Demand Analysis - F.Y.Sem.1

KEY NOTES BUSINESS ECONOMICS (F.Y.SEM.
1)
ECONOMICS
Syllabus of Unit – 2
(Effective from 2023-24 as per NEP-2020)
Demand Analysis
Demand Analysis……Why?
 To get the answer of….
What to Produce?
How much to produce?
 For better Decision making and forward planning…
 For estimation of Cost and Profit…
 For Investment, Expansion and diversification decision…
Meaning of Demand:
Desire of consumer to buy the product
+
Adequate purchasing power (Capacity)
+
Willingness to pay the price for the product.
 Demand must be always reference to quantity, price, period of time and place.
Example
 There is a demand of 50,000 cell phones in market. = Incorrect
 There is a demand of 50,000 cell phones in India’s market @ a price of 1500 per piece, in Jan. 2009.= Correct
Type of demand:
1. Demand of Consumer and Producer goods
2. Demand of Perishable and Durable goods
3. Demand of Company and Industry
4. Demand by Total market and Market segment
5. Derived and Autonomous demand
6. Short and Long run demand
1 Conceptual coaching for 11th, 12th, B.Com. Mo.78783-77885 | CMA. Nirav Shah
KEY NOTES BUSINESS ECONOMICS (F.Y.SEM.1)
Demand of Consumer and Producer goods:

Consumer Goods Producer Goods
 Goods which satisfy human wants  Goods which can be used for production /
manufacturing process
 It’s for direct consumption or final  Can be called as investment or capital goods
consumption
 Ex. Readymade cloths, books, food items,  Ex. Coal, Oil, Raw material, machinery, plant,
CD-DVD’s etc… tools etc…
Demand of Perishable and Durable Goods:

Perishable Goods Durable Goods
 Goods which can be consumed only once  Goods which can be used for more than once
 Its utility / usefulness gets exhausted in one  Its utility / usefulness Continuous for some fix
single use. period of time.
 Ex. Food items, soft drinks, sweets etc…  Ex. Furniture, Car, Building, tools etc…
Derived and Autonomous Demand:

Autonomous Derived
 Direct demand for product which arise  Which arise out of the demand for some other
independently. product
 Demand of such goods which satisfy human  Demand for jointly usable goods
needs directly.
 Ex. Food items, tooth paste, sweets etc…  Ex. Demand of car will leads to increase in
demand of petrol.
Company and Industry Demand:

Company Industry
 Demand for the product by a Single firm or  Demand for the product by particular industry
company
 Ex. Demand of steel produced by TATA  Ex. Demand of steel produced by steel industry
Substitution Effect:
 When price of a goods falls and price of other related goods remain constant…
 Then cheaper goods will become more attractive for consumers…
Income Effect:
 Fall in price of goods will leads to increase in real income / purchasing power of consumers…
 Thus, due to increase in the real income consumer can purchase more goods…and demand will increase…
Law of Demand:
 When the price of a product increase then demand of such product will decrease, and price will decrease,
demand will increase….
 It means INVERSE relationship between price and demand.
Demand Curve:
Exceptions to the Law of demand:

1. Expectations regarding price variations
2. Articles having prestige value
3. The ‘Giffen’ or Inferior goods
4. Illusion regarding price and satisfaction
5. Fashion
Demand Function:
Dx = f (Px, I, Ps, Pc, T, u…..)
Px = Price of Product
I= Income of Consumer
Ps = Price of Substitutes
Pc = Price of Complementary goods
T = Taste and Preferences
u = Other factors
Demand Determinants:
1. Price of Goods:
 Primary determinant
 If price will increase then demand will decrease, vice-versa…
2. Income of Consumers:
 Means purchasing power of consumers
 If income of consumer will increase, he will create more demand
3. Essential Commodities:
 General commodity consumed by all type of consumers
 Ex. Cooking oil, food grains, minimum required cloths etc…
 Demand of such goods will increase up to certain point only. (up to the necessity)
4. Luxury (Prestigious) Goods:
 Richer class of the society consumes more…such as diamonds, cars, gadgets etc.
 Consumption can be related with ‘Status’
 For such type of goods if price increase then prestige value also increase and demand also increase.
5. Fashion, Taste, Choice:

 Goods in fashion have more demand than old fashion cheap goods.
 Taste or habit of consumers also determined his demand.
 Consumer always demand more such type of goods for which he is habitual.
6. Expectations regarding price variations:

 If consumer expect the FALL in price in future then he will not create any demand even if the price is
decreased.
 If consumer expect the RISE in price in future then he will create more demand even if the price is increased.
 So as per future expectation of price and supply, consumer changes demand.
7. Demonstration Effect:
 When some new product come into the market then it will be bought by richer class.
 Some people purchase the product because of their relatives or neighborhood have the same thing.
 This is due to ‘Demonstration effect’.
8. Snob Effect:
 When some product become common among the people, richer class will leave to demand that. This is
called as ‘Snob Effect’.
9. Advertisement Expenditure:
Due to advertisement….
 People will know about the goods or service…
 Seller can claim superiority of his goods then rivals…
 Buyer can know the creative and different use of the same single product…
 Buyer will get the ‘choices’
9. Consumer Credit Facilities:

 When better consumer credit facility is available in market then….
 Consumer can create demand on the basic of future estimated income…
 Easy EMI will be available so person can even create the demand for such goods which is out his income
range.
Questions asked in past university papers:

1. Clarify the meaning of Demand. (Apr.2012)
2. What is meant by demand function? (Oct. 2005, 2006, 2007, 2011, Apr. 2008, 2012)
3. List out demand determinants and explain in detail. ( Oct. 1994, 2006, 2008, 2011, Apr.2005, 2006, 2012, 2013)
4. Explain the types of demand. (Oct.2005, Apr.2010, 2011)
5. Explain the ‘Law of Demand’ and state its exceptions. (Nov. 2015)
Elasticity of Demand
Price Elasticity of Demand:

 The proportionate change in quantity demanded due to change in price is known as price elasticity of
demand.
 In other words, price elasticity is a ‘Sensitivity of Demand’ to a change in price.
 So, price elasticity gives us rate of change (percentage change) in quantity demanded in response to
percentage change in price.
Types of Price Elasticity of Demand:

 There are FIVE types of elasticity of demand.
1. Perfectly Elastic
2. Relatively Elastic Demand
3. Unitary Elastic Demand
4. Relatively Inelastic Demand
5. Perfectly Inelastic Demand.
1. Perfectly Elastic Demand

 Demand of product changes even if there is no
change in price, than its known as perfectly
elastic demand.
 Elasticity = ∞
2. Relatively Elastic Demand

 When proportionate change in demand is
MORE than proportionate change in price, its
known as relatively elastic demand.
 Elasticity = >1
3. Unitary Elastic Demand

 When proportionate change in demand is
EQUAL to proportionate change in price, its
known as unitary elastic demand.
 Elasticity = 1
4. Relatively Inelastic Demand

 When proportionate change in demand is LESS
to proportionate change in price, its known as
relatively inelastic demand.
 Elasticity = <1
5. Perfectly Inelastic Demand

 Demand of product NOT changes even if there
is no change in price, then its known as
perfectly inelastic demand.
 Elasticity = 0
Can be expressed as….
Type Particulars Expression Elasticity

1. Perfectly Elastic Change in Demand – No Change in Price - ∞
2. Relatively Elastic Demand Change in Demand is MORE than change in Price ΔD > ΔP >1
3. Unitary Elastic Demand Change in Demand is EQUAL to change in Price ΔD = ΔP =1
4. Relatively Inelastic Demand Change in Demand is LESS than change in Price ΔD < ΔP <1
5. Perfectly Inelastic Demand. NO change in Demand – change in Price. - 0
Factors affecting Price elasticity of demand:
1. Nature of Commodity:
 Demand for goods which are daily necessity is generally less elastic because of their daily consumption is
required.
 Example: Sugar, Food grains, Oil etc.
 On the other hand, luxurious items are more elastic because small change in price will highly affect its demand.
 Consumer goods is less elastic compared to producer goods.
 Durable goods are more elastic compared to non-durable goods.
2. Availability of Substitutes / Homogeneous Products:

 Such goods are MORE elastic for which substitute products are available.
 Example: If price of tea rises the demand of coffee will increase because it’s become relatively cheaper.
 On the other hand, good for which near substitute is NOT available is LESS elastic. (Example: Salt)
3. Income Spent on Commodity:

 Such goods are relatively less elastic on which consumer spent very low proportion of income. (Example: Salt)
 On the other side goods which consumes big proportion of income is relatively more elastic (Example: Gold)
4. Habit of Consumers:
 Goods for which consumer has formed a habit is generally less elastic. (Example: Pan, Tobacco, Guthkha,
Cigarettes, Alcohol etc.)
5. Postponement of consumption:
 Goods whose consumption can be postpone by consumer for future are more elastic in nature.
 Example: Car, Television, Jewelry etc.
 On the other hand, goods whose consumption cannot be postpone are less elastic.
 Example: items of necessities.
6. Price Range of Goods:

 Very high priced and very low pried both type of goods tends to be less elastic or inelastic.
 Example - 1: If price of match box rises it will not reduce its demand.
 Example – 2: If price of Gold decreases it will not much rise its demand.
7. Income Groups:
 Demand for a product which is elastic for one income group may be inelastic for other.
 Example: Demand of Milk, Dry fruits etc. are inelastic for richer class but highly elastic for lower class.
8. Pattern of Income Distribution:

 Generally, where there is an equal income distribution elasticity will be high.
Income Elasticity of Demand:
 Change in demand due to change in income of consumers is income elasticity of demand.

 In other words, income elasticity is a ‘Sensitivity of Demand’ to a change in income.
 So, income elasticity gives us rate of change (percentage change) in quantity demanded in response to
percentage change in income.
Types of Income Elasticity:

 There are THREE types of income elasticity of demand.
1. Positive Income Elasticity
2. Negative Income Elasticity
3. Zero Income Elasticity
1. Positive Income Elasticity:

 When increase in income leads to INCREASE in demand.
 For normal and superior goods income elasticity is always positive.
 It can be further divided in three parts.
1. I.E. Equal to One
2. I.E. Greater than One
3. I.E. Less than One
1.Income Elasticity EQUAL to ONE:

 When demand changes in the EOUAL proportion to
change in demand.
2.Income Elasticity GREATER than ONE:

 When change in demand is MORE than change in
income.
3.Income Elasticity LESS than ONE:

 When change in demand is LESS than change in
income.
5. Negative Income Elasticity:

 When increase in income leads to FALL in demand.
 For inferior goods income elasticity is always
negative.
4. Zero Income Elasticity:

 When there is no change in demand inspite of RISE
or FALL in income.
 Shape of such curve is straight line parallel to Y axis.
Can be expressed as….
Type Particulars Elasticity Applicable to

Normal Goods and
Change in Demand is MORE than change
1. I.E. GRATER than one. ΔD > ΔY >1 Semi luxurious
in income.
goods
Change in Demand is EQUAL to change
2. I.E. EQUAL to one. ΔD = ΔY =1 Normal Goods
in income.
Change in Demand is LESS than change
3. I.E. LESS than one. ΔD < ΔY <1 Necessity goods
in income.
No change in demand even if change in Salt, Match box,
4. ZERO I.E. - =0
income. Needle etc.
Decrease in demand, even if income is
5. NEGATIVE I.E. - Negative Inferior Goods
increased.
Measurement for Income Elasticity:

𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑
𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑎𝑚𝑎𝑛𝑑 =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
∆𝑄 ∆𝑌
𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑎𝑚𝑎𝑛𝑑 = ÷
𝑄 𝑌
Example: When income of consumer is Rs.5,000 he purchases 40 units of X and when income increase to Rs.6,000 he
purchases 50 units of X.
10 𝑢𝑛𝑖𝑡𝑠 𝑅𝑠. 1,000
𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑎𝑚𝑎𝑛𝑑 = ÷ = 1.25
40 𝑢𝑛𝑖𝑡𝑠 𝑅𝑠. 5,000
Cross Elasticity of Demand:
 Cross elasticity is applicable to two products which are related to each other.
 Relation can be of ‘Substitute’ or ‘Complementary’ for each other.
Example:
 Substitute product: Tea and Coffee, Gur and Sugar etc.
 Complementary product: Ink and Pen, Car and Petrol etc.
Meaning:
 Cross elasticity of demand express relation between the change in demand for one product due to change in
price of other related (substitute or complementary) product.
 In other words, cross elasticity is a ‘Sensitivity of Demand’ to a change in the price of related goods.
 There are THREE types of cross elasticity.
1. C.E. EQUAL to One.

2. C.E. GREATER than One.
3. C.E. LESS than One.
1. Cross Elasticity EQUAL to ONE:

 When demand of product ‘X’ changes in the EOUAL proportion to change in price of product ‘Y’.
2. Cross Elasticity GREATER than ONE:

 When change in the demand of product ‘X’ is GREATER than proportionate change in price of product ‘Y’.
3. Cross Elasticity LESS than ONE:

 When change in the demand of product ‘X’ is LESS than proportionate change in price of product ‘Y’
Cross Elasticity of Substitute Product:

 C.E. of substitute product is always POSITIVE.
 If X and Y both are substitute for each other
than…
 When price of Y increases demand of X will
increase (because X will become relatively
cheaper)
Cross Elasticity of Complementary Products:

 C.E. of complementary product is always
NEGATIVE.
 If X and Y both are complementary for each
other than…
 When price of Y increases demand of X will
decrease (because collective use of Y and X will
become relatively costlier)
Cross Elasticity of Neutral/Unrelated Products:

 C.E. of neutral / unrelated product is always
ZERO.
 If X and Y both are unrelated to each other
than…
 When price of Y increases demand of X will NOT
change.
What will be the type of cross elasticity between the goods mentioned below?
Product -1 Product – 2 Relation Type of Cross elasticity

Bread Butter Complementary Negative
Tea Coffee Substitutes Positive
Car Petrol Complementary Negative
Shoes Potatoes Neutral Zero
Amul Ice-Cream Tata Salt Neutral Zero
Maruti Car MRF Tyres Complementary Negative
Domino’s Pizza PizzaHut Pizza Substitutes Positive
Sony T.V. L.G.T.V. Substitutes Positive
Motorcycle Petrol Complementary Negative
Reliance cell phone Tata cell phone Substitutes Positive
Measurement for Cross Elasticity:

𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 ′𝑋′
𝐶𝑟𝑜𝑠𝑠 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑎𝑚𝑎𝑛𝑑 =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 ′𝑌′
∆𝑄𝑥 ∆𝑃𝑦
𝐶𝑟𝑜𝑠𝑠 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑎𝑚𝑎𝑛𝑑 = ÷
𝑄𝑥 𝑃𝑦
Example: Price of X is Rs.10 and demand is 500 units, Price of Y is Rs.15 and demand is 400 units now if price of Y
increase to 20 then demand of X increase to 700 units. Here cross elasticity will be…
200 𝑢𝑛𝑖𝑡𝑠 𝑅𝑠. 5

𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑎𝑚𝑎𝑛𝑑 = ÷ = 1.2
500 𝑢𝑛𝑖𝑡𝑠 𝑅𝑠. 15
Advertising / Promotional Elasticity of Demand: (Only for short answer)

 Advertising / Promotional elasticity of demand is the measurement of the rate of change in demand due to
change in advertisement expenditure.
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
 𝐴𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑖𝑛𝑔 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑎𝑚𝑎𝑛𝑑 =
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑎𝑑𝑣𝑒𝑟𝑡𝑖𝑠𝑚𝑒𝑛𝑡 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒
 There is a direct relation between advertisement expenditure and sales.
 If other factors like price, quality, distribution system remains constant…generally increase in advertisement
expenditure will leads to increase in demand.
Demand Forecasting
Why firm has to know demand of its product?
 To formulate price policy
 To avoid ‘Under production’ and ‘Over Production’
 To formulate Promotion and Advertisement decisions
 To take decision regarding Investment and Diversification
 To plan out capital requirement
 To arrange for Man Power (HR)
Meaning:
 Demand forecasting is a technique to predict, estimate, guess, calculate the future demand of the firm’s
product.
Importance of Demand forecasting:

 To decide ‘What to Produce’
 To decide the SCALE of production (How Much to produce)
 To arrange for the Finance and Human resources
Other points can be adopted from - why Demand forecasting?
Active and Passive Forecast:
1. Passive Forecast:
 Demand forecast without any action affecting demand is passive forecast….
Example:
 Sony Company estimates its demand of cell phones at 50000 pieces during diwali without any action to
boost sale.
2. Active Forecast:
 Demand forecast with any action affecting demand is active forecast….
Example:
 Sony Company estimates its demand of cell phones at 60000 pieces during diwali after making special demo
campaign to boost sale.
Objective of Demand Forecasting:
1. Short Term:
 To reduce cost of raw material and other inventories
 To formulate pricing policy
 To decide Advertisement and promotional activity
 To estimate Sales target
 To arrange short term finance and HR requirement
2. Long Term:
 To plan out for Expansion
 To plan out for Diversification
 To arrange Long term finance and HR requirement
Methods of Demand Forecasting:

1. Direct / Survey Methods
a) Consumer Surveys
b) Expert opinion Method
2. Indirect Method
a) Trend Projection Method
b) Regression Method
c) Leading Indicator Method
d) Simultaneous Equation Method
Direct Methods:
1. Consumer Survey Method:
 To know the intention of BUYERS…What they WANT TO BUY…
 Survey can be done by….
1. Personal Interview
2. Mail / Post Interview by Questionnaires
3. Telephonic Interview
1. Personal Interview:
Door to Door Survey
Interviewer has to visit home or office of prospective buyer.
Benefits:
Interviewer can explain matter to buyers
Personal Information can be taken
‘Non-verbal’ information can be taken
Limitation:
Expensive
Time Consuming
No good result if interviewer is not trained
2. Mail/Post Interview:
Sending questionnaires by post or e-mail
Prepaid reply envelopes must be sent
Benefits:
Less Cost and Time
Coverage of large geographical area
No trained staff required
Limitation:
Personal Information cannot be taken
No explanation to buyers
Half-filled or totally blank questionnaires
3. Telephonic Interview:
 Calling to buyers for getting responses
 Questions will be asked and answers will be recorded on telephone
Benefits:
 Less Cost and Time
 Coverage of large geographical area
 Personal Touch without face to face meeting
Limitation:
 Not for underdeveloped countries and regions
 No Long interview
 Large rejection rate
Two types of consumer survey:

1. Complete Enumeration Method
2. Sample Survey Method
1. Complete Enumeration Method:

 Under this method ALL THE POTENTIAL BUYERS are interviewed.
 Demand of all the buyers are added to get total demand.
Dx = X1 + X2 + X3 + X4…………Xn
Benefits:
 Great accuracy in results, since all buyers are interviewed.
 Best for new product survey
Limitations:
 No use if consumer is spread over large geographical area.
 More expensive and Time consuming
2. Sample Survey Method:

 Only FEW SELECTED consumers form all potential buyers are interviewed.
 Average of their demand will be taken as total demand.
Dx = X1 + X2 + X3 + X4…………X100 ÷ 100
Benefits:
 Less costly and Time consuming
 When there are no trained staff for work
Limitations:
 No proper result if sampling is defective
 Choice of sample is critical, careful planning is required
 Responder might not give TRUE answers or give diplomatic answers.
 Survey method is VERY EXPENSIVE compared to other methods.
 Skill full investigators and staff required for survey work.
 If questionnaires is poorly drafted then it leads to wrong results and interpretations.
Expert Opinion Method:

 There are certain persons who know / can estimate the response of consumers, prospective demand and
condition of market.
 Such as Market consultants, Salesman, Professional expert.
 Experts are in touch with changing trends of market so information can be taken from him and after
analysis of that information demand of product can be determined.
 These methods can be known as ‘Delphi Technique’
Limitation of Expert Opinion Method:

 Opinion may be BIASED.
 Estimation of different expert may be different and based on his/her personal judgment.
 Expensive- because expert charges HUGE FEES.
 Less experienced and knowledgeable expert can misguide.
Indirect Method of Forecasting:
Trend Projection Method:

 Increase and decrease in the demand over a period of long time creates tendency…..this tendency is
TREND.
 Firm can construct trend from the past years data of sales or demand. (This past data can be known as Time
Series)
 New firm who doesn't have past data can take the data of relative business firms for trend projection.
 Such data will be plotted on graph and trend of demand can be obtained.
Example:
Limitation:
 This method only give idea about INCREASE or DECREASE in sales…..doesn’t give actual figure of quantity
demand.
 If past data is defective then trend can misguide.
How to forecast the demand of a NEW PRODUCT?
1. Evolutionary approach:
 New product will grow as same as old product.
Example:
 Growth of smart phone in market can be as same as growth of basic phone.
Condition:
 New product must be SO CLOSED to old product.
 How to forecast the demand of a NEW PRODUCT?
2. Opinion approach:
 Estimation of Demand by direct inquiry form ultimate buyer.
Example:
 Demand estimation can be done by giving sample product to prospective buyer.
3. Sales experience approach:

 Estimation of Demand by launching product in sample (small) market.
Example:
 Nokia Company has launched new model of cell phone in his native country only….form the experience of
sales it can be decided to launch it worldwide.
4. Indirect / Vicarious approach:

 Estimation of Demand …form the information of dealers and sellers who keep touch with consumers and
know their reactions….
 Dealers have good idea about various product in market and consumer need and preferences so…
Criteria of Good Forecasting Method:
1. Accurate: gives accurate forecast result.

2. Simple: Technique must be easy and simply understandable.
3. Flexible: Should permit change whenever require.
4. Economical: Should not involve much money and efforts.
5. Durable: Technique must be useful in LONG RUN.
6. On time: Estimation should be on time and up to date basis.
Questions asked in past university papers:

1. Explain the meaning of demand forecasting. (Oct.2011, 2013, 2014)
2. What are the objective of long-term demand forecasting? (Apr.2008, 2012)
3. What is the difference between active and passive demand forecasting? (Apr. 2005. Oct.2008)
4. What are the criteria for good demand forecasting? (Apr.2006, 2007, 2011, 2012, 2013, 2015, Oct.2006)
5. Discuss the sample survey method for demand forecasting. (Apr.2006)
6. Explain the possible approach for demand forecasting of a new product. (Oct.2006, 2007, 2008, Apr.2008, 2009,
2010, 2012, 2014, 2015)
7. Explain trend projection method for demand forecasting. (Oct.2006, 2007)
ECONOMICS
Syllabus of Unit – 3
(Effective from 2023-24 as per NEP-2020)
Supply Analysis
Supply Analysis……Why????
 To get the answer of….
What to Produce?
How much to produce?
 For better Decision making and Forward Planning…

 For estimation of Cost and Profit…
 For Investment, Expansion and Diversification decision…
Meaning of Supply:
Desire of supplier to produce/supply the product
+
Ability to supply product at particular price (Capacity)
 Supply must be always reference to quantity, price, period of time and place.
Example:
 There is a supply of 50,000 cell phones in market. (Incorrect: As only quantity is specified)
 There is a supply of 50,000 cell phones in India’s market @ a price of 1500 per piece, in Jan. 2009.
(Correct: As quantity, place, time and price all information is specified)
Distinction between Stock and Supply:

Stock Supply
 Stock is ‘Potential’ supply.  Supply is actual quantity which is offered for
(Total quantity can be offered for sale) sale.
 Stock is outcome of production.  Supply is outcome of desire of seller to sale
product in market.
 Stock can be a total quantity stored in  Supply mean total quantity supplied from
godown / warehouse. godown for a purpose of sale.
 Stock comes from production.  Supply comes from stock.
Determinant of Supply:
1. Price of goods/service:
 Most important factor affecting supply.
 When price is HIGH supplier is willing to supply MORE.
 When price is LOW supplier is willing to supply LESS.
 So, price and supply are POSITIVELY related.
2. Price of other related goods:

 When price of related goods rises the supplier will also increase the supply of goods (on the estimation of
gradual increase in his goods also.) and vice-versa.
3. Price of factors of production or Inputs:

 Factors of production or Inputs includes Land, Labour, Capital etc.
 When price of factors of production or input is LOW means the COST OF PRODUCTION is LOW.
 So, supplier will supply more to get the benefit of opportunity to earn MORE PROFIT.
4. Numbers of Sellers in the Market:

 When number of sellers are more in the market (or increasing) the total supply of goods will also increase
and vice-versa.
5. Expectation of sellers regarding future:

6. State / level of technology:
 State of technology can also affect supply in market.
 Due to better technology producer can produce more goods with better quality using present resources.
 So technological advancement can increase the supply.
7. Natural factors:
 At last natural factors like weather condition, flood, drought, pests etc. also affect the supply of goods.
 When such factors work favorable supply is more and vice-versa.
Supply Function:
Sx = ʄ ( Px, Pr, Pi, T, W, Gp,U…..)
Px = Price of Product X.
Pr = Price of related goods
Pi = Price of production factors or input
T = State of technology
W = Weather conditions (Natural factors)
Gp = Government Policy
U = Other Factors
Law of Supply:
 If other factors remain constant…

 The supplies of goods ‘Expand’(rises) with the rise in price & ‘Contracts’ (falls) with fall in price.
 So, we can say that there is a direct/positive relationship between supply and price of goods.
 So, law of supply reflects the general behavior of supplier that they want to sell more with rise in price and
vice-versa.
Supply Curve:
Rational Explanation of Law of Supply:
 When price is low in the market, supplier will not find it worth-while to sell more product because of high
cost or low profits.
 When price rises, they will get more profit so start investing more in production factors and supply will
automatically rise.
Assumption of Law of Supply:
1. Cost of production will remain unchanged:

 As if cost of production will also rise with price, overall profit will be the same. It will not encourage supplier
to supply more.
2. No change in transportation cost:

 As if transportation cost will change, there will be a change in production and distribution cost. So we have
to assume that transport facility and cost will remain same.
3. No change in technique of production:

 As technique of production will affect cost of product.
 Due to latest technique is cost is decreasing faster than price then even if there is fall in price, supplier will
tend to supply more.
4. Government policies will remain unchanged:

 Government policies like Trade Policy, Fiscal Laws, Monetary- Credit policy, Banking Policy etc. will affect to
the cost of production so to supply also.
 So, it will be assumed that there will be no change in government policy while studying law of supply.
5. The price of other goods will remain unchanged:

 If price of other product will rise faster than the product of producer, for a better return he might diversify
his productive resources to that product.
Exception to Law of Supply:
Exception Details
1. Immediate Cash Requirements  In case of need of cash seller may sell product below market price.
 Here also supplier will sell more quantity on lower price to avoid total
2. Perishable Goods
loss due to damage to the product.
 Here, supplier has to sell obsolete and out of fashion goods at less
3. Out of Fashion Goods
price. (sometime below cost)
 Such goods depend on changes in nature and season, so here law of
4. Agricultural Goods
supply will not work correctly.
 Such good are limited in quantity so the supply is not easy to increase
5. Artistic and rare goods
even if there is a constant rise in price.
6. Firm want to leave  At a time of shut down of firm, it can sell product below cost.
7. Restriction on quantity by  Sometime government apply price ceiling policy or put restriction on
govt. quantity to be sold, in such case law of supply will not work.
 In a time of slow down or depression in business firm can sell at or
8. Slowdown in business
below cost to clear the stock.
 If supplier feels that in future price is decrease further, he will tend to
9. Anticipation of future price
supply more even if there is a constant decrease in price.
Elasticity of Supply:
 The proportionate change in quantity supplied due to change in price is known as elasticity of supply.
 In other words, price elasticity is a ‘Sensitivity of Supply’ to a change in price.
 So, supply elasticity gives us rate of change (percentage change) in quantity supplied in response to
percentage change in price.
𝑷𝒓𝒐𝒑𝒐𝒓𝒕𝒊𝒐𝒏𝒂𝒕𝒆 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑺𝒖𝒑𝒑𝒍𝒚

𝑬𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 𝒐𝒇 𝑺𝒖𝒑𝒑𝒍𝒚 =
𝑷𝒓𝒐𝒑𝒐𝒓𝒕𝒊𝒏𝒂𝒕𝒆 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆
Types of Elasticity of Supply:
1. Perfectly Elastic Supply:
 Supply of product changes even if there is

no change in price, then its known as
perfectly elastic supply.
 Elasticity = ∞
2. Relatively Elastic Supply:
 When proportionate change in supply is

MORE than proportionate change in price,
its known as relatively elastic supply.
 Elasticity = >1
3. Unitary Elastic Supply:

EQUAL to proportionate change in price, its
known as unitary elastic supply.
 Elasticity = 1
4. Relatively Inelastic Supply:

LESS to proportionate change in price, its
known as relatively inelastic supply.
 Elasticity = <1
5. Perfectly Inelastic Supply:
 Supply of product NOT changes even if

there is change in price, then its known as
perfectly inelastic Supply.
 Elasticity = 0
Can be expressed as:
Type Particulars Expression Elasticity

1. Perfectly Elastic Supply Change in Supply – No Change in Price - ∞
2. Relatively Elastic Supply Change in Supply is MORE than change in Price ΔS > ΔP >1
3. Unitary Elastic Supply Change in Supply is EQUAL to change in Price ΔS = ΔP =1
4. Relatively Inelastic Supply Change in Supply is LESS than change in Price ΔS < ΔP <1
5. Perfectly Inelastic Supply NO change in Supply – change in Price. - 0
Factors affecting Elasticity of Supply:
Factors Details
 If there is a more / plenty of producer in market then it’s easy to increase
1. Number Producers in Market the quantity if price rise.
 So, here supply will be more elastic.
 Supply of perishable goods is less elastic because it cannot be stored for
2. Types of Goods
longer period.
 But in case of durable product the elasticity will be more.

 If cost of production is low, supplier will / can increase the production or
store the finished stock to increase the supply.
3. Cost of Production
 So, if cost of production is low, supply will be more elastic and vice-
versa.
 If in economy the resources required to particular product is scared,
4. Availability of Resources then it would not be possible to increase the output of such
commodity after certain level. So, elasticity in such product will be low.
 Where technological improvement is fast, elasticity of supply will be
5. Improvement in Technology high because supplier can increase production of goods in favorable
pricing condition.
 In short run firm cannot change in fixed factor of production so elasticity
will be low.
6. Time Factor
 In long run firm will be able to change its variable as well as fixed
factors of production so elasticity will be high.
Production Function
What is Production?
 ‘Creation of Values’…
 Creation of Utility by application of Labour, Finance…
 Making goods usable to consumer by Changing place of goods, Time of use of goods, Changing form (size,
shape etc..) of goods …
Production Function:
 It’s a (technical / mathematical) relationship between…
 Rate of INPUT of goods and productive services and rate of OUTPUT of finished product.
 Generally, the out of finished goods or services is depends on the INPUT of raw material, labour, capital and
other productive services…
Q = ʄ (X1, X2, X3……)
Where, Q= Output, X1=Land, X2= Labour, X3= Capital
Two Assumption of Production Function:

1. State of Technology:
 State of technology will remain same during a given period.
 If technology changes then it will alter the relation between input and output.
2. Maximum efficiency use of factors:

 All the resources employed for production must be utilized at maximum / optimum capacity.
Short Run Production Function:

 In short run only Variable factors of production can be changed…..
 Fixed factor such as Land and Capital will remain constant
 So, production can be increased or decreased by changing VARIABLE FACTORS of production.
Q = ʄ (∆L, C, L……)
Long Run Production Function:

 In long run ALL Variable and Fixed factors of production can be changed…..
 So, production can be increased or decreased by changing ALL FACTORS of production.
Q = ʄ (∆L, ∆C, ∆L……)
Law of Variable Proportion:

 This Law express relationship between…
 CHANGE in VARIABLE FACTORTS of production and CHANGE in OUTPUT.
Process:
 One Fixed factor of production will remain constant…
 Another Variable factor are increased…
Result:
 Then output would not increase in proportionate manner.

 Output will not change in same proportion as increase in variable factor of production….this is known as
‘Law of variable Proportion’
Change will be on three phases:
1. Increasing Return
2. Constant Return
3. Diminishing Return
Three phases of Return to Scale:

1. Increasing Return:
 When the output increase in a greater speed then the increase in input…
Example: Input is increased by 20% and due to that output has increased by 25%...
2. Content Return:
 When the output increases in a same speed as the increase in input…
3. Diminishing Return:
 When the output increase in a lower speed then the increase in input…

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KEY NOTES BUSINESS ECONOMICS (F.Y.SEM.

Demand of Consumer and Producer goods:

Demand of Perishable and Durable Goods:

Derived and Autonomous Demand:

Company and Industry Demand:

Exceptions to the Law of demand:

5. Fashion, Taste, Choice:

6. Expectations regarding price variations:

9. Consumer Credit Facilities:

Questions asked in past university papers:

Price Elasticity of Demand:

Types of Price Elasticity of Demand:

1. Perfectly Elastic Demand

2. Relatively Elastic Demand

3. Unitary Elastic Demand

4. Relatively Inelastic Demand

5. Perfectly Inelastic Demand

Can be expressed as….

Type Particulars Expression Elasticity

Factors affecting Price elasticity of demand:

2. Availability of Substitutes / Homogeneous Products:

3. Income Spent on Commodity:

6. Price Range of Goods:

8. Pattern of Income Distribution:

Income Elasticity of Demand:

 Change in demand due to change in income of consumers is income elasticity of demand.

Types of Income Elasticity:

1. Positive Income Elasticity:

1.Income Elasticity EQUAL to ONE:

2.Income Elasticity GREATER than ONE:

3.Income Elasticity LESS than ONE:

5. Negative Income Elasticity:

4. Zero Income Elasticity:

Can be expressed as….

Type Particulars Elasticity Applicable to

Measurement for Income Elasticity:

Cross Elasticity of Demand:

1. C.E. EQUAL to One.

1. Cross Elasticity EQUAL to ONE:

2. Cross Elasticity GREATER than ONE:

3. Cross Elasticity LESS than ONE:

Cross Elasticity of Substitute Product:

Cross Elasticity of Complementary Products:

Cross Elasticity of Neutral/Unrelated Products:

Product -1 Product – 2 Relation Type of Cross elasticity

Measurement for Cross Elasticity:

200 𝑢𝑛𝑖𝑡𝑠 𝑅𝑠. 5

Advertising / Promotional Elasticity of Demand: (Only for short answer)

Importance of Demand forecasting:

Other points can be adopted from - why Demand forecasting?

Active and Passive Forecast:

Objective of Demand Forecasting:

Methods of Demand Forecasting:

Two types of consumer survey:

1. Complete Enumeration Method:

2. Sample Survey Method:

Expert Opinion Method:

Limitation of Expert Opinion Method:

Trend Projection Method:

How to forecast the demand of a NEW PRODUCT?

 How to forecast the demand of a NEW PRODUCT?

3. Sales experience approach:

4. Indirect / Vicarious approach: