DEMAND FORECASTING

DEMAND ANALYSIS
MODULE 2
 INTRODUCTION

• The economy relies on the willingness of consumers to make purchases and

the ability of companies to supply them. When consumers make more
purchases, inflation and interest rates decrease. When consumers decrease
their purchases or if producers are unable to supply, inflation and interest
rates increase.
• Consumer demand drives production and supports a thriving economy.
 MEANING & DEFINITION OF DEMAND:
• Demand is an economic principle referring to a consumer's desire to
purchase goods and services and willingness to pay a price for a specific good
or service.
• Demand refers to the willingness and ability of consumers to purchase a
given quantity of a good or service at a given point in time or over a period in
time. Demand is a consumer want or a need supported by an ability to pay.
DEFINITION:
• Demand refers to consumers' desire to purchase goods and services at
given prices.
• Demand can mean either market demand for a specific good or aggregate
demand for the total of all goods in an economy.
TYPES OF DEMAND:
• Joint demand
• Composite demand
• Short-run and long-run demand
• Price demand Income demand
• Competitive demand
• Direct and derived demand
1. Joint demand:
Joint demand is the demand for complementary products and services.
These can be products that are accessories for others or that people commonly purchase together.
For Example, cereal and milk or peanut butter and jelly. The two are linked but demand for one is not
necessarily dependent on the demand for the other.
2. Composite demand:
Composite demand happens when there are multiple uses for a single product.
For Example, corn can be used as animal feed, ethanol and food in its whole form. The rise in demand for any of
these products leads to a shortage in supply for the others. This shortage can lead to a rise in price.
3. Short-run and long-run demand:
Short-run demand refers to how people will immediately react to price changes while elements are fixed.
For example, if the demand for a product drastically decreases and a manufacturer has high overhead costs,
they have no choice but to absorb the profits lost.
Over time, or in the long run, companies have a chance to adjust to the new situation by decreasing labor or
increasing price and supplies.
4. Price demand
Price demand relates to the amount a consumer is willing to spend on a product at a given price.
Businesses use this information to determine at what price point a new product should enter the market.
Consumers will buy items based on their perception of that product's value.
5. Income demand:
As consumers make more income, quantity demand increases.
This means people will buy more overall when they earn more income.
Tastes and expectations also change with an increase in income, reducing the size of one market and increasing the
size of another.
Consumers will often buy a product or service because it is what they can afford but may deem lower quality. The
demand for those lower-quality products will decrease as income increases.
6. Competitive demand:
Competitive demand occurs when there are alternative services or products a customer can choose from.
From a business's perspective, they can use fluctuations in the price of their competitors to determine how their own
will sell.
An example of this is between name-brand and store-brand medicine. If a consumer prefers a name brand but it is out
of stock or the price increases significantly, the store brand will see a rise in sales.
7. Direct and derived demand:
Direct demand is the demand for a final good.
Food, clothing and cell phones are an example of this.
Also called autonomous demand, it's independent of the demand for other products.
Derived demand is the demand for a product that comes from the usage of others.
For example, the demand for pencils will result in the demand for wood, graphite, paint and eraser materials.
In this example, the demand for wood is dependent on the demand for its uses.
FACTORS THAT INFLUENCE DEMAND:
• Demand is influenced by the activities of consumers and businesses. Businesses attempt
to drive demand through marketing efforts. Consumers drive demand through their
tastes, income levels and resistance to price increases.
1. Price:
Price is the value of product or service expressed in monetary terms.
In other words, the price is the amount of money whose payment is expected or required
for buying a product or accessing a service.
A price of a product has a maximum effect on its demand.
If other factors remaining constant (do not change) then the relationship between price
and demand is as follows:
If a product's price is low, then its demand is high.
If a product's price is high, then there is low demand for it.
Hence, it can be said that price and demand are inversely proportional to each other,
provided other determinants remain constant or do not change.
In other words, if price increases then demand falls and vice-versa.
2. Income:
Income of an individual is his capacity to earn money.
A person with a higher income makes more money and vice-versa.
After the determinant of price, income is the second most significant factor that affects demand.
The relation between income and demand is as follows:
If income is high, then demand is also high.
If income is low, then demand is minimum.
So, we can say, income is directly proportional to demand.
3. Tastes:
Tastes, Preferences, Habits, Fashion, and Popularity, also has an impact on the demand.
Tastes of people i.e. their likes and dislikes affect demand: If people like a product, then its demand is high even
when charged at higher prices.
If people dislike a product, then its demand is low even when charged at lower prices.
Fashion or current trend in the market has an impact on the demand for a type of product.
For example, now, young generation in India prefers to wear fashionable and comfortable western apparels over
traditional and cheaper Indian clothes.
Popularity or fame also affects the demand for a product.
For example, people prefer to buy regularly advertised and popular branded products over lesser known
alternatives.
4. Price of Related Goods:
Related Goods exhibit some relationship with each other.
These are of two types: Substitute Goods, and Complementary Goods.
Substitute Goods are products that can easily replace each other. That is, they can take each
other's place.
In other words, they act as an alternative to each other to satisfy a similar want or desire.
They are even called Supplementary Goods because they readily supplement each other's role or
function just in case of unavailability, scarcity, higher market price, etc.
5. Consumers' Expectations:
Consumers' expectations arise out of their predictions about:
Future Price, and Future Income.
If there is an expectation of a rise in the future price of an essential commodity, then current
demand for it increases.
If consumers are expecting a fall in the future price of an essential commodity, then current
demand for it will also fall.
If consumers are expecting a rise in their future income, then their current demand will increase.
6. Number of Buyers:
The number of buyers or consumers' population is another determinant of demand:
If buyers are more, then their demand will also be more.
If buyers are few, then their demand will also be small.
So, the population of consumers is directly proportional to the demand they generate in the
market.
7. Climatic Condition:
The climatic condition or weather of an area is also a determinant of demand.
For example: In colder regions, there is a high demand for woolen clothes. In hotter areas, there is
more demand for cotton clothes.
8. Level of Economic Activity:
The level of economic activity is a determinant of demand: A high level of economic activity usually
comprises of huge investments in infrastructure development, high rate of employment, high
consumption power, rising standard of living of people, etc. It increases demand.
Contrarily, a low level of economic activity displays characteristics like lack of investments, increase
in the unemployment rate, low purchasing power, plunging living standards of people, so on.
It decreases demand. If economic activity increases, demand also increases and vice-versa.
DEMAND ANALYSIS:
• Demand analysis is the process of understanding the customer demand for a
product or service in a target market.
• Companies use demand analysis techniques to determine if they can successfully
enter a market and generate expected profits to expand their business operations.
• It also gives a better understanding of the high-demand markets for the company’s
offerings, using which businesses can determine the viability of investing in each of
these markets.
• Steps in market demand analysis:
❖ Market identification
❖ Business cycle
❖ Product Niche
❖ Evaluate competition
LAW OF DEMAND:
• The Law of demand explains the functional relationship between price of a commodity and the quantity
demanded of the commodity.
• It is observed that the price and the demand are inversely related which means that the two move in the
opposite direction.
• An increase in the price leads to a fall in quantity demanded and vice versa.
• This relationship can be stated as “Other things being equal, the demand for a commodity varies inversely as the
price”.
• Chief Characteristics of the Law of Demand :
• The following are the chief characteristics of the Law of Demand.
1. Inverse Relationship. The relationship between price and the demand of a particular commodity is inverse i.e.,
the demand of a commodity will fall with the increase in the price of the commodity or it will increase with the
fall in-the price.
2. Price an Independent Variable and Demand a Dependent Variable. In the Law of Demand, price is regarded as
an independent variable that affects the demand inversely. Thus, it is the effect of price on demand that is to be
examined and not the effect of demand on price.
3. It is a Qualitative Statement. The Law of Demand simply explains the direction of change in the demand with
the increase or decrease in the price of a commodity. It does not explain the quantum of change. The law is thus,
a qualitative statement and not a quantitative statement.
4. Other thing remains the same. The Law of Demand applies only when other things remain the same. In other
words, there should be no change in factors influencing demand except price.
• Exceptions to the law of demand:
1. Giffen Goods:
• Giffen goods are the inferior goods whose demand increases with the increase in its prices. There are several
inferior commodities, much cheaper than the superior substitutes often consumed by the poor households
as an essential commodity. Whenever the price of the Giffen goods increases its quantity demanded also
increases because, with an increase in the price, and the income remaining the same, the poor people cut
the consumption of superior substitute and buy more quantities of Giffen goods to meet their basic needs.
2. Veblen Goods:
• Another exception to the law of demand is given by the economist Thorstein Veblen, who proposed the
concept of “Conspicuous Consumption.”
• According to Veblen, there are a certain group of people who measure the utility of the commodity purely
by its price, which means, they think that higher priced goods and services derive more utility than the lesser
priced commodities.
3. Expectation of Price Change in Future:
• When the consumer expects that the price of a commodity is likely to further increase in the future, then he
will buy more of it despite its increased price in order to escape himself from the pinch of much higher price
in the future.
• On the other hand, if the consumer expects the price of the commodity to further fall in the future, then he
will likely postpone his purchase despite less price of the commodity in order to avail the benefits of much
lower prices in the future.
4. Ignorance:
• Often people are misconceived as high-priced commodities are better than the low- priced commodities and
rest their purchase decision on such a notion. They buy those commodities whose price are relatively higher
than the substitutes.
5. Emergencies:
• During emergencies such as war, natural calamity- flood, drought, earthquake, etc., the law of demand
becomes ineffective.
• In such situations, people often fear the shortage of the essentials and hence demand more goods and services
even at higher prices.
6. Change in fashion and Tastes & Preferences:
• The change in fashion trend and tastes and preferences of the consumers negates the effect of law of demand.
The consumer tends to buy those commodities which are very much ‘in’ in the market even at higher prices.
7. Conspicuous Necessities:
• There are certain commodities which have become essentials of the modern life. These are the goods which
consumer buys irrespective of an increase in the price. For example TV, refrigerator, automobiles, washing
machines, air conditioners, etc.
8. Bandwagon Effect:
• This is the most common type of exception to the law of demand wherein the consumer tries to purchase
those commodities which are bought by his friends, relatives or neighbors. Here, the person tries to emulate
the buying behavior and patterns of the group to which he belongs irrespective of the price of the commodity.
 ASSUMPTIONS OF THE LAW OF DEMAND:

The Law of Demand is based on the following assumptions :

(1) No change in taste, habits, preferences : It is assumed that there is no change in the taste, habits,
preferences of a rational consumer. Thus, consumers' choice of product must remain the same.
(2) No change in the income level: If the consumer's income rises, he will demand more though the prices
of commodities rise. In such a situation, the law will not hold good.
(3) No change in population : The law is based on the assumption that there should be no change in
population, size, sex ratio, age composition, etc.
(4) No change in prices of related goods : The law assumes that the prices of close substitutes and the
complementary products should remain constant.
(5) No expectation of future change in the price: If the consumers expect high rise in the price in future,
they demand more though current price is high. In such condition,the Law of Demand cannot be
verified.
(6) No change in taxation : It is assumed that the structure of direct and indirect taxes remain constant.
Thus, the disposable income of a consumer should remain the same.
(7) No introduction of new product: It is assumed that there is no introduction of a new product in the
market. Thus, the consumer's taste, habits and preferences remain constant.
(8) No change in technology : The law assumes that the present technology of production remains
constant.
 Elasticity of Demand:
Elasticity is a measure of a variable's sensitivity to a change in other
variables—or a single variable.
Most commonly this sensitivity is the change in quantity demanded
relative to changes in other factors, such as price.
Elasticity is defined as a ratio of the percentage change in the
dependent variable to the percentage change in the independent
variable.
Price Elasticity of Demand:
• The price elasticity of demand, commonly known as the elasticity of
demand refers to the responsiveness and sensitiveness of demand for
a product to the changes in its price.
• The response of the consumers to a change in the price of a
commodity is measured by the price elasticity of the commodity
demand.
 Types of price Elasticity of Demand

• The following are the main types of price elasticity of demand:

1. Perfectly Elastic Demand (Ep = ∞):
The demand is said to be perfectly elastic when a slight change
in the price of a commodity causes a major change in its
quantity demanded. Such as, even a small rise in the price of a
commodity can result into fall in demand even to zero. Whereas
a little fall in the price can result in the increase in demand to
infinity. In perfectly elastic demand the demand curve is a
straight horizontal line which shows, the flatter the demand
curve the higher is the elasticity of demand.
2. Perfectly Inelastic Demand (Ep =0):
When there is no change in the demand for a product due to
the change in the price, then the demand is said to be perfectly
inelastic. Here, the demand curve is a straight vertical line which
shows that the demand remains unchanged irrespective of
change in the price., i.e. quantity OQ remains unchanged at
different prices, P1, P2, and P3.
3. Relatively Elastic Demand (1 to ∞):
The demand is relatively elastic when the proportionate change in
the demand for a commodity is greater than the proportionate
change in its price. Here, the demand curve is gradually sloping
which shows that a proportionate change in quantity from OQ0 to
OQ1 is greater than the proportionate change in the price from
OP1 to Op2.
4. Relatively Inelastic Demand (0-1):
When the proportionate change in the demand for a product is
less than the proportionate change in the price, the demand is said
to be relatively inelastic demand. It is also called as the elasticity
less than unity, i.e. 1. Here the demand curve is rapidly sloping,
which shows that the change in the quantity from OQ0 to OQ1 is
relatively smaller than the change in the price from OP1 to Op2.
5. Unitary Elastic Demand (Ep =1):
The demand is unitary elastic when the proportionate change in
the price of a product results in the same change in the quantity
demanded. Here the shape of the demand curve is a rectangular
hyperbola, which shows that area under the curve is equal to one.
FACTORS AFFECTING PRICE
ELASTICITY OF DEMAND
1. Nature Of Commodity:
• Nature of the commodity is the most important factor that affects the
price elasticity of demand. There are three types of commodities:
Necessaries, Comforts and luxuries. Necessaries are those goods
which are mandatory for survival of human being. Comforts are those
which make our life smooth and happy living. Luxuries are the goods
considered as status symbol. The price elasticity of demand of these
three kinds of goods is:
2. Availability Of Substitutes:
Substitutes are those which can be used in place of one another. Example: Tea
and Coffee, Pepsi and Coke etc. The price elasticity in case of availability of
substitutes is:

3. Alternative Or Multiple Uses:

There are some commodities which can be used alternatively or these
commodities have multiple uses like milk, coal etc. The demand for these goods
rises as the price falls and vice versa. The price elasticity of demand in this case
is as follows:
4. Time Period:
• In Economics, the time is divided into two horizons: Short Period and Long
Period. The elasticity of demand is also get affected by the duration of time.

5. Income Of Consumer :
• Elasticity of demand for a commodity also depends upon the income level of
the consumers. If the buyers are high end consumers i.e. rich, they will not care
for the price. Accordingly, elasticity of demand is expected to be low. Example:
Demand for cars by multi-billionaires. On the other hand, if income level of the
buyers is low, elasticity of demand is expected to be high.
• Example: Demand for small cars by the middle class people in India.
6. Level Of Price:
Elasticity of demand also depends upon the level of price of the commodity. The commodities having the highest or lowest price carry
less elasticity of demand. On the contrary, the commodities with medium ranged price have highly elastic demand.

7. Standard Of Living
The society where the standard of living of the people is high, the elasticity of demand is low and where the standard of living is low, the
elasticity of demand is high.
8. Postponement Of Use Of Commodity
The commodities whose demand can be postponed in near future have more elastic demand. Example: Demand for luxury furniture or
car etc. Whereas for those goods whose demand cannot be postponed have less elastic or inelastic demand. Example: Demand for food.
9. Habits Of Consumer
Commodities which have become habits of consumer have inelastic demand because demand does not get affected by change in price.
10. Proportion Of Income Spent On A Commodity
Goods on which consumer spend a small proportion of their income like toothpaste, newspaper etc. will have an inelastic demand. On
the other hand, goods on which the consumers spend a large proportion of their income like clothes, scooter etc. tends to have elastic
demand.
INCOME ELASTICITY OF
DEMAND:
• It measures the responsiveness of demand after a change in income
level of individuals. Income elasticity of demand refers to the
sensitivity of the quantity demanded for a certain good to a change in
real income of consumers who buy this good, keeping all other things
constant.
• “It is the ratio of percentage change in quantity demanded over the
percentage change in income level of individuals”.
• In the given figure, quantity demanded and consumer’s income is
measured along X-axis and Y- axis respectively. The small rise in
income from OY to OY1 has caused greater rise in the quantity
demanded from OQ to OQ1 and vice versa. Thus, the demand curve,
DD shows income elasticity greater than unity.
 CROSS ELASTICITY OF DEMAND:
• It measures the responsiveness of demand of one product, after a change
in price level of other product.
• “It is the ratio of percentage change in quantity demanded of any one
product (X) over the percentage change in price level of other product (Y)”.
• The cross elasticity of demand for substitute goods and complimentary
goods is always positive because the demand for one good increases when
the price for the substitute goods and complimentary goods increases.
• For example: if there is an increase in the price of tea by 10%. and the
quantity demanded for coffee increases by 2%, then the cross elasticity of
demand = 2/10 = +0.2.
• If two commodities are unrelated goods, the increase in the price of one
good does not result in any change in the demand for the other goods.
 ADVERTISING AND PROMOTIONAL ELASTICITY OF DEMAND:

• In the modern competitive or partial competitive market economy,

advertising has a great significance.
• Under advertising, various visible or verbal activities are done by the firm
for the purpose of creating or increasing demand for its goods or services.
Informative advertising is very helpful for the consumer in making rational
purchase decisions.
• “It is a ratio of percentage change in quantity demanded of any goods and
services over the percentage change in expenses incurred for advertising
and promotion”.
• The extension of demand through advertising can be measured by
advertising or promotional elasticity of demand (EA) which measures
the expected changes in demand as a result of change in other
promotional expenses. The demand for some goods is affected more by
advertising.
• Advertising elasticity of demand (AED) measures the impact advertising
expenditure has in generating new sales for a company.
• Companies want a positive AED because this indicates their advertising efforts
are resulting in an increased demand for their goods and services.
• AED may not be the most accurate predictor of advertising's impact on sales
because it does not take into account other factors that affect demand, such as
changes in consumer tastes and spending habits.
• Consumer demand can also be impacted by the price of products and
the availability of lower-priced substitutes.
USES OF ELASTICITY OF
DEMAND FOR MANAGERIAL
DECISION MAKING:
• Determination of Price policy: Determination of Prices means to determine
the cost of goods sold and services rendered in the free market. A
manufacturer has to consider the elasticity of demand for the product.
• Price discrimination: it is an act of selling same products at different prices to
different section of customers or in different sub-markets. A monopolist
adopts a price discrimination policy only when the elasticity of demand of
different consumers or sub- markets is different. Consumers whose demand is
inelastic can be charged a higher price than those with more elastic demand.
• Public utility pricing: In case of public utilities which are run as monopoly
undertakings e.g. elasticity of water supply, railways, postal services, price
discrimination is generally practiced, charging higher prices from consumers or
users with inelastic demand and lower prices in case of elastic demand.
• Shifting of tax burden: It is possible for a business to shift a commodity tax in
case of inelastic demand to his customers. But if the demand is elastic, he will
have to bear the tax burden himself, otherwise demand for his goods will go
down sharply.
• Pricing of Joint supply products: Certain goods, being products of the same
process are jointly supplied, e.g. wool and mutton. Here if the demand for wool
is inelastic compared to the demand for mutton, a higher price for wool can be
charged with advantage.
• Super Markets: Super-markets are a combined set of shops run by a single
organization selling a wide range of goods. They are supposed to sell
commodities at lower prices than charged by shopkeepers in the bazaar. Hence,
price policy adopted is to charge slightly lower price for goods with elastic
demand.
• Use of machines on employment: Workers often oppose use of machines out
of fear of unemployment. Machines need not always reduce demand for
labor as this depends on price elasticity of demand for the commodity
produced. When machines reduce costs and hence price of products, if the
products demand is elastic, the demand will go up, production will have to be
increased and more workers may be employed for the product is inelastic,
machines will lead to unemployment as lower prices will not increase the
demand.
• Factor pricing: The factors having price inelastic demand can obtain a higher
price than those with elastic demand. Workers producing products having
inelastic demand can easily get their wages raised.
• Taxation policy: Government can easily raise tax revenue by taxing
commodities which are price inelastic.
 MEASUREMENT OF ELASTICITY OF DEMAND

• The elasticity of demand is measured by dividing the percentage

change in quantity demanded by the percentage change in price :

• The result of this calculation determines if demand is elastic,

unit elastic, or inelastic:
• Elastic: Demand is elastic if the result is greater than or equal to one. This means that a
change in price leads to a significant shift in demand.
• Unit elastic: Demand is unit elastic if the result is equal to zero.
• Inelastic: Demand is inelastic if the result is less than one. This means that a change in
price leads to a small change in demand.
• The elasticity of demand measures how responsive the
quantity demanded is to changes in price or income. For
example, if a good has many substitutes, then the demand for
it will be more elastic.
 LAW OF SUPPLY
• The law of supply is the microeconomic law that states that, all other
factors being equal, as the price of a good or service increases, the
quantity of goods or services that suppliers offer will increase, and vice
versa.
• The law of supply says that as the price of an item goes up, suppliers will
attempt to maximize their profits by increasing the number of items for
sale.
• An economic law stating that as the price of a good or service increases, the
quantity supplied increases, and vice versa .
• The law of supply says that a higher price will induce producers to supply a
higher quantity to the market.
• Because businesses seek to increase revenue, when they expect to receive a
higher price for something, they will produce more of it.
• When college students learn that computer engineering jobs pay more than
English professor jobs, the supply of students with majors in computer
engineering will increase.
• FACTORS AFFECTING SUPPLY:
• There are many factors affecting the supply of a commodity in the market
including
1. Input costs,
2. Price of the commodity,
3. The state of technology at a given time, taxation,
4. Prices of other goods,
5. Objective of the seller,
6. Number of firms selling the same commodity among others.
EXCEPTIONS TO THE LAW OF
SUPPLY:
• The law will not apply if there are future expectations for further
change in prices.
• If sellers expect further fall in prices in future, they would be ready to
sell more even at low prices.
• For perishable goods like milk, vegetables, fish, eggs, etc. the supply is
not affected by their prices. Sellers cannot hold these goods for long.
• Even for agricultural goods, the supply depends more on natural
factors such as drought, floods, natural calamities etc. and less on
their prices.
 Elasticity of Supply
• The price elasticity of supply is a measure of the degree of
responsiveness of the quantity supplied to the change in
the price of a given commodity.
• It is an important parameter in determining how the
supply of a particular product is affected by fluctuations in
its market price.
• It also gives an idea about the profit that could be made
by selling that product at its price difference.
• The price elasticity of supply refers to the response to a
change in a good or service's price by the supply of that
good or service. According to basic economic theory, the
supply of goods decreases when its price increases.
5 Types of Elasticity of Supply
• Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit
elastic supply, less than unit elastic, and perfectly inelastic. Read below to know
them in more detail.
1. Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is infinite.
This means that even for a slight increase in price, the supply becomes infinite. For a perfectly elastic
supply, the percentage change in the price is zero for any change in the quantity supplied.
2. More than Unit Elastic Supply: When the percentage change in the supply is greater than the
percentage change in price, then the commodity has the price elasticity of supply greater than 1.
3. Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its quantity
supplied is proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to
1.
4. Less than Unit Elastic Supply: When the change in the supply of a commodity is lesser as compared to
the change in its price, we can say that it has a relatively less elastic supply. In such a case, the price
elasticity of supply is less than 1.
5. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the percentage change
in the quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply
applies to exclusive items. For example, a designer gown styled by a famous personality.

• The point to be noted is that the elasticity of supply is always a positive number.
This is because the law of supply states that the quantity supplied is always directly
proportional to the change in the price of a particular commodity. This means that
the supply of a product either increases or remains the same with the increase in its
market price.
Determinants of Price Elasticity of Supply
• Marginal Cost- As the cost of producing one more unit is rising with
output or Marginal Costs (which are the increased costs related to each
additional unit produced) are rising rapidly with output, then the rate of
output production will be limited, i.e Price Elasticity of Supply will be
inelastic., which means that the percentage of quantity supplied
changes less than the change in price. However, if Marginal Cost rises
slowly, then Supply will be elastic.
• Time- As the price elasticity of supply increases over time, producers
would increase the quantity supplied by a greater percentage than the
price increases.
• Number of Firms- It is more likely that the supply will be elastic when
there are a large number of firms. This occurs because other firms can
step in to fill the supply gap.
• Mobility of Factors of Production- When the factors of production
are mobile, then the price elasticities of supply are higher. This means
that labor and other manufacturing inputs may be imported from other
regions to quickly increase production.
 The Elasticity of Supply Curves

Keeping the quantity supplied on the X-axis and the price of the commodity on the Y-
axis, we can draw certain conclusions from the different values of elasticity of the
supplied formula.
• When ES= infinite (Perfectly elastic supply), the curve (SS) is a straight line parallel to the X-axis.

• When ES>1 , a flatter curve (S2S2) is obtained which when extended intersects the Y-axis.

• When ES<1 , it results in a steeper curve (S3S3), which when extended crosses the X-axis.

• When ES=1 , the curve (S4S4) comes out to be a straight line that passes through the origin at an angle
of 45 degrees.

• When ES=0 (Perfectly inelastic supply), the curve (S1S1) obtained is parallel to the Y-axis.

• This graph shows us the relationship between the different types of elasticity of supply and helps in
understanding the elasticity of supply definition better.
 DEMAND FORECASTING:MEANING
• A forecast is a prediction or estimation of a future situation, under given conditions.
• Demand forecasting is a technique that is used for the estimation of what can be the
demand for the upcoming product or services in the future.
• Demand forecasting is a field of predictive analytics which tries to understand and
predict customer demand to optimize supply decisions by corporate supply chain
and business management.
• Demand estimation and forecasting means when, how, where, by whom and how
much will be the demand for a product or service in near future. The process of
demand estimation/forecasting can be broken into two parts i.e. analysis of the past
conditions and analysis of current conditions with reference to a probable future
trend.
• It helps in estimating the most likely demand of a good or service under given
business conditions.
 SIGNIFICANCE OF DEMAND
FORECASTING
i. Fulfilling objectives:
• Implies that every business unit starts with certain pre-decided objectives. Demand forecasting helps in
fulfilling these objectives. An organization estimates the current demand for its products and services in
the market and move forward to achieve the set goals. For example, an organization has set a target of
selling 50, 000 units of its products. In such a case, the organization would perform demand forecasting for
its products. If the demand for the organization’s products is low, the organization would take corrective
actions, so that the set objective can be achieved.
ii. Preparing the budget:
• Plays a crucial role in making budget by estimating costs and expected revenues. For instance, an
organization has forecasted that the demand for its product, which is priced at Rs. 10, would be 10, 00,00
units. In such a case, the total expected revenue would be 10* 100000 = Rs. 10, 00, 000. In this way,
demand forecasting enables organizations to prepare their budget.
iii. Stabilizing employment and production:
• Helps an organization to control its production and recruitment activities. Producing according to the
forecasted demand of products helps in avoiding the wastage of the resources of an organization. This
further helps an organization to hire human resource according to requirement. For example, if an
organization expects a rise in the demand for its products, it may opt for extra labor to fulfill the increased
demand.
iv. Expanding organizations:
• Implies that demand forecasting helps in deciding about the expansion of the business
of the organization. If the expected demand for products is higher, then the
organization may plan to expand further. On the other hand, if the demand for products
is expected to fall, the organization may cut down the investment in the business.
v. Taking Management Decisions:
• Helps in making critical decisions, such as deciding the plant capacity, determining the
requirement of raw material, and ensuring the availability of labor and capital.
vi. Evaluating Performance:
• Helps in making corrections. For example, if the demand for an organization’s products
is less, it may take corrective actions and improve the level of demand by enhancing the
quality of its products or spending more on advertisements.
vii. Helping Government:
• Enables the government to coordinate import and export activities and plan
international trade.
METHODS OF DEMAND
FORECASTING:
1. Opinion Polling Method/Qualitative methods
• In this method, the opinion of the buyers, sales force and experts
could be gathered to determine the emerging trend in the market.
• The opinion polling methods of demand forecasting are of three
kinds:
(a) Consumer’s Survey Method or Survey of Buyer’s Intentions(opinion polling
method 1)
• In this method, the consumers are directly approached to disclose their
future purchase plans. This is done by interviewing all consumers or a
selected group of consumers out of the relevant population. This is the direct
method of estimating demand in the short run.
(i) Complete Enumeration Survey:
• Under the Complete Enumeration Survey, the firm has to go for a door to door survey for the forecast
period by contacting all the households in the area. This method has an advantage of first hand,
unbiased information, yet it has its share of disadvantages also. The major limitation of this method is
that it requires lot of resources, manpower and time.
(ii) Sample Survey and Test Marketing:
• Under this method some representative households are selected on random basis as samples and
their opinion is taken as the generalized opinion. This method is based on the basic assumption that
the sample truly represents the population. If the sample is the true representative, there is likely to
be no significant difference in the results obtained by the survey. Apart from that, this method is less
tedious and less costly.
• A variant of sample survey technique is test marketing. Product testing essentially involves placing
the product with a number of users for a set period. Their reactions to the product are noted after a
period of time and an estimate of likely demand is made from the result.
(iii) End Use Method or Input-Output Method:
• This method is quite useful for industries which are mainly producers goods. In this method, the sale
of the product under consideration is projected as the basis of demand survey of the industries using
this product as and intermediate product, that is, the demand for the final product is the end use
demand of the intermediate product used in the production of this final product.
(b) Sales Force Opinion Method (opinion polling method 2):
• This is also known as collective opinion method. In this method, instead of
consumers, the opinion of the salesmen is sought. Sales person in the company to
make an individual forecast for his or her particular sales territory. These
individual forecasts are discussed and agreed with the sales manager. The
composite of all forecasts then constitutes the sales forecast for the organisation.
(c) Experts Opinion Method:
• This method is also known as “Delphi Technique” of investigation. The Delphi
method requires a panel of experts, who are interrogated through a sequence of
questionnaires in which the responses to one questionnaire are used to produce
the next questionnaire. Thus any information available to some experts and not
to others is passed on, enabling all the experts to have access to all the
information for forecasting.
2. Statistical Method/ Quantitative methods
• Statistical methods have proved to be immensely useful in demand
forecasting. In order to maintain objectivity, that is, by consideration of
all implications and viewing the problem from an external point of view,
the statistical methods are used.
(i) Trend Projection Method:
• A firm existing for a long time will have its own data regarding sales for
past years. Such data when arranged chronologically yield what is
referred to as ‘time series’. Time series shows the past sales with
effective demand for a particular product under normal conditions. Such
data can be given in a tabular or graphic form for further analysis. This is
the most popular method among business firms, partly because it is
simple and inexpensive and partly because time series data often exhibit
a persistent growth trend.
• The trend can be estimated by using any one of the following methods:
• a) Graphical Method:
• This is the most simple technique to determine the trend. All values of output or sale
for different years are plotted on a graph and a smooth free hand curve is drawn
passing through as many points as possible. The direction of this free hand curve—
upward or downward— shows the trend.
• (b) Least Square Method:
• Under the least square method, a trend line can be fitted to the time series data with
the help of statistical techniques such as least square regression.
• When the trend in sales over time is given by straight line,
the equation of this line is of the form: y = a + bx.
(ii) Barometric Technique:
• This method is based on the notion that “the future can be predicted from
certain happenings in the present.” In other words, barometric techniques are
based on the idea that certain events of the present can be used to predict
the directions of change in the future. This is accomplished by the use of
economic and statistical indicators which serve as barometers of economic
change.
(iii) Regression Analysis:
• It attempts to assess the relationship between at least two variables (one or
more independent and one dependent), the purpose being to predict the
value of the dependent variable from the specific value of the independent
variable.
• The basis of this prediction generally is historical data. This method starts from
the assumption that a basic relationship exists between two variables. An
interactive statistical analysis computer package is used to formulate the
mathematical relationship which exists.
(iv) Econometric Models:
• Econometric models are an extension of the regression technique whereby a
system of independent regression equation is solved. The requirements for
satisfactory use of the econometric model in forecasting is under three
heads: variables, equations and data. The appropriate procedure in
forecasting by econometric methods is model building. Econometrics
attempts to express economic theories in mathematical terms in such a way
that they can be verified by statistical methods and to measure the impact of
one economic variable upon another so as to be able to predict future
events.
PROBLEMS ON PRICE ELASTICITY OF DEMAND, AND DEMAND
FORECASTING USING TIME-SERIES METHOD.

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