CHAPTER-1

INTRODUCTION

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DEMAND

Concept of Demand

In ordinary speech, the term demand is many times confused with ‘desire’ or ‘want’. But in
economics, demand is not the same thing as desire or want. A does not become demand unless it is backed
by the ability to satisfy it. Hence, demand is the desire to purchase backed by purchasing power.

While discussing the concept of demand, some points should be kept in mind. First, demand means
demand per unit of time. The time may be a day, a week, a month or a year, etc.

Secondly, demand always relates to a commodity. Hence, we should specify the commodity. Thirdly,
demand for any commodity may be individual demand or market demand. Fourthly, the quantity demanded
may vary from one place from another. However, the reference to place is necessary only in the case of
market demand.

Determinants of Demand

The discussion on factors affecting demand will take place at two levels. First we consider the factors
affecting individual demand and then we shall consider the factors affecting market demand. Among the
factors affecting individual demand, we may mention the following:

1) Tastes and Preferences of the Consumer: The changes in demand for various goods occur
due to changes in fashion, and massive advertisement by the sellers.

2) Income of the People: The greater the incomes of the people, the greater will be their demand for
goods and vice versa. Thus, there is a positive relationship between income and demand when all
other factors are kept constant.

3) Price of the Commodity: Greater the price of the commodity, the lesser will be its demand and
vice-versa. Thus, there is a negative relationship between the price and quantity demanded of a
commodity, if all other factors remain constant.

4) Changes in the Prices of the Related Goods: When the price of a substitute for a good X
falls, the demand for that good X will decline and when the price of the substitute rises, the
demand for that good will increase. Tea and coffee are very close substitutes. Therefore,
when the price of tea falls, the consumers substitute tea for coffee and as a result,the demand for
coffee declines. Forgoods that are complementary with each other, the change in the price of
any of them would affect the demand of the other. For instance, if the price of milk falls,
its demand would rise. Along with the demand for milk, the demand for sugar would
also rise, as milk and sugar are complementary goods. Likewise, when the price of car falls,
the demand for them would increase which in turn will increase the demand for petrol.

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5) Expectations about Future Prices: If consumers expect that the price of a good to rise sharply
in near future, they may buy more of that good now itself soas to avoid paying higher prices
later.

6) Demonstration Effect: Demonstration effect refers to the effect of purchase of any commodity by
an individual on the purchase of others. For example, when an individual in a locality purchase T.V.
set, his neighbours may also purchase T.V. sets as a result of the demonstration effect.The market
demand at any period of time is obtained by adding together the individual demands. Apart from the
determinants of individual demand, the market demand depends on certain other factors. The
determinants of market demand are as follows:

7) Population: As population increases, the number of consumers would also increase and as a result,
more of goods will be purchased.

8) Income Distribution: In a country with equitable distribution of income, there will be lesser
demand for certain luxury goods, while in a country where the income is unequally divided
among the very rich and very poor people, the demand for such luxury goods-will be more.

9) Advertisement Expenditure: Market demand also influenced by advertisement expenditures

incurred by firms. The greater the amount of advertisement expenditure, the greater is likely to be
the demand for any commodity.

10) Terms of credit and rate of interest: Many durable consumer goods are purchased by
taking loans. Their demand will depend on the term on which loans are obtained and also on the
rate of interest on such loans.

11) Introduction of new products: If new products are introduced in the market, it reduces the
demand for old products. For example, when a new model of car is introduced, the demand for the
old model decrease.

12) Distribution of income: Total market demand also depends on the distribution of income.
Since different individuals have different marginal propensities to consume, total demand may be
affected even if total income remains the same.

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Demand Function

As we know, a function is a symbolic statement of relationship between the dependent and

independent variables. The demand function state the relationship between the demand for a product (the
dependent variable) and its determinants (the independent or explanatory variables). A demand function may
be expressed as follows:

Dx = f (PX, M, PY, T, A)

Where

DX is the quantity demanded of product X,

M is the money income of the consumer,

PY is the price of other goods,

T is the taste of the consumer and A is advertisement expenditure.

Law of Demand

The law of demand is one of the most important laws of economic theory. The law states the nature
of relationship between the quantity demanded of aproduct and its price. According to the law of demand,
other things being equal, if the price of a commodity falls, the quantity demanded of it will rise and if the
price of a commodity rises, its quantity demanded will decline.

Thus, there is an inverse relationship between price and quantity demanded, ceteris paribus. The
other things which are assumed to be equal or constant are the prices of related commodities, income of
consumers, tastes and preferences of consumers, and such other factors which influence demand. The law
can be stated mathematically as

Demand Schedule

A demand schedule is a schedule which shows various quantities of demanded of a commodity at

different prices in a tabular form, other things remaining unchanged. The demand schedule may be of two
types: individual demand schedule and market demand schedule.

Individual Demand Schedule is a table showing different quantities of commodity that one particular
consumer is willing to buy at different level of prices, during a given period of time. An individual demand
schedule is shown below.

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Table: Demand Scheduled of an Individual Buyer

Price of sugar ` per kg. Quantity Demanded kgs. per month

1 5

2 4

3 3

4 2

5 1

Market demand schedule is a table showing different quantities of a commodity that all the
consumers are willing to buy at different prices, during a given period of time. If there are only two
consumers the market demand schedule will be constructed as under.

Table : Market Demand Schedule

Price of sugar ` per kg. Quantity Demanded p.m. kgs. Market Demand

Consumer A Consumer B A+B

1 5 6 5 + 6 = 11

2 4 5 4+5=9

3 3 4 3+4=7

2 3 2+3=5

5 1 2 1+2=3

Demand Curve

The curve which shows the relationship between price and quantity demanded, other things
remaining the same, is called demand curve. If the demand schedule is represented in a diagram, we can get
the demand curve. Thus a demand curve for any commodity can be drawn by plotting each combination of
price and demand on a graph. Price (independent variable) is taken on the y-axis and quantity demanded
(dependent variable) on the X-axis. The demand curve may be of two types: individual demand curve and
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 market demand curve.

Individual Demand Curve

Exception to the Law of Demand

Generally, the amount demanded of good increases with a decrease in price of the good and vice versa. In
some cases, however, this may not be true. Such situations are explained below.

1. Giffen goods: these are those inferior goods on which the consumer spends a large part of his income and
the demand for which falls with a fall in their price. The demand curve for these has a positive slope. The
consumers of such goods are mostly the poor. a rise in their price drains their resources and the poor have
to shift their consumption from the more expensive goods to the giffen goods, while a fall in the price
would spare the household some money for more expensive goods. which still remain cheaper. These goods
have no closely related substitutes; hence income effect is higher than substitution effect.
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2. Commodities which are used as status symbols: Some expensive commodities like diamonds, air
conditioned cars, etc., are used as status symbols to display one’s wealth. The more expensive these
commodities become, the higher their value as a status symbol and hence, the greater the demand for
them. The amount demanded of these commodities increase with an increase in their price and decrease
with a decrease in their price. Also known as a Veblen good. (In economics, Veblen goods are a group of
commodities for which people's preference for buying them increases as their price increases, as greater
price confers greater status, instead of decreasing according to the law of demand.)

3. Expectations regarding future prices: If the price of a commodity is rising and is expected to rise in
future the demand for the commodity will increase.

4. Emergency: At times of war, famine etc. consumers have an abnormal behaviour. If they expect shortage
in goods they would buy and hoard goods even at higher prices. In depression they will buy less at even
low prices.

5. Quality-price relationship: some people assume that expensive goods are of a higher quality then the low
priced goods. In this case more goods are demanded at higher prices.

6. Demonstration Effect: In the case of demonstration effect, law of demand is not applicable. When a
consumer starts to use a commodity in order to imitate others, it is called demonstration effect. In this case,
if price of a commodity rises, its demand will also rise.

7. Share Market: When the price of any particular share increase in the share market, the demand for that
share also rises. The buyers expect that the price of that share will increase further in near future. To make
more profit, they will want to purchase more of that share. Similarly, when price of any share falls, its
demand decreases. So, the law of demand does not operate in the share market.

Change in Quantity demanded and Change in Demand

The demand schedule, demand curve and the law of demand all show that when the price of a
commodity falls, its quantity demanded increases, other things being equal. When, as a result of decrease in
price, the quantity demanded increases, we say that there is an increase in quantity demanded or an
expansion of demand and when , as a result of increase in price, the quantity demanded decreases, we say
that there is a decrease of quantity demanded or contraction of demand.

For example , suppose the price of apples at any time is Rs.100/per kilogram and a consumer buys
one kilogram at that price. Now, if other things such as income, prices of other goods and tastes of the
consumers remain the same but the price of apples falls to Rs. 80 per kilogram and the consumer now buys
two kilograms of apples, we say that there is a change in quantity demanded or there is an expansion of
demand. On the contrary, if the price of apples rises toRs. 150 per kilogram and the consumer then buys only

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half a kilogram, we say that there is a contraction of demand.

On the other hand, when demand for any commodity changes due change in any factor other than its
own price, we call it change in demand.

The phenomena of expansion and contraction of demand are shown in the Figure below. The figure shows
that when price is OP, the quantity demanded is OM, given other things equal. If, as a result of increase in

price (OP”), the quantity demanded falls to OL, we say that there is ‘a fall in quantity demanded’ or
‘contraction of demand’ or ‘an upward movement along the same demand curve’. Similarly, as a result of
fall in price to OP’, the quantity demanded rises to ON, we say that here is ‘expansion of demand ’or‘ arise
in quantity demanded’ or‘a downward movement on the same demand curve.’

It should be noted that expansion and contraction of demand take place as a result of changes in the
price while all other determinants of price viz. income, tastes, propensity to consume and price of related
goods remain constant. The ‘other factors remaining constant’ means that the position of the demand curve
remains the same and the consumer moves downwards or upwards on it. What happens if there is a change in
consumers’ tastes and preferences, income, the prices of the related goods or other factors on which demand
depends? Let us consider the demand for commodity X.

Table shows the possible effect of an increase in income of the consumer on the quantity demanded of
commodity X.

Table-3 : Two demand schedules for commodity X

Pric Quantity of ‘X’ demanded when Quantity of ‘X’ demanded when average
e average household income household income isRs.25,000 per month
isRs.20,000 per month

A 5 10 15 A1

B 4 15 20 B1

C 3 20 25 C1

D 2 35 40 D1

E 1 60 65 E1
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 Figure showing two demand curves with different incomes

These new data are plotted in Figure 4 as demand curve D’D’ along with the original demand curve DD.
We say that the demand curve for X has shifted [in this case it has shifted to the right]. The shift from DD to
D’D’ indicates an increase in the desire to purchase ‘X’ at each possible price. For example, at the price of
Rs.4 per unit, 15 units are demanded when average household income is Rs.20,000 per month. When the
average household income rises to Rs.25,000 per month, 20 units of X are demanded at price Rs.4. A rise in
income thus shifts the demand curve to the right, whereas a fall in income will have the opposite effect of
shifting the demand curve to the left.

DEMAND ANALYSIS

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 Introduction

Demand and Supply are the two main concepts in Economics. Experts are of the opinion that entire
subject of economics can be summarized in terms of these two basic concepts. Hence the knowledge about
demand and supply are of great importance to a student of Economics.

Understand the concept of demand and its features.

The term demand is different from desire, want, will or wish. In the language of economics, demand
has different meaning. Any want or desire will not constitute demand

Demand = Desire to buy + Ability to pay + Willingness to pay + time + price

The term demand refers to total or given quantity of a commodity or a service that are purchased by
the consumer in the market at a particular price and at a particular time

The demand for any commodity is its quantity which consumers are able and willing to buy at various
prices during a given period of time

The following are some of the important quality of demand-

 It is backed up by adequate purchasing power.
 It is always at a price.
 It should always be expressed in terms of specific quantity
 It is created in the market.
 It is related to a person, place and time.

Consumers create demand. Demand basically depends on utility of a product. There is a direct relation
between the two i.e., higher the utility, higher would be demand and lower the utility, lower would be the
demand.
Demand schedule
The demand schedule explains the functional relationship between price and quantity variations, It is
a list of various amounts of a commodity that a consumer is willing to buy (and so seller to sell) at
different prices at one instant of time. It is necessary to note that the demand schedule is prepared with
reference to the price of the given commodity alone. We ignore the influence of all other determinants of
demand on the purchase made by a consumer.

Individual demand schedule

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 When the price-demand relationship of single person is shown through table is called individual
demand schedule. In other words the table showing various quantities of commodity that could be bought
by the single consumer per period of time at various prices of commodity, keeping other factors constant is
known as individual demand schedule

The following individual demand schedule shows that people buy more when price is low and buy less
when price is high.

Market Demand Schedule

When the demand schedules of all buyers are taken together, we get the aggregate or market demand
schedule. In other words, the total quantity of a commodity demanded at different prices in a market
by the whole body consumers at a particular period of time is called market demand schedule. It refers
to the aggregate behavior of the entire market rather than mere totaling of individual demand schedules.
Market demand schedule is more continuous and smooth when compared to an individual demand schedule.

The study of the market demand schedule is of great importance to a business manager on account of
the following reasons:
1. It helps to make an intelligent forecast of the quantity to be sold at different prices.
2. It helps the business executives to know the various quantities that are likely to be demanded at
different prices.

3. It helps to study the effect of taxes on the total demand for goods in the market.

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4. It helps to forecast the percentage of profits due to variation in prices and to arrange production
well in advance.

5 It helps the monopolist to manipulate prices to stimulate demand for a product.

6. It helps the managers to estimate its production plan in accordance with the market demand.

Demand Curve
A demand curve is a locus of points showing various alternative price – quantity combinations. In
short, the graphical presentation of the demand schedule is called as a demand curve.Presents the

functional relationship between quantity demanded and prices of a given commodity. The demand curve has
a negative slope or it slope downwards to the right. The negative slope of the demand curve clearly indicates
that quantity demanded goes on increasing as price falls and vice versa.

Demand curve are of two types:

1. Individual demand curve

2. Market demand curve

1. Individual demand curve: individual demand curve represents the graphical presentation of various
quantities of commodity demanded by a single consumer per period of time at various prices of commodity,
keeping all the other factors constant.

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2. Market demand curve: Market Demand curve represents the diagrammatic presentation of various
quantities of commodity demanded by all the existing consumers per period of time at various prices of
commodity, keeping all the other factors constant. It is a summation of all consumers purchasing the
commodity at all various price levels .

Reasons of downwards sloping demand curve:

1. law of diminishing marginal utility

2. A product becomes cheaper.[Price effect]

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3. Purchasing power of a consumer would go up.[Income effect]
4. Cheaper products are substituted for costly products [substitution effect].

The Law Of Demand

It explains the relationship between price and quantity demanded of a commodity. It says that demand varies
inversely with the price. The law can be explained in the following manner: “Other things being equal, a
fall in price leads to expansion in demand and a rise in price leads to contraction in demand”.

The law can be expressed in mathematical terms as “Demand is a decreasing function of

price”.

Symbolically, thus D = F (p)

where,
D represent Demand,
P stands for Price and
F denotes the Functional relationships.

The law explains the cause and effect relationship between the independent variable [price] and the
dependent variable [demand].

Important Features of Law of Demand

1. There is an inverse relationship between price and demand.

2. Price is an independent variable and demand is a dependent variable

3. It is only a qualitative statement and as such it does not indicate quantitative changes in price and demand.

4. Generally, the demand curve slopes downwards from left to right.

The operation of the law is conditioned by the phrase “Other things being equal”. It indicates that given
certain conditions certain results would follow. The inverse relationship between price and demand would
be valid only when tastes and preferences, customs and habits of consumers, prices of related goods, and
income of consumers would remains constant.

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 Exceptions To The Law Of Demand
Generally speaking, customers would buy more when price falls in accordance with the law of demand.
Exceptions to law of demand states that with a fall in price, demand also falls and with a rise in price
demand also rises. This can be represented by rising demand curve. In other words, the demand curve
slopes upwards from left to right. It is known as an exceptional demand curve or unusual demand curve.

It is clear from the diagram that as price rises from Rs. 4.00 to Rs. 5.00, quantity demanded also
expands from 10 units to 20 units.

Following are the exception to the law of demand

1. Giffen’s Paradox

A paradox is a foolish or absurd statement, but it will be true. Sir Robert Giffen, an Irish
Economists, with the help of his own example (inferior goods) disproved the law of demand. The Giffen’s
paradox holds that “Demand is strengthened with a rise in price or weakened with a fall in price”. He
gave the example of poor people of Ireland who were using potatoes and meat as daily food articles. When
price of potatoes declined, customers instead of buying greater quantities of potatoes started buying more of
meat (superior goods). Thus, the demand for potatoes declined in spite of fall in its price.
2. Veblen’s effect
Thorstein Veblen, a noted American Economist contends that there are certain commodities which are
purchased by rich people not for their direct satisfaction, but for their ’snob – appeal’ or
‘ostentation’ .Veblen’s effect states that demand for status symbol goods would go up with a arise in
price and vice-versa. In case of such status symbol commodities it is not the price which is important but the
prestige conferred by that commodity on a person makes him to go for it. More commonly cited examples of
such goods are diamonds and precious stones, world famous paintings, commodities used by world figures,
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personalities etc. Therefore, commodities having ’snob – appeal’ are to be considered as exceptions to the
law

3. Fear of shortage

When serious shortages are anticipated by the people, (e.g., during the war period) they purchase more
goods at present even though the current price is higher.

4. Fear of future rise in price

If people expect future hike in prices, they buy more even though they feel that current prices are higher.
Otherwise, they have to pay a still high price for the same product.

5. Speculation

Speculation implies purchase or sale of an asset with the hope that its price may rise of fall and make
speculative profit. Normally speculation is witnessed in the stock exchange market. People buy more
shares only when their prices show a rising trend. This is because they get more profit, if they sell their
shares when the prices actually rise. Thus, speculation becomes an exception to the law of demand.

6 Conspicuous necessaries

Conspicuous necessaries are those items which are purchased by consumers even though their prices
are rising on account of their special uses in our modern style of life.

In case of articles like wrist watches, scooters, motorcycles, tape recorders, mobile phones etc customers buy
more in spite of their high prices.

7. Emergencies

During emergency periods like war, famine, floods cyclone, accidents etc., people buy certain articles even
though the prices are quite high.

8. Ignorance

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Sometimes people may not be aware of the prices prevailing in the market. Hence, they buy more at higher
prices because of sheer ignorance.

9. Necessaries

Necessaries are those items which are purchased by consumers whatever may be the price. Consumers
would buy more necessaries in spite of their higher prices.

Determinants of Demand

• The price of the product.

• The income available to the household.
• The consumers amount of accumulated wealth.
• The prices of related products available to the household.
• The consumer’s tastes and preferences.
• The consumer’s expectations about future income, wealth, and prices.

Thus, several factors are responsible for bringing changes in the demand for a product in the market. A
business executive should have the knowledge and information about all these factors and forces in order to
finalize his own production marketing and other business strategies.

Demand function
The demand function is an algebraic expression of the relationship between demand for a commodity
and its various determinants that affect this quantity. Demand function is a comprehensive formulation
which specifies the factors that influence the demand for a product other than price. The market demand
function may be expressed mathematically thus:
Dx = f(Px, Pr, M, T, A, U)
Where

• Dx = Quantity demanded for commodity x

• f = functional relation
• Px = Price of commodity x
• Pr = Prices of related commodities i.e. substitutes and complementary goods
• M = The money income of the consumer

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 • T = The taste of the consumer
• A = The advertisement effect
• U = Unknown variables

The knowledge of demand function is more important for a firm than the law of demand. Demand
function explains the various factors and forces other than price that would affect the demand for a
commodity in the market.

In economics the terms change in quantity demanded and change in demand are two different concepts.

Change in quantity demanded refers to change in the quantity purchased due to increase or decrease in
the price of a product. In such a case, it is incorrect to say increase or decrease in demand rather it is increase
or decrease in the quantity demanded.

On the other hand, change in demand refers to increase or decrease in demand of a product due to
various determinants of demand, while keeping price at constant.

Changes in quantity demanded can be measured by the movement of demand curve, while changes in
demand are measured by shifts in demand curve. The terms, change in quantity demanded refers to
expansion or contraction of demand, while change in demand means increase or decrease in demand.

1. Expansion and Contraction of Demand:

The variations in the quantities demanded of a product with change in its price, while other factors are
at constant, are termed as expansion or contraction of demand.

Expansion of demand refers to the period when quantity demanded is more because of the fall in
prices of a product.

However, contraction of demand takes place when the quantity demanded is less due to rise in the
price of a product.

For example, consumers would reduce the consumption of milk in case the prices of milk increases
and vice versa. Expansion and contraction are represented by the movement along the same demand curve.
Movement from one point to another in a downward direction shows the expansion of demand, while an
upward movement demonstrates the contraction of demand.

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Figure demonstrates the expansion and contraction of demand:

When the price changes from OP to OP1 and demand moves from OQ to OQ1, it shows the expansion of
demand. However, the movement of price from OP to OP2 and movement of demand from OQ to OQ2
show the contraction of demand.

2. Increase and Decrease in Demand:

Increase and decrease in demand are referred to change in demand due to changes in various other
factors such as change in income, distribution of income, change in consumer’s tastes and preferences,
change in the price of related goods, while Price factor is kept constant Increase in demand refers to the rise
in demand of a product at a given price.

On the other hand, decrease in demand refers to the fall in demand of a product at a given price. For
example, essential goods, such as salt would be consumed in equal quantity, irrespective of increase or
decrease in its price. Therefore, increase in demand implies that there is an increase in demand for a product
at any price. Similarly, decrease in demand can also be referred as same quantity demanded at lower price,
as the quantity demanded at higher price.\

Increase and decrease in demand is represented as the shift in demand curve. In the graphical
representation of demand curve, the shifting of demand is demonstrated as the movement from one demand
curve to another demand curve. In case of increase in demand, the demand curve shifts to right, while in
case of decrease in demand, it shifts to left of the original demand curve.
Figure-shows the increase and decrease in demand:

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The movement from DD to D1D1 shows the increase in demand with price at constant
(OP). However, the quantity has also increased from OQ to OQ1.

Figure-shows the decrease in demand:

In Figure the movement from DD to D2D2 shows the decrease in demand with price at
constant (OP). However, the quantity has also decreased from OQ to OQ2.

DEMAND AND SUPPLY

 Distinguish between quantity demanded and demand and explain what determines
demand.

 Distinguish between quantity supplied and supply and explain what determines
supply.

 Explain how demand and supply determine price and quantity in a market, and
explain the effects of changes in demand and supply.

QUANTITY DEMANDED

The amount of a good, service, or resource that people are willing and able to buy
during a specified period at a specified price. The quantity demanded is an amount per unit
of time. For example, the amount per day or per month.

THE LAW OF DEMAND

 If the price of good rises, the quantity demanded of those good decreases.

 If the price of a good falls, the quantity demanded of that good increases.

DEMAND SCHEDULE AND DEMAND CURVE

The relationship between the quantity demanded and the price of a good when all other
influences on buying plans remain the same. Demand is a list of quantities at different prices
and is illustrated by the demand curve.
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 DEMAND SCHEDULE

The demand for a commodity is defined as a schedule of the quantities that buyers
would be willing and able to purchase at various possible prices per unit of time. Unit of
time refers to year, month, and week and so on. It should also be understood that demand is
not the same thing as desire or need. A ‘desire’ becomes ‘demand’ only when it is backed
up by the ability and willingness to satisfy it.

An individual’s demand schedule is a list of various quantities of a commodity, which

an individual consumer purchases at different (alternative) prices in the market at a given
time. The demand schedule, thus, states the relationship between the quantity demanded of a
commodity and its price. In a market, there are a number of consumers each with his own
demand schedule, showing the different quantities of the commodity that he will purchase at
different prices.

The market demand schedule can be obtained in two ways. First, by adding up the
demand schedules of all the consumers in the market. Second, by taking the demand
schedule of the representative consumer and multiplying it by the total number of
consumers in the market.

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 DETERMINANTS OF DEMAND:

The demand is influenced by the following factors:

Tastes and Preferences of the Consumer:

The changes in demand for various goods occur due to changes in fashion, and massive
advertisement by the sellers.

Income of the People:

The greater the incomes of the people, the greater will be their demand for goods and
vice versa. Thus, there is a positive relationship between income and demand when all other
factors are kept constant.

Oil of the Commodity:

Greater the Oil of the commodity, the lesser will be its demand and vice-versa. Thus,
there is a negative relationship between the Oil and quantity demanded of a commodity, if all
other factors remain constant.

Changes in the Oil of the Related Goods:

When the Oil of a substitute for a good X falls, the demand for that good X will
decline and when the Oil of the substitute rises, the demand for that good will increase. Tea and
coffee are very close substitutes. Therefore, when the Oil of tea falls, the consumers substitute
tea for coffee and as a result, the demand for coffee declines. For goods that are
complementary with each other, the change in the Oil of any of them would affect the demand
of the other. For instance, if the Oil of milk falls, its demand would rise. Along with the
demand for milk, the demand for sugar would also rise, as milk and sugar are complementary
goods. Likewise, when the Oil of car falls, the demand for them would increase which in
turn will increase the demand for petrol.

Population:

As population increases, the number of consumers would also increase and as a result,
more of goods will be purchased.

Income Distribution:

In a country with equitable distribution of income, there will be lesser demand for
certain luxury goods, while in a country where the income is unequally divided among the very
rich and very poor people, the demand for such luxury goods-will be more.

Expectations about Future Oil:

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 If consumers expect that the Oil of a good to rise sharply in near future, they may buy
more of that good now itself so as to avoid paying higher Oil later.

LAW OF DEMAND

The law of demand expresses the functional relationship between Oil and quantity of a
commodity demanded. The law of demand may be stated as follows: other things being
equal, if the Oil of a commodity falls, the quantity demanded of it will rise and if Oil of the
commodity rises, its quantity demanded will decline. Thus, according to the law of demand,
there is an inverse relationship between Oil and quantity demanded, other things remaining
the same. These other things which are assumed to be constant are a) tastes and preferences of
the consumer, b) income of the consumer and c) Oil of related goods (substitute and
complementary goods). If these other factors, which determine demand, also undergo a change,
then the inverse Oil-demand relationship may not be valid.

The law of demand can be illustrated through a demand curve (Fig.3.1). Suppose, the
consumer purchases OQ0 quantity of Oil for OP0. If Price of Oil rises from OP0 to OP1 the
quantity demanded decreases from OQ0 to OQ1. Similarly, if the Price falls from OP0 to OP2,
the quantity demanded rises from OQ0 to OQ2. Thus, there is a negative relationship between
the Price and quantity demanded. In other words, the demand curve slopes downward from
left to right. The law of demand can be expressed in the functional form as follows

Qd = f (P, I, PR/T)

Where,Qd = Quantity demanded of a commodity

P = Price of the commodity

I = Income of the consumer

23
 PR = Prices of the related goods

T = Tastes and preferences of the consumer

Why does the Law of Demand operate?

Now, an important question is: why the demand curve slopes downward, or in other words,
how the law of demand describing inverse Price-demand relationship is valid? There are three
reasons for the operation of the law. Firstly, the law of demand is operated because the law of
diminishing marginal utility comes into force when a consumer buys additional quantities of a
particular commodity.

Derivation of Law of Demand from Law of Diminishing Marginal Utility and Law of Equi-
Marginal Utility
The law of demand or the demand curve can be derived in two ways: firstly, with the aid of
law of diminishing marginal utility, and secondly, with the help of law of equi-marginal utility.
The law of diminishing marginal utility states that as the quantity of a good with a consumer
increases, marginal utility of the good to him expressed in terms of money falls.

In other words, the marginal utility curve of a good is downward sloping. Now, a
consumer will go on purchasing a good until the marginal utility of the good equals the market
Price. His satisfaction will be maximum only when marginal utility equals Price. It, therefore,
follows that the diminishing marginal utility curve implies the

Now, we proceed to derive the law of demand from the law of equi-marginal utility.
According to the law of equi- marginal utility, the consumer is in equilibrium in regard to his
purchase of various goods when marginal utilities of the goods are proportional to their Prices.
Thus, the consumer is in equilibrium when he is buying the quantities of two goods in such a
way that it satisfies the following proportionality rule:

24
Income Effect

A fall in Price of a commodity results in a rise in the consumer’s real income. He can,
therefore, purchase more of it. On the contrary, a rise in Price of a commodity amounts to a fall
in his real income. He is, therefore, forced to purchase less of it. Let us suppose that the Price
of sugar falls down. After having purchased his usual quantity, the consumer is still left with
some money, a part of which he is likely to spend on buying additional quantity of sugar.

Substitution Effect

A fall in Price of a commodity, while the Prices of its substitutes remain constant, will
make it cheaper and attractive to the consumers. Conversely, a rise in the Price of the
commodity, while the Prices of its substitutes remain constant, will make it unattractive to the
25
consumers who will demand less of it. Now, the consumers will buy more of the substitute than
that of the commodity.

Suppose, the Prices of apple and orange are Re 1.00 and Re 0.50 respectively. Orange
is taken as a substitute for apple. Now, the Price of apple is twice costlier than that of an orange.
If the Price of orange (substitute) alone falls to Re 0.25, then apple is four times as costly as
orange. A consumer will always buy low-Priced commodity than high-Price commodity.
Hence, the consumer, in this case, will buy more of the substitute (orange) in the place of
apple. This is due to substitution effect.

Normally, the income effect is weaker than the substitution effect. As stated above, a
consumer ordinarily spends a very small part of his income on oneparticular commodity. A fall
in the Price of the commodity will not, therefore, increase his real income in any substantial
measure. The substitution effect, on the contrary, is stronger than the income effect, because
the consumer will always substitute the inexpensive for the expensive commodity. Further
more, the income effect is positive only in case of a superior commodity.

A superior commodity is one, which is consumed, in increased quantities when income

of the consumer rises. For example, Oil is a superior commodity because people consume more
of it when their incomes rise. This is due to the fact that the consumer’s real income would
increase, if Price of such a commodity falls. On the other hand, the income effect is negative
in case of an inferior commodity. An inferior commodity is one, which is consumed, in smaller
quantities when the income of the consumer rises. Its consumption is a symbol of low status
and therefore, if the Price of such a commodity falls, the consumer’s real income increases, but
he buys less of inferior commodity. For example, jaggery is an inferior commodity because
people consume less of it when their incomes rise.

26
DEMAND SCHEDULE

A list of the quantities demanded at each different price when all the other influences on
buying plans remain the same. Demand curve A graph of the relationship between the quantity
demanded of a good and its price when all other influences on buying plans remain the same.

Changes in Demand Change in the quantity demanded A change in the quantity of a

good that people plan to buy that results from a change in the price of the good. Change in
demand A change in the quantity that people plan to buy when any influence other than the
price of the good changes. The main influences on buying plans that change demand are:

 Prices of related goods

 Income

 Expectations

 Number of buyers

 Preferences

An oil is any neutral, non polar chemical substance that is a viscous liquid at ambient
temperatures and is both hydrophobic and lipophilic. Oils have a high carbon and hydrogen
content and are usually flammable and surface active.

The general definition of oil includes classes of chemical compounds that may
be otherwise unrelated in structure , properties and uses. Oil may be animal , vegetable or
petrochemical in origin and may be volatile or non volatile. They are used for food , fuel ,
medical purposes , lubrication and the manufacture of many types of paints , plastics and
other materials . Specially prepared oils are used in some religious ceremonies and rituals as
purifying agents.

A hydro carbon liquid substance that is greasy to touch and is formed by natural
resources or the breakdown of fats. Oil comes in many forms as diverse as crude oil and
vegetable oil , which serve very difficult purposes . Products consisting oils are insoluble
when added to water but will dissolve in organic substances such as those acquired from
living organisms.

27
 Coconut oil , copra oil , is an edible oil extracted from the kernel or meat of
mature coconuts harvested from the coconut palm ( cocos nucifera ). It has various
applications. Because of its high saturated fat content , it is slow to oxidize and thus resistant
to rancidification, lasting upto six months at 24C (75F) without sOiling.

Coconut oil is one of the oil which helps in lubrication of the hair . The content in
coconut oil like magnesium , potassium , calcium and iron happens to provide the best for
your hair .It is very useful for damaged hair due to its ability to strengthen it . Oiling one’s
hair is one of the most important things, if we want to take care of our hair. It is very
necessary that hair is given proper treatment which would mean a massage with some of the
most beneficial oils.

The massaging and oiling to your hair stimulates the blood circulation, which in
return helps your hair . Due to the oil your hair is protected from the strong and hot sunrays.
The oil also gives your hair that extra shine.

28
 CHAPTER-2

DEMAND AND SUPPLY ANALYSIS

29
INTRODUCTION

Satisfaction of human needs is the basic end and goal of all production activities in an
economy. As we have learnt in Unit 1, human wants are unlimited and recurring in nature,
whereas means available to satisfy them are limited. Therefore, a rational consumer has to make
an optimal use of available resources. The demand and supply analysis provides a framework within
which these decisions have to be made. Hence, in this unit we shall discuss the various issues
related to the theory of demand and supply analysis.

THE NATURE OF DEMAND

At first, let us understand the meaning of the terms like desire, want, and demand. Desire
is just a wish on the part of the consumer to possess a commodity. If the desire to possess a
commodity is backed by the purchasing power and the consumer is also willing to buy that
commodity, it becomes want. The demand, on the other hand is the wish of the consumer to get a
definite quantity of a commodity at a given price in the market backed by a sufficient
purchasing power. There are three important points to remember about the quantity demanded:

 First, the quantity demanded is the quantity desired to be purchased. It is the desired
purchase. The quantity actually bought is referred to as actual purchase.

 Secondly, quantity demanded is always considered as a flow measured over a period of

time, like if the quantity demanded of oranges is 10, it must be per day or per week, etc.

 Thirdly, the quantity demanded will have an economic meaning only at a given price. For
example, the demand for oranges equal to 10 units per week at a price of Rs. 100 per
dozen is a full and meaningful statement, as used in micro-economic theory.

30
DETERMINANTS OF DEMAND

The demand of a product is determined by a number of factors.

Determinants of Demand by a Consumer

The demand for commodity or the quantity demanded of a commodity on the part of the
consumer is dependent on a number of factors. These are mentioned as follows:

i) Price of the commodity in question

ii) Prices of other related commodities

iii) Income of the consumers, and

iv) Taste of the consumers.

Demand function refers to the rule that shows how the quantity demanded depends upon above
factors. A demand function can be shown as:

Dx = f (Px, Py,Pz, M, T)

where,

Dx is quantity demanded of X commodity,

Px is the price of X commodity,

Py is the price of substitute commodity,

Pz is price of a complement good,

M stands for income,

T is the taste of the consumer.

If all the factors influencing the demand for a commodity X vary simultaneously, the
picture would be highly complicated. Therefore, normally we allow only one of the factors to
change, assuming that all other factors remain unchanged (‘ceteris paribus’ other things
remaining equal).

31
Demand Relationship: Relationship of quantity demanded of a commodity to its various
determinants can be stated as follows:

1. Price of the commodity: Normally, higher the price of the commodity, the lower the
demand of the commodity. This is the law of demand.

2. Size of the consumer’s income: When the increase in income leads to an increase in the
quantity demanded, the commodity is called a ‘normal good’. If an increase in income
leads to a fall in the quantity demanded, we call that commodity an ‘inferior good’.

3. Prices of other commodities: A consumer’s demand for a commodity may also be

influenced by the prices of some other commodities. Some are complementary goods,
which are consumed along with the commodity in question while others may be used in
place of this commodity. This category is called substitutes.

Demand bears inverse relationship with prices of complements and direct relationship with
prices of substitutes. Tea and coffee are substitutes and a car and petrol are example of a pair of
complementary goods.

Tastes of consumer: If a consumer has developed a taste for a particular commodity, he/she
will demand more of that commodity. Similarly, if a consumer has changed his taste against a
particular commodity, less of it will be demanded at any particular price. This development of
tastes may be related to seasons of the year as well. In summer months, you may consume more
cold drinks and ice creams, whereas in winters, the preference may shift towards hot or warm
drinks like tea and coffee etc.

32
Determinants of Market Demand

The factors determining the demand for a commodity in a market are the same as those which
determine the demand for the commodity on the part of a consumer. Besides that two additional
factors are also to be included. These two factors are:

1) Size of the population: All other factors remaining unchanged, the greater is the size of
the population, more of a commodity will be demanded.

2) Income distribution: People in different income groups show marked differences in their
preferences. So if larger share out of national income goes to the rich, demand for the
luxury goods may rise and a rise in income share of the poor will increase demand for the
wage goods.

A correct specification of the demand equation is a must for the estimated function to predict
demand accurately.

THE LAW OF DEMAND

The inverse relationship between the quantity of a commodity and its price, given all other
factors that influence the demand is called ‘law of demand’. It gives us a demand curve that
slopes downwards to the right. We can explain this idea with help of a demand schedule, a table
that records quantities demanded at different prices. This schedule, on being recorded on a two
dimensional axes system, gives us a demand curve.

Demand and Supply Analysis

Table 2.1 : The Demand Schedule of a Consumer for Apples

Quantity Demanded
Price of Apple per
of Apples
Kg. (in Rs.)
(in Kg. per week)
100 15
200 12
300 8
400 3

33
Four combinations of price and quantity demanded are shown in the Table 2.1. We can easily
infer that as price of an apple rises quantity demanded by the consumer is falling.

The Demand Curve

The demand curve graphically shows the relationship between the quantity of a good that
consumers are willing to buy and the price of the good. Let us understand the demand curve
with the help of the Fig. 2.1. In this figure, on the Y-axis, price of an apple in rupees in
measured and on the X-axis the quantity demanded of apples per week is measured. The first
combination of Table 2.1 is shown by point a where at Rs. 100 per kg 15 units of apples are
demanded. Similarly points b, c, d represent combinations of Rs. 200 price – 12 quantity
demanded, Rs. 300 price – 8 quantity demanded and Rs. 400 price – 3 quantity demanded,
respectively. The joining together of points a, b, c, and d give us the demand curve, DD.

Fig. 2.1

The most important feature of a demand curve is that it slopes downward from left to
right. In Fig. 2.1 the demand curve is a straight line. But it can also be in the form of a curve as
shown in Fig. 2.2.

Whether a demand curve is a straight line or a curve depends on how much quantity
demanded rises with the fall of its price or how much quantity demanded falls with the rise in

34
the price of the commodity. Whether we take Fig. 2.1 or 2.2, in both the cases the law of
demand is applicable.

35
 Fig. 2.2 Quantity Vs Price

If we record demand schedules of two or more consumers of a commodity on the same axes, we
can get a number of demand curves. Horizontal summation of those curves gives us the market
demand curve. We are illustrating a two consumer market demand curve for ice cream with help
of the following schedule and diagram:

Demand and Supply Analysis

36
 Table 2.2

Price (Rs) Quantity Demanded by Market

Demand
Household Household
A B
3 4 + 5 =9
4 3 + 4 =7
5 2 + 3 =5
6 1 + 2 =3

Market demand curve is a horizontal summation of individual demand curves, as illustrated

below.

Fig. 2.3

Why does a Demand Curve Slope Downwards?

Law of demand states that there is an inverse relationship between the price of a commodity and
its quantity demanded.

Substitution Effect

Substitution effect results from a change in the relative price of a commodity. Suppose a Pepsi
Can and a Coke Can both are priced at Rs. 90 and Rs. 20 each. If the price of Coke is raised to Rs.
25, and the price of Pepsi is not changed, Pepsi will become relatively cheaper to Coke, i.e.

37
although the absolute price of Pepsi has not changed, the relative price of Pepsi has gone down.
The change in the relative price of commodity causes substitution effect.

Similarly, if price of mango falls, the rest of the fruits will appear costlier, in comparison
with mango.So in both the cases above, the quantity demanded of relatively costlier items will
register a decline.

Income Effect

This is the effect of a change in total purchasing power of the money income of the
consumer. As price of mango falls the purchasing power of the given money income rises, or his
real income rises. Thus, he can buy more of the mangoes with the same money income. His
demand for any other commodities may also rise. This is called the ‘income effect’. A
commodity with positive income effect is called a ‘normal good’. It shows a positive or direct
relationship between the income and the quantity demanded. When rise in income leads to a fall
in the quantity demanded, we have a case of negative income effect. Such goods are called the
‘inferior goods’.

Price Effect

Price Effect is the sum total of the substitution effect and income effect, i.e.

PE = SE + IE
Where PE = Price Effect.
SE = Substitution
Effect IE = Income
Effect

It is important to note that substitution effect and income effect operate simultaneously with
the change in the price of the commodity. ‘Substitution effect’, and ‘income effect’ taken
together give ‘price effect.’ We can identify three cases.

1. Substitution effect always operates in a manner such that as price falls, quantity
demanded of this commodity increases. If along with substitution effect, we take income
effect and if that happens to be positive (a case of normal commodity) the law of demand
will necessarily apply.

2. Given substitution effect, if income effect is negative (a case of an ‘inferior commodity’)

38
the law of demand can still apply provided the substitution effect outweighs or is more
powerful than the negative income effect, and

39
GIFFEN GOOD

A case where negative income effect outweighs substitution effect is possible when we have
‘Giffen good’ named after the Robert Giffen who first talked of such paradox. Here a fall in the
price of a commodity does not lead to a rise in its demand, it may result in a fall in demand for
this commodity.

CHANGE IN QUANTITY DEMANDED Vs. CHANGE IN DEMAND

When the demand for a commodity changes because of the change in its price, it is called
‘change in quantity demanded’. On the other hand, when the change in demand is due to the
factors other than its price cause a change it is called ‘change in demand’.

Expansion and Contraction in Demand

The change in quantity demanded of a commodity is called the expansion in demand if a fall in
the price causes the quantity demanded to rises. Conversely, if with a rise in the price of a
commodity, its quantity demand falls, we call it contraction in demand. These can be
represented in the form of a movement on a demand curve, as shown in Fig. 2.4.

Fig. 2.4 movement on a demand curve

DD is the demand curve. At point ‘a’ on the demand curve we find that at price OPa, OQa of a
commodity is demanded. As price falls to OP c, demand becomes OQc. This movement from point a
to point c on the demand curve DD is referred to as ‘extension in demand’. Similarly when price
of a commodity rises to OPb, demand falls to OQb. Thus, the movement from a to b on the
40
demand curve DD is known as ‘contraction in demand’.

Change in Demand

Change in demand takes place when the whole demand scenario undergoes a change. This
change occurs due to a change in any determinant of demand

Change in demand may take two forms:

i) Increase in demand, and (ii) Decrease in demand Increase in demand
takes place when;
a) at a given price, higher quantity is demanded, or

b) at a higher price, the same quantity is demanded Decrease in

demand takes place when:
a) at a given price, lower quantity is demanded, or

b) at a lower price, the same quantity is demanded

Graphically, increase in demand results in rightward shift of the whole demand curve.
Likewise, decrease in demand results in leftward shift of the demand curve. This is shown in

the Fig. 2.5.

Fig. 2.5 Increase in demand

At price Pa, at point ‘a’ on DD, quantity demanded is OQ a. At the same price, quantity demanded
rises to OQb at point b on the demand curve D'D'. This is called ‘increase in demand’.
Similarly, at price OP a the quantity demanded comes down to OQc on point ‘c’ of demand
curve D"D". This change in quantity demanded is ‘decrease in demand’. The shift of the
demand curve to the right shows ‘increase in demand’ and a movement of the demand curve to
the left of the initial demand curve is a ‘decrease in demand’.
41
Many factors can shift a demand curve. Some of them are:

1) A rise in income of the consumer can enables him to demand more of a commodity at a
given price and a fall in income will generally force him to curtail his demand.

2) A rightward shift in the demand curve can also take place because of increase in price of
a substitute. Similarly, a leftward shift in the demand curve can be because of decrease in
price of a substitute.

3) If the consumer develops a taste for a commodity, he may demand more of it even if the
price remains unchanged, shifting the demand curve to the right. On the other hand, a
leftward shift in the demand curve can indicate that our consumer has started disliking the
commodity.

42
THE CONCEPT OF SUPPLY

Supply refers to the quantity of a commodity that producers are willing to sell at different prices
per unit of time. Just like demand, the word supply also has some distinguishing features which
are given below.

1) The supply of a commodity indicates the offered quantities. In fact, current supply can be
different from current production, the difference is accounted for by the changes in the
inventories or the stocks.

2) Like the demand, the supply is also with reference to the price at which that quantity is
supplied. If the price is not mentioned, our statement would not carry any economic
meaning.

3) The supply is a flow. It has a time unit attached therewith. The supply has to be per
day/week or month.

Formally, supply of a commodity refers to the quantity that a producer is willing to sell at
different prices.

Determinants of Supply

Some of the important determinants of supply are as follows:

1) Price of the commodity supplied: The price is most immediate determinant of supply. A
person or firm will make quick check whether the costs will be covered by the price. As
the price goes up, a firm/person will be willing to sell larger quantity.

2) The prices of factors of production or cost of production: These affect the cost of
production and possible profits of the firm. A rise in the prices of factors of production
discourages the production and supply of the commodity.

3) Prices of other goods: As the prices of other commodities rise, they become more
attractive to produce for a profit maximising firm. Hence supply of commodity whose
price is unchanged will decline.

4) The state of technology: The improvement in the knowledge about the means and the
methods of production lead to lower costs of production and helps increasing output.

5) Goals of the producer: The objective with which the producer undertakes production
37
 also influences his production and supply decisions.

A simultaneous change in all the determinants makes analysis difficult. Therefore, we

talk of a change in only one of the factors, others remaining unchanged to work out effect of that
factor on the quantity of the commodity supplied by a firm.

THE LAW OF SUPPLY

A producer aims to maximise profits, the difference between total revenue and total cost. Total
revenue is the price of the product multiplied by its quantity sold. Total cost is the cost of
production.

Profit = TR – TC

TR = Total Revenue (q.p) TC = Total Cost (q.AC)

where AC is average cost.

A higher price would mean more profits. The producer will supply more at a higher
price. Similarly, a producer will supply smaller quantity at a lower price. This is a direct
relationship between the price and the quantity supplied of a commodity and is called the ‘Law
of Supply’.

Here the change in price is the cause and change in supply is the effect. Thus, the supply
function is:

S = f (P)

The supply of a commodity is a function of its price, the price of all other commodities, the prices
of factors of production, technology, the objectives of producers and other factors remaining
unchanged. So:Qs = f(P1, P2, P3... Pn, F1… Fa, T, G, ….)

Where Qs stands for the quantity of the commodity supplied;

P1 is the price of that commodity, P2, P3...Pa are the prices of other commodities;

F1 …… Fn are the prices of all factors of production; T is the state of

technology;
G is the goal of the producer.

38
The Supply Schedule

A supply schedule shows quantities of a commodity that a seller is willing to supply, per
unit of time, at each price, assuming other factors remaining constant. A supply schedule of a
product based on imaginary data is given in Table 2.3 illustrating the relationship between price
and quantity supplied as given by the law of supply.

Table 2.3: Supply Schedule of a Pen Producer

Price (in Rs) per Pen Quantity Supplied

(in thousand)

per Month

2 25

3 40

4 50

5 60

6 70

The schedule presented in Table 2.3 shows that at Rs. 2 per pen, the producer is willing to
supply 25 thousand pens per month. At a higher price of Rs. 3 per pen, he is willing to supply 40
thousand pens per month and so on. This schedule depicts direct relationship between price per
pen and quantity supplied of pens per month.

The Supply Curve

Look at Fig. 2.6 where the data from Table 2.3 has been plotted. Here price is plotted on the Y-
axis and quantity supplied on X-axis.

39
Fig:2.6 Demand Curve

40
Figure 2.6 shows that point labelled a, for example, gives the same information that is given on
the first row of the table; when the price of pens is Rs. 2 per pen, 25,000 pens per month are
offered for sale. Similarly, points b, c, d, and e on the graph correspond to row 3rd, 4th, 5th and
6th of Table 2.3 respectively.

The supply curve S is a smooth curve drawn through the five points a, b, c, d and e. This
curve shows the quantity of pens offered for sale at each price.

The supply curve (just like a demand curve) can be linear straight line, or in the shape of
an upward slopping curve convex downwards.

The upward slope of the supply curve indicates that higher the price, the greater the
quantity will be supplied. If the supply curve is extended to the Y- axis, it may or may not pass
through O. If it passes through O, it shows that the quantity supplied is zero when the price is
zero. If it does not pass through zero, it shows that until the price rises up to a certain point, the
quantity supplied will remain zero. Re. 1 can be such a price. The producer will not offer any
quantity for sale if price is Re. 1 or less. The upward sloping supply curve is just a diagrammatic
representation of the law of supply.

Exceptions to the Law of Supply

Generally speaking, the law of supply indicates a direct relation between the price and
the quantity supplied. But there can be some exceptions to the law of supply such as:

Non-maximisation of profits:

In some cases the enterprise may not be pursuing the goal of maximisation of profits. In
that case, the quantity supplied may increase even when price does not rise. For example, if the
firm wants to maximise sales, it may sell larger quantities even when the price remains
unchanged.A multiproduct firm may aim at maximising total profits, rather than profit from
each of the line of production. So, the law of supply may not apply for each product.

Factors other than price not remaining constant:

We may notice that factors other than the price of the product may not remain constant. For
example, the quantity supplied of a commodity may fall at a given price if prices of other
commodities show a tendency to rise. The change in technology can also bring about a change in
the quantity supplied of a commodity even if the price of that commodity does not undergo a
41
change.
CHANGES IN SUPPLY VERSUS CHANGES IN QUANTITY SUPPLIED

Changes in Quantity Supplied

Just as we saw for the demand, there can be changes in the quantity offered for sale due to
changes in the price of the commodity only, all other factors remaining constant. This is termed
as change in quantity supplied. The change in quantity supplied can be of two types,

1) When the price of a commodity falls and its quantity supplied falls. It is termed as
‘contraction of supply’.

2) When the price of a commodity rises and its quantity supplied rises, provided the law
of supply applies, it is termed as “extension of supply”.

The contraction, and ‘extension’ of supply has been shown in Fig. 2.7 below.

Fig. 2.7 : Supply Curve

Start with point b on the supply curve at which price per pen is Rs. 3 and quantity supplied is
30,000 pens. As price per pen falls to Rs. 2, the quantity supplied falls to 20,000. This is
contraction of supply. When price of pen rises to Rs. 4, the quantity supplied rises to 40,000.
This is extension of supply.

43
On the graph it is the movement from b to a on the supply curve which represents ‘contraction
of supply’. Similarly, the movement from b to c on the curve represents ‘extension of supply’.

Change in Supply

If supply of a commodity undergoes a change because of changes in factors other than the
price of the commodity, we call this change in supply. It is usually shown by a shift in the
position of the supply curve.

Change in supply can be of two types:

A decrease in supply: When the quantity of a commodity supplied declines, at the same price it
is referred to as a ‘decrease in supply’. It implies a leftward shift of the supply curve.

An increase in supply: When the quantity of a commodity supplied increases, at the same
price, it is known as an increase in supply. This is shown by a rightward shift in the supply
curve.

Fig. 2.8: Shifts in Supply Curve

In short, a rise in supply implies a rightward shift of the supply curve showing that producers
are willing to supply more at each price. A fall in supply, on the other hand, implies a leftward
shift of the supply curve indicating that producers are willing to supply less at each price.

43
Why the Supply Curve Shifts?

The reasons for the change in supply (both increase and decrease in supply) are:

1) Change in the prices of other commodities: A decrease in the prices of other

commodities increases the supply of the commodity in question at each price because
relative profits from supplying other products fall. An increase in the prices of other
commodities decreases the supply of the commodity in question at each price.

2) Change in the prices of factors of production: An increase in the prices of factors of

production used in producing the commodity tends to reduce the supply of the
commodity as the cost of production rises but the price is given. Conversely, a decrease
in the price of factors of production used

in making a commodity leads to an increase in supply, at each price.

3) Change in technology: An improvement in technology normally leads to a fall in cost of

production and given the price of the product, a producer tends to produce more of that
commodity, at each price. Conversely, loss in technical knowledge (the chances of which
are meager) leads to a fall in supply.

4) Change or expectation of change in other factors: Sometimes, supply of a commodity

may change because of the change in or expectation of a change in government policies,
taxes or rate of interest, fear of war, inequalities of income and wealth which influence the
demand pattern. This will affect supply through expectations of the producer about the
profits.

43
THE IDEA OF ELASTICITY

We examined, in particular, impact of own price, prices of related goods and income of the
consumer on demand for a commodity. Likewise, we tried to explore impact of a change in own
price, prices of factors of production etc. on the supply of a commodity. The above analysis
underlined only one aspect: a change in a determinant leads to a change in the determined
variable. We still do not know how strong the impact is. We still cannot say that how much change
in, say, demand for oranges (or in supply of) will be if their price increased by 10 per cent. This
situation makes it difficult to talk about the possible effects of the policy changes. In fact, an
assessment of relative strength of the impacts of different determinants is also not possible. To
this end, we use ‘the idea of elasticity’.

The elasticity of a variable X with respect to some other variable Y shows

responsiveness or sensitivity of X to changes in Y. the elasticity of X with respect to Y is
defined as the ratio of per cent change in X to per cent change in Y. Symbolically:

Per cent change in

EXY
X Per cent change
=
in Y
We can also write it
as:

∆ X/
X

EXY = ∆Y/
Y

So the elasticity of demand for (or supply of ) oranges with respect to a change in their price will
be:

∆ Q/
Q
Eq,p =

43
 ∆P/
P

Where Q represents quantity of oranges and P represents their price.

If we show two commodities by symbols X and Y, their respective quantities and prices
by Qx & Qy and Px & Py we can write down the expression for the cross elasticity of demand for X
with respect to a change in the price of commodity Y:

∆ QX
/
QX
EX,Y =

∆ P Y/
P
Y

Similarly, We can write expression for income elasticity of demand:

∆ QX
/
Q
X
EX,M =

∆M/
M

Where M shows the income of the consumer.

Elasticity of Demand

We can use different diagrams to depict the demand curves and their elasticities.

The demand curve with Zero elasticity is depicted in Fig. 2.9. Here a change in price has no
impact on the quantity demanded. Such a commodity is, sometimes, called an absolute
necessity.

43
43
 Fig. 2.9: Demand curve with zero elasticity

The Fig. 2.10 shows a demand curve which is infinitely elastic. In such a situation, a very small
fall in price can lead to an extremely large increase in quantity demanded.

Fig. 2.10 : Infinite Elasticity of Demand

For a straight line demand curve falling to the right, elasticity of demand at any point on the
curve is given by the ratio of the lower segment to the upper segment. Fig. 2.11, the elasticity
will be:

E = (-) BE/EA

43
 A Proof: Initial price was OH and quantity demanded was OM. The price rises to OA. At
this price, the consumer does not demand any quantity of the good. So, new demand is zero.
Using this information in the formula for elasticity we get:

E = (Change in quantity/ original quantity)/( change in price/ original price)

= (OM/OM ) / {( OA – OH) / OH} = 1/ (HA/OH) = OH/HA.

Now consider right angled triangle AOB. Line HE is parallel to base OB. Therefore it divides
perpendicular and the hypotenuse in equal proportions. Therefore:

OH/HA = BE /EA

That means elasticity at point E on the demand curve AB equals ratio of lower segment BE to
the upper segment EA.

We can depict a special type of demand curve which has elasticity equal to unity at every point.
Such a demand function is shown using a rectangular hyperbola, a curve which shows constant
area under the curve at every point on the curve. The Fig. 2.12 is such a demand curve.

Fig. 2.12: Demand curve with unitary elasticity

We can, likewise, show supply curves with zero, unitary, infinite and variable elasticity.

45
Elasticity of Supply

 A supply curve with zero elasticity is a vertical straight line, just like the perfectly
inelastic demand curve.

 A straight line supply curve passing through the origin will have unitary elasticity
throughout.

 A straight line supply curve running parallel to the quantity axis will have infinite
elasticity. This too is similar to the case of demand curve.

 A straight line supply curve that intersects price axis will have elasticity greater than one
at all points in the 1st quadrant.

 A straight line demand curve that intersects quantity axis in 1 st quadrant has elasticity less
than one.

We can make a general observation about the supply curves involving the above
characteristics. For a straight line supply function shown in Fig. 2.13, elasticity of supply at a
point E can be determined in this manner: drop a perpendicular EM from E to the quantity
axis. Extend the supply line to meet the quantity axis in point K. Then:

Fig. 2.13: Elasticity of supply at point E

Es = KM/OM

If supply line passes through origin, point K will coincide with O. Therefore, the ratio KM/OM
will be equal to unity (KM = OM). If the supply line intersects quantity axis in the 1st quadrant,
elasticity will be less than one as KM < OM. In the Fig. 2.13, the supply line cuts quantity axis
in 2nd quadrant. Therefore, KM> OM. Hence elasticity is greater than one.

45
MEASUREMENT OF PRICE ELASTICITY OF DEMAND

There are a number of methods to measure price elasticity of demand. Some of the important
methods are as follows:

1) Point Method: Also known as the percentage method (as discussed above), the main point
to remember about this method is that it is employed only when the changes in price and
quantity demanded are very small.

2) Total Expenditure Method: This total outlay method to measure price elasticity of
demand is used whenever the changes in price and demand are not small. But it only helps
us to distinguish three situations (i) whether the price elasticity of demand is one or unity,
(ii) whether the price elasticity of demand is more than one, and (iii) whether the price
elasticity of demand is less than one. Here the elasticity is measured by ratio P1Q1/P0Q0.

E = (P1Q1 ) / ( P0Q0 )

Where initial and after change price and quantity are indicated by subscript 0 and 1 respectively

3) Geometrical Method: According to this method, elasticity of demand is different at

different points on a given demand curve, and is measured as follows on any point of a
straight line curve.

Lower segment of the demand curve

Ep =

Upper segment of the demand cur

45
DETERMINANTS OF PRICE ELASTICITY OF DEMAND

The price elasticity of demand for a commodity depends on these important factors:

1) Nature of the Commodity: The commodities are divided into three categories (i)
necessities, (ii) comforts, and (iii) luxuries. Price elasticity of demand will be less
for the necessities. We know a rise in the price of salt will not be able to force
people to reduce their consumption. As luxuries are purchased by people with high
income their demand also does not change much with change in price.

2) Number of Substitutes: If a good’s substitutes are easily available, price elasticity

of demand will be high.

3) Number of uses of a commodity: The greater the number of possible uses of a

commodity, the greater its price elasticity of demand will be.

4) Price level of a commodity: The level of price will also have an impact on price
elasticity of demand. A commodity priced high will have higher elasticity of
demand and a low priced commodity will have lower elasticity (This idea becomes
clearer when you revisit Fig. 3.12).

Importance of Elasticity of Demand

The price elasticity of demand is very important in a number of policy decisions

regarding individual commodity markets. Some of the important fields where price
elasticity of demand is important are:

1) Price fixation by a monopolist: The monopolist is always interested in charging a

higher price. If he comes to know that the price elasticity for a commodity is low, he
would fix up a higher price for that commodity. He would not be able to charge a
very high price for a commodity whose price elasticity of demand is relatively
higher.

2) Price support programme of the government: A good harvest, because of better

monsoon can lead to a big fall in agricultural prices as elasticity of demand is rather
low. To protect the farmer’s interests, the government announces a price support
programme and the price of the commodity is not allowed to fall below a particular
level. Obviously, this creates a situation of excess supply and the government has to
lift the excess supply from the market.

Similarly, a poor harvest can raise the price. Here to protect the interest of the consumer,
the government can announce a ‘price ceiling’ and releases stock from its own
warehouses or imports to meet the excess demand in the market.

52
 DETERMINANTS OF ELASTICITY OF SUPPLY

Elasticity of supply depends on a number of factors and all these factors are to be taken
together before one can comment on the elasticity of supply of a commodity. Some of the
important determinants of elasticity of supply are given as follows:

1) Behaviour of costs as output varies: As output of a commodity rises total cost do

rise, normally, at a falling rate in the beginning, then at a constant rate and finally at a
rising rate. If cost of production rises rapidly as output rises, then a rise in price will
not induce a big rise in supplies.

2) Nature of the commodity: Perishable products cannot be stored for long and thus,
their supply does not respond very much to the price changes. Durable products can
be stored and their supply responds to the price changes.

3) Time: In the short-run, supply of a commodity is less elastic, but in the long run, the
size of the plant can be changed supply responds to the price changes. Hence, supply
can be more elastic.

4) Price expectations: If the producers expect that prices in the future will be
maintained above particular level, they may produce more. If they expect prices to
rise in the future, they may hold more stocks and may supply lesser quantities in the
market. Supply in such a case will be inelastic. If the prices are expected to fall in the
future, supply will be more elastic.

LET US SUM UP

The demand refers to the wish on the part of the consumer to buy a commodity in the market
at a given price backed by the sufficient purchasing power. The price of the commodity in
question, prices of other related commodities, income and taste of the consumers determine
the demand for consumer.

Supply refers to the quantity a firm is willing to sell at a given price in every time period. In
addition to the own price, supply of a commodity depends on prices of related goods and the
factors of production as well. State of technology is another important determinant of
supply.

Elasticity is the responsiveness of quantity demanded (supplied) to given changes in own

price or prices of other related goods. In case of demand, it can be with respect to income as
well. Elasticity can be measured by way of pointmethod, outlay method or geometrical

53
method. Nature of the commodity, number of substitutes, number of uses of a commodity
and price level of the commodity are among important determinants of price elasticity.
Elasticities of demand and supply play an important role in price fixation by a monopolist,
price support programme of the government and in determination of incidence of indirect
tax.

CHAPTER-1

COMPANY PROFILE

54
 COMPANY PROFILE
MARICO INDUSTRY PROFILE OF PARACHUTE OIL
Overview:
Overview this case study depicts the exceptional growth of leading Indian “FMCG
MARICO INDUSTRIES “ in the past few years. It shows that how company sustained as a
market leader in few segments of the company. It depicts the various strategies being used by
the company in the specific product range. It shows the future growth for the company’s
strategies. It asks suggestions for their most successful Products Parachute and Saffola to
resist competitors to enter into market.

Nature Of Business:
Nature of Business Type –Public (BSE :531642) Industry – FMCG Founded-1987
Headquarters-Bandra , Mumbai , India Products-Edible Oil , Hair Oils , Skin Care, Fabric
Care , etc. Revenue – 31.3 billion Employess-1000(2011) Website-www.marico.com

Introduction:
Introduction Inception in 1948 by the Mumbai based Mariwala Family-Bombay oil industries
ltd. (BOIL) The company is a leading Indian FMCG dealing in consumer products and
services in largely commoditised business of hair oils and edible oils. The company’s most
successful brands Parachute and Safolla enjoying leadership position in their respective
market area. The group’s turnover for the year 2010-2011 was 31.3 billion. The major brands
includes Parachute , Safolla , Mediker , Sil , Revive , Kaya clinic and Sundari etc.

Milestones:
Milestones. 1999 Acquire P and G anti lice brand Mediker 2000 Acquire Kanmoor Foods for
manufacture of jams , sauses and other fruit and vegetables products . 2001 Acquire
parachute and saffola brand from “ BOIL “ 2003 Acquire Sundari LLC from the USA , a
manufacturer of ayurvedic products . 2004 introduce the Kaya skin clinics offering scientific ,
unisex and dermatological procedures for skin care 2006 Acquire herbal bath soap brand
Manjal from kerala and made a entry into soap markets. 2009 Awarded the NDTV Profit
Business Leadership in the FMCG ( Personal Hygiene) Category 2010 Won “ silver “ at the
Greentech Environment Excellence Award in the FMCG Sector.

55
Global Presence:
Global presence today , Marico has a presence in over 25 countries across Asia and Africa .
Every month , over 70 million consumer packs from Marico reach approximately 130 million
consumers in about 23 million households , through a widespread distribution network of
more than 3 million outlets in India and overseas. Marico’s international Business Group
(IBG) saw a 5 years top line CAGR of over 44% in the year ending 2011 , with an organic
CAGR of above 36 % during the same period .Today , IBG has an annual turnover of over
USD 160 millions .(2010-11).

Presence in Bangladesh:
Presence in Bangladesh in 2002 Marico established a factory on foreign soil –
Bangladesh. Marico was the first Indian company to have a manufacturing location in
Bangladesh. In Bangladesh , Marico operates through Marico Bangladesh limited (MBL) , a
wholly owned subsidiary with its manufacturing facility at Mouchak , near Gazipur . This is
an ISO 9001 certified facility.
Started operations in 2000 Acquired 2 soap brands – Camelia and Aromatic- in 2005
Launched Hair code Hair Dye in 2009 Marico is amongst the top 3 FMGC MNC companies
in Bangladesh launched Saffola Gold , a premium edible oil , in 2010 Parachute has been
among top 10 most trusted brands continuously in the years 2008 , 2009 and 2010. Launched
Parachute Advanced Cooling Hair Oil in 2011.

Core Competence:
Core competence Market leadership Wide distribution channel – Access to rural market
Converted commodity into product Created new niche categories for growth – E.g . Revive
and Mediker.

Achievements:
Achievements Marico’s “ Saffola Heart Day “ campaign own a Bronze at Asia Pacific Effie ,
Singapore 2008 Kaya – Best retailer in the Beauty and Fitness category , Indian Retail Forum
, 2007 One of India’s 10 best marketers brand leadership award at the brand Summit , 2006.

Major Brands – Saffola and Parachute:

Major Brands – Saffolla and Parachute Brand name : Saffola Positioning : As a Healthy
Edible Oil Brand Target Audience : The primary target audience of “ Saffola “ are
homemakers who to give healthy food to their family . Pioneering idea : Saffola pioneered
the idea of selling the edible oil in plastic wrapper . Communication : Mass communication
on the platform of “ Healthy oil for healthy people “.

56
Competitors:
Competitors National Dairy Development Board – Dhara Agrotech Food Limited – Sundrop
Panak Foods – Gemini Adani Wilmar Ltd – Fortune Hindustan Unilever Limited –Flora.

Unique Selling Practices ( USP’s):

Unique selling practices (USP’s) “Health of Heart “ is the best USP of Saffola Renowned and
trust worthy brand in the market . Saffola products are the first in your line of defence against
heart diseases , making your transition to a healthier lifestyle a lot easier . Products to cater
the healthy life of everyone in a family with its wide product Range( Gold , Oats , Active
etc ).

Parachute:
Parachute brand name : Parachute Positioning : As a purity brand . Target Audience : The
primary target audience of ‘ Parachute ‘ is women of all ages in both urban and rural
population of India . Pioneering idea : Parachute pioneered the idea of selling the coconut oil
in plastic . Communication : Mass communication on the platform of ‘ caring ‘ with mother
and daughter theme.
Brand Name Target Audience Positioning Parachute Advanced refined hair oil , Parachute
Jasmine Young and appearance conscious consumer Focuses upon the fragnance aspect of
the oil. Parachute After shower Hair Creame Young men Focuses upon stylish look , non
sticky and nourishing aspect Parachute Sampoorna Women customers Focus on providing
strong hair.

Competitors:
Competitors Dabur – Vatika Emami – Navratan HUL – Clinic all clear CavinKare – Nyle .

USPs:
USPs Improvements in aesthetics Improvement in the functionality area – Wide Mouth Jar ,
Easy Jar and the Flip Top Pack with Tamper proof seal .

Market Share:
Market Share Parachute oil ~ 45.8 % Coconut Hair oil segment including Nihar and Malabar
oil ~ 52.6 % Saffola in premium edible oil category ~ 52.1% Hair oil segment ~ 23 %

Future Focus:
Future Focus Growth rate is exceptional – Parachute – 10% and Saffola – 15 % increase in
consumer demands Brand Loyalty New products introduction in health food Expenses on
Advertising and Brand building.

57
SWOT Analysis:
SWOT Analysis helpful (To achieving the objectives). Harmful ( To achieving the objective
). STRENGTHS Understanding of consumer in oils segment Rural market reach Wide
distribution channel Monopoly in few segments Brand image. WEAKNESS not really
successful in all the products offered no products for anti-dandruff purpose have to do much
work on their advertising skills charge premium prices for products. OPPORTUNITIES need
to focus on various markets such as hair oil , hair shampoo and hair colorant etc. Increasing
disposable income of consumer should loyalty change in demographic profile Robust growth
in FMCG sector in India. THREATS Stiff competition from FMCG giants of India Entrance
of foreign player into market economic downturn harm their premium products demands
hardly any share in hair shampoo and other hair oils inputs costs increased.

58
 HISTORY OF MARICO
The history of Marico can be traced all the way back to 1857 , when a young man Kanji
Moorarji, set up a modest trade in spices which , in time , grew to include other export
worthy coomodities . This firm’s success gave birth to the Bombay Oil Industries in 1948 ;
set up to convert the traditional buying strengths of the firm in the commodities areas , to
value added manufactured products.
At first Bombay Oil was involved in copra trading besides crushing and refining of vegetable
oil’s . Gradually , the company established itself firmly as a marketer of branded vegetables
oils and later expanded into fatty acids , speciality chemicals and spice extracts.
In 1983 , Bombay Oil divisionalised its operations to create three business : a consumer
products Division ; a fatty acids and Chemicals Division and an Oleoresins Division , also
called the Spice Extracts Division .
In 1990 , Bombay Oil again restructured itself to form several companies , each focusing on a
specialised area of business . In April 1990 , the Consumer Products Division became
Marico.
To understand how far Marico has come , all you need to do is take a look at what we
inherited .

59
 MR . HARSH MARIWALA . M.D
A bachelor of Commerce from Sydenham College , Bombay , and Mr. Harsh Mariwala has
spent 26 years managing the business. Mr. Harsh Mariwala developed the consumer products
business in Bombay Oil Industries and functioned , as its Executive Director from 1980-
1999.
In 1990 he took over as Managing Director of Marico Industries Limited . Mr. Harsh is an
active director on the boards of other companies like Unichem Laboratories Ltd ., Kotak
Mahindra Asset Management Company and Cadbury India Ltd . He is also Chairman of the
Consumer Goods Committee of FICCI (2000-01)

60
 CORPORATE
8 brands, 3 markets leaders , 5 factories , 28 depots , 3400 distributors , 1.4 million retail
outlets. The description of a true blue chip . Marico Industries Ltd , India’s home grown Fast
Moving Consumer Goods ( FMCG ) Company has come a long way . From a typically
family owned business , we have successfully transformed ourselves into a professionally
managed and focused consumer products company . We grown from 2 brands to 8 , from 2
manufacturing units to 5 factories , supported by several sub – contract manufacturers.
The formation of Marico in 1990 , as a separate company, accelerated our endeavour to
build a unique , high spirited , flexible , yet stable enterprise. Marico has over the years , built
for itself a stimulating work culture that empowers it’s people , promotes team building and
encourages new ideas.

61
 MARICO YESTERDAY (1991)

MARICO TODAY (2017)

 A sales turnover of Rs. 1.1 billion

 A sales turnover of Rs .7.5 billion

 Two products with brand names –parachute and saffola 8 Brands , 3 of which are
Market Leaders.

 Two factories – a coconut oil plant at Sewree , Bombay and a sunflower refining
plant ( which has been shut down since ) at Mazgaon , Bombay.

 5 factories and sub – contract facilities .

 Around 400 employees representing the blue collared work force , staff and managers.

 A total strength of around 1000 members .

62
 STRUCTURE
A flat structure:
At Marico , we are an organization , which is flat with only five levels of reporting between
the Managing Director and an operator on the shop floor.
We believe that a flat structure helps us in being more responsive to the environment while
providing enriched roles for our members. Our structure defines clear roles and supporting
relationships but is by no means rigid . Keeping in mind the fast and ever changing business
environs , Marico’s structure is dynamic and constantly evolving .

Profit Centres:
As Marico grew , the need was felt to recognize the business further. The focus was to drive
additional growth and the idea of recognizing ourselves around value chains led to the birth
of Profit Centres in 1998.

What it has done for us:

The creation of Profit Centres has led to higher business orientation , improved inter –
functional coordination and has ensured that our orientation structure supports our overall
company strategy and business direction . Each business unit has a business head supported
by a team of professionals.

63
 R & D AT MARICO
A Human Interface:
The backbone of any progressive organization that constantly evolves and redefines itself is
it’s R & D team . And the backbone of any R & D team is it’s potential to gather consumer
insight and find path-breaking means to implement this insight . At Marico’s our R&D
centre is not only equipped with the latest gizmos but also with the talent to bring a human “
Consumer “ interface to their work . 10000 sq .ft.area is dedicated to research activities ,
which houses various laboratories with state of the art equipment for product and packaging
innovations.

People:
Our R&D team includes scientists from diverse fields . Product and packaging innovation
teams comprise oil technologists , microbiologists , nutritionist , pharmacist , statistician ,
process engineers , packaging designers & technologists , cosmetologists and analytical
chemists.
At Marico , Brand Equity is continuously reinforced by path breaking insight
.Innovations made , keeping in mind the standards that you set for your family. And when
insight is translated into our products , they become a standard that raises quality expectations
in the market place.
All our brands have gone beyond being mere packaged products to becoming apart of
everyday living.
We have also gone that crucial step further. We are of a mindset that places a premium
on the maxim “ products are what corporations make , brands are what consumers buy
“. And this line of thought has been backed up by constant financial support , critical to
ensuring success in a competitive market place . The Result success stories like parachute ,
the definitive brand amongst coconut oil’s , and Saffola , a synonym with preventive health
care . At Marico each of our brands has a unique success story to tell . We’d rather you read it
yourselves.
We are amongst the largest Fast Moving Consumer Goods Companies in India (
Turnover – Rs 7.5 billion during the year ended March 2005 ) with the talent and
resulting repute for launching and sustaining some of the most respected consumer brand in
India .
We know our well known brands such as parachute , parachute Lite , parachute
Jasmine , parachute Dandruff Solution , Marico’s Hair & Care , Revive ( Instant Cold Water

64
Starch and Spray Starch ) , Mediker , Oil of Malabar , Saffola , Saffola Healthy Heart Salt ,
Sweeker , refined Sunflower Oil and refined Soya Oil , and the Sil range of processed foods .

A consumer focused organization , we select our business opportunities

carefully and strive to reach our internal goals of innovation and excellence. We also
thrive on the fact that our competition comes from national and multi – national companies.
Marico is run completely by professionals with only Harsh Mariwala representing
the founding family . Consumer insight continues to be the key force , enabling us to pre-
empt consumer needs and satisfy them . Thanks to this insight , Marico is energetically
pursuing new business opportunities and tapping new markets with relevant brand extensions.
The learning over the years has helped Marico evolve a business model for itself .
Our model centres around remaining focused , building and leveraging our brand strength and
distribution network . The entire turnover of the company comes from branded products.
Choosing to shun trading in the underlying commodities , organizational energies are
invested in areas where the potential for value is high.

AWARDS
 National HRD Award received in 1994

 National Award for outstanding work in HRD , National HRD Network , 1994

 Amity Award received by Marico ( Kerala ) in 1996

 Innovative practices – HR Award ( Asia Pacific Conference ) in 1998

 Top Performing Global Growth Company from India at the World Economic Forum ,
1997

65
Parachute Brand evolution:

Presentation Transcript.
1. Presented By: Adhavan A.S Thigarajar school of management

2. History of the product

 Parachute is premium edible grade coconut oil, a market leader in its category.
 Parachute is positioned on the platform of purity.
 Parachute pioneered the switch from coconut oil sold in tins to plastic.

3. History of the product

 Parachute is the flagship brand of Marico and consists of a line of edible coconut-oil
based hair products.
 Industry: FMCG
 Founded: 1987
 Head quarters: Bandra,Mumbai
 Products: Edible oil, Hair Oils, Skin Care, Fabric Care.
 Marico’s own manufacturing facilities are located at Goa, Kanjikode, Jalgoan,
Pondicherry, Dehradun, Baddi, Paonta Sahib and Daman.

4. History of the product

 Parachute is the market leader in the branded hair oil market with a market share of
around 53%.
 This is a 1500 crore industry which is dominated by unbranded oils.
 Marico in early 1990s made a bold step in launching a brand in this segment.
 5. Existing strategies
 It has been a long road for Parachute (the first branded coconut oil in the Indian
market) and the journey began more than four decades ago.
 Today the blue bottle is a strong metaphor for the Coconut Oil category and reaches
18 million households every year.

6. Improvement in the functionally area

 Wide Mouth Jar, Easy Jar and the Flip Top pack with Tamper proof seal
 The Easy Jar positioned as the all season jar was launched as the ‘kamaal ka
dhakkan’ mainly to address the North markets where severe winters make the hair
oiling a challenge.

66
  The jar that offers the twin benefits of a wide mouth and has an easy pour cap whish
ensure that the pack does not suffer seasonality.

7. Best Strategies Applied So Far

 They changed pack shapes to one that is sleek, modern and aesthetic.
 Flip top cap to ensure safety and purity of parachute oil.
 Easy jar of parachute to facilitate usage during winters.
 Parachute mini-a bottle shaped sachet sold at an MRP of Re 1.
 20 ml parachute-a Re 5 that enables loose oil users to upgrade.
 Strong distribution network.

8. Product Differentiation
 Parachute baby oil – It is a special hair oil for kids – Moistures baby delicate skin and
helps protect from dryness scalp.

9. Product Differentiate
 Parachute Oil spray – It can be used by modern generation like the youth – Instant
usage – Optimum utilization.

10. Product Differentiate

 Parachute Ayurvedic Oil – The herbs and medicinal herbs are used to enrich the oil
content –It would help to nourish your hair growth and strengthen it.

11. Product Differentiation:

 Parachute Scalp Oil – To prevent excessive hair loss- To reduce density of oil in hair
because a survey revealed that excessive content of oil in hair leads to hair loss as the
oil clogs in hair and leads to formation of wax in the scalp , thus leading to damage of
scalp.

12. Advertising Agencies:

 BBH India ,
 Ambience D’arcy Ad Agency’
 Madison Ad Agency.

13. Rural Advertising

 “ Tamper –proof “ Packaging
 Covered more than 200 towns each in Gujarat , Maharashtra , Rajasthan and Punjab.
 Used pamphlets in theatres plays in towns of Kolkata.

67
14. TV Commercials
 Parachute Advanced –Parachute Advanced Holi Ad – Parachute Advanced Winter Ad
 Parachute Jasmine – Parachute Jasmine Blinkers Ad
 Parachute Advanced Starz – Chocolate Shampoo Ad ( Choose Your Avatar )

15. Promotion:
 It advertises through Television , Print , Outdoor , Digital , Radio
 The brand has been endorsed by celebrities like Deepika Padukone , Diya Mirza ,
Yuvraj , Sreesanth.
 Advertising is heavy before Holy & during winters .
 Popular & effective campaigns like ‘ 1 hour champi kiya ‘, Help remind people
about the benefits of oiling before hair wash .
 Sales Promotions like ‘ 20 % extra ‘ was made on the 200 ml pack.

16. Reference:

www.marico.comhttp://strategicbrand.blogspot.com/2007/06/parachuteoil.html.

68
PRODUCT PROFILE

69
 PRODUCT PROFILE

What does parachute stand for?

Parachute is a premium edible grade oil , a market leader in its category . Synonymous with
pure coconut oil in the market , Parachute is positioned on the platform of vital nourishment
today . From a loosely available commodity to a path – breaking brand , Parachute pioneered
the switch from coconut oil sold in tins to plastic . Parachute is also available in pouch packs ,
to service the rural sectors , increasing penetration . The positioning of parachute has evolved
over time. From the initial stand of purity to that of clarity to the ‘ Coconut Dream ‘ theme ,
with a new look and logo is seen as an opportunity to transform parachute from being the
largest coconut oil brand into a mega brand with several value added products under the ‘
Coconut Goodness ‘ umbrella .

Our consumers:
Parachute’s primary target has been women of all ages . The brand has a huge loyalty , not
only in the urban sections of India but also the rural . Parachute has several brand extensions,
each filling existing need gaps , acquired from consumer insight .

Contributors to Parachute’s success:

The quality of the product has contributed to its lasting success . The consistency , with
parachute has delivered , ensures consumer loyalty and trust in the brand . Innovations – in
the bottle too , whether from the aspect of user – friendliness or aesthetics have and continue
to help parachute grow . One of the first brands to utilize mass communication , parachute
used the ‘caring’ platform with the ‘mother – daughter’ theme to underline the message
that this was a brand handed down from and to generations . The new look and logo have
helped attract the younger’s of today.

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What does Parachute Jasmine stand for today?
Parachute Jasmine is perfumed coconut hair oil . It is non –sticky and has lingering fragrance
of Jasmine and nourishes hair to keep it healthy and beautiful .

Evolution:
With consumer insight , it was felt that there was a need for an oil with fragrance . That there
are people who already used oil but would like it more with added fragrance. With parachute
Jasmine, the consumer can now have oil which has the fragrance of jasmine without
compromising on the nourishment that coconut oil embodies .

Our Consumers:
Parachute Jasmine is primarily targeted at women who wish to have and use perfumed oil
which is non- greasy and nourishing.

Contributors to Parachute Jasmine’s success:

Having been launched recently, the initial response has been encouraging.

What does Parachute Lite stand for today?

Parachute Lite is a non-greasy hair oil. The only non-sticky oil with the
added benefits of coconut milk proteins, it washes off easily while leaving hair nourished.

Evolution:
There was a need for oil that would provide easy and non-grassy care for daily user . But with
the quality and goodness of oil retained . Parachute offered a solution with Parachute Lite
which combined the goodness of coconut oil with convience.

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Our Consumers:
The primary target of Parachute Lite is women who wish to have the reassurance of coconut
oil without the inconvenience those greasy oils cause.

Contributors to Parachute Lite’s success:

It is modern light oil with the nourishment of coconut and meets the need of the times . The
new look and logo have helped to attract the youngsters of today.

What does Parachute Dandruff Solution stand for today?

Parachute Dandruff Solution is positioned as the most effective solution for dandruff
available in the market today . Unlike the commonly accepted product for solving dandruff problems
– Anti Dandruff Shampoos , Parachute Dandruff Solution Coconut Hair Oil is a natural solution for
addressing dandruff problems . Its unique formulation with Tea Tree Oil , Neem , Lemon and other
active ingredients assure that the solution is effective , yet gentle.

Our Consumers:
Our primary target is women between the age group of 20-25 years and secondary target are
men between the age group of 15-35 years . People who suffer from Dandruff and those who
already are coconut users .

Contributors to parachute’s Dandruff Solution:

Dandruff is one of the largest need gaps in the market today . Establishing Parachute
extensions that will address this problem is one of the opportunities that Parachute has today .
We also have the “ first mover advantage “ in the segment.

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 CHAPTER-3

CONSUMER BEHAVIOUR

73
 CONSUMER BEHAVIOUR
Consumer orientations stem from the company’s adaptation and implementation of the
Production concept a philosophy of every business unit, which has triple implementation
namely:
1. The victory of any business rests on consumers who are willing to accept and
pay for products or services.
2. The firm must be aware of what the markets wants in advance of production.
3. Consumers wants must be monitored continuously for assured success over
competition.
The consumers are the arbiters of fortune in business highly competitive economic system ,
the success , survival and growth of firm warrants accurate knowledge about the consumers
behavior – how , why , where , what , they buy ? Understanding consumer is the crucial task
of everything Production manager.

Definition:
Professor . C.G.Walter and Professor G.W.Paul says that , “ It is the process whereby
individuals decide whether , what , when , how from whom to purchase goods and services .”

Steps In Consumer Buying Process:

The following are 5 steps generally by the consumers while buying a product.

1 . Need Recognition:
Need recognition is the awareness of the want or desire or a
consumption problem without the satisfaction feels restless and tension charged.
2. Information Search:
Consumer interest is indicated in the consumer’s willingness to
seek further information about the product or service . Since there are varieties of products
and he seeks to have maximum satisfaction , he searches relevant information.

3. Relevant Information:
The evaluation stage is the mental trail of product or service.

4. Purchase Decision:
Decision to purchase implies consumer commitment for a
product or a service. Practically it is the last stage in the buying process because, it completes
the exchange process.

74
5. Post Purchase Behaviour:
The post purchase experience may be a set of positive or
negative feelings. Positive or satisfaction will results in repeat sales or at least recommending
the product or service to others; on the hands, dissatisfaction or negative feeling creating
anxiety and doubts.

75
 CHAPTER-4

OBJECTIVES

76
 OBJECTIVES
 To find out the factors influencing buying behaviour of a consumer.

 To find out consumer opinion on quality and quantity of a product.

 To find out the effect of advertisement on purchase or buying decision.

 To find out consumer’s level of satisfaction.

 To find out consumer opinion on price, availability, awareness, packaging.

 To find out influence of brand image on purchase decision.

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LIMITATIONS

78
 LIMITATIONS
Though every effort has been made to make the project study authentic, there have been
limitations like,
 Place constraints as the study was confined to Kurnool city.

 Time constraint as the time given for doing project work was only 1 month.

 The method used in the project is Random Sampling method obtained may not be

fully accurate.

 Some consumers have given indefinite answers and some have given irrelevant

answers. This might make the data incomplete and inaccurate.

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RESEARCH & METHODOLOGY

80
 RESEARCH & METHODOLOGY
“ TO MANAGE THE BUSINESS WELL IS TO MANAGE ITS FUTURE AND TO MANAGE
THE FUTURE IS TO MANAGE INFORMATION “
To collect the information, Production research is to be done. Production Research has been
defined as
“ THE SYSTEMATIC GATHERING , RECORDING AND ANALYSING OF DATA ABOUT
PEROBLEMS RELATING TO PRODUCTION OF GOODS AND SERVICES FROM
PRODUCER TO CONSUMER “.

_ BY AMERICAN PRODUCTION ASSOCIATION

Data Sources:
There are two sources of collecting data
 Primary Source
 Secondary Source
In the survey being conducted both primary & secondary source of data has been used in the
collection of relevant information.

Primary Data:
Primary Data are those collected specifically by or for the data users. Primary Data gathering
for a specific purpose or for a specific research report.
A questionnaire was used as a tool for the systematic collection of relevant information. A
well structured questionnaire consisting of 14 sample questions has been prepared and
directed to respondents.
The questionnaire prepared consists of closed-end questions which include dichotomous,
multiple choices and rating scale type of questions. The closed – end questions are very easy
to answer. From the questionnaires responded by the respondents the relevant data regarding
the market, product, competition , consumer awareness and preference is gathered.

Secondary Data:
Secondary Data is the data is collected for another purpose and already exist somewhere.
Data pertaining to company is collecting from companies website and companies catalogue .
The company profile gives a detailed report of the information.

Sampling Plan
 SAMPLING UNIT: Students Working & Men
 SAMPLING SIZE: 100
 SAMPLING PROCEDURE: Stratified Random Sampling method is chosen.

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 CHAPTER-5

DATA ANALYSIS

82
 5.1 TABLE SHOWING AWARENESS TOWARDS
VARIOUS BRANDS OF COCONUT OIL

Brand Name No. of Respondents % of Respondents

Parachute 82 82%

Nihar 4 4%

Vatika 8 8%

Nuzen 6 6%

Total 100 100%

Source: Questionnaire

Inference:
From the above table, it is clear that 84% of the respondents are aware of parachute coconut
oils, 4% are aware of nihar, 8% of the respondents are aware of vatika and 6% are aware of
nuzen.

83
 GRAPH SHOWING AWARENESS TOWARDS
VARIOUS BRANDS OF COCONUT OIL

90
80
82
70
60
50
40
30
20
10

4 8 6
0
Parachute Nihar Vatika Nuzen

Fig: Awareness towards various brands of coconut oil

84
 5.2 TABLE SHOWING SOURCE OF AWARENESS

Source No. of Respondents % of Respondents

Friends 12 12%
Relatives 20 20%
Advertisements 66 6%
Others 2 2%
Total 100 100%

Source: Questionnaire

Inference:
From the above table, it is clear that 12% of the respondents are aware by the friends, 20%
are aware through relatives, 66% of the respondents are aware by means of advertisements
and 2% are from others.

85
GRAPH SHOWING SOURCE OF AWARENESS.

2%

12%

Friends
20% Relatives Advertisements
Others

66%

Fig: Source of awareness

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 5.3 TABLE SHOWING FACTORS INFLUENCING
PURCHASE OF PARACHUTE COCONUT
OIL

Aspect No. of Respondents % of Respondents

Price 8 8%
Quality 66 66%
Brand image 24 24%
Others 2 2%
Total 100 100%

Source: Questionnaire

Inference:
From the above table, it is clear that 8% of the respondents are influenced to buy parachute
oil because of its price, 66% of them are influenced by quality, 24% of them are influenced
by brand image, and the rest 2% influenced by others.

87
GRAPH SHOWING FACTORS INFLUENCING
PURCHASE OF PARACHUTE OIL

70 66

60

50

40

30
24
20
8
10

0 2
Price
Quality
Brand image
Others

Fig: Factors influencing purchase of Parachute coconut oil

88
 5.4 TABLE SHOWING PLACE FROM WHERE
PARACHUTE COCONUT OIL IS
PURCHASED

Purchasing Place No. of Respondents % of Respondents

Supermarkets 62 62%

Wholesale Shops 26 26%

Departmental stores 8 8%

Others 4 4%

Total 100 100%

Source: Questionnaire

Inference:
From the above table, it is clear that 62% of the respondents purchase from supermarkets,
26% from wholesale shops, 8% from departmental stores and 4% from others.

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GRAPH SHOWING PURCHASE OF PARACHUTE COCONUT
OIL.

4%
8%

Supermarkets
Wholesale Shops Departmental stores Other
26%

62%

Fig: Purchase of parachute coconut oil

90
 5.5 TABLE SHOWING PRODUCTION
REGARDING ADVERTISEMENT

Response No. of Respondents % of Respondents

Yes 76 76%

No 24 24%

Total 100 100%

Source: Questionnaire

Inference:
The above table indicates that 76% of the respondents like Parachute coconut oil
advertisement whereas 24% did not like advertisement.

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GRAPH SHOWING PRODUCTION REGARDING
ADVERTISEMENTS.

76
80
70
60
50
40
30

24
20
10
0

Yes
No

Fig: Production regarding advertisements

92
 5.6 TABLE SHOWING QUANTITY PURCHASED
BY RESPONDENTS

Quantity No. of Respondents % of Respondents

50 ml 16 16%
100 ml 34 34%
200 ml 26 26%
500 ml 24 24%
Total 100 100%

Source: Questionnaire

Inference:
From the above table, it is clear that 16% of the respondents are purchasing 50 ml, 34% of
the respondents are purchasing 100 ml, 26% of them are purchasing 200 ml and 24% of the
respondents are purchasing 500 ml.

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GRAPH SHOWING QUANTITY PURCHASED
BY RESPONDENTS.

24% 16%

50 ml
26% 34% 100 ml
200 ml
500 ml

Fig: Quantity purchased by respondents

94
 5.7TABLE SHOWING SATISFACTION OF THE
CUSTOMERS REGARDING DIFFERENT TYPES OF
PACKING

Packing No. of Respondents % of Respondents

Bottle pack 58 58%
Refill pack 22 22%
Bubble pack 12 12%
Others 8 8%
Total 100 100%

Source: Questionnaire

Inference:
From the above survey table, it is clear that 58% of the respondents are using bottle pack,
22% are using refill pack, 12% of the respondents are using bubble pack and 8% are using
others.

95
GRAPH SHOWING SATISFACTION OF THE CUSTOMERS
REGARDING DIFFERENT TYPES OF PACKING.

8%

12%

Bottle pack
Refill pack Bubble pack Others

58%
22%

Fig: Satisfaction of the customers regarding different types of packing

96
 5.8 TABLE SHOWING SATISFACTION LEVEL OF
USING PARACHUTE COCONUT OIL

Level of Satisfaction No. of Respondents % of Respondents

High 14 14%
Average 52 52%
Moderately High 30 30%
Reasonable 4 4%
Total 100 100%

Source: Questionnaire

Inference:
From the above table, it is clear that 14% of the respondents rate parachute coconut oils as
high, 52% of the respondents rate parachute coconut oils as average, 30% of the
respondents rate parachute coconut oils as moderately high and 4% of them rate as
reasonable.

97
GRAPH SHOWING LEVEL OF SATISFACTION

4%
14%

30%

High

52% Average
Moderately High Reasonable

Fig: Level of satisfaction

98
CHAPTER-6

FINDINGS

99
 FINDINGS

 From the study conducted, it can be concluded that many of the respondents are from
middle class.
 From the study conducted, it can be concluded that main source of awareness for the
respondents was advertisements.
 From the study conducted, it can be concluded that most of the respondents have gone
for parachute coconut oils.
 From the study conducted, it can be concluded that the main reason which made the
respondents go for parachute coconut oil was the aspect of the quality and they are
satisfied with it.
 From the study conducted, it can be concluded that majority of the respondents are
influenced by the advertisements of parachute coconut oils.
 From the study conducted, it can be concluded that majority of the respondents are
satisfied with the bottle packing of parachute coconut oils.
 From the study conducted, it can be concluded that majority of the respondents rate
the price of parachute coconut oils as moderate.
 From the study conducted, it can be concluded that the majority of the respondents
satisfaction level towards the product is 100%.

100
SUGGESTIONS

101
 SUGGESTIONS
 As many of the respondents are from the middle class, the company should try to
cover all the people of this class.
 The company should also try to add many more varieties to satisfy its existing
customers and to attract new customers.
 As major source of awareness is the advertisements, the company should try to make
the advertisements more effective so as to reach all the customers.
 As many of the consumers go for a purchase of once every month , the company can
go for effective schemes and offers and can try to attract the consumers to go for more
purchases.
 The company should try to enhance the quality more by maintaining the same basis so
as to maintain the customer and to attract many more consumers.
 The company can go for other media like hoardings, posters , banners etc.
 The company should try to make all the consumers aware of all varieties of parachute
coconut oils range to increase its sales

102
 CHAPTER-7

QUESTIONNAIRE

103
 QUESTIONNAIRE
NAME : AGE :

OCCUPATION : GENDER :

1. Do you apply oil to your hair ?

(a) Yes (b) No

2. How many times will you apply oil to your hair ?

(a) Daily (b) Weekly once (c) Once in a month (d) Twice a month

3. Which of the following Oil’s are you aware of ?

(a) Nihar (b) Parachute (c) Vatika (d) Nuzen

4 . Among different brands of Parachute oil’s to which brand do you give more
preference ?
(a) Parachute coconut oil (b) Parachute Jasmine
(c) Parachute Lite (d) Parachute Enrich

5. How did you get aware of brand of parachute coconut oil’s ?

(a) Friends (b) Relatives (c) Advertisement (d) Others

6. What made you to go for parachute coconut oil ?

(a) Price (b) Quality (c) Brand image (d) Others

7. From where do you purchase it ?

(a) Super market (b) Wholesale shops (c) Departmental stores (d) Others

8. How much quantity do you purchase ?

(a) 50 ml (b) 100 ml (c) 200 ml (d) 500 ml

9. Which of the following parachute coconut oil pack do you like to purchase?
(a) Bottle pack (b) Refill pack (c) Bubble pack (d) Others

10. How do you rate the price of parachute coconut oil ?

(a) High (b) Average (c) Moderately High (d) Reasonable

11. Are you satisfied with parachute coconut oil ?

(a) Yes (b) No

12. Which attributes do you like in parachute coconut oil ?

(a) Quality (b) Price (c) Smell (d) Quantity

104
13. Do you want any changes in parachute coconut oil ?
(a) Yes (b) No

14. Suggestions you would like to give

SIGNATURE

105
 CHAPTER-8

BIBLIOGRAPHY

106
 BIBLIOGRAPHY
 Sri Lakshmi Venkateswara Traders
( Distributors for Marico Products )

 Website : www.maricoindia.com

 Production Management ( C.N.Sontakki )

 Consumer Behaviour ( Suja.R.Nair )

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