DEMAND

🔹 Introduction

 In common language, demand means desire, but in economics it is more specific

 Demand must be effective, i.e., backed by money

 It involves three elements: desire, ability, and willingness

 Demand is always expressed in relation to price and time

👉 Thus, demand is both a quantitative and economic concept

Meaning of Demand

 Demand refers to the quantity of a commodity that a consumer is willing and able to buy
at a given price and time.
 Demand refers to specific quantity, not just desire
 It is always related to a given price
 It is measured over a period of time (per day/week/year)
 It varies with changes in economic factors
👉 Demand is dynamic and not constant

CONDITIONS OF DEMAND
1️⃣ Desire to Purchase

 Basic requirement for demand 2

 Without desire, demand cannot exist

👉 Desire alone is not sufficient

2️⃣ Ability to Pay

 Consumer must have purchasing power

 Depends on income and wealth

👉 Lack of money means no demand

3️⃣ Willingness to Pay

 Consumer must be ready to spend money

 Depends on priorities and preferences

👉 Completes the concept of demand

Demand Function
Demand function shows the relationship between quantity demanded and its determinants.

📌 Formula:
Q = f(P, I, T, P₁…Pₙ, EP, EI, A, O)

🔑 Variables:
  Q = Quantity demanded

 P = Price of the good

 I = Income of consumers

 T = Tastes and preferences

 P₁…Pₙ = Prices of related goods

 EP = Expected future price

 EI = Expected future income

 A = Advertisement

 O = Other factors

👉 Quantity demanded is dependent variable

👉 Others are independent variables

 Shows functional relationship between variables

 Helps in analyzing market behavior

 Useful for forecasting demand

 Includes both economic and non-economic factors

👉 Important tool for business decision-making

⚖️LAW OF DEMAND

🔹 Definition

👉 According to Alfred Marshall:

“When price falls, demand increases and when price rises, demand decreases.”

 Establishes inverse relationship between price and demand

 Based on ceteris paribus (other things constant)

 Operates due to:

o Law of diminishing marginal utility

o Income effect

o Substitution effect

👉 It is one of the fundamental laws of economics

Demand Curve

 Downward sloping curve

 Shows inverse relationship between price & quantity

 Slopes downward from left to right

  Can be represented graphically
👉 Helps in easy understanding of demand behavior

ASSUMPTIONS OF LAW OF DEMAND

1. There 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

EXCEPTIONS TO LAW OF DEMAND

1️⃣ Giffen Goods
Giffen goods are inferior goods where demand increases as price increases.
This happens because the income effect is stronger than the substitution effect.
When price rises, consumers cannot afford better substitutes, so they buy more of the inferior good.
👉 Examples include bajra, barley, coarse grains consumed by low-income groups.
👉 This results in a direct relationship between price and demand, violating the law.

2️⃣ Status Goods (Prestige / Veblen Goods)

These are goods purchased for social status and prestige, not for utility.
Consumers associate higher price with higher status, so demand increases with price.
Such goods are used to display wealth and social position.
👉 Examples: diamonds, luxury cars, designer products.
👉 Hence, demand rises as price rises, violating the law of demand.

3️⃣ Ignorance
In some cases, consumers are unaware of the true quality of a product.
They assume that higher price indicates better quality, which may not be true.
Due to this misconception, they buy more at higher prices.
👉 This behavior is common in markets with low consumer awareness.
👉 Thus, demand increases with price, breaking the law.
4️⃣ Consumer Expectations
Consumer expectations about future prices affect current demand.
If people expect prices to increase further, they buy more now even at high prices.
If they expect prices to fall, they postpone purchases.
👉 This leads to abnormal demand behavior.
👉 Hence, demand may increase even when price rises.

5️⃣ Fear of Shortage

During emergencies like war, natural disasters, or pandemics, people expect shortages.
To avoid future scarcity, they buy and stock goods even at high prices.
This results in panic buying and hoarding behavior.
👉 Demand increases despite rising prices.
👉 Therefore, it violates the normal law of demand.

6️⃣ Necessaries
Necessities are essential goods required for daily survival.
Even if prices rise, people cannot reduce their consumption significantly.
Demand remains high due to their basic needs.
👉 Examples: rice, vegetables, medicines.
👉 Hence, demand does not fall much with price rise, showing an exception.

DETERMINANTS OF DEMAND
🔹 Introduction
Determinants of demand are the factors that influence the quantity demanded of a commodity.
Demand is not affected by price alone, but also by economic, social, and political factors.
👉 The combined effect of these factors is expressed through the demand function.

⭐ MAIN DETERMINANTS OF DEMAND

1️⃣ Price of the Commodity
 It is the most important determinant of demand.

 There is an inverse relationship between price and demand (Law of Demand).

 When price falls → purchasing power increases → demand rises.

👉 When price rises → purchasing power decreases → demand falls.

2️⃣ Income of the Consumer

 Income determines the purchasing capacity of consumers.

 Generally, income ↑ → demand ↑ and income ↓ → demand ↓.

👉 Effect differs for different types of goods:

a) Normal Goods
  Demand increases with increase in income
👉 Direct relationship

b) Perishable Goods

 Demand increases initially, then becomes constant

👉 Limited consumption due to short life

c) Inferior Goods

 Demand decreases when income increases

👉 Consumers shift to better alternatives

3️⃣ Prices of Related Goods

a) Substitutes

 Goods that can replace each other

 Price ↑ of one → demand ↑ for the other

👉 Example: Tea & Coffee

b) Complementary Goods

 Goods used together

 Price ↑ of one → demand ↓ for the other

👉 Example: Car & Petrol

4️⃣ Tastes and Habits of Consumers

 Demand depends on preferences, lifestyle, and habits

 Change in fashion or trends affects demand

👉 Example: Vegetarians do not demand meat

5️⃣ Wealth
 Wealth affects spending capacity of consumers

 More wealth → higher demand for normal goods

👉 Unequal distribution increases demand for luxuries

6️⃣ Population
 Increase in population → increase in demand

 Composition (age, gender) also affects demand

👉 Example: More youth → more demand for gadgets

7️⃣ Government Policy

 Taxes increase price → demand decreases

 Subsidies reduce price → demand increases

👉 Government actions directly influence demand
8️⃣ Future Expectations
 If price expected to rise → demand increases now

 If income expected to rise → demand increases

👉 Future expectations affect present demand

9️⃣ Climate and Weather

 Demand changes with seasonal conditions
👉 Example:

 Winter → woollen clothes

 Summer → cold drinks

🔟 State of Business (Business Conditions)

 During boom → demand increases

 During recession/depression → demand decreases

👉 Economic conditions strongly influence demand

ELASTICITY OF DEMAND
🔹 Introduction

 Elasticity of demand measures how much quantity demanded changes when price or other
factors change.
It shows the responsiveness of demand.
👉 Concept introduced by Marshall

Definition

👉 Elasticity of demand is the degree of change in quantity demanded due to change in price
or other factors.

Types of Demand Based on Elasticity

 Elastic Demand: A small change in price leads to a large change in quantity demanded.

 Inelastic Demand: A large change in price leads to a small change in quantity demanded.

TYPES OF ELASTICITY OF DEMAND

There are four main types:

1. Price Elasticity of Demand

2. Income Elasticity of Demand

 3. Cross Elasticity of Demand

4. Advertisement Elasticity of Demand

[Link] ELASTICITY OF DEMAND (Ep)

Meaning

It measures the responsiveness of quantity demanded to a change in price.

Formula

% change in quantity demanded

Ep=
% change in price

Q 1=Old demand Q 2=New demand p 1=Old price p 2=New price

Types of Price Elasticity

1. Perfectly Elastic Demand (Ep = ∞)
 Very small change in price → infinite change in demand

 Demand curve: horizontal straight line

 Rare in real life

2. Perfectly Inelastic Demand (Ep = 0)

 Change in price → no change in demand

 Demand curve: vertical straight line

 Example: life-saving medicines

3. Relatively Elastic Demand (Ep > 1)
 Small change in price → large change in demand

 Demand curve: flatter

 Example: luxury goods

4. Relatively Inelastic Demand (Ep < 1)

 Large change in price → small change in demand

 Demand curve: steeper

 Example: necessities

5. Unitary Elastic Demand (Ep = 1)

 Percentage change in demand = percentage change in price

 Demand curve: rectangular hyperbola

II. INCOME ELASTICITY OF DEMAND (Ey)
Meaning

It measures the responsiveness of quantity demanded to a change in consumer income.

Formula

% change in quantity demanded

Ey=
% change in income

Q 1=Old demand Q 2=New demand I 1=Old income I 2=New income

Types of Income Elasticity

1. High Income Elasticity (Ey > 1)

 Demand increases more than proportionately

 Example: luxury goods (TV, AC)

2. Low Income Elasticity (Ey < 1)

 Demand increases less than proportionately

 Example: necessities (rice, vegetables)

3. Unitary Income Elasticity (Ey = 1)

 Demand increases in same proportion as income

4. Zero Income Elasticity (Ey = 0)

 Income changes but demand remains constant

 Example: essential medicines

5. Negative Income Elasticity (Ey < 0)

 Income increases → demand decreases

 Example: inferior goods

III. CROSS ELASTICITY OF DEMAND (Ec)

Meaning

It measures the responsiveness of demand for one good due to change in price of another good.

Formula

% change in quantity demanded of X

Ec=
% change in price of Y
Types

1. Positive Cross Elasticity

 Goods are substitutes (Tea & Coffee)

 Price of one ↑ → demand for other ↑

2. Negative Cross Elasticity

 Goods are complements (Car & Petrol)

 Price of one ↑ → demand for other ↓

IV. ADVERTISEMENT ELASTICITY OF DEMAND (Ea)

Meaning

It measures the responsiveness of demand to a change in advertisement expenditure.

Formula

% change in quantity demanded

Ea=
% change in advertisement expenditure
Features
  Always positive

 Shows direct relationship between advertising and sales

 Useful for firms in decision-making

FACTORS AFFECTING ELASTICITY OF DEMAND

Elasticity of demand is influenced by several factors which determine how responsive demand is to
changes in price.

1. Nature of Commodity
 The type of good determines elasticity.

 Necessaries (rice, salt, medicines) → Inelastic demand

 Comforts and luxuries → Elastic demand

 Reason: Necessities are essential for survival, so demand does not change much.

2. Availability of Substitutes
 More substitutes → More elastic demand

 No substitutes → Inelastic demand

 Example: Tea has substitutes (coffee), so demand is elastic.

3. Variety of Uses

 Goods with multiple uses → Elastic demand

 Goods with single use → Inelastic demand

 Example: Electricity has many uses → elastic demand

4. Possibility of Postponement

 If consumption can be postponed → Elastic demand

 If it cannot be postponed → Inelastic demand

 Example: Buying a car can be postponed, but medicine cannot

5. Amount of Money Spent

  Small expenditure items → Inelastic demand

 Large expenditure items → Elastic demand

 Example: Salt (cheap) vs. clothing (costly)

6. Time Period
 Short run → Inelastic demand

 Long run → Elastic demand

 Reason: Consumers need time to adjust to price changes

7. Range of Prices
 At very high prices → Demand is inelastic

 At very low prices → Demand is also inelastic

 Elasticity is higher in the middle price range

SIGNIFICANCE / IMPORTANCE OF ELASTICITY OF DEMAND

Elasticity of demand is an important tool for decision-making by producers, consumers, and the
government.

1. Price Fixation
 Helps firms decide whether to increase or decrease prices

 If demand is inelastic → higher price can be charged

 Important in monopoly and imperfect competition

2. Production Decisions
 Helps producers decide what and how much to produce

 Goods with elastic demand are preferred

 Small price reduction can increase sales significantly

3. Pricing of Factors of Production

 Factors with inelastic demand get higher rewards

 Helps trade unions in wage bargaining

 Example: If labour demand is inelastic → wages can be increased

4. International Trade
 Helps determine terms of trade (exchange ratio between countries)

 If export demand is inelastic → country can charge higher prices

  If demand is elastic → buyers benefit more

5. Taxation Policy
 Government prefers taxing goods with inelastic demand

 Ensures higher revenue collection

 Example: Taxes on petrol, cigarettes

6. Nationalization of Public Utilities

 Public utilities (electricity, water, transport) have inelastic demand

 If private → may exploit consumers

 Hence, government ownership protects public interest

Conclusion

Elasticity of demand plays a crucial role in economic decision-making. It helps businesses in pricing
and production, governments in taxation and policy-making, and also influences international trade
and resource allocation.

DEMAND FORECASTING
Meaning
Demand forecasting refers to the process of estimating or predicting the future demand for a
product or service.

It is a systematic and scientific method of anticipating what products are required, where, when, and
in what quantity, so that firms can plan their activities accordingly.

Definition
Demand forecasting can be defined as the process of estimating the quantity of a product or service
that consumers will purchase in the future based on past data and present trends.

Importance / Need for Demand Forecasting

Demand forecasting is essential both at the firm level and national level for effective planning.

 Acts as a road map for production planning

 Helps in dealing with uncertain demand and supply conditions

 Facilitates proper business planning and coordination

 Useful for framing export-import and fiscal policies

 Helps in decision-making regarding inputs like labour, capital, etc.

 Assists in inventory and capacity planning

CHARACTERISTICS OF GOOD DEMAND FORECASTING
A good demand forecast has the following features:

1. Specific in quantity – Clearly indicates expected demand in numbers

2. Made under uncertainty – Future conditions are unpredictable

3. Time-bound – Forecast is for a specific period

4. Based on past data – Uses historical information

5. Approximate in nature – Gives estimates, not exact figures

6. Based on assumptions – Relies on certain conditions remaining constant

7. Not 100% accurate – Because it deals with future events

STEPS IN DEMAND FORECASTING

The process of demand forecasting involves the following steps:

1. Determining Objectives

 Clearly define the purpose of forecasting (e.g., production, pricing)

2. Deciding the Period

 Determine whether it is a short-term or long-term forecast

3. Determining Scope

 Decide whether forecasting is for:

o A product

o A region

o The entire industry or economy

4. Sub-dividing the Task

 Divide forecasting into smaller groups based on:

o Product

o Area

o Customer group

5. Identifying Variables

 Identify factors affecting demand such as:

o Price

o Income
 o Consumer preferences

o Competition

6. Selecting the Method

 Choose an appropriate forecasting method depending on:

o Purpose

o Data availability

o Required accuracy

7. Collection and Analysis of Data

 Collect relevant data

 Analyze using statistical or graphical tools

8. Studying Sales Promotion Plans

 Evaluate the impact of:

o Advertising

o Personal selling

o Marketing strategies

9. Analyzing Competitors’ Activities

 Study competitors’:

o Pricing

o Strategies

o Market behavior

10. Preparing Final Forecast

 Revise preliminary estimates

 Arrive at the final demand forecast

11. Evaluation and Revision

 Compare forecast with actual performance

 Make necessary adjustments for future forecasts

Conclusion

Demand forecasting is a crucial managerial function that helps in efficient planning and decision-
making. Though it cannot be perfectly accurate, it provides a scientific basis for reducing uncertainty
and improving business performance.
SUPPLY
Meaning

In economics, supply refers to the quantity of a commodity that producers are willing and able to
offer for sale at different prices during a given period of time, other factors remaining constant.

Supply reflects the producer’s behavior, just as demand reflects consumer behavior.

Definition

Supply is defined as the amount of a commodity which a producer is willing to sell at a given price in
a given period of time.

LAW OF SUPPLY
Definition

The Law of Supply states that, other things remaining constant, there is a direct relationship
between price and quantity supplied.

In other words:

 Price ↑ → Supply ↑

 Price ↓ → Supply ↓

According to Dooley:
“Higher the price, greater the quantity supplied and lower the price, smaller the quantity supplied.”

Assumptions of the Law of Supply

The law is based on the following assumptions:

1. Income of buyers and sellers remains constant

2. Tastes and preferences remain unchanged

3. Cost of factors of production is constant

4. Technology remains unchanged

5. Commodity is divisible

6. It represents a static situation

Explanation of the Law

  When price increases, producers earn higher profits

 This encourages them to produce and supply more

 When price decreases, profits fall, so supply reduces

 Thus, the supply curve slopes upward from left to right

SUPPLY FUNCTION
Meaning

Supply function expresses the relationship between supply and its determining factors.

Functional Form

[
S_x = f(P_x, P_f, T, t, S, O)
]

Where:

 ( S_x ) = Supply of commodity X

 ( P_x ) = Price of commodity X

 ( P_f ) = Prices of factors of production

 ( T ) = Technology

 ( t ) = Taxes

 ( S ) = Subsidies

 ( O ) = Other external factors

👉 There is a direct relationship between price and supply.

DETERMINANTS OF SUPPLY
The supply of a commodity depends on several factors:

1. Number of Sellers

 More sellers → Supply increases

 Fewer sellers → Supply decreases

 Supply curve shifts accordingly

2. Prices of Resources (Factors of Production)

 Increase in input costs → Supply decreases

 Decrease in input costs → Supply increases

 Supply is inversely related to factor prices

3. Taxes and Subsidies

 Higher taxes → Reduce supply

 Subsidies → Increase supply

 Taxes raise costs; subsidies reduce costs

4. Technology

 Improvement in technology → Increases supply

 Outdated technology → Reduces supply

 Better efficiency lowers production cost

5. Suppliers’ Expectations

 Expectation of higher future prices:

o May reduce current supply (hoarding)

 Expectations influence present production decisions

6. Prices of Related Goods

 If price of a related good rises:

o Producers shift production

o Supply of other goods decreases

7. Prices of Joint Products

 Joint products are produced together

 Increase in price of one → Supply of all increases

 Example: Meat and leather

Conclusion

Supply is a fundamental concept in economics that explains producer behavior. The law of supply
and its determinants help in understanding how producers respond to changes in price and other
economic factors, which is essential for business decision-making and policy formulation.