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Demand Analysis - Managerial Economics
Demand Analysis - Managerial Economics
Demand Analysis - Managerial Economics
Block
2
DEMAND AND REVENUE ANALYSIS
UNIT 4
Demand Concepts and Analysis 5
UNIT 5
Demand Elasticity 19
UNIT 6
Demand Estimation and Forecasting 36
1
Demand and Revenue
Analysis Course Design Committee and Preparation Team
Prof. V.L. Mote (Retd.) Dr. C.G. Naidu
IIM, Ahmedabad Planning & Developing Division
IGNOU, New Delhi
PRINT PRODUCTION
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Asstt. Registrar (Publication), Sr. Scale Section Officer (Publication) Proof Reader
SOMS, IGNOU SOMS, IGNOU SOMS, IGNOU
December, 2003
ISBN- 81-266-0972-9
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other
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Printed and published on behalf of the Indira Gandhi National Open University, New Delhi,
by Director, School of Management Studies.
2 Printed at Berry Art Press, A-9, Mayapuri Industrial Area, Phase-1, New Delhi-64
BLOCK 2 DEMAND AND REVENUE
ANALYSIS
This block examines demand, elasticity and forecasting techniques. Demand is the
force that drives all business. Without a demand for its goods or services, a firm is
doomed to failure. Several determinants of demand are identified in Unit 4. The
most important of these are the product’s price, the level of income, consumers’
tastes and preferences, and the prices of complementary or substitute goods. When
drawing a demand curve, only the axes of price and quantity demanded are used;
all determinants of demand other than price are assumed to be constant. Although
demand curves allow us to examine the relationship between price and quantity
demanded, the analysis is a simplification of conditions in the real world.
Unit 5 goes a step further and discusses the importance of elasticities as measures
of the responsiveness of one item to changes in another item. The price elasticity of
demand measures the responsiveness of quantity demanded to changes in price
(while holding all other things constant). Likewise, income elasticity measures the
responsiveness of quantity demanded to changes in income (again holding all other
things constant). Cross-price elasticity of demand measures the responsiveness of
quantity demanded to changes in the price of another good.
These elasticities are calculated using two different techniques–arc elasticity and
point elasticity. The arc elasticity method of calculation estimates each of these
three elasticities by using past data on changes in quantity demanded and the
changes in the particular determinant selected (price, income, or the price of
another good). The second method of estimation, called the point estimation
method, requires an accurate estimate of the demand for its calculation. The point
estimate is more precise, but it also requires the estimator to have more information
to carry out the calculation.
In order to actually estimate and forecast real world demand, we use a variety of
methods including regression analysis in Unit 6. By using regression, all the
determinants of a particular demand can be included in the analysis at once. Use of
regression estimates also allows a comparison of the importance and magnitude of
the various determinants of demand and the easy calculation of elasticities.
You should appreciate that the need to estimate and forecast demand is not
confined to private sector organisations. It is equally necessary for many public
sector organizations. The principles of demand forecasting for public sector
organisations are not significantly different from those applied in the private sector.
However, this block very much focuses on the range of demand forecasting
techniques often used in the private sector.
3
Demand and Revenue
Analysis
4
Introduction to
UNIT 4 DEMAND CONCEPTS AND Microbes
ANALYSIS
Objectives
After studying this unit, you should be able to: