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Managerial Economics
Module - 2

Topics to be covered :
Demand Analysis Law of Demand, Exceptions to the Law of Demand, Elasticity of Demand , Classification
of Price, Income &Cross elasticity, Promotional elasticity of demand. Uses of elasticity of demand for
Managerial decision making, Measurement of elasticity of demand. Law of supply, Elasticity of supply.
Demand forecasting: Meaning & Significance, Methods of demand forecasting. (Problems on Price
elasticity of demand, and demand forecasting using Time-series method).

The Meaning of Demand

The demand for a commodity is the amount of it that a consumer is able and willing to
purchase from the market at various given prices during a specified time period. This demand in
economics implies both the desire to purchase and the ability to pay for a good. For eg. If a
poor man who hardly makes both ends meet wishes to have a car, his wish or desire for a car
will not constitute the demand for the car because he cannot afford to pay for it, that is, he has
no purchasing power to make his wish or desire effective in the market.
Market demand for a good is the total sum of the demands of individual consumers, who
purchase the commodity in the market.

Demand Function
Individual’ demand for a commodity depends on the own price of a commodity, his income,
prices of related commodities (which may be either substitutes or complements), his tastes and
preferences, and advertising expenditure made by the producers for the commodity. Individual
demand for a commodity can be expressed mathematically in the following general functional
form :

Qd = f(Px, I, Pt, T, A)
Where, Qd = Quantity demanded for a commodity
Px = Own price of a commodity
I = Income of the individual
Pt = Prices of related commodities
T = Tastes and preferences of the individual consumer
A = Advertising expenditure made by the producers of the
commodity

Determinants of Demand
 Price of the Product : Normally, price has a negative effect on demand. With all other
determinants of demand remaining unchanged, if the price of the product falls, its

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quantity demanded will rise. Alternatively, if the price of the product increases, its
quantity demanded will fall.
 Income of the Consumer : Normally, income bears a positive relationship with demand,
i.e. when income increases, demand also increases due to increase in consumer’s paying
capacity. Normal goods are those goods which have a positive relation between
demand and income, i.e. as income increases, their demand also increases and vice
versa. Inferior goods are commodities, the demand for which falls as income rises.
Typical examples may be that with an increase in income, people spend summers in hill
stations and travel in higher class, whereas people with less income stay in homes in
vacations, and travel in lower class.
 Price of Related Goods : If the price of a commodity increases, and the demand for
another product also falls as a consequence to rise in price of this commodity, the two
goods are complementary to each other (eg. Car and petrol). On the other hand, when
demand for another commodity rises as a consequence of increase in price of this
commodity, they are substitutes to each other (eg. Tea and coffee).
 Tastes and preferences : Tastes and preference have such an impact that inspite of a fall
in price, demand may not increase if the good has gone out of fashion and in spite of
increase in price, demand may not decrease because of the product being in fashion. Eg.
Flowers on Valentine day, A smoker will have to purchase a pack of cigarettes inspite of
rise in price.
 Advertising : Firms incur heavy expenditure on advertising to generate awareness about
the features, price and uniqueness of their products. The primary motive behind
advertising is to stimulate demand for own brand.
 Consumer’s Expectation of Future Income and Price : In case of durables, when demand
can be postponed, consumers decide their purchase on the basis of future price and
income. If they expect their income to increase or price to fall in future, they will
postpone their demand; on the other hand, if they expect price to increase in futurethey
will hasten the purchase.
 Population : If the population of a country is constantly increasing, more food items and
other goods and services will be needed to satisfy the needs of the people.

Types of Demand
 Direct and Derived Demand : When a commodity is demanded for its own sake, i.e., by
the final consumer, it is known as a consumer good. All household items, like TV,
refrigerator, furniture, computer and eatables have direct demand. On the other hand,
when a commodity is demanded for using it either as a raw material or as an
intermediary for value addition in any other good or in the same good, it is known as a
capital good, and its demand is derived demand. For eg. If demand for buildings
increases, demand for construction materials like cement, concrete and bricks will also
increase; thus demand for construction material is a derived demand.
 Recurring and Replacement demand : Consumable goods have recurring demand, i.e.,
they are consumed at frequent intervals, like food is eaten twice a day, tea and snacks
are taken four times a day, newspaper is read everyday and petrol is filled in bike every

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week. On the other hand, goods like television, cars, bikes, mobile phones, watches,
furniture and house are all examples of durable consumer goods; they are purchased to
be used for a long period of time. But they wear and tear over time due to use or
obsolescence of technology; thus they need replacement. At the same time, all capital
goods like machinery also need replacement.

 Complementary and Competing Demand : Goods which create joint demand are
complementary goods; therefore demand for one commodity is dependent upon
demand for the other one. If purchase of cars increases, demand for petrol will also
increase. If price of petrol goes up, demand for cars may go down. Goods that compete
with each other to satisfy any particular want are called substitutes. For eg. If you are
thirsty, you may either opt for water, or Coke or Pepsi, or juice, which are substitutes of
each other.

 Individual and Market demand: Demand for an individual consumer is known as

individual demand and the theory of demand is based on individual demand. Demand
by all the consumers in the market for its product is known as market demand. Industry
demand is the demand for the product produced by all the firms in the industry. For eg.
Your demand for Indica is an example of individual demand, total sale of Indica in a year,
is the annual market demand and total demand for cars in a year is Industry demand for
one year.
The Law of Demand
According to the law of demand, other factors being constant, if the price of a commodity falls, the
quantity demanded of it will rise, and if the price of the commodity rises, its quantity demanded
will decline. Thus, according to the law of demand, there is inverse relationship between price
and quantity demanded, other factors remaining the constant.

Assumptions underlying the Law of Demand

The law of demand is based on the following ceteris paribus (other factors being same)
assumptions:
 No change in consumer’s income
 No change in consumer’s preferences
 No change in the fashion
 No change in the price of related goods
 No expectation of future price changes or shortages
 No change in size, age, composition and sex ratio of the population
 No change in the distribution of income and wealth of the community
 No change in government policy

Demand Curve and the Law of Demand The law of demand can be illustrated through a demand
schedule and through a demand curve. A demand schedule of an individual consumer is
presented in Table 1.

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Demand schedule of an individual consumer

Price (Rs.) Quantity Demanded
12 10
10 20
8 30
6 40
4 50
2 60
It will be seen from this demand schedule that when the price of a commodity is Rs. 12 per unit,
the consumer purchases 10 units of the commodity. When the price of the commodity falls to
Rs. 10, he purchases 20 units of the commodity. Similarly, when the price further falls, quantity
demanded by him goes on rising until at price of Rs. 2, the quantity demanded by him rises to
60 units.
Demand schedule can be converted into a demand curve by graphically plotting the various
price- quantity combinations, where along the X-axis, quantity demanded is measured and
alongthe Y- axis price of the commodity is measured.

A Demand Curve does not tell us what the price is; it only tells us how much quantity of the
good would be purchased by the consumer at various possible prices. Since more is demanded
at a lower price and less is demanded at a higher price, the demand curve slopes downward to
the right. Thus, the downward sloping demand curve is in accordance with the law of demand
which, as stated above, describes inverse price-demand relationship.

Characteristics of a Typical Demand Curve

 The demand curve is drawn by joining the of points representing alternative amounts of
the commodity demanded by the consumer per period of time at all relevant prices.
 Usually, a demand curve has a negative slope, which reflects the inverse relationship
between price and quantity demanded.
 A particular point on the demand curve depicts specifically a single price-quantity
relation. The demand curve as a whole, and not its particular point, reflects the demand
behavior of the consumer in relation to all possible alternative price variation.
 A demand curve may be linear or non-linear. This depends on the data obtained in
compiling the demand schedule.

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Reasons for the Law of Demand : Why does Demand Curve Slope Downward?
 Income Effect : As a result of the fall in the price of a commodity, consumer’s real
income or purchasing power increases. This increase in real income induces the
consumer to buy more of that commodity. This is called income effect of the change in
price of the commodity.
 Substitution Effect : When the price of a commodity falls, it becomes relatively cheaper
than other commodities. This induces the consumer to substitute the commodity whose
price has fallen for other commodities which have now become relatively costlier. As a
result of this substitution effect, the quantity demanded of the commodity, whose price
has fallen, rises.
 Price Effect : Some commodities may have multiple uses, like electricity, milk, coal, steel
etc. A fall in the price of such a commodity would induce a consumer to put it to
alternative uses, like electricity can be used for lighting, cooling, cooking, heating,
running machines etc. If it is cheap, people will use it for all possible purposes, whereasif
its price rises, people start using it only for most important purposes and use alternative
modes of energy, like LPG or kerosene for cooking, wood or coal for heating etc.
 Law of Diminishing Marginal Utility : According to this law, as the consumer consumes
successive units of a commodity, the utility derived from each additional unit (marginal
unit) goes on falling. Hence, the consumer would purchase only as many units of the
commodity, where the marginal utility of the commodity is equal to its price.
For eg., In the table, the total and marginal utilities derived by a person from cups of tea
consumed per day is presented. When one cup of tea is taken per day, the total utility
derived by a person is 12 utils. And because this is the first cup its marginal utility is also
12. With the consumption of 2 nd cup per day, the total utility rises to 22, but marginal utility
falls to 10. It will be seen from the table that as the consumption of tea increases to 6
cups per day, marginal utility from the additional cup goes on diminishing.
Diminishing Marginal Utility
Cups of Tea consumed per Total utility Marginal utility
day
1 12 12
2 22 10
3 30 8
4 36 6
5 40 4
6 41 1

Exceptions to the Law of demand

 Giffen Goods : Poor population consumed two goods: meat (which was costly) and
bread (which was cheap). When the price of bread was increased, the poor people
wereforced to curtail their consumption of meat and buy more of bread, which was still
the cheapest food. Hence, such goods which display direct price demand
relationship are

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called Giffen goods. These goods are considered inferior by the consumer, but they occupy
a significant place in the individual’s consumption basket. It so happens that people in
this case, with the rise of price of Giffen good, are forced to reduce their purchase of
other expensive goods, and increase the purchase of Giffen good in larger quantity to
supplement the reduction in luxury food item.
 Snob Appeal (Veblen Effect) : Veblen goods have snob value, for which the consumer
measures the satisfaction derived not by their utility value, but by social status. The
consumers of this particular commodity want to show it off to others, and as a result
they buy less of it at lower prices and more at higher prices. Diamond or antique works
of art, latest model of mobile phones, sports cars, designer clothes are examples of such
goods. Higher is the price of diamonds, higher is the snob value attached to it and hence
higher is the demand, although among a special class of people.

The demand curve for goods of snob appeal is less elastic when the price is very high because these
goods are in demand only because of the status attached to them due to their high price. As the
price of these goods falls, the demand increases but beyond certain point, it shows an abnormal
tendency to fall. The reason is simple. With fall in price, these goods become affordable to
many people and hence lose the snob appeal, which was the primary cause of their demand.
With further fall in its price, it has to compete with other non-branded products resulting in a
highly elastic demand curve; where the sellers have to offer discounts and other promotional
schemes in order to sell the product. Hence the curve emerges in the shape of letter Z.
 Demonstration Effect : Demonstration effect is the influence on a person’s behavior by
observing the behavior of others. Fashion is one such incidence. Demand for most of the
items of luxury is governed by demonstration effect. In all of these cases price is not a
governing parameter and goods are bought even though prices are rising because these
consumers do not want to be labeled as lagging behind.
 Future Expectation of Prices : When the prices are rising and it is expected that they will
continue to rise in future, consumers buy more to keep a stock of the good. This
happens when there is a natural calamity like a famine or a flood. People expect that
because of a famine there will be a shortage of supply of goods and thus they anticipate
a rise in price in the future. So they stock a good amount of the commodity mainly food
grains at the currently rising prices. Share market is another example. Panic buying is
when people increase the purchase of goods with the expectation that prices will rise
more in the future.

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 Insignificant proportion of Income spent : Things of very low value and limited use like
salt and matchbox do not show any impact of price on their demand. The reason is that
the amount spent on these goods is very small and even a large increase in price has
very negligible impact on money spent.
 Goods with no substitutes : For the goods which have no substitute, such as life saving
drugs, petrol and diesel, people have no option but to buy them, whatever be the price;
hence demand does not show any effect of price change.

Elasticity of demand
The law of demand indicates only the direction of change in quantity demanded in response
to a change in price. Elasticity of demand measures the degree of responsiveness of the
quantity demanded of a commodity to a given change in any of the determinants of
demand.
Elasticity of Demand = Percentage change in quantity demanded
Percentage change in determinant of demand
Accordingly, there are three concepts of demand elasticity : price elasticity, income
elasticity and cross elasticity.

Price elasticity of demand

Price elasticity of demand indicates the degree of responsiveness of quantity demanded of a
good to the change in its price, other factors such as income, prices of related
commodities that determine demand are held constant. Price elasticity of demand is
defined as the ratio of the percentage change in quantity demanded to a percentage
change in price.
Ep = Percentage change in quantity demanded
Percentage change in price
When percentage change in quantity demanded of a commodity is greater than the
percentage change in price that brought it about, price elasticity of demand (e p) will be
greater than one and in this case demand is said to be elastic. On the other hand, when
a given percentage change in price of a commodity leads to a smaller percentage
change in quantity demanded, elasticity will be less than one and demand in this case is
said to be inelastic. Further, when the percentage change in quantity demanded of a
commodity is equal to the percentage change in price that caused it, price elasticity is
equal to one.

Degrees of Price Elasticity

Perfectly Elastic Demand : When elasticity is equal to infinity, i.e., e p = ∞. In this case,
unlimited quantities of the commodity can be demanded at the prevailing price
andeven a negligible increase in price would result in zero quantity demanded.

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Relatively Elastic Demand : When proportionate change in quantity demanded is more than a
given change in price, the commodity is said to have a highly elastic demand. In other words, ep
> 1, such that a proportionate change in quantity demanded is more than a proportionate
change in price. Demand for goods like refrigerator, radios etc. is elastic, since changes in their
prices bring about large changes in their quantity demanded.

Unitary Elastic Demand : When a given proportionate change in price brings about an equal
proportionate change in quantity demanded, then demand for that commodity is said to be
unitary elastic. In other words, ep = 1.

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Relatively Inelastic Demand : When change in quantity demanded is found to be offset by

change in its price, then the commodity has a relatively inelastic demand. In other words, e p <1,
such that proportionate change in quantity demanded is less than a proportionate change in
price. Some goods like common salt, wheat and rice are very unresponsive to the changes in
their prices. The demand for salt remains practically the same for a small rise or fall in its price.
Therefore demand for common salt is said to be inelastic.

Perfectly Inelastic Demand : Elasticity is equal to zero i.e., e p = 0. In this case, the quantity
demanded of a commodity remains the same, irrespective of any change in the price, i.e,
quantity demanded is totally unresponsive to changes in price.

The main reason for differences in elasticity of demand is the possibility of substitution,
i.e, the presence or absence of competing substitutes. The greater the ease with which

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substitutes can be found for a commodity, the greater will be the price elasticity of
demand of that commodity.

Measurement of Price Elasticity

Percentage Method : Price elasticity can be precisely measured by dividing the percentage
change in quantity demanded in response to a small change in price, divided by a small change
in price.
Price Elasticity = Percentage change in quantity demanded
Percentage change in price

Mathematically speaking, price elasticity of demand has a negative sign since the change in
quantity demanded of a good is in opposite direction to the change in its price. When price
falls, quantity demanded rises and vice versa. But for the sake of convenience in understanding
the magnitude of response of quantity demanded of a good to a change in its price we ignore
the negative sign and take into account only the numerical value of the elasticity.

Arc Elasticity of Demand : When the price change is quite large or we have to measure
elasticity over an arc of the demand curve rather than at a specific point on it, then accurate
measure of price elasticity of demand can be obtained by taking the average of original price
and subsequent price as well as average of the original quantity and subsequent quantity as the
basis of measurement of percentage changes in price and quantity. Thus, if price of a good falls
from p1 to p2 and as a result its quantity demanded increases from q1 to q2, the average of the
two prices is given by p1+p2 and average of the two quantities can be given by q1+q2.
2 2
Determinants of Price Elasticity of demand
 Nature of Commodity: In case of necessity item, the demand is relatively inelastic,
whereas in case of luxury items, the demand is elastic in nature.
 The Availability of Substitutes : If for a commodity, close substitutes are available, its
demand tends to be elastic. If the price of such a commodity goes up, the people will
shift to its close substitutes and as a result the demand for that commodity will greatly

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decline. If for a commodity substitutes are not available, people will have to buy it even
when its price rises, and therefore its demand would tend to be inelastic. Eg. Coke and
Pepsi.
 The Proportion of Consumer’s Income spent : The greater the proportion of income
spent on a commodity, the greater will be generally its elasticity of demand, and vice
versa. The demand for common salt, soap, matches and such other goods tends to be
highly inelastic because the households spend only a fraction of their income on each of
them.
 The Number of uses of a commodity : The greater the number of uses to which a
commodity can be put, the greater will be its price elasticity of demand. If the price of a
commodity having several uses is very high, its demand will be small and it will be put to
the most important uses and if the price of such a commodity falls it will be put to less
important uses also and consequently its quantity demanded will rise significantly. Milk
has several uses. If its price rises to a very high level, it will be used only for essential
purposes such as feeding the children and sick persons. If the price of milk falls, it would
be devoted to other uses such as preparation of curd, cream, ghee and sweets.
Therefore the demand of milk tends to be elastic.
 Complementarity between Goods : Complementarity between goods and joint demand
for goods also affects the price elasticity of demand. Households are generally less
sensitive to the changes in price of goods that are complementary to each other. For eg.
For the running of automobiles, petrol is used. Now if the price of petrol goes up,
consumers will have to purchase the petrol, as without it they cant run the automobile.
Thus the demand for petrol tends to be inelastic.
 Time and Elasticity : Demand tends to be more elastic if the time involved is long. This is
because consumers can substitute goods in the long run. In the short run, substitution
of one commodity by another is not so easy. For instance, if the price of fuel oil rises, it
may be difficult to substitute fuel oil by other types of fuels such as coal or cooking gas.
But, given sufficient time, people will make adjustments and use coal or cooking gas
instead of the fuel oil.
 Items of Addiction : Items of addiction are relatively price inelastic. For eg. Cigarettes, If
their price rises, smokers may not be able to promptly cut down their consumption of
cigarettes and may thus not respond instantly to an increase in price.

Importance of the Price Elasticity of demand

 Pricing decisions by Business firms : The business firms take into account the price
elasticity of demand when they take decisions regarding pricing of the goods. This is
because change in the price of a product will bring about a change in the quantity
demanded depending upon the coefficient of price elasticity. If the demand for a
product of the firm happens to be elastic, then any attempt on the part of the firm to
raise the price of its product will bring about a fall in its total revenue.
 Use in International trade : If the demand for a country’s exports is inelastic, the fall in
the prices of exports as a result of devaluation will lower their foreign exchange
earnings rather than increasing them. This is because demand being inelastic, as a result

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of the fall in prices quantity demanded of the exported products will increase very little and
the country would suffer because of the lower prices. On the other hand, if the demand
for a country’s exports is elastic, then the fall in the prices of these exports due to
devaluation will bring about a large increase in their quantity demanded which will
increase the foreign exchange earnings of the country.
 Importance in Fiscal Policy : The imposition of an Indirect Tax, such as excise duty or
sales tax raises the price of a commodity. Now, if the demand for the commodity is
elastic, the rise in price caused by the tax, will bring about a large decline in the
quantitydemanded and as a result the Government revenue will decline rather than
increase. The Government can succeed in increasing its revenue by the imposition of
commodity taxes only if the demand for the commodity is inelastic.

Income Elasticity
Income elasticity of demand shows the degree of responsiveness of quantity demanded of a good
to a small change in the income of consumers. The degree of response of quantity demanded to
a change in income is measured by dividing the proportionate change in quantity demanded by
the proportionate change in income.

Income Elasticity = Percentage change in purchases of a good

Percentage change in income
Let Y stands for an initial income, ∆Y for a small change in income, q for the initial quantity
purchased, ∆q for a change in quantity purchased as a result of a change in income and e i for
income elasticity of demand. Then

Income Elasticity, Normal Good and Inferior Goods

When Income elasticity is more than zero (that is positive), then an increase in income leads to the
increase in quantity demanded of the good. This happens in case of normal goods. Goods
whose income elasticity is less than zero, (that is negative) are known as inferior goods. In such
cases increase in income will lead to the fall in quantity demanded of the goods.

Luxuries and Necessities : A good having income elasticity more than one and which therefore
bulks larger in consumer’s budget as he becomes richer is called a luxury. A good with an
income elasticity less than one and which claims declining proportion of consumer’s income as
he becomes richer is called a necessity.

Importance of Income Elasticity for Business Firms

Firms which are producing products having high income elasticity are more interested in
forecasting the level of national income because the demand for their products will greatly
depend on the level of overall economic activity. On the other hand, the demand for products
with low income elasticity will not be greatly affected by the fluctuations in aggregate economic
activity.

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Cross Elasticity of demand

The degree of responsiveness of demand for one good in response to the change in price of
another good represents the cross elasticity of demand of one good for the other.
Cross Elasticity of Demand = Proportionate or percentage change in demand for X
Proportionate or percentage change in price of Y

When two goods are substitutes of each other, then as a result of the rise in price of one good,
the quantity demanded of the other good increases. Therefore, the cross elasticity of demand
between the two substitute goods is positive, that is, in response to the rise in price of one
good, the demand for the other good rises. Eg. Coke and Pepsi
On the other hand, when the two goods are complementary with each other just as bread and
butter, tea and milk etc., the rise in price of one good brings about the decrease in demand for
the other. Therefore, the cross elasticity of demand between the two complementary goods is
negative.

Importance of Cross Elasticity of Demand for Business Decision Making

Cross elasticity of demand is used for formulating proper pricing strategy. Multiproduct firms
often use this concept to measure the effect of change in price of one product on the demand
for other products. For eg. Maruti Udyog Ltd. Produces Maruti Vans, Maruti 800 and Maruti
Esteem. These products are good substitutes of each other and therefore cross elasticity of
demand between them is very high. If Maruti Udyog decides to lower the price of Maruti 800, it
will significantly affect the demand for Maruti Vans and Maruti Esteem.

Promotional Elasticity of Demand

Advertising and promotion are vital tools in the competitive market to generate awareness
about its products. Some goods (like consumer goods) are more responsive to advertising than
others. (like heavy capital equipment’s). Promotional elasticity of demand measures the degree
of responsiveness of demand to a given change in advertising expenditure. Thus ea can be
expressed as:
Ea = Proportionate change in quantity demanded of commodity X
Proportionate change in advertising expenditure
= Q 2 – Q 1/ Q 1
A2 – A1/A1
Where Q1 = Original Quantity Demanded
Q2 = New Quantity demanded
A1 = initial level of advertising expenditure
A2 = new level of advertising expenditure

Demand Forecasting
Demand forecasting is an estimate of sales in dollars or physical units for a specified
future period under a proposed marketing plan. It is the scientific and analytical

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estimation of demand for a product (good or service) for a particular period of time. It
is the process of determining how much of which product is needed when and where. It
involves estimation of the level of demand; extent and magnitude of demand;
responsiveness of demand to a proposed change in price, income of consumer, price of
other goods and other determinants.

Significance of Demand Forecasting

 Production planning : Expansion of output of the firm should be based on the estimates
of likely demand, otherwise there may be overproduction and consequent losses may
have to be faced.
 Sales forecasting : Sales forecasting is based on the demand forecasting.
 Control of business : For controlling the business on a sound footing, it is essential to
have a well conceived budgeting of costs and profits that is based on the forecast of
annual demand.
 Inventory control : A satisfactory control of business inventories , raw materials,
intermediate goods, semi-finished product, finished product, spare parts etc. requires
satisfactory estimates of the future requirements which can be traced through demand
forecasting.
 Growth and long-term investment programs : Demand forecasting is necessary for
determining the growth rate of the firm and its long-term investment programs and
planning.

Methods of Demand Forecasting

 Consumer Survey Method : Surveys generally involve use of conducting consumer
interviews or sending mailed questionnaire asking consumers about their intentions or
plans about demand for goods. 1) Complete Enumeration : In this all consumers of a
product are asked questions about quantity of a product they plan to buy in future if the
price of the good is increased. Thus, in a survey questions may be asked for consumer’s
reactions or response to proposed changes in price of a product, changes in their
income, advertisement expenditure etc. 2) Sample Survey Method : In this method,
only a few consumers are selected at random or on a stratified basis. Through personal
interviews or mailed questionnaire, questions are asked from them about their intended
demand for a product and their response to changes in price of the product, their
incomes, prices of competing products. The data so collected is classified and tabulated
for analysis of consumer’s demand.
 Expert Opinion Method :This method is to obtain views of specialists who are well-
informed about the market possibilities of a product. The executives and sales managers
of the firm may be asked to estimate future market possibilities of a product. There may
be outside experts such as consultant firms, investment analysts, who are professionally
trained for the purpose of forecasting demand. 1) Delphi Technique : In Delphi
Technique opinion of a number of experts about future demand is first obtained. Then,
each expert is told about the prediction of the other experts and asked in the light of the
other’s views whether he would revise his prediction about future demand. This is
repeated till a consensus is reached. 2) Survey of Sales Force : In this method,

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information regarding likely sales is obtained from the sales representatives or salesmen of
the firm who are closest to the market.
 Market Experiments : In this method, the first step is to select a particular test area
which accurately represents the whole market in which the new product is to be
launched. By introducing a new product in the test market consumers response about it
can be judged.
 Time Series Analysis : Each technique of time series analysis uses only past or historical
values of a variable to predict future values. These components of change in a variable
over time are divided in to four components : 1) Trends : Long-term increase or
decrease in time-series of a variable. For eg. Increasing population over time or
changing consumer tastes may result in long-term increase or decrease of a demand for
a product over time. 2) Seasonal variations : Changes in demand series over time due to
changes in seasons during a year. Eg. Demand of umbrellas and woolen clothes. 3)
Cyclical variations
: These are substantial expansion or contraction in an economic variable that are usually
more than a year’s duration. In cyclical variations in an economic series sustained
periods of high values of a variable are followed by its low values.

Supply and Law of Supply

Supply is the amount of something that firms, producers, labourers, providers of financial assets, or
other economic agents are willing to provide to the marketplace. Supply is often plotted
graphically with the quantity provided plotted horizontally and the price plotted vertically.

 Good's own price: Although there is no "Law of Supply", generally, the

relationship is positive, meaning that an increase in price will induce an increase
in the quantity supplied.
 Prices of related goods: For purposes of supply analysis related goods refer to
goods from which inputs are derived to be used in the production of the primary
good. For example, Biscuits are made from flour and sugar. Therefore, flour
would be considered a related good to Biscuits. In this case the relationship
would be negative or inverse. If the price of wheat goes up, the supply of biscuits
would decrease (supply curve shifts left) because the cost of production would
have increased. A related good may also be a good that can be produced with
the firm's existing factors of production. For example, suppose that a firm
produces leather belts, and that the firm's managers learn that leather pouches
for smartphones are more profitable than belts. The firm might reduce its
production of belts and begin production of cell phone pouches based on this
information.
 Conditions of production: The most significant factor here is the state of
technology. If there is a technological advancement in one good's production,
the supply increases. Other variables may also affect production conditions. For

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instance, for agricultural goods, weather is crucial for it may affect the production
outputs.
 Expectations: Sellers' concern for future market conditions can directly affect
supply. If the seller believes that the demand for his product will sharply increase
in the foreseeable future the firm owner may immediately increase production
in anticipation of future price increases. The supply curve would shift out.
 Price of inputs: Inputs include land, labor, energy and raw materials. If the price
of inputs increases the supply curve will shift left as sellers are less willing or able
to sell goods at any given price. For example, if the price of electricity increased a
seller may reduce his supply of his product because of the increased costs of
production.
 Number of suppliers: The market supply curve is the horizontal summation of
the individual supply curves. As more firms enter the industry the market supply
curve will shift out driving down prices.
 Government policies and regulations: Government intervention can have a
significant effect on supply. Government intervention can take many forms
including environmental and health regulations, hour and wage laws, taxes,
electrical and natural gas rates and zoning and land use regulations.

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 quantity offered for sale.
The chart below depicts the law of supply using a supply curve, which is always upward sloping.

When college students learn computer engineering jobs pay more than English professor jobs,
the supply of students with majors in computer engineering will increase.
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Problems on Price elasticity of demand and demand

forecasting using time series method

THANK YOU

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