Module3- Market Forces

Mr. Deepak Kulkarni

 Meaning of Demand
Demand implies 3 conditions :
• Desire for a commodity or service
• Ability to pay the price of it
• Willingness to pay the price of it.

Further demand has no meaning without reference

to time period such as a week, a month or a year.
The demand for a product can be defined as the
“Number of units of an commodity that consumer will
purchase at a given price during a specified period of
time in the market.”
 Determinants of Demand
 Price of Commodity
 Price of Related Goods
 Income of the Consumer
 Distribution of Wealth
 Tastes & Habits
 Population growth
 State of Business (Business Cycle)
 Government Policy
 Advertisement
 Level of Taxation
 The Law of Demand
The law of demand expresses the
relationship between the price & quantity
demanded .It says that demand varies inversely
with price.

The Law can be stated in the following:

“ Other things being equal, a fall in the price
leads to expansion in demand and a rise in
price leads to contraction in demand.”
Diagrammatical representation
of the Law
 Why does the demand curve
slope downwards to right?
OR
Why does demand curve has a negative
slope?

• Operation of the Law of Diminishing Marginal Utility

• Income Effect
• Substitution Effect
• Different Uses
• New Buyers
 Assumptions to the Law of
Demand
• Consumers Income remains Constant
• The Tastes & Preferences Of the Consumers
remain the same
• Prices of other related Commodities remain
Constant
• No new Substitutes are available for the
Commodity.
• Consumers do not expect further change in the
price of the commodity.
• The Commodity is not of Prestigious value
Eg: Diamond
• The size of population is constant
• The rate of taxes remain the same
• Climate & Weather Conditions do not
change.
Exceptions to the law of
demand
 A few exceptions
– Price Illusion
– Fear of Future Rise in Prices
– Emergency
– Necessaries
– Conspicious Necessaries (More Noticeable)
Eg:- TV, Watch, Scooters, Car etc
– Fear of Shortage
– Ignorance
– Speculation (Stock Market)
- Giffen’s goods – An inferior good much
cheaper than its superior substitutes
consumed by the poor as an essential
commodity. If prices of cheaper goods
increases with the price of substitute
remaining constant , consumption of
cheaper good increases owing to the fact
income effect of price rise is greater than
the substitution effect.
 Demand Schedule
• Individual Demand Schedule
• Market Demand schedule

1. Individual Demand Schedule:

It is a list of various quantities of a
commodity which an individual consumer
purchases at different prices at one instant of
time.
D= f (P) (or) D(x) = f(Px)
 Individual Demand
Schedule(Hypothetical)
 2. Market Demand Schedule
The market demand Schedule can
be obtained by adding all the individual
Demand Schedules of Consumers in the
market.
Hypothetical market demand
schedule is as follows:
Diagrammatical representation
 Shifts in Demand
A. Extension & contraction of demand:

When demand changes due to change

in the price of the commodity, it is a case
of either extension or contraction of
demand. The Law of demand relates to
the Extension & Contraction of Demand.
B. Increase and Decrease in
Demand
When demand changes, not due to
changes in the price of the commodity or
service but due to other factors on which
demand depends.

Eg:- Income, Population, Climate, Tastes

& Habits etc.
Diagrammatical Representation
Diagrammatical Representation
 Elasticity of Demand
 Elasticity of demand measures the
responsiveness of demand for a
commodity to a change in the variables
confined to its demand.
 For measuring the elasticity coefficient, a
ratio is made of two variables,
ED = %change in quantity demanded
% change in determinants of demand
 Important Kinds of Elasticity
of Demand
1. Price ED:
e = % change in quantity demanded
% change in price
2. Income ED:
e = % change in quantity demanded
% change in income
3. Cross ED:
e = % change in quantity demanded
% change in price of Y
4. Advertising / Promotional ED:
eA = % change in sales
% change in advertisement
expenditure
Factors Influencing Elasticity
of Demand
1. Nature of Commodity:
 Necessaries --- inelastic
 Comforts and Luxuries --- elastic
2. Availability of Substitute:
 A commodity which has more substitutes
the demand is ------ more elastic.
Ex: Tea , Coffee, Milk ,Bournvita etc,
3. No of users of a commodity:
 More no of users ---elastic
Ex: Electricity, Iron and Steel etc.
 Only one use --- inelastic
Ex: Printing machine , stitching machine
4. Proportion of Income Spent on the
Goods:
 Small proportion of income --- inelastic
Ex: Salt, Match box, Postcard
5. Habit:
Ex: Coffee ,Tea --- inelastic
6. Level of Income of the People:
 Rich People --- inelastic
 Poor People --- elastic
7. Period of time:
 Short period --- inelastic
Habit and prices of commodities do not
change much.
 Long period --- elastic
8. Durability of a commodity:
 Durable goods --- elastic
Ex: fan, table, Chair
 Perishable goods --- inelastic
Ex: Milk, flower
9. Postponement of Purchase:
 Postponement --- elastic
Ex: Fan, TV, Fridge
 Cannot be postponed --- inelastic
Ex: Medicine, Rice, Wheat
10. Level of Prices:
 High priced --- elastic
Ex: Cars, TV , Air conditioners
 Low priced --- inelastic
Ex: Newspaper, Nails, Needle
DEMAND FORECASTING METHODS
 Demand Forecasting
Meaning:
Demand forecasting means estimating the
expected future demand for a product ,
related to a
particular period of time.
Methods of forecasting:
The methods of forecasting can be broadly
classified into two categories. They are:
1. Survey Method
2. Statistical Method
 DEMAND FORECASTING METHODS

Survey Method Statistical Method

Expert opinion Direct interview Trend Regression Barometric

method method projection method method
(Collective opinion) method (Economic

indicator
method)

Complete Sample survey End User

enumeration method method
method
 (A) Survey Method
The survey method consists of two methods:
• Survey of experts opinion
• Survey of consumers intentions through
direct interview with them.
 (1) Experts Opinion Method (or)
Collective Opinion Method
• This method is also known as Sales
Force Composite Method.
Advantages:
1. It is a simple method of forecasting.
2. It involves minimum statistical work.
3. It is less expensive.
4. It is based on the first hand knowledge of
the salesmen who are directly connected
with the sales.
 Contd…
5. It is more useful for short term forecasting rather
than long term forecasting.
6. It is particularly useful in forecasting the sales of
new products.
Disadvantages:
1. It is subjective approach.
2. The salesmen may underestimate the
demand.
3. The salesmen may not be able to judge the
future trends in the economy and their impact
on the sales of the product of the firm.
 (2) Direct Interview Method (or)
Customers Interview Method
Under this method ,consumers are
directly interviewed to find out the future demand
or demand trends for a product by a firm. They
are three types of consumers’ interview:
 Complete Enumeration Method
 Sample Survey Method
(Stratified = Society divided into different
classes)
 End Use Method
 Continued……
A. Complete Enumeration Method
under this method ,almost all the
consumers of the product are interviewed and
are asked to inform about their future plan of
purchasing the product in question.
Advantages:
• This method is true from any bias of the
salesmen ,as they only collect the information
and aggregate it.
• This method seems to be ideal, since almost all
the consumers using the product are
contacted.
 Contd…
Disadvantages:
1. This method is however very costly and
tedious.
2. It is also too much time consuming, since
every potential customer is to be interviewed.
3. It would be very difficult and impractical if the
consumers who are spread over the entire
country are to be contacted.
Hence this method is highly
cumbersome in nature.
 Contd…
B. Sample Survey Method:
When the demand of consumers is very large
this method is used by selecting a sample of
consumers
for interview .
Advantages:
1. This method is single and less costly and hence it
is widely used.
2. It is less time consuming ,since only a few selected
consumers are contacted.
 Contd…
3. It is used to estimate short term demand
by business firms, governments departments
and household customers.
4. It is highly useful in case of new products.
5. This method is of greater use in forecasting
where consumers behaviour is subject to
frequent changes.
However the success if this method
depends on the sincere co-operation of the
selected consumers.
 Contd…
Disadvantages:
1. This method is less reliable , because it does
not give opinion of all the consumers.
2. A sudden change in the price of the product in
future may upset the calculations of
consumers.
3. The rich consumers may not bother to fill the
details in the questionnaire.
These are the practical problems faced
in using this method to forecast demand.
 Contd…
C. End Use Method:
Under this method, the sale of the
product under consideration is projected
on the basis of the demand survey’s of
the industries using this given product or
intermediate product.
 Contd…
Advantages:
1. This method is used to forecast the demand
for intermediate products only.
2. It is quite useful for industries which largely
produces goods like aluminium, steel, etc.
Disadvantages:
The main limitation of this method is that , as
the number of end- users of a product
increases, it becomes more difficult to estimate
demand under this method.
 (B) Statistical Method
Under these methods, statistical or
mathematical techniques are used to forecast
the demand for a product in the long period. The
following are the important statistical methods
used in forecasting:
1. Trend Projection Method
2. Regression Method
3. Barometric Method
 (1) Trend Projection Method
This method is also known as Time Series
Analysis.
Time series refers to the data over a period
of time. During this time period, fluctuations
and turning points may occur in demand
conditions .These fluctuations in demand occur
due to the following four factors. They are:
 Secular Trends
 Seasonal Variations
 Cyclical Fluctuations
 Random Variations
Table - Sales of Transistors for 5 years

YEAR SALES in
lakhs of Rs

1991 50

1992 60

1993 55

1994 70

1995 75
 DIAGRAMATIC REPRESENTATION
Y
75

70 Trend line

65

60 Sales curve

55

50

0 X
91 92 93 94 95
 Contd…
Advantages :
1. Trend projection method is quite popular in
business forecasting, because it is a simple
method.
2. The use this method requires only the
simple working knowledge of statistics.
3. It is also less expensive , as its data
requirements are limited to the internal
records.
4. This method yields fairly reliable estimates
if future course of demand.
 Contd…
Disadvantages:
• The most important limitation of this method
arises out of its assumption that the past rate of
change in the dependent variable ( demand).
• This method is not useful for short run
forecasting and cyclical fluctuations.
• This method does not explain the relationship
between dependent and independent variables.
 (2)Regression Method
It combines the economic theory and
statistical techniques of estimation.
 (3) Barometric Method
This method is also known as
Economic Indicators Method. Under this
method , a few economic indicators become the
basis for forecasting the sales of a company.
Some of the most commonly used
indicators are given below:
• Construction contracts
• Personal Income
• Automobile registration
 Contd…
Limitations
• It is difficult to find out an appropriate
economic indicator
• It is not suitable for new products as past
data not available
• It is best suited where relationship of
demand with a particular indicator is
characterized by time-lag
 Significance of Demand
Forecasting
• Production planning
• Sales Forecasting
• Control of business
• Inventory control
• Growth and Long term Investment
Programs
• Stability
• Economic planning and Policy making
 SUPPLY ANALYSIS
Meaning:
Supply of a commodity may be
defined as the quantity of that commodity
which the sellers or producers are able
and willing to offer for sale at a particular
price during a certain period of time.
For eg: At the price of Rs.10 per litre , diary
farms’ daily supply of milk is 200 liters.
Distinction between stock & supply

Stock refers to total quantity of output kept

in the warehouse which can be offered for
sale in the market by the seller.

On the other hand, the term supply refers

to that part of the stock which is actually
offered for sale in the market at a price per
unit of time.
 Law of supply
“ Other things remaining the same, the
supply of a commodity expands (rises)
with a rise in its price and contracts (falls)
with a fall in its price.”

Thus supply varies directly with the

price. In other words, the relationship
between supply & price is direct.
 Explanation of the law
The Law can be explained clearly with the
help of supply schedule and a diagram.
Graph:
 Assumptions underlining the Law of
Supply:
1. Cost of Production is Unchanged
2. No Change in techniques of Production
3. Fixed scale of Production
4. Government policies are unchanged
5. No change in Transport Cost
6. The prices of related goods are constant
 INCREASE & DECREASE IN
SUPPLY
The 2 terms are introduced to explain the
changes in Supply without any change in
price are:

1. Increase in Supply
2. Decrease in Supply
1. Increase In Supply
2. Decrease in supply
Extension & Contraction in supply
 Determinants of supply
1.Price of the commodity
2. Price of the related goods
3. Cost of production
4. Technology
5. Natural factors
6. Tax & subsidy
7. Development of transport & communication
8. Agreement among producers
9. Future Expectations
 Elasticity of supply

It means responsiveness of supply to

change in price.

ES= Proportionate change in the quantity supplied

Proportionate change in price

=
 Illustration
For example, as a result of a change in the
price of a product X from Rs.40 to Rs.45, per
unit, the total supply of ‘X’ is increased from
1000 units to 1200 units. Then Elasticity of
Supply may be calculated as,
Degrees of Elasticity of Supply
1. Perfectly Elastic Supply:
When sellers are prepared to sell all
they can at same price and none at all even
at a slightly lower price.
2. Perfectly Inelastic Supply
When quantity supplied does not change
as price changes.
3. Relatively Elastic Supply
When quantity supplied changes by a
larger % than price.
4. Relatively Inelastic Supply
When quantity supplied changes by a
smaller % than price.
5. Unitary Elastic Supply
When quantity supplied changes by
exactly the same % as price.
Factors determining Elasticity of
Supply
1. Price of Commodity
2. Cost of Production
3. Price of Other Products
4. Change in Technology
5. Time Period
6. Objective of the Firm
7. Size of the Firm
8. Imposition of Taxes
 Continued…..
9. Number of Producers
10. Agreement among Producers
11. Political Disturbances
12. Mobility of factors of Production
13. Availability of Markets
14. Nature of Commodities (perishable &
Durable goods)
15. Improvement in the means of
Communication
16. Nature of production (paintings)