quantity demanded to a
change in the consumer’s income. Symbolically,

E (I) = Percentage change in quantity demanded / Percentage change in income

Cross Elasticity (XED)
The cross elasticity of demand of a commodity X for another commodity Y, is the change in
demand of commodity X due to a change in the price of commodity Y. Symbolically,

E c = Δqx / Δ py × py / qx

The quantity demanded for a product does not only depend on itself but rather, there is an
effect even when prices of other goods change. Cross Elasticity of Demand, is an economic
concept that measures the sensitiveness of quantity demanded of a good (X) when there is a
change in the price of another good (Y),

XED = (% Change in Quantity Demanded for one good (X)%) / (Change in Price of another
Good (Y))
The result obtained for a substitute good would always come out to be positive as whenever
there is a rise in the price of a good, the demand for its substitute rises. Whereas, the result will
be negative for a complementary good.
On the basis of the amount of fluctuation shown in the quantity demanded of a good, it
is termed as ‘elastic’, ‘inelastic’, and ‘unitary’.

● An elastic demand is one that shows a larger fluctuation in the quantity demanded
of a product, in response to even a little change in another economic variable. For
example, if there is a hike of $0.5 in the price of a cup of coffee, there are very high
chances of a steep decline in the quantity demanded.

● An inelastic demand is one that shows a very little fluctuation in the quantity
demanded with respect to a change in another economic variable. An example of
this can be petrol or diesel.

● Unitary elasticity is one in which the fluctuation in one variable and quantity
demanded is equal.
In other words, it shows how much change in price will cause how much change in demand.
The formula to calculate the price elasticity of demand is:

EP = Proportionate change in Demand / Proportionate change in Price

= Dq /dp x P / q

Types of Price Elasticity of Demand

● Perfectly elastic demand

● Perfectly inelastic demand
● Relatively elastic demand
● Relatively inelastic demand
● Unitary elastic demand
 ● 1. Perfectly elastic demand
Perfectly elastic demand is when the price is constant but there is a change in the
demand i.e. increase or decrease of a commodity. Thus, the demand curve is parallel to
the X-axis. Here, EP = ∞

When there is a sharp rise or fall due to a change in the price of the commodity, it is
said to be perfectly elastic demand. In perfectly elastic demand, even a small rise in
price can result in a fall in demand of the good to zero, whereas a small decline in the
price can increase the demand to infinity. However, perfectly elastic demand is a total
theoretical concept and doesn’t find a real application, unless the market is perfectly
competitive and the product is homogenous.

The degree of elasticity of demand helps to define the slope and shape of the demand
curve. Therefore, we can determine the elasticity of demand by looking at the slope of
the demand curve. A Flatter curve will represent a higher elastic demand. Thus, the
slope of the demand curve for a perfectly elastic demand is horizontal.
In perfectly elastic demand, the demand curve is represented as a horizontal straight line, it
can be interpreted that at price OP, demand is infinite; however, a slight rise in price would result in
fall in demand to zero. It can also be interpreted that at price P consumers are ready to buy as much
quantity of the product as they want. However, a small rise in price would resist consumers to buy
the product.
Though, perfectly elastic demand is a theoretical concept and cannot be applied in the real situation.
However, applicable in cases, such as perfectly competitive market and homogeneity products. In
such cases, the demand for a product of an organization is assumed to be perfectly elastic. From an
organization’s point of view, in a perfectly elastic demand situation, the organization can sell as
much as much as it wants as consumers are ready to purchase a large quantity of product. However,
a slight increase in price would stop the demand.
 ● 2. Perfectly inelastic demand
Perfectly inelastic demand is when the demand is constant or there is no change in the
demand of a commodity even if the price changes i.e. increases or decreases. Thus, the
demand curve is parallel to the Y-axis. Demand for salt is an example of perfectly inelastic
demand. Here, EP = 0

A perfectly inelastic demand is the one in which there is no change measured against a
price change. Like perfectly elastic demand, the concept of perfectly inelastic is also a
theoretical concept and doesn’t find a practical application. However, the demand for
necessity goods can be the closest example of perfectly inelastic demand.

The numerical value obtained from the PED formula comes out as zero for a perfectly
inelastic demand. The demand curve for a perfectly inelastic demand is a vertical line i.e. the
slope of the curve is zero.
In case of perfectly inelastic demand, demand curve is represented as a straight
vertical line, It can be interpreted that the movement in price from OP1 to OP2 and OP2
to OP3 does not show any change in the demand of a product (OQ). The demand
remains constant for any value of price. Perfectly inelastic demand is a theoretical
concept and cannot be applied in a practical situation. However, in case of essential
goods, such as salt, the demand does not change with change in price. Therefore, the
demand for essential goods is perfectly inelastic.
3. Relatively elastic demand
Relatively elastic demand is when the proportionate change in demand is more than the
proportionate change in the price. In other words, this means that a little change in the
price shall cause more change in demand. Thus, the demand curve slopes downward from
left to right. An example of this is luxury goods.

Here, EP ˃ 1

Relatively elastic demand refers to the demand when the proportionate change in the
demand is greater than the proportionate change in the price of the good. The
numerical value of relatively elastic demand ranges between one to infinity. In relatively
elastic demand, if the price of a good increases by 25% then the demand for the product
will necessarily fall by more than 25%. Unlike the aforementioned types of demand,
relatively elastic demand has a practical application as many goods respond in the same
manner when there is a price change. The demand curve of relatively elastic demand is
gradually sloping.
when the proportionate change in the demand is greater than the proportionate change
in the price of the good. The numerical value of relatively elastic demand ranges
between one to infinity. In relatively elastic demand, if the price of a good decreases by
25% then the demand for the product will necessarily increase by 40% ([Link] than
25%.)
4. Relatively inelastic demand
Relatively inelastic demand is when the proportionate change in demand is less than the
proportionate change in the price. In other words, this means that more change in price shall
cause less change in demand. Thus, the demand curve slopes downward from left to right but
is steeper. An example of this is the necessary goods.

Here, EP ˂ 1

when the percentage change produced in demand is less than the percentage change in the
price of a product. For example, if the price of a product increases by 30% and the demand
for the product decreases only by 10%, then the demand would be called relatively inelastic.
The numerical value of relatively elastic demand ranges between zero to one (ep<1).
Marshall has termed relatively inelastic demand as elasticity being less than unity. Relatively
inelastic demand has a practical application as demand for many of products respond in the same
manner with respect to change in their prices.
In a relatively inelastic demand, the proportionate change in the quantity demanded for a
product is always less than the proportionate change in the price.

For example, if the price of a good goes down by 10%, the proportionate change in its demand
will not go beyond 9.9..%, if it reaches 10% then it would be called unitary elastic demand.
The numerical value of relatively inelastic demand always comes out as less than 1 and the
demand curve is rapidly sloping for such type of demand.
5. Unitary elastic demand
Unitary elastic demand is when the proportionate change in demand is equal to the
proportionate change in price. In other words, it means that the change in demand is the
same as the change in price it may increase or decrease. Thus, the demand curve slopes
downward from left to right but it is a rectangular hyperbola. An example of this is
comfort goods. Here, EP = 1

When the proportionate change in demand produces the same change in the price of the
product, the demand is referred as unitary elastic demand. The numerical value for unitary
elastic demand is equal to one (ep=1). The demand curve for unitary elastic demand is
represented as a rectangular hyperbola,
 Determinants Of Price Elasticity Of Demand

● 1. Nature of the commodity: The demand for necessities is inelastic because

the demand does not change much with a change in price. But the demand for
luxuries is elastic in nature.
● 2. Extent of use: A commodity having a variety of uses has a comparatively
elastic demand.
● 3. Range of substitutes: The commodity which has more number of substitutes
has relatively elastic demand. A commodity with fewer substitutes has
relatively inelastic demand.
● 4. Income level: People with high incomes are less affected by price changes
than people with low incomes.
● 5. Proportion of income spent on the commodity: When a small part of
income is spent on the commodity, the price change does not affect the demand
therefore the demand is inelastic in nature.
 Determinants Of Price Elasticity Of Demand

● 6. Urgency of demand / postponement of purchase: The demand for certain

commodities are highly inelastic because you cannot postpone its purchase. For
example medicines for any sickness should be purchased and consumed
immediately.
● 7. Durability of a commodity: If the commodity is durable then it is used it for
a long period. Therefore elasticity of demand is high. Price changes highly
influences the demand for durables in the market.
● 8. Purchase frequency of a product/ recurrence of demand: The demand for
frequently purchased goods are highly elastic than rarely purchased goods.
● 9. Time: In the short run demand will be less elastic but in the long run the
demand for commodities are more elastic.
 Importance of elasticity of demand

● Business decision: This concept helps the seller in deciding the price of the
commodity. He fixes less price for the product that has more elastic demand
and vice-versa.
● Monopolist: Where the elasticity of demand is less, the monopolist fixes more
price of the commodity and vice-versa.
● Determination of factor price: Factors that have elastic demand also have
higher prices and vice-versa.
● International trade: A country whose demand for exports is inelastic, it
enjoys favorable terms of trade. On the other hand, if the demand for exports is
more elastic than imports, they shall have unfavorable terms of trade.
● Government: It helps the government to decide to declare which industries as
public utilities and the take them over and operate them.
THANK YOU
 Demand Forecasting
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 facts and events related to forecasting should be
considered.

Demand plays a vital role in the decision making of a business. In competitive market conditions, there
is a need to take correct decision and make planning for future events related to business like a sale,
production, etc. The effectiveness of a decision taken by business managers depends upon the accuracy
of the decision taken by them. Demand forecasting reduces risk related to business activities and helps
it to take efficient decisions.

Demand forecasting is an estimate of sales during a specified future period based on

proposed marketing plan and a set of particular uncontrollable and competitive forces.

Cundiff and Still

Level of forecasting
Demand forecasting can be done at the
firm level, industry level, or economy
level. At the firm level, the demand is
forecasted for the products and services
of an individual organisation in the future.
At the industry level, the collective
demand for the products and services of
all organisations in a particular industry is
forecasted. On the other hand, at the
economy level, the aggregate demand for
products and services in the economy as
a whole is anticipated.
 Time period involved Nature of products

Short-term forecasting: It involves Consumer goods: The goods that are meant for
anticipating demand for a period not final consumption by end users are called
exceeding one year. It is focused on the short consumer goods. These goods have a direct
term decisions (for example, arranging demand. Generally, demand forecasting for these
finance, formulating production policy, making goods is done while introducing a new product or
promotional strategies, etc.) of an replacing the existing product with an improved
organisation. one.

Capital goods: These goods are required to

Long-term forecasting: It involves predicting produce consumer goods; for example, raw
demand for a period of 5-7 years and may material. Thus, these goods have a derived
extend for a period of 10 to 20 years. It is demand. The demand forecasting of capital
focused on the long-term decisions (for goods depends on the demand for consumer
example, deciding the production capacity, goods. For example, prediction of higher demand
replacing machinery, etc.) of an organisation. for consumer goods would result in the
anticipation of higher demand for capital goods
too.
a. Formulating production policy: Helps in covering the gap between the demand and
supply of the product. The demand forecasting helps in estimating the requirement of raw
material in future, so that the regular supply of raw material can be maintained. It further
helps in maximum utilization of resources as operations are planned according to forecasts.
Similarly, human resource requirements are easily met with the help of demand forecasting.

b. Formulating price policy: Refers to one of the most important objectives of demand
forecasting. An organization sets prices of its products according to their demand. For
example, if an economy enters into depression or recession phase, the demand for products
falls. In such a case, the organization sets low prices of its products.

c. Controlling sales: Helps in setting sales targets, which act as a basis for evaluating sales
performance. An organization make demand forecasts for different regions and fix sales
targets for each region accordingly.

d. Arranging finance: Implies that the financial requirements of the enterprise are
estimated with the help of demand forecasting. This helps in ensuring proper liquidity within
the organization.
Long term Objectives

a. Deciding the production capacity:

Implies that with the help of demand forecasting, an organization can determine the
size of the plant required for production. The size of the plant should conform to the
sales requirement of the organization.

b. Planning long-term activities:

Implies that demand forecasting helps in planning for long term. For example, if the
forecasted demand for the organization’s products is high, then it may plan to invest in
various expansion and development projects in the long term.
 Factors influencing demand forecasting
Prevailing Economic Conditions
Demand forecasting can be affected by the changing price
levels, national and per capita income, consumption pattern of
consumers, saving and investment practices, employment
level, etc. of an economy. Thus, it is important that existing
economic conditions should be assessed in order to align
demand forecasting with current economic trends.

Existing conditions of the Industry

The assessment of demand for an organisation’s products and
services is also affected by the overall conditions of the industry in
which the organisation operates. For eg, concentration of an
industry increases the level of competition, which directly affects
the demand for products and services of different organisations in
the industry. In such a case, demand forecasted by organisations
may falter.
Existing Condition of an Organization

Apart from industry conditions, the internal state of an organisation also affects demand
forecasting. Within the organisation, demand forecasting is affected by various factors, such
as plant capacity, product quality, product price, advertising and distribution policies, financial
policies, etc.

Prevailing Market Conditions

in market conditions, such as change in the prices of goods; change in consumers’

expectations, tastes and preferences; change in the prices of related goods; and change in
the income level of consumers also influence the demand for an organisation’s products and
services.

Sociological factors, such as size and density of population, age group, size of family, family
life cycle, education level, family income, social awareness, etc. largely impact demand
forecasts of an organisation. For example, markets having a large population of youngsters
would have a higher demand for lifestyle products, electronic gadgets, etc.
Psychological Conditions
Psychological factors, such as changes in consumer attitude, habits, fashion, lifestyle, perception,
cultural and religious beliefs, etc. affect demand forecast of an organisation to a large extent.

Competitive Conditions
A market consists of several organisations offering similar products. This gives rise to competition
in the market, which affects demand forecasted by organisations.

For example, reduction in trade barriers increases the number of new entrants in a market, which
affects the demand for products and services of existing organisations.

Import – Export policies

The demand for export-import goods gets directly affected by changes in factors, such as import
and export control, terms and conditions of import and export, import/export policies,
import/export conditions, etc.
Producing the desired output

Demand forecasting enables an organisation to produce the pre-

determined output. It also helps the organisation to arrange for
the various factors of production (land, labour, capital, and
enterprise) beforehand so that the desired quantity can be
produced without any hindrance.

Assessing the probable demand

Demand forecasting enables an organisation to assess the

possible demand for its products and services in a given period
and plan production accordingly. In this way, demand
forecasting avoids dependence on merely making assumptions
for demand.

Forecasting sales figures

Sales forecasting refers to the estimation of sales figures of an

organisation for a given period. Demand forecasting helps in
predicting the sales figures by considering historical sales data
Better control - on business activities, it is important to have a proper understanding of
cost budgets, profit analysis, which can be achieved through demand forecasting.
Controlling inventory- it helps in estimating the future demand for an organisation’s
products or services. This, in turn, helps the organisation to accurately assess its
requirement for raw material, semi-finished goods, spare parts, etc.
Assessing manpower requirement- it helps inaccurate estimation of the manpower
required to produce the desired output, thereby avoiding the situations of under-
employment or over-employment.
Ensuring stability- it helps an organisation to stabilise their operations by initiating the
development of suitable business policies to meet cyclical and seasonal fluctuations of an
economy.
Planning import and export policies- At the macro level, demand forecasting serves as an
effective tool for the government in determining the import and export policies for the
nation. It helps in assessing whether import is required to meet the possible deficit in
domestic supply.
1. Specifying the objective

The objective or the purpose of demand

forecasting must be clearly specified. The
objective may be specified in terms of;
(a) short-term or long-term demand,
(b) the overall demand for a product or for a
firm’s own product,
(c) the whole or only a segment of the
market for its product,
(d) firm’s market share.

The objective of demand forecasting must be

determined before the process of forecast is
started.
2. Determining the time perspective

Depending on the firm’s objective, demand may be forecast for a short period, that is, for
the next year, or for a long period. In demand forecasting for a short period, many of the
demand determinants can be taken to remain constant or not to change significantly.
However in the long-run, however, demand determinants may change significantly.

3. Making choice of method for demand forecasting

There are a number of methods available for demand forecasting however, all methods
are not suitable based on purpose of forecasting, data requirement and availability of data
for the use of a method, and time frame of forecasting differ from method to method.
Therefore, they shall choose a method based on the purpose, experience and skill/
knowledge of the forecaster and availability of required data. The choice of a suitable
method saves not only time and cost but also ensures the reliability of forecast to a great
extent.
4. Collection of data and data adjustment

Once method of demand forecasting is decided on, the next step is to collect
the required data, primary or secondary or both. The required data is often
not available in the required type/ form. In that case, data needs to be
adjusted – even messaged, if necessary – with the purpose of building data
series consistent with data requirement. Sometimes the required data has to
be generated from the secondary sources.

5. Estimation and interpretation of results

As mentioned earlier, the availability of data often determines the method,

and also the potential/feasible equation to be used for demand forecasting.
Once required data is collected and forecasting method is finalized, the final
step in demand forecasting is to make the estimate of demand for the
predetermined years or the period. Where estimates appear in the form of an
equation, the result must be interpreted and presented in a usable form.
Lack of historical sales data- Past sales figures may not always be available
with an organisation. For example, in case of a new commodity, there is
unavailability of historical sales data. In such cases, new data is required to be
collected for demand forecasting, which can be cumbersome and challenging for
an organisation.
Unrealistic assumptions- Demand forecasting is based on various assumptions,
which may not always be consistent with the present market conditions. In such a
case, relying on these assumptions may produce incorrect forecasts for the future.
Cost incurred- Demand forecasting incurs different costs for an organisation,
such as implementation cost, labour cost, and administrative cost. These costs
may be very high depending on the complexity of the forecasting method selected
and the resources utilised. Owing to limited means, it becomes difficult for new
startups and small-scale organisations to perform demand forecasting.
Change in fashion- Consumers’ tastes and preferences continue to change with a
change in fashion. This limits the use of demand forecasting as it is generally
based on historical trend analysis.
Lack of expertise- Demand forecasting requires effective skills, knowledge and
experience of personnel making forecasts. In the absence of trained experts,
demand forecasting becomes a challenge for an organisation. This is because if
the responsibility of demand forecasting is assigned to untrained personnel, it
could bring huge losses to the organisation.
Psychological factors- Consumers usually prefer a particular type of product
over others. However, factors, such as fear of war and changes in economic
policy, could affect consumers’ psychology. In such cases, the outcomes of
forecasting may no longer remain relevant for the time period.