Module-2
Demand Analysis
Law of Demand
Elasticity of Demand
Law of Supply
Demand Forecasting
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Demand
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.
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Demand = Desire + Ability to pay +
Willingness to spend
Demand is a relative concept – not absolute
It is related to price , time and place.
“The demand for a commodity refers to the amount of it which will be
bought per unit of time at a particular price ( in a particular market)”
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Types of Demand
Direct and derived demand
Recurring and replacement demand
Complementary and competing demand
Consumer and capital goods
Perishable and Durable goods
Individual and Market demand
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Determinants of Demand
Price of the product
Price of the related goods
Consumer’s income level
Distribution pattern of national income
Consumer’s taste and preferences
Advertisement of the product
Consumer’s expectation about future price and supply
position
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Determinants of Demand
(Contd…)
Demonstration effect and Band-Wagon effect
Consumer credit facility
Demography and growth rate of population
General std. of living and spending habits
Climatic and weather conditions
Customs
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Law of Demand
The law of demand says that quantity demanded
varies inversely with price, other things constant.
Thus, the higher the price, the smaller the
quantity demanded.
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LaW of Demand
Statement of Law : “ Other things being equal
(Ceteris paribus), the higher the price of a
commodity, the smaller is the quantity
demanded and lower the price, larger the
quantity demanded”.
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Factors behind Law of
Demand
Substitution effect
The change in the relative price (the price of one good relative to the prices
of other goods) causes the substitution effect
If all prices changed by same margin, there would be no substitution effect
Income effect
Money income – the number of rupees you receive per period
Real income – measure in terms of how many goods and services you can
buy
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Factors behind Law of
Demand
Diminishing marginal utility
Marginal utility – additional satisfaction you derive from each item
Law of marginal utility you derive from each additional item
consumed decreases as your consumption increases (example: pizza
slices)
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Exceptions to Law of
demand
Expectation regarding future prices
Giffen goods
snob appeal / Veblen effect
Consumer’s psychological bias ( about
quality and price relationship
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Exceptions to Law of
demand
Demonstration Effect
Insignificant proportion of Income spent
Goods with No Substitutes
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Elasticity of Demand
Elasticity of demand is the degree of responsiveness of
demand to the changes in its determinants.
PRICE ELASTICITY OF DEMAND
INCOME ELASTICITY OF DEMAND
CROSS ELASTICITY OF DEMAND
ADVERTISING / PROMOTIONAL ELASTICITY OF DEMAND
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Price Elasticity of demand
The extent of response of demand for a commodity to the changes in its
price, other determinants of demand remaining constant is called price
elasticity of demand.
Proportional changes in quantity
ep = demanded
Proportional changes in
price
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Types of price elasticity of demand
Perfectly elastic demand
Perfectly inelastic demand
Relatively elastic demand
Relatively inelastic demand
Unitary elastic demand
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Perfectly elastic demand (Ep= )
Perfectly elastic demand
Perfectly inelastic demand
Relatively elastic demand
Relatively inelastic demand
Unitary elastic demand
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Perfectly Inelastic demand (Ep=0)
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Relatively Elastic demand (Ep>1)
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Relatively Inelastic demand (Ep<1)
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Unitary Elastic demand (Ep=1)
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Practical application
Pricing decisions
Factor rewarding
Terms of trade
Foreign exchange rates
Tax rates
Public utilities
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Income Elasticity of Demand
The degree of responsiveness of demand for a commodity
to the changes in the consumers’ income is known as
income elasticity of demand
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Practical application
Growth rate of firm
Demand forecasting
Production planning
Marketing plan
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Cross Elasticity of
Demand
The degree of responsiveness of demand for a commodity to
a given change in the price of some other related commodity
is known as cross elasticity of demand.
Proportional changes in demand for X
e XY
= Proportional changes in price of Y
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Advertising/ Promotional Elasticity
of Demand
The degree of responsiveness of demand for a commodity to
given change in the advertising or promotional expenses is
known as Advertising elasticity of demand.
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Measurement of Elasticity of Demand
Ratio (or Percentage) Method
Price elasticity of demand(Ed) is measured as the
ratio of proportionate change in quantity demanded
and proportionate change in the price of the
commodity
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Measurement of Elasticity of Demand
Arc Elasticity Method
Arc Elasticity measures elasticity at the midpoint of an
arc between any two points on a demand curve
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Measurement of Elasticity of Demand
Total outlay method
Elasticity is measured by comparing expenditure levels
before and after any change in price
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Demand Forecasting
Is the tool to scientifically predict the likely demand of a
product in the future
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Types of Demand forecasting
Level of Forecasting Time Period Nature of
• Firm (Micro) • Short Term Goods
• Industry • Long term • Consumer goods
• Economy (Macro) • Capital goods
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Methods of Demand forecasting
Qualitative
• Consumer’s Opinion survey Quantitative
• Sales force Composite method • Trend Projection
• Expert’s Opinion • Smoothing Techniques
• Group discussion • Moving Average
• Delphi Technique • Weighted moving Average
• Market Simulation • Exponential smoothing
• Test Marketing • Regression Analysis
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Qualitative Methods of Demand forecasting
Consumer’s Opinion Sales force Composite
survey method
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Qualitative Methods of Demand forecasting
(Contd…)
Expert’s Opinion
Group discussion Delphi Technique
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Qualitative Methods of Demand forecasting
(Contd…)
Test Marketing Market Simulation
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Quantitative Methods of Demand forecasting
1. Naive Approach
TIME SERIES MODELS
2. Trend Projection
3. Moving Averages
4. Exponential Smoothing
5. Linear Regression ASSOCIATIVE MODELS
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