of istance, if price Price of any of them would favourably affect the demand for the other. For instan would take more milk falls, the demand for sugar would also he favourably affected, When people wou! ilk, the demand for sugar will also increase. Likewise, whe he price of ears falls, the quantity e he pi 7 nd for petrol demand of them would inctease which in turn will increase the demand for = 10 promote the 5) Advertisement expenditure, The advertisement expenditure made by a firm to prom oe sales of its product is an important factor determining demand for a product, espe cially of the is to influence the product of the firm which gives advertisements. The purpose of advertisement is to in! such as newspapers, consumers in favour ofa product, Advertisements are given in various media such as newspa onsumers are radio, television. Advertisements for goods are repeated several times so that cons cause an convinced about their superior quality. When advertisements prove successful they caus: increase in the demand for the product. 6) The number of consumers in the market: The greater the number of consumers of a good, the greater the market demand for it. Now, the question arises on what factors the number of ‘consumers for a good depends. If the consumers substitute one good for another, then the number of consumers for the good which has been substituted by the other will decline and for the good which has been used in place of the others, the number of consumers will increasc. Besides, when the seller of a good succeeds in finding out new markets for his good and as a result the market for his good expands, the number of consumers for that good will increase. Another important cause for the increase in the number of consumers is the growth in population. For instance, in India the demand for many essential goods, especially food grains, has increased because of the increase in the population of the country and the resultant increase in the number of consumers for them. 7) Consumers’ Expectations: Another factor which influences the demand for goods is consumers” expectations with regard to future prices of the goods. If due to some reason, consumers expect that in the near future prices of the goods would rise, then in the present they would demand greater quantities of the goods so that in the future they should not have to pay higher prices. Similarly, when the consumers expect that in the future the prices of oods will fall, then in the present they will postpone a part of the consumption of goods with the result ; that their present demand for goods will decrease.GOGe& GO 8) Government Potic This includes the actions taken by the government to determine the fiscal Policy and monetary policy such as taxation levels, hudgets, money supply. and interest rates. Government policies have direet impact on the demand for varius commorities For example if es high taxes (sales tax, VAT, ete.) on commodities, their prices would demand On the contrary, if the government invests in the government impos tmerease, which would lead to a fall in the: building of roads, bridges, schools, and! hospitals, the demand for bricks, cement, labour, ete. Would rise, Similarly, government may encourage the consumption of a commodity by providing subsidy on it, People buy commodities at a cheaper price from shops run by the government 9) Pattern of Saving: Demand is also influenced by the pattern of saving. If people begin to save more, their demand will decrease. It means the disposable income will be less to purchase the ‘goods and services. On the contrary, if saving is less their demand will increase 10) Climatic factors: The demand for commodities depends on the climatic conditions of a region such as cold, hot, humid, and dry. For example, the demand for air coolers and air conditioners is higher during suuuner while the demand for umbrellas tends to rise during monsoon. 11) Demonstration Effect: Demonstration effect helps to increase human wants. In underdeveloped countries, there is a desire in the minds of the people to imitate other people for conspicuous consumption and that is why they are not able to save. This change in the saving habits of the people is due to “contact effect”. The demonstration effect has a positive effect on the demand for comforts and luxury goods. 12) Credit Policy: It refers to terms and conditions for supplying various commodities on credit The credit policy of suppliers or banks also affects the demand for a commodity. This is because favourable credit policies generally result in the purchase of commodities that consumers may not have purchased otherwise. Favourable credit policies generally increase the demand for expensive durable goods such as cars and houses. For example, easy home and car loans offered by banks have led to a steep rise in the demand for homes and cars respectively.LAW OF DEMAND zs aviservices tie eve everyay anaactions. Thelnw af demand expresses rlaionshiP lefinitions of the ‘between the quantity demanded and its price, The following: are some popular dé law of demand given by experts! shor things being equal, the lower the price at which a things offered the more a man will be prepared to buy it” price at In the words of Marshall, “The greater the amount to be sold, the smaller must be the which it is offered in order that it may find purchasers; or in other words. the amount demanded increases with a fall in price ‘and diminishes with a rise in price.” ‘According to Ferguson, “Law of Demand, the quantity demanded varies inversely with price.” According to the law ‘of demand, ather things being equal. if price of a commodity falls, the quantity demanded of it will rise, and if p price of the commodity rises, its quantity demanded will decline. The law states that relationship between the quantity demanded and price. It implies that there is an inverse relationship between the price and quantity demanded of a commodity. ‘The law of demand represents a functional relationship between the price and quantity demanded ofa commodity or service. The law states that the quantity demanded of a commodity increases with « fall in the price of the commodity and vice versa while other factors like consumers’ preferences, level of income, population size, ete. are c onstant, Demand is a dependent variable, while price is an independent variable. Therefore, demand is a function of price and can be expressed as follows: D=f(P) _ 33 Cooter, R., & Ulen, T. (1988). Law and economics.f= Functional Relationship: P= Price “The law of demand describes the functional relationship between price and quantity demanded, demand varies inversely with price, the higher the price of a good, the less people will demand that good and lower the price of a good the more people will demand that good” Diagrammatic Representation of Demand Curve Demand Relationship | throughout is length, The inverse p of demand is based on certain assumptions, which HOE oc ent.ASSUMPTIONS OF THE LAW OF DEMAND The law of demand follows the assumption of ceteris paribus, which means that the other factors remain unchanged or constant, As mentioned earlier, the demand for a commodity or service not only depends on its price but also on several other factors such as price of related goods, income, and consumer tastes and preferences. In the Inw of demand, other factors are assumed to remain constant while only the price of the commodity changes. The law of demand is based on the following assumptions: * There is no change in the tastes and preferences of the consumer "The income of the consumer remains constant. + The commodity is a normal commodity. "There should not be any substitutes of the commodity * Price of related goods remains unchanged. = Consumer expectations do not change. There should not be any possibility of change in the price of the product being used. the quality of the product and = There should not be any chang The habits of the consumers should remain unchanged Given these conditions, the law of demand operates. If there is change even in one of these conditions, it will stop operating. The law of demand can be understood with the help of certain concepts, such as demand schedule, demand curve, and demand function. Let us discuss these concepts in detail in the upcoming sections. DEMAND SCHEDULE A demand schedule refers to a tabular representation of the relationship between price and. quantity demanded. It demonstrates the quantity of a product demanded by an individual or a group of individuals at specified price and time while other factors are constant. It can be categorized into two types. They are:1, Individual Demand Schedule: It refers to a tabular representation of quantity of products demanded by an individual at different prices and time provided all other factors remain constant. Individual Demand Schedule for Commodity X Ga ‘Quantity Demanded for ‘Commodity X (Rs) ‘Commodity x (Units) 10 6000 20 5000 30 4000 40 3000 50 2000 60 1000 2) Market Demand Schedule: It shows a tabular representation of quantity demanded in aggregate by individuals at different prices and time. Therefore, it demonstrates the demand of a Product in the market at different prices. The market demand schedule can be derived by aggregating the individual demand schedules. Market Demand Schedule Prices ofpen | Quantity demanded by Al ey ‘Market Demand Rs) (units) (units) In the above table, ‘he individual demand schedule of A and B fora pen are depicted in the columns (2) and (3) at different price levels shown in column (1). Column (4) depicts the market demand schedule, which is the sum total of the individual demands of A and B. As shown in the above At 8 Price level of Rs.6 for a pen, individual demand by A and B are 0 pen and 5 pensket) is the respectively. The market demand (assuming there are only two individuals in the mark sum total of individual demands i.e. 01-5 Pens. manded. This law of demand expresses the functional relationship between price and quantity dei demanded 0 The law of demand or functional relationship between price and quantity demande: 0 ording to commodity is one of the best known and most important laws of economic theory. According antity the law of demand, other things being equal, if the price of a commodity falls, the 4) line. demoded of it will rise, and if the price of the commadity rises, its quantity demanded will decli Thus, according to the law of demand, there is inverse relationship between price and quantity demanded. other things remaining the same. These other things which are assumed to be constant are the tastes and preferences of the consumer, the income of the consumer, and the prices of related goods. If these other factors which determine demand also undergo a change at the same time, then the inverse price-demand relationship may not hold good Thus, the constancy of these other things which is generally stated as ceteris paribus is an important qualification of the law of demand, DEMAND CURVE A demand curve is a graphical representation of the law of demand. The demand schedule can be converted into a demand curve by graphically plotting the different combinations of price and quantity demanded of a product. Thus, it can be said that demand curve is the Pictorial representation of the demand schedule. The demand curve represents different quantities of a commodity demanded at specific price and time while other factors remain constant"*. Similar to demand schedule, demand curve can also be categorised into the following two types: * Individual demand curve: It is the curve that shows different quantities of a commodity which an individual is willing to purchase at all possible prices in a given time Period with an assumption that other factors are constant, * Boulding,K.E. (1941). Economic analysis. Harper and brothers Publishers, London,PRICE curve isthe graphical representation of the market demand ferent quantities of a commodity which all e levels at a given time surve can be plotted by surve is the horizontal + Market demand curve: This schedule. A market demand curve shows dif consumers in a market are willing to purchase at different pric period, while other factor consolidating individual demand curves. Therefore, jividual demand curves. « remaining constant. A market demand market demand ci summation of indi ‘The negative slope of a demand curve is a reflection of the law of demand. However, iportal Pp id fa de fF thi f demand. H itis (0 understand wi lemand curve slopes downwards to the right. fand the reasons why the di uN de Is to the rightWHY DOES DEMAND CURVE SLOPES DOWNWARD? We have explnined above thal, when price flle the quantity demanded of a commodity rises and vice versa, other things remaining the same Iti de to thi law of demand that demand curve slopes downwant to the right. Now, the important question ie why the demand curve Slopes downwant, or in other words, why the law of demand which desen thes inverse price-demand relationship is valid Tt may however be mentioned here that there are two factors due to which quantit ry demanded inereases when price falls: (1) Income Effect: When the price of a commodity falls the consumer can buy more quantity: of the commodity with his given income. Or, if he chooses to buy the same amount of quantity a5 before, some money will be left with him because he has to spend less on the commodity due to its lower price. In other words, as a result of fall in the price of a commodity, consumer's real income or purchasing power increases. This increase in real income induces the consumer to buy more of that commodity. This is called income effect of the change in price of the commodity This is one reason why a consumer buys more of a commodity when its price falls'* For instance, with the fall in price of milk, a person will buy more of it and at the same time he will increase the demand for other commodities. On the other hand, with the increase in price of milk he will reduce its demand. The income effect of a change in the price of an ordinary commodity being positive, the demand curve slopes downward. (2) Substitution Effect: The other important reason why the quantity demanded of a commodity rises as its price falls is the substitution effect. When price of a commodity falls, it becomes relatively cheaper than other commodities. This induces the consumer to substitute the commodity whose price has fallen for other commodities which have now become relatively dearer. As a result of this substitution effect, the quantity demanded of the commodity, whose price has fallen, rises, This substitution effect is more important than the income effect, Marshall explained the downward-sloping demand curve with the aid of this substitution effect alone, since he ignored. +5 Browning, E.K., & Zupan, M. A. (2020). Microeconomics: Theory and applications. John Wiley & Sons,es even the income effect of the price change the income effect of the price change. But in some cas ; is very significant and cannot be ignored. Hicks and Allen who put forward an alternative theory ysis of consumer's behaviour explain this downward- of demand called as indifference curve anal fe with the help of both income and substitution effects sloping demand “onsumers purchase commodities to derive utility out (3) Law of diminishing marginal utility: shing marginal utility states that as consumption increases, the utility jonal units (marginal utility) of a commodity diminishes of them, The law of dimit that a consumer derives from the additi constantly, Therefore, a consumer would purchase a larger amount of a commodity when it is priced low as the marginal utility of the additional unit's decreases. : When the price of a commodity decreases, the number (4) Change in the number of consume! of consumers of the commodity increases. This leads to a rise in the demand for the commodity. For example, when the price of apples is Rs. 120 per kg, only a few people purchase it. However, when the price of apples falls down to Rs. 60 per kg, more number of people can afford it. (5) Multiple uses of a commodity: There are certain commodities that can serve more than one wurpose. For example, milk, steel, oil, etc. However, some uses are more important over the others. When the price of such a commodity is high, it will be used to serve important purposes. Thus, the demand will be low. On the other hand, when the price of the commodity falls, it will be used for less important purposes as well. Thus, the demand will increase. For example, when the price of electricity is high, it is used only for lighting purposes, whereas when the price of electricity goes down, itis also used for cooking, heating, etc. (6) There are persons in different income groups in every society but the majority is in low income group. The downward sloping demand curve depends upon this group. Ordinary people buy more when price falls and less when price rises. The rich do not have any effect on the demand curve because they are capable of buying the same quantity even at a higher price, (7) There is a tendency to satisfy unsatisfied wants, Each person has some unsatisfied wants. When . Wher the i * Price of a good such as apple falls, the demand for it will increase as people who were earliermand curve not able to buy apples can now buy. Due to this behaviour of human beings, the der slopes downward DEMAND FUNCTION oO le Mathematically, a function is a symbolic representation of the relationship between depen quantity independent variables. Demand function represents the relationship between the qi ee yendent demanded for a commodity (dependent variable) and the price of the commodity (indep’ ; ids on variable). Let us assume that the quantity demanded of a commodity X is Dx, which depen ly on its price P,, while other factors are constant, It can be mathematically represented as: F(Px) However, the quantitative relationship between D, and P, is expressed as: Dx=a—bP Where, a (intercept) and b (relationship between D, and P,) are constants. There are mainly two types of demand functions, which are discussed as follows: * Linear demand function: In the linear demand function, the slope of the demand curve Femains constant throughout its length. A linear demand equation is mathematically expressed as: Dy =a—bPx In this equation, a denotes the total demand at zero price. b= slope or the relationship between D, and Px b can also be denoted by change in Dx for change in Py Ifthe values ofa and bare known, the demand fora commodity at any given price can be com ted pul using the equation given above.> > 2 2 2 2 2 2 . » v » » » 2 » . ? > , ) ) For example, let us assume a ~ 50, h~ 2.5, and Px= 10: Demand function is: Dx = 50 ~ 2.5 (Ps) Therefore, Dy 80. 2.5(10) or Dy> 25 units + Non-linear demand function: In the non-linear or curvilinear demand function, the slope of the demand curve (AP/AQ) changes along the demand curve. Instead of a demand line, non-linear demand fimetion yields a demand curve A non-linear demand equation is mathematically expressed is Dx = a(Pxy-b or of a rectangular hyperbola of the form where a, b, ¢> 0, Exponent -b of price in the non-linear demand function refers to the coefficient of the price elasticity of demand EXCEPTIONS TO THE LAW OF DEMAND As a general rule, demand curve slopes downwards, showing the inverse relationship between price and quantity demanded, However, in certain special circumstances, the reverse may occur. i.e. arise in price may increase the demand. These circumstances are known as “Exceptions to the Law of Demand’. The Law of demand is generally believed to be valid in most of the situations. However, some exceptions to the law of demand have been pointed out. 1) Veblen Effect: One exception to the law of demand is associated with the name of the economist, Thorstein Veblen who propounded the doctrine of conspicuous consumption. According to Veblen, some consumers measure the utility of a commodity entirely by its price ic, for them, the greater the price of a commodity, the greater its utility. For example, diamonds are considered as prestige good in the society and for the upper strata of the society the higher the price of diamonds, the higher the prestige value of them and therefore the greater utility or desirability of them. In this case, some consumers will buy less of the diamonds at a lower price because with the fall in price its prestige value goes down'®, On the other hand, when price of diamonds goes up, their prestige value goes up and therefore ** Dolfsma, W. (2000). Life and times of the Veblen effect. History of Economic Ideas, 61-82.d their utility or desirability increases. As a result, at a higher price the quantity demande is, other of diamonds by a consumer will rise This is called Veblen effect. Besides diamonds, othe goods such as mink coats, luxury cars have prestige value and Veblen effect works In their case too 2) Giffen Goods: Another exception to the law of demand was pointed out by Sir Robert Giffen (1837 -1910) who observed that when price of bread increased, the low-paid British fit and this is workers in the carly 19th century purchased more bread and not less © s is that these contrary to the law of demand described above. The reason given for thi British workers consumed a diet of mainly bread and when the price of bread went UP they vere compelled to spend more on given quantity of bread. Therefore, they could not afford to purchase as much meat as before. Thus, they substituted even bread for meat in order to maintain their intake of food. After the name of Robert Giffen, such goods in whose case there is a direct price-demand relationship are called Giffen goods. It is important to note that with the rise in the price of a Giffen good, its quantity demand increases and with the fallin its price its quantity demanded decreases, the demand curve will slope upward to the right and not downward. 3) Demonstration Effect: If consumers are affected by the principle of conspicuous consumption or demonstration effect, they will like to buy more of those commodities which confer distinction on the possessor, when their prices rise. On the other hand, with the fall in the prices of such articles, their demand falls, as is the case with diamonds. 4) Ignorance Effect: Consumers buy more ata higher price under the influence of the “igno- rance effect”, where a commodity may be mistaken for some other commodity, due to deceptive packing, label, ete. 5) Speculation: Marshall mentions speculation as one of the important exceptions to the downward sloping demand curve. According to him, the law of demand does not apply to the demand in a campaign between groups of speculators. When a group unloads a great quantity of a thing on to the market, the price falls and the other group begins buying it.ranges to sell a great deal quietly. Thus when When it has raised the price of the thing, it Price rises, demand also increases. y on necessities of life such 6) Necessities of Life: Normally, the nw of demand does not appl consumer does not reduce as food, cloth ete. Even the price of these goods increases, the their demand, Rather, he purchases them even the prices of these goods increase often by reducing the demand for comfortable goods, This is also a reason that the demand curve slopes upwands to the right. Fear of Shortage: If the consumers expect a shortage or scarcity of a particular commodity in the near future, then they would start buying more and more of that commodity in the f their prices are rising. The consumers demand more due to fear of current period ev further rise in prices. For example, during emergencies like war, famines, etc., consumers demand goods even at higher prices due to fear of shortage and general insecurity. Fashion related goods: Goods related to fashion do not follow the law of demand and their demand increases even with a rise in their prices. For example, if any particular type of dress is in fashion, then demand for such dress will increase even if its price is rising 8) 9) Change in weather: With change in season/weather, demand for certain commodities also changes, irrespective of any change in their prices. For example, demand for umbrellas increases in rainy season even with an increase in their prices. It must be noted that in normal conditions and considering the given assumptions, ‘Law of Demand’ is universally applicable. 10) Situations of crisis: Crisis such as war and famine negate the law of demand. During crisis, consumers tend to purchase in larger quantities with the Purpose of stocking, which further accentuates the prices of commodities in the market, They fear that goods would not be available in the future. On the other hand, at the time of depression, a fall in the price of commodities does not induce consumers to demand more.SHIFT AND MOVEMENT OF DEMAND CURVE, In economies, change in quantity demanded and change in demand ity demanded refers to change in the quantity purchased due to rise or fal ‘onstant. On the other hand, change in demand refers < determinants of demand other are two different concepts Hin Change in qui product prices while other factors are c to increase or decrease in demand for a produet due to variou! than price (in this case, price is constant) nd curve. Change in quantity demanded can be measured by the movement along the demai tity while change in demand is measured by shifts in demand curve. The terms. change tm qua demanded refers to expansion or contraction of demand, while change in demand means increase or decrease in demand. Increase and Decrease in Demand Increase and decrease in demand takes place due to changes in other factors, such as change in income, distribution of income, change in consumer's tastes and preferences. change in the price of related goods. In this case, the price factor remains unchanged. Increase in demand refers to the rise in demand for a product at a specific price, while a decrease in demand is the fall in demand for a product at a given price. When other factors change, the demand curve changes its position which is referred to as a shift along the demand curve, which is shown in the below figure:Shift in Demand Curve Demand curve D2 is the original demand curve of commodity X. At price OP, the demand is OQ units of commodity X. When the consumer’s income decreases owing to high income tax, he/she is able to purchase only OQ) unit of commodity X at the same price OP2. There- fore, the demand curve, D2 shifts downwards to Dj. Similarly, when the consumer’ disposable income increases due to a reduction in taxes, he/she is able to purchase OQ3 units of commodity X at the price OP . Therefore, the demand curve, D2 shifts upwards to D3. Such changes in the position of the demand curve from its original position are referred to as a shift in the demand curve. There are several factors that cause a shift in the demand curve. Some of them are given as follows: ¢ A fallin consumers’ income due to which they can Purchase few units of a commodity (income effect). * A fall in the price of a related commodity due to which consumer prefer to purchase the substitute commodity (substitution effect). Changes in the tastes and preferences of consumers due to which they may replace the original commodity with a new one,«Increase in the price of complementary goods due to which consumers can afford to buy fewer units of the original commodity on, technology, or quality due to which consumers may © Change in fashion, s purchase fewer units of the original commodity Expansion and Contraction of Demand The change in the quantity demanded of a product with change in its price, while other factors are at constant, is called expansion or contraction of demand. Expansion and contraction are represented by the movement along the same demand curve. Let us discuss the expansion and contraction of demand as follows: ¢ Expansion or extension of demand: It is an increase in the demand of a commodity due to decrease in its prices, while other factors are constant. For example, in Table 2.1. when the price ofeggs falls from 60 per dozen to 50 per dozen, its quantity demanded rises from 6 dozen to 9 dozen by individual A. Therefore, the demand for eggs is expanded or extended. Contraction of demand: It is a decrease in the demand of a commodity due to increase » When the in its price, while other factors remain unchanged. For example, in Table price of eggs rises from 60 per dozen to 80 per dozen, its quantity demanded falls from dozen to 2 dozen by individual A. Therefore, the demand for eggs is contracted,a3 01.027 Ox In the demand curve, when the price of commodity X is OP}, quantity dernanded is OQ). If the price of commodity X decreases to OP2, the quantity demanded increases to OQ3. The movement of the demand curve from Aj to A2 in the downward direction is called the extension of the demand curve. On the other hand, if the price of the commodity X rises from OP} to OP3, the quantity demanded of commodity X falls from OQ] to 0Q3. This movement along the demand curve in the up- ward direction is called the contraction of demand. CONCEPT OF SUPPLY The behaviour of buyers is understood with the help of the concept of demand. On the other hand, the behaviour of sellers is analysed using the eoncept of supply. Supply can be defined as the quantity of a product that a seller is willing o offer in the market at a particular price within specific time. The supply of a product is influenced by various determinants, such as price, cost of production, goverment policies, and technology. Itis governed. by the law of supply, which states a direct relationship between the supply and price of a Product, while other factors remaining the same. In simple words, the law of supply states that the supph ly of a product increases with an increase in its price, while other factors at constant and vice versa,rium of a product by buyers is equal to the quantity supplied by sellers. In simple terms, equilib tween market demand and supply. The equilibrium price price is a price when there is a balance he mn, fall in the of a product can change due to various reasons, such as reduction in cost of producto price of substitutes, and unfavourable climatic conditions In economies, supply refers to the quantity of a product available in the market for sale at 8 specified price and time. In other words, supply can be defined as the willingness of the specified quantity of a product within a particular price and time period. Here, noted that demand is the willingness of a buyer, while supply is the willingness of a supplier. a seller to sell should be Different experts have defined the term supply differently. The following are some popular definitions of supply: According to Meyers, “Supply may be defined as a schedule of the amount of a product that would be offered for sale at all possible prices at any one instant of time, or during any one period of time, for example, a day, a week, a month, a year and so on, in which the conditions of suppls remain the same.” In the words of McConnell, “Supply may be defined as a schedule which shows the various amounts of a product which a particular seller is willing and able to produce and make available ‘for-sale in the market at each specific price in a set of possible prices during a given period.” According to Anatol Murad, “Supply refers to the quantity of a commodity offered for sale at a given price, ina given market, at given time.” From the aforementioned definitions, it can be said that supply has three important aspects, which are as follows: + Supply is always referred in terms of price, The price at which quantities are supplied differs from one location to the other. For example, fast moving consumer goods (FMCG) are usually supplied at different prices in different prices.js the amount that suppliers are red in terms of time. This means that supply ic, per month, bi-annually, = Supply is refer per weel willing to offer during a specific period af time (per day. ete.) «Supply considers the stock and market price of the product. The stock of a product refers able in the market for sale within a specified point of to the quantity of the produet avail If the time. Both stock and market price of a product affect its supply t a greater extent more than its cost price, the seller would increase the supply market price of a product is red to the of the product in the market. However, a decrease in the market price as comP: cost price would reduce the supply of product in the market. aseller offers a commodity cept of supply with an example. For example, ed; thus, it ¢ market. In this case, only commodity and price are specifie there is another seller who offers the same commodity Let us understand the cot at Rs.100 per piece in th cannot be considered as supply. However, at Rs.110 per piece in the market for the next six months from now on. In this case, commodity. price, and time are specified, thus it is supply. Supply can be classified into two categories, which are individual supply and market supply Individual supply is the quantity of goods and time in the market. In economics, a single market supply is the quantity of goods supplied by all firm: period and at a particular price. Market supply is also known as a single producer is willing to supply at a particular price producer is known as a firm. On the other hand. s in the market during a specific time industry supply as firms collectively constitute an industry. DETERMINANTS OF SUPPLY Supply does not remain constant all the time in the market, There are many factors that influence the supply of a product. Generally, the supply of @ product depends on its price and cost of production. Thus, it can be said that supply is the function of price and cost of production. Let us study these factors in detail.e. An * Price of a product: The major determinant of the supply of a product is its pric’ . factors increase in the price of a prochuct increases its supply and vice versa while other ; eto the remain the same. Producers increase the supply of the product at higher prices du‘ . nship- expectation of receiving increased profits, Thus, price and supply have a direct relationship. are to be manufacturing of goods that "Cost of production: It is the cost incurred on the jo each upply are inversely proportional t offered to consumers. Cost of production and tof other. This implies that suppliers do not supply products in the market when the cos! in their market price. In this case, sellers would wait for a rise manufacturing is more tha fi f Price in the future. The cost of production increases due to several factors, such as loss fertility of land; high wage rates of labour; and increase in the prices of raw material, transportation cost, and tax rate. Natural conditions: The supply of certain products is directly influenced by climatic the supply of agricultural products increases when the monsoon conditions. For instance, the supply of these products decreases at the time of comes well on time. On the contrary, drought. Some of the crops are climate specific and their growth purely depends on climatic conditions. For example, Kharif crops are well grown at the time of summer, while Rabi crops are produced well in the winter season. Transportation conditions: Better transport facilities result in an increase in the supply of goods. Transport is always a constraint to the supply of goods. This is because goods are not available on time due to poor transport facilities, Therefore, even if the Price of a product increases, the supply would not increase. Taxation policies: Government's tax policies also act as a regulating force in supply. If the rates of taxes levied on goods are high, the supply will decrease, This is because high ‘ax rates increase overall productions costs, which will make it difficult for suppliers to offer products in the market. Similarly, reduction in taxes on 800d will lead to an increase in their supply in the market,= Production techn ce-The supply of goods also depends onthe rye of teniues use ion, which further decreases the sult in low producti for production, Obsolete techniques mendous improvement in production cor the years, there has been tren supply of goods. Ov ply of goods techniques, which has led to increase in the sup} he production of goods is dependent om the factors = Factor prices and their availability: Tt 1m nachines and equipment, and labour. An increase in of production, stich as raw mater 1 increases the cost of production. This will make the prices of the factors of produ difficult for firms to supply large quantities in the market «Price of related goods: The prices of substitutes and complementary goods also influence the supply of product to a large extent. For example, if the price of tea increases, farmers would tend to grow more tea than coffee. This would decrease the supply of tea in the market, + Industry structure: The supply of goods is also dependent on the structure of the industry in which a firm is operating. If there is monopoly in the industry, the manufacturer may and increase restrict the supply of his/her goods with an aim to raise the prices of goods there would profits. On the other hand, in case of a perfectly competitive market structure, bea large of number of sellers in the market. Consequently, the supply of a product would increase LAW OF SUPPLY The law of supply explains the relationship between price and supply of a product. According to the law, the quantity supplied increases with a rise in the price of a product and vice versa while other factors are constant. The other factors may include customer preferences, size of the market, size of population, etc. For example, in the case of rise in a product's price, sellers would prefer to increase the production of the product to earn high profits, which would automatically lead to an increase in supply’. Similarly, if the price of the product decreases, the supplier would decrease the supply of the product in the market as he/ she would wait for a rise in the price of the product ” Frisch, R. (1950). Alfred Marshall's theory of value. The Quarterly Journal of Economics, 64(4), 495-524.yfa product and in the future. Thus, the law of supply states a direct relationship between the price of a P oe tan its supply. Therefore, both price and supply moves in the same direction. To unders! of supply: itis important to discuss the concepts of supply schedule and supply curve SUPPLY SCHEDULE, i ts Supply schedule can be defined as a tabular representation of the law of supply. It represent 1 other quantities of a product supplied by a supplier at different prices and time periods, keeping all edule factors constant, There can be two types of supply schedules, namely individual supply schedu and market supply schedule. These two types of supply schedules are explained as follows: Individual supply schedule: This schedule represents the quantities of a product supplied by an individual firm or supplier at different prices during a specific period of time, assuming other factors remain unchanged. Individual Supply Schedule for Good From the above table, it is clear that the firm is supplying 50 units per week of commodity X at ‘he price of Rs.10 per unit. As the price rises from 10 to 50 per unit, the firm also increased the Supply to 250 units. Therefore, the individual supply schedule shown in the above table indicates that the quantity supplied increases with arise in price. ‘This schedule represents the quantities ofa product supplied b y " Market supply schedul all firms or suppliers in the market at different prices during a specific Period of ti me, whileother factors are constant. In ather words, market supply schedule can be defined as the summation of all individual supply schedules, The helow table shows the market supply schedule of two firms A and B for the commodity A Table : Market Supply Schedule Price (%) | Individual Supply (units) | Market Supply “| Px | Sa | __ ($n * Sah __ 1 5 $+10=15 2 10 20 10+20=30 | 3 1s 25 15+25=400 4 20 35 20+35=55 5 25 40 25+40=65 | In the above table, market supply is calculated by combining the quantities supplied by firm A and B. It also shows when the commodity is priced at Rs.1 per unit the market supply of commodiy X is 15 units, When the price rises to Rs. 5 per unit, the market supply also increases to 65 units. So it can be observed, that a rise in price of the commodity X increases the market supply. SUPPLY CURVE The graphical representation of supply schedule is called supply curve. In a graph, the price of a product is represented on Y-axis and quantity supplied is represented on X-axis. Supply curve can be of two types, individual supply curve and market supply curve. These two types of curves are explained as follows: * Individual supply curve: It is the graphical representation of individual supply schedule. The individual supply schedule of commodity A represented in the below figure.1 8 “ Price 12 w] ox O'S 10 15 20 25 Quantity Figure-14: Individual Supply Curve hi The slope moving upwards to the right in individual supply curve shows the direct relationship between supply and price, i.e. increase in supply along with the rise in prices. + Market supply curve: It is the graphical representation of market supply schedule. The market supply schedule of commodity A (supplied by Firm X and Firm Y) represented in the below diagram: Y is ——— 7 Tito Toso zoe ** Quantity Supplied Figure-15: Market Demand Curve The slope of market supply curve can be obtained by calculating the supply of the slopes of individual supply curves, Market supply curve also represents the direct relationship between th e quantity supplied and price of a product.~~ = “w f&e ete SUPPLY FUNCTION Supply function is the mathematical expression of law of supply. In other words, supply function SWantifies the relationship between quantity supplied and price of a product, while keeping the other factors at constant. The law of supply expresses the nature of relationship between quantity Supplied and price of a product, while the supply function measures that relationship. The supply function can be expressed as: Qs =f (Pa, Pb, Pe, T, Tp) Where, Qs = Supply Pa = Price of the good supplied Pb = Price of other goods Pc = Price of factor input T = Technology Tp = Time Period According to supply function, the quantity supplied of a good (Qs) varies with price of that good (Pa), the price of other goods (Pb), the price of factor input (Pc), technology used for production (1), and time period (Tp) ASSUMPTIONS IN LAW OF SUPPLY Like the law of demand, the law of supply also follows the assumption of ceteris paribus, which means that ‘other things remain unchanged or constant’, As mentioned earlier, the supply of a commodity is dependent on many factors other than price, such as consumers” income and tastes, Price of substitutes, natural factors, ete, All the factors other than the price are assumed to be constant. The law of supply works on certain assumptions which are given as follows: * Income of buyers and sellers remains unchanged, * The commodity is measurable and available in small units, * The tastes and preferences of buyers remain unchanged. ‘The cost ofall factors of production does not change over a period of time.= The time period under consideration is short = The technology used remains constant = The producer is rational = Natural factors remain stable time. of Expectations of producers and the government policy do not change over a period ENCEPTIONS TO THE LAW OF SUPPLY According to the law of supply, if the price of a product rises, the supply of the product also rises and vice versa. However, there ate certain conditions where the law of supply is not applicable. These conditions are known as exceptions to the law of supply. In such cases, the supply of @ product falls with the increase in the price of a product at a particular point of time. For example, there would be a decrease in the supply of labour in an organisation when the rate of wages is high. The exception to the law of supply is represented on the regressive supply curve or backward sloping curve. It is also known as an exceptional supply curve. Some important exceptions to the law of supply are given below. Let us discuss these exceptions in detail Agricultural products: The law of exception is not applicable to agricultural products The production of these products is dependent on so many factors which are uncontrollable, such as climate and availability of fertile land. Thus, the production of agricultural products cannot be increased beyond a limit. Therefore, even a rise in price cannot increase the supply of these products beyond a limit. * Goods for auetion: Auctions goods are offered for sale through bidding. Auction can take place due to various reasons, for instance, a bank may auction the assets of a customer in case of his failure in paying off the debts over a period of time. Thus, supply of these goods cannot increase or decrease beyond a limit. In case of these goods, a rise or fall in price does not impact the supply.= PCC CCCP, - lS Us rTM OCHTOGE EE * Expectation of change in prices in the future: Law of supply is not applicable under the circumstances when there is an expectation of change in the prices of a product in the near fature. For instance, if the price of wheat rises and is expected to increase further in the hext few months, sellers may not increase supply and store huge quantities in the hope of achieving profits atthe time of a price rise : When there is rise in the interest rate, more savings = Rate of Interest and Savings Positio are induced. But after a certain point of rise in the rate of interest households may tend to save less than before due to high income from the interest. In that case savings tend to decline even with a rise in the rate of interest, ‘+ Supply of labour: The law of supply fails in the case of labour. After a certain point, the tise in wages does not increase the supply of labour. At higher wages, labour prefers to work for lesser hours. This happens due to change in preference of labour for leisure hours. "Speculation: It refers to the fact that the supply of a product decreases instead of increasing in present when there is an expected increase in the price of the product. In such a case, sellers would not supply the whole quantity of the product and would wait for the increase in price in future to earn high profits. This case is an exception to law of supply. SHIFT AND MOVEMENT OF SUPPLY CURVE In economics, like demand, change in quantity supplied and change in supply are two different concepts. Change in quantity supplied occurs due to rise or fall in product prices while other factors are constant. On the other hand, change in supply refers to increase or decrease in the supply ofa product due to various determinants of supply other than price (in this case, price is constant), Change in quantity supplied can be measured by the movement of the supply curve, while change in supply is measured by shifts in the sup- ply curve. The terms, change in quantity Supplied refers to expansion or contraction of demand, while change in supply means increase or decrease in demand.Expansion and Contraction of Supply itis known as expansion When there are large quantities of a good supplied at higher prices, Jer quantities H orextensionof supply. Onthe otherhand, contraction of supply oceurs when sma of goods are supplied even at reduced prices ° Qs QA @® Es Q In the above diagram, quantity supplied at price OP) is OQy, When the price rises to OP2, the quantity supplied also increases to OQ, which isshown by the upward movement from A} to Ag (it is pointed by the direction of the arrow between Aj to Az). This upward movement is known as the expansion of supply. On the contrary, a fall in price from OP to OP3 results ina decrease in supply from OQ) to OQs, This movement from A to A3 shown by the arrow pointed downwards is known as the contraction of supply. Thus, the movement from Aj to A3 is the representation of the expansion and contraction of the quantity supplied. Increase and Decrease in Supply ‘An increase in supply takes place when a supplier is willing to offer large quantities of products in the market at the same price due to various reasons, such as improvement in production techniques, fall in prices of factors of production, and reduction in taxes. On the other hand, a decrease in supply occurs when a supplier is willing to offer small quantities of products in the market at the same price due to increase in taxes, low agricultural production, high costs of labour, unfavourable weather conditions, etc. A shift takes place in suppl pply curve Arr ‘i 4 lue to increase or decrease in supply, which is shown in below in figure.i ne af €) In the above figure, an increase in supply in indicated by the shift of the sup- ply curve from Sj ‘0 S2. Because of an increase in supply, there isa shift atthe given price OP. from A] on supply curve S] to A2 on supply curve S2. At this point, large quantities (i. Qo instead of Q)) are offered at the given price OP.On the contrary, there is a shift in the supply curve from S}t0 S3 when there is a decrease in supply. The amount supplied at OP is decreased from 0Q; to 0Q3 due to a shift from A} on supply curve $1 to A3 on supply curve $3. However, a decrease in supply also occurs when producers sell the same quantity at a higher price (which is shown in the figure) as OQ is supplied at a higher price OP>. MARKET EQUILIBRIUM: DEMAND AND SUPPLY EQUILIBRIUM Market equilibrium refers to the stage where the quantity demanded for a product is equal to the quantity supplied for the product. The price when the quantity demanded is equal to the quantity supplied for the product is known as equilibrium price. The Equilibrium price is also termed as market clearing price, which is referred to a price when there is neither an unsold stock nor an unsupplied demand. The market price refers to a current price at which a product is sold in the market. It is determined by the collaboration of two functions, namely, demand and supply.int where the According to economic theory, the market price of a product is determined at a point whe! led forces of supply and demand meet. The point where the forces of demand and supply meet is ©! the balance equilibrium point'®, C means state of rest. It is the stage wher‘ eptually, equilib between two opposite functions, demand and supply is achieved Let us understand the concept of market equilibrium with the help of an example: Demand and Supply of Fansin Ban galore Price Supply Demand per fan) ooo in a month) (000 in a month) 600 55 80 650 65 6 700 70 70 750 es 50 In the above table, it can be observed that at the price of Rs.700, the demand and supply of fans is equal i.e. 70,000 fans in a month. Therefore, market equilibrium exists at 70,000 where demand and supply are the same. The diagram of market equilibrium of demand and supply of fans are shown below: Demand, 0) Quantity * Sraffa, P. (1926). The laws of returns under competitive conditions. The economic journal, 36(144), 535, 550.In the above f, Bure E is the point where demand and supply both intersect. Thus, market il SaRHIDrium exists a the point F where demand and supply are equal Table-10 sho : "YS the market demand and! supply for talcum powder in Mumbai with their varying Prices of a week Supply (In thousands) te 80000 10,000 Shortage a 2 [Eso a Sora a 40.000 10,000 | Equilibrium Stable at | 28000 000 Surplus 7) 500 [e000 [38.0 Sapa fa L& 13,000 60.000 ‘Surplus | Fa Determination of Market Price The equilibrium price of a product is determined when the forces of demand and supply meet. For understanding the determination of market equilibrium price, let us take the example of talcum Powder shown in Table-10. In Table-10 we have taken the initial price of talcum powder as Rs. 100. In this case, the quantity demanded is 80,000, while the supply is 10,000. This results in the shortage of 70,000 of talcum powder in the market. Due to this shortage, the sellers get a chance to earn more by increasing the price of the talcum powder and consumers are ready to purchase at the price quoted by sellers due to shortage of talcum powder. This increase in profit results in increase in the production of a product to eam more profit, which, in turn, increases the supply of the product. The process of increase in prices goes on till the price of talcum powder reaches to Rs. 300. At this price, the demand and supply is equal to 40,000. Therefore, equilibrium is achieved and the equilibrium price is Rs. 300.jond Rs. 300, then the sellers need to Similarly, if the supply of taleum powder increases bey esults in the xy would also stop production that © decrease their prices to sell their unsold stock. The ‘on in price of talcum decrease in supply. In such a ease, consumers would buy more due to red librium price powder. This would continue till the stock would achieve equilibrium and the equilibrium P' come out to be Rs, 300. ‘The graphical representation of equilibrium of demand and supply 1s shown 1” Figure-20: 600 Pree of Takum %° Powder é } , DIDI In Figure-24, initially equilibrium position, F1 is obtained by balancing the demand curve, ig PI and quantity is OQI, When the demand and supply curve, S181. Equilibrium price at curve shifts from DIDI to D2D2 and supply curve shifts fro also shifts from EI to E2, In this ease, demand shift is greater than the shift in supply; therefore, om S181 to $282, then equilibrium equilibrium price increases to P2 and output increases to OQ2. DEMAND FORECASTING risks and uncertainties especially in today’s dynamic world. If Every business involves certai these risks are not mitigated on time, it may lead to huge losses for organisations. Organisations can cope with these risks by determining the future demand or sales prospects for its products or services. Demand forecasting is a process of predicting the demand for an organisation's products or services in a specified time period in the future. Demand forecasting is helpful for both new as well as existing organisations in the market. For instance, a new organisation needs to anticipate demand to expand its scale of production. On the other hand, an existing organisation requires demand forecasts to avoid problems. such as overproduction and underproduction. Demand forecasting enables an organisation to arrange for the required inputs as per the predicted demand, without any wastage of materials and time” Demand forecasting, thus helps a firm whether small or large to diversify its output to stabilize its income over time. Demand Forecasting has been given great significance in developed countries of the world like USA, France, Germany, UK and Japan. It is because firms in these countries produce goods on a mass scale and there is always fear of over production. The most successful, firm is one whose estimates (guess) of demand are very near to the actual demand. An organization faces several internal and extemal risks, such as high competition, failure of technology, labor unrest, inflation, recession, and change in government laws. Therefore, most of the business decisions of an organization are made under the conditions of risk and uncertainty. ‘An organization can lessen the adverse effects of risks by determining the demand or sales Prospects for its products and services in future. Demand forecasting is a systematic process that ‘Archer, (1987), Demand forecasting and estimation, Demand forecasting and estimation, 77-85.pure under & it involves anticipating the demand for the product and services of an organization in Fu set of uncontrollable and competitive forces and, sales, and A market is characterised by va ffect the dem: ices of goods and services in the market. These risks and uncertainties involve failure of mines, floods, earthquakes, etc.), restrictions by the government, 1 order to mitigate su jous risks and uncertainties that r technology, natural disasters ( ich risks, it is of Jr products and ice in the market ion), and so on, Thus, s (like reces cconomie fuctuatio paramount importance for organisations to determine the future prospects of the services in the market, This knowledge of the future demand for a product or servi is gained through the process of demand forecasting Demand forecasting can be defined as a process of predicting the future demand for an organisation's goods or services. It is also referred to as sales forecasting as it involves anticipating the future sales figures of an organisation. Some of the popular definitions of demand forecasting are as follows: According to Evan J. Douglas, “Demand estimation (forecasting) may be defined as a process of finding values for demand in future time periods.” In the words of Cundiff and Still, “Demand forecasting is an estimate of sales during a specified future period based on proposed marketing plan and a set of particular uncontrollable and competitive forces.” Demand forecasting enables an organization to take various business decisions, such as planning the production process, purchasing raw materials, managing funds, and deciding the price of the Product. An organization can forecast demand by making own estimates called guess estimate of ‘aking the help of specialized consultants or market research agencies. Let us discuss the significance of demand forecasting in the next section.NG SIGNIFICANCE OF DEMAND FORECAS Demand plays a crucial role in the management of every business. t helps an organization to business activities and make important business decisions. Apart from reduce risks involved this, demand forecasting provides an insight into the organization's capital investment and expansion decisions ‘ance of demand forecasting is shown in the following points: The signi 1) Fulfilling Objectives: 11 implies that every business unit starts with certain pre-decided ‘objectives. Demand forecasting helps in fulfilling these objectives. An organization estimates the current demand for its products and services in the market and move forward to achieve the set goals. For example, an organization has set a target of selling 50, 000 units of its products. In such a case, the organization would perform demand forecasting for its products. If the demand for the organization's products is low, the organization would take corrective actions, so that the set objective can be achieved. 2) Preparing the budget: It plays a crucial role in making budget by estimating costs and expected revenues. For instance, an organization has forecasted that the demand for its product, which is priced at Rs. 10, would be 10, 00, 00 units. In such a case, the total expected revenue would be 10* 100000 = Rs. 10, 00, 000. In this way, demand forecasting enables organizations to prepare their budget. 3) Stabilizing employment and production: It helps an organization to control its production and recruitment activities. Producing according to the forecasted demand of Products helps in avoiding the wastage of the resources of an organization. This further helps an organization to hire human resource according to requirement, For example, if an organization expects a rise in the demand for its products, it may opt for extra labor to fulfil the increased demand.bout the 4) Expanding organizations: It implies that demand forecasting helps in deciding * jucts is expansion of the business of the organization, If the expected demand for pr 7 deman higher, then the organization may plan to expand further. On the other hand, if the the for products is expected to fall, the organization may eut down the investment in business. 5) Taking Management Decisions: It helps in making critical decisions, such as deciding the plant capacity, determining the requirement of raw material, and ensuring the availability of labor and capital. ©) Evaluating Performance: It helps in making corrections. For example, if the demand for an organization's products is less, it may take corrective actions and improve the level of demand by enhancing the quality of its products or spending more on advertisements, NEED FOR DEMAND FORECASTING Demand forecasting is vital to the management of every business. It enables an organisation to mitigate business risks and make effective business decisions. Moreover, demand forecasting provides insight into the organisation’ capital investment and expansion decisions. The following points explain the need for demand forecasting: = Producing the desired output: Demand forecasting enables an organisation to produce the pre-determined output. It also helps the organisation to arrange for the various factors of production (land, labour, capital, and enterprise) beforehand so that the desired quantity can be produced without any hindrance. Assessing the probable demand: Demand forecasting enables an organisation to assess the possible demand for its products and services in a given period and plan production accordingly. In this way, demand forecasting avoids dependence on merely making assumptions for demand. — - -~ mm! AForecasting sales figures: Sales forecasting refers to the estimation of sales figures of an organisation for a given period, Demand forecasting helps in predicting the sales figures ind current trends in the market by considering historical sales di Better control: In order to have better control on business activities, it is important to have 4 proper understanding of cost budgets, profit analysis, which can be achieved through demand forecasting Controlling inventory: As discussed earlier, demand forecasting helps in estimating the future demand for an organisation's products or services, This in turn helps the organisation to accurately assess its requirement for raw material, semi-finished goods. spare parts, etc Assessing manpower requirement: Demand forecasting helps in accurate estimation of the manpower required to produce the desired output, thereby avoiding the situations of under-employment or over-employment. Ensuring stability: Demand forecasting helps an organisation to stabilise their operations by initiating the development of suitable business policies to meet cyclical and seasonal fluctuations of an economy. Planning import and export policies: At the macro level, demand forecasting serves as an effective tool for the government in determining the import and export policies for the nation. It helps in assessing whether import is required to meet the possible deficit in domestic supply. It also helps in developing effective export promotion policies in the case ofa surplus in domestic supply.OBJECTIVES OF DEMAND FOREC; STING Demand forecasting constitutes an important part in making crucial business decisions. Objectives of Bemend Forecasting ‘Long Term uu Objectives Decing the Panning no Potcy Finance Copecty ‘sion Figure-1: Objectives of Demand Forecasting + Formulating production policy: It helps in covering the gap between the demand and supply of the product. The demand forecasting helps in estimating the requirement of raw material in future, so that the regular supply of raw material can be maintained. It further helps in maximum utilization of resources as operations are planned according to forecasts. Similarly, human resource requirements are easily met with the help of demand forecasting. * Formulating price policy: It refers to one of the most important objectives of demand forecasting. An organization sets prices of its products according to their demand. For example, ifan economy enters into depression or recession phase, the demand for products falls. In such a case, the organization sets low prices of its products. * Controlling sales: It helps in setting sales targets, which act as a basis for evaluating sales performance. An organization make demand forecasts for different regions and fix sales targets for each region accordingly. * Arranging finance: It implies that the financial requirements of the enterprise are estimated with the help of demand forecasting. This helps in ensuring proper liquidity within the organization. ~~ mann €g the production capacity: It implies that with the help of demand forecasting, an organization can determine the size of the plant required for production. The size of the plant should conform to the sales requirement of the organization Planning long-term activities: It implies that demand forecasting helps in planning for long term. For example, if the forecasted demand for the organization's products is high, then it may plan to invest in various expansion and development projects in the long term. FACTORS INFLUENCING DEMAND FORECASTING Demand forecasting is a proactive process that helps in determining what products are needed where, when, and in what quantities. There are a number of factors that affect the process of demand forecasting. Prevailing economic conditions: Demand forecasting can be affected by the changing price levels, national and per capita income, consumption pattern of consumers, saving and investment practices, employment level, etc. of an economy. Thus, it is important that existing economic conditions should be assessed in order to align demand forecasting with current economic trends. Existing conditions of the industry: The assessment of demand for an organisation’s products and services is also affected by the overall conditions of the industry in which the organisation operates. For example, concentration of an industry increases the level of competition, which directly affects the demand for products and services of different organisations in the industry. In such a case, demand forecasted by organisations may falter. Existing condition of an organisation: Apart from industry conditions, the internal state of an organisation also affects demand forecasting. Within the organisation, demand forecasting is affected by various factors, such as plant capacity, product quality, product Price, advertising and distribution policies, financial policies, etc.' r the prices * Prevailing market conditions: Changes in market conditions, such as change in the p) . in the prices of goods: change in consumers’ expectations, tastes and preferences; change in the P' demand of related goods; and change in the income level of consumers also influence the for an organisation's products and services, ‘tors, such as size and density of population, age * Sociological conditions: Sociological group, size of family, family life cycle, education level, family income, social awareness, ste, largely impact demand forecasts of an organisation. For example, markets having a large population of youngsters would have a higher demand for lifestyle products, electronic gadgets, etc. Psychological conditions: Psychological factors, such as changes in consumer attitude, habits, fashion, lifestyle, perception, cultural and religious beliefs, etc. affect demand forecast of an organisation to a large extent. Competitive conditions: A market consists of several organisations offering similar products. This gives rise to competition in the market, which affects demand forecasted by organisations. For example, reduction in trade barriers increases the number of new entrants in a market, which affects the demand for Products and services of existing organisations. Import-export policies: The demand for export-import goods Bets directly affected by changes in factors, such as import and export control, terms and conditions of import and ©xPort, import/export policies, import/export conditions, etc, Types of Goods: It affect the demand forecasting process to a larger extent. Goods can be Producer's goods, consumer goods, or services, Apart from this, goods can be established and new goods. Established goods are those goods which already exist in the market whereas new goods are those which are yet to be introduced in the market, inergeea regarding the demand, substitutes and level of. competition of goods is known only in caseese ee CeCSG in difficult ta forecast demand for the new goods of established goods On the other hand Therefore, forecasting is different for different types of goods Level of Technology: It constitutes an important factor in ohtainmg reliable demand forecasts. If there 1s a rapid change in technology, the existing technology or products may Jn high decline in the demand of floppy disks with become obsolete For example, th the introduction of compact disks (CDs) and pen drives for saving data in computer In such a case, it 1s difficult to forceast demand for existing products in furure Nature of Forecasts: It constitutes an important factor that affects demand forecasting. A forecast can be specific or general. A general forecast provides a global picture of busimess environment, while a specific forecast provides an insight into the business environment in which an organization operates. Generally, organizations opt for both the forecasts together because over-generalization restricts accurate estimation of demand and too specific information provides an inadequate basis for planning and execution. STEPS IN DEMAND FORECASTING To achieve the desired results, it is important that demand forecasting is done systematically Demand forecasting involves a number of steps, which are as follows: Specifying the objective: The purpose of demand forecasting needs to be specified before starting the process. The objective can be specified on the following basis: © Short-term or long-term demand for a product, # Industry demand or demand specific to an organisation ‘© Whole market demand or demand specific to a market segment Determining the time perspective: Depending on the objective, the demand can be forecasted for a short period (2-3 years) or long period (beyond 10 years). [fan organisation performs long-term demand forecasting, it needs to take into consideration constant changes in the market as well the economy.* Selecting the method for forecasting: There are various methods of demand forecasting, Which have been discussed later in the chapter. However, not all methods are suitable for all types of demand forecasting. Depending on the objective, time period, and availability of data, the organisation needs to select the most suitable forecasting method. The selection of demand forecasting method also depends on the experience and expertise of the demand forecaster. * Collecting and analysing data: After selecting the demand forecasting method, the data needs to be collected. Data can be gathered either from primary sources or secondary sources or both. As data is collected in the raw form, it needs to be analysed in order to derive meaningful information out of it. * Interpreting outcomes: Afier the data is analysed, it is used to estimate demand for the Predetermined years. Generally, the results obtained are in the form of equations, which need to be presented in a comprehensible format. TECHNIQUES/METHODS OF DEMAND FORECASTING Different organisations rely on different techniques to forecast demand for their products or Services fora future time period depending on their requirements and budget. The various methods of demand forecasting can be summarised in the form of a chart as shown in Table 1.Table 1. Methods of Demand Forecasting te Opinion Polling Method Statistical Consumers Sales Force Experts Survey Opinion Method Method Method Barometric Regression Simultaneous Method Method Equation Method So Complete End Use Enumeration Survey Test Marketing ft t t tT 1 Fimng Least Square ‘Time Series Moving Average Exponennal Trend line Linear Analysis and Annual Smoothing by . Regression Difference observation 1. Opinion Polling Method: In this method, the opinion of the buyers, sales force and experts could be gathered to determine the emerging trend in the market. The opinion polling methods of demand forecasting are of three kinds: (a) Consumers Survey method of Survey of Buyer’s Intentions: In this method, the consumers are directly approached to disclose their future purchase plans. | his is done by interviewing all consumers or a selected group of consumers out of the relevant population. This is the direct method of estimating demand in the short run. Here the burden of forecasting is shifted to the buyer. The firm may go in for complete enumeration or for sample surveys. If the commodityunder consideration is an intermediate product, then the industries using it as an end product are surveyed”. (@ Complete Enumeration rvey: Under the Complete Enumeration Survey, the firm has to g0 for a door to door survey forthe forecast period by contacting all the households in the area. This method has an advantage of first hand, unbiased information, yet it has its share of disadvantages also. The major limitation of this method is that it requires lot of resources, manpower and time: In this method, consumers may be reluctant to reveal their purchase plans due to personal privacy or commercial secrecy. Moreover, at times the consumers may not express their opinion properly or may deliberately misguide the investigators. (ii) Sample Survey and Test Marketing: Under this method some representative households are selected on random basis as samples and their opinion is taken as the generalised opinion. This method is based on the basic assumption that the sample truly represents the population. If the sample is the true representative, there is likely to be no significant difference in the results obtained by the survey. Apart from that, this method is less tedious and less costly. ‘A variant of sample survey technique is test marketing, Produet testing essentially involves placing the product with a number of users for a set period. Their reactions to the product are noted after 1 period of time and an estimate of likely demand is made from the result. These are suitable for new products or for radically modified old produets for which no prior data exists. It is a more scientific method of estimating likely demand because it stimulates a national launch in a closely defined geographical area. (iii) End Use Method or Input-Output Method: This method is quite useful for industries which are mainly producer’s goods. In this method, the sale of the product under consideration is projected as the basis of demand survey of the industries using this product as an intermediate product, that is, the demand for the final product is the end user demand of the intermediate product used in the production of this final product. ® Pilinkiené, V. (2008). Market demand forecasting models and their elements in the context i xt of comy ‘market. Engineering economics, (5 (60)), 24-31. ae eacann ce rere eee f 08 |, 2. 6 aaa etCCCCdCECEECS “a y — = Wey eogg € The 7 end user demand estimation of an intermediate product may involve many final good industries ing this product at home andl abroad. I helps us to understand inter-industry’ relations. In input-o = MPut-output accounting two matrices used are the transaction matrix and the input co-efficient Matrix, The major efforts required by this type are not in its operation but in the collection and Presentation of data. (b) Sales Force Opinion Met : This is also known as collective opinion method. In this method, instead of consumers, the opinion of the salesmen is sought. It 1s sometimes referred as the “grass roots approach” as it is a bottom-up method that requires each sales person in the company to make an individual forecast for his or her particular sales territory. These individual forecasts are discussed and agreed with the sales manager. The composite of all forecasts then constitutes the sales forecast for the organisation. The advantages of this method are that itis easy and cheap. It does not involve any elaborate statistical treatment. The main menit of this method lies in the collective wisdom of salesmen. This method is more useful in forecasting sales of new products. (©) Experts Opinion Method: In this method, sales representatives of different organisations zet in touch with consumers in specific areas. They gather information related to consumers’ buying behaviour, their reactions and responses to market changes, their opinion about new products. etc In this way, the sales representatives provide an estimate of the probable demand for their organisation’s product. (4) Delphi method: In this method, market experts are provided with the estimates and assumptions of forecasts made by other experts in the industry. Experts may reconsider and revise their own estimates and assumptions based on the information provided by other experts. The consensus of all experts on demand forecasts constitutes the final demand forecast. The Delphi method requires a panel of experts, who are interrogated through a sequence of questionnaires in which the responses to one questionnaire are used to produce the next questionnaire. Thus any information available to some experts and not to others is passed on, enabling all the experts to have access to all the information for forecasting.1s for new products. This The method is used for long term forecasting to estimate potential sales for new Pt i in their expertise, posse method presumes two conditions Firstly, the panellists must he rich in their exp job. This sare objective in their wide range of knowledge and experience Seconilly, its conductors are objects method has some exclusive advantages of saving time and other resources referred to as market experiment (e) Market studies and experiments: This method 1s a Ject certain aspects of a market such as population, method. In this method, organisations initially se ion, and consumers” tastes income levels, cultural and social background, occupational distr aspects, one aspect is selected and its effect on demand 1s and preferences. Among all these ct) determined while keeping all other aspects constant, The controlled variable (the selected aspe is changed over time and subsequent changes in the demand over a period of time are recorded. Based on the data collected, the demand for a product in the future is assessed. 2. Statistical Method: Statistical methods have proved to be immensely useful in demand forecasting. In order to main- tain objectivity, hat is, by consideration of all implications and viewing the problem from an external point of view, the statistical methods are used. The important statistical methods are: (i) Trend Projection Method: A firm existing for a long time will have its own data regarding sales for past years. Such data when arranged chronologically yield what is referred to as “time series’. Time series shows the past sales with effective demand for a particular product under normal conditions. Such data can be given in a tabular or graphic form for further analysis. This is the most popular method among business firms, partly because it is simple and inexpensive and Partly because time series data often exhibit a persistent growth trend. Time series analysis or trend projection method is one of the most popular methods used by organisations for the prediction of demand in the long run. The term time series refers to a Sequential order of values of a variable (called trend) at equal time intervals. Using trends, an rganisation can predict the demand for its products and services for the projected time. There are four main components of time series analysis that an organisation must take into consideration ‘hile forecasting the demand for its products and services. These components are:~ OCC Idd ddd d om D yonent: The trend component in time series analysis accounts for the gradual Shift in the time series to a relatively higher or lower value over a long period of time. * Cyclical component: The cyclical component in time series analysis accounts for the Nof- sequences of values above and below the trend line lasting more than one regular patt year * Seasonal component: The seasonal component in time series analysis accounts for regular Pattems of variability within certain time periods, such as a year * Irregular component: The irregular component in time series analysis accounts for a short term, unanticipated and non-recurring factors that affect the values of the time series. When a forecast is made the seasonal, cyclical and random variations are removed from the observed data. Thus only the secular trend is left. This trend is then projected. Trend projection fits a trend line to # mathematical equation. ‘the trend can be estimated by using any one of the following methods: (4) Graphical Method: This is the simplest technique to determine the trend. All values of output or sale for different years are plotted on a graph and a smooth free hand curve is drawn passing through as many points as possible. The direction of this free hand curve: upward or downward shows the trend. (b) Least Square Method: Under the least square method, a trend line can be fitted to the time series data with the help of statistical techniques such as least square regression. When the trend in sales over time is given by straight line, the equation of this line is of the form: y = a + bx. Where ‘a’ is the intercept and ‘b’ shows the impact of the independent variable. We have two variables, the independent variable x and the dependent variable y. The line of best fit establishes a kind of mathematical relationship between the two variables. v and y. This is expressed by the regression y on x.al equations: De eer att be we vet abeiee OU rama normal equati Ly ona tb dx wagehys symetric methods are used to speculate the future tends based on Barometric Technique: Bar «of economic and statistical indicators, which ferred to as the leading rent developments. Barometric methods make w serve as barometers of economic change, Thus, these methods are also re sors approach to demand forecasting. Many economists use barometric methods to forecast indicat The basic approach followed in barometric methods of demand trends in business activities analysis isto prepare an index of relevant economic indicators and forecast furure trends based on the movements shown in the index. A barometer is an instrument of measuring change. This method is based on the notion that “the future can be predicted from certain happenings 1 the present.” In other words, barometric techniques are based on the idea that certain events of the present can be used to predict the directions of change in the future?'. This is accomplished by the tase of economic and statistical indicators which serve as barometers of economic change The barometric methods make use of the following indicators: a) The Leading Seri the leading series comprise those factors which move up or down before the recession or recovery starts. They tend to reflect future market changes. For example, baby powder sales can be forecasted by examining the birth rate pattern five years earlier, because there is a correlation between the baby powder sales and children of five years of age and since baby powder sales today are correlated with birth rate five years earlier, itis called lagged correlation. Thus we can say that births lead to baby soaps sales. b) Coincident or Concurrent Series: The coincident or concurrent series are those which move up or down simultaneously with the level of the economy. They are used in confirming or refuting the validity of the leading indicator used a few months afterwards. 2 La Rocca, P., Rigg D., & Rigg F. (2010). Time series analysis of barometric pressure data. European journal of . o physics, 31(3), 645. ane €eeeeeegeeee eee eee Common examples of coinciding indicnors ae (3 N Patel, insta production. fading and the retail sector These indicators include events that follow a change, Lagging ©) The Lagging Series in the future. These fal to interpret how the economy would shape uP 1 For example. inflation. indicators are useful in predicting the future economic events dicators of the performance of a country's economy ‘unemployment levels, ete are thy The lagging series are those Which take place after some time lag with respect t0 the business cycle, Examples of lagging series are, labour cost per unit of the manufacturing nding, leading rate of short term loans, ete ‘output, loans outs sis: It attempts to assess the relationship between at least two variables (one (iii) Regression Analys the purpose being to predict the value of the dependent or more independent and one dependent), variable from the specific value of the independent variable, The basis of this prediction generally is historical data. This method starts from the assumption that a basic relationship exists between, two variables. An interactive statistical analysis computer package is used to formulate the ‘mathematical relationship which exists. For example, one may build up the sales model as: Quantum of Sales =a. price +. advertising +c. price ofthe rival products + d. personal disposable income +u Where a, b, c, d are the constants which show the effect of ‘corresponding variables as sales. The constant u represents the effect of all the variables which have been left out in the equation but having effect on sales. In the above equation, quantum of sales is the dependent variable and the variables on the right hand side of the equation are independent variables. If the expected values. of the independent variables are substituted in the equation, the quantum. of sales will then be forecasted. The regression equation can also be written in a multiplicative form as given below:Quantum of Sales ~ (Pricey (Adwertisingy (Price afthe rival prodctsy® + (Personal dish income Yt asticities of the corresponding In the above case, the exponent of each variable indicates the el : Pp 1, the equation form 1s OS variable. Stating the independent variables ‘of notatior As Res ye 40 of sales Then we can say that 1 per cent increase in price leads to 0.8 per cent change In quantum f sal in an and so on. If'we take logarithmic form of the multiple equation, we can write the equation | additive form as follows: log QS =a log P +b log A+c log R +d log Ye + log u In the above equation, the coefficients a, b, ¢, and d represent the elasticities of variables P, A, R and Yq respectively. The co-efficient in the logarithmic regression equation are very useful in policy decision making by the management. ) Econometric Models: Econometric models are an extension of the regression technique whereby a system of independent regression equation is solved. The requirement for satisfactory use of the econometric model in forecasting is under three heads: variables, equations and data. Econometric methods make use of statistical tools combined with economic theories to assess various economic variables (for example, price change, income level of consumers, changes in economic policies, and so on) for forecasting demand. The forecasts made using econometric methods are much more reliable than any other demand forecasting method. An econometric model for demand forecasting could be single equation regression analysis or a system of simultaneous equations, ‘The appropriate procedure in forecasting by econometric methods is model building. Econometrics attemy A ; Isto express economic theories in mathematical terms in such a way that they can be verified fie Can noe sby statistical methods and to measure the impact of one economic variable upon another so as to be able to predict future events LIMITATIONS ¢ Although demand. forecast limitations associated with demand forecasting. ‘Th the analysis of past and present even DEMAND FOREC NG 1 has wide applicability in an organisation, there are certain js because demand forecasting 1s based on for determining the future course of action. The events or ‘occurrences in the past may not always be reliable to base the future predictions on them. Apart from this, there are some other limitations of demand forecasting, which are explained as follows Lack of historical sales data: Past sales figures may not always be available with an organisation. For example, in case of a new commodity, there is unavailability of historical sales data. In such cases, new data is required to be collected for demand forecasting, which can be cumbersome and challenging for an organisation. Unrealistic assumptions: Demand forecasting is based on various assumptions, which may not always be consistent with the present market conditions. In such a case, relying on these assumptions may produce incorrect forecasts for the future. Demand forecasting incurs different costs for an organisation, such as Cost incurres implementation cost, labour cost, and administrative cost. These costs may be very high depending on the complexity of the forecasting method selected and the resources utilised. Owing to limited means, it becomes difficult for new start-ups and small-scale organisations to perform demand forecasting. Change in fashion: Consumers’ tastes and preferences continue to change with a change in fashion. This limits the use of demand forecasting as it is generally based on historical trend analysis. Lack of expertise: Demand forecasting requires effective skills, knowledge and experience of personnel making forecasts. In the absence of trained experts, demandif onsibility forecasting becomes a challenge for an organisation. This is because if the resP% ,¢ losses to the of demand forecasting is assigned to untrained personnel, it could bring huge losses organisation, over others. «Psychological factors: Consumers usually prefer a particular type of product over 0! could affect However, factors, such as fear of war and changes in economic policy. . remain consumers’ psychology. In such cases, the outcomes of forecasting may no longer relevant for the time period. CRITERIA FOR GOOD DEMAND FORECASTING Demand forecasting can be effective if the predicted demand is equal to the actual demand. The effectiveness of demand forecasting depends on the selection of an appropriate forecasting technique. Each technique serves a specific purpose; thus an organisation should be careful while selecting a forecasting technique for a particular problem The following points explain the criteria for the selection of demand forecasting technique: * Accuracy: Almost all the methods of demand forecasting yield accurate results under different circumstances. However, not all methods are appropriate to be used for all kinds of forecasting. For example, a lack of statistical data limits the use of regression analysis in order to predict demand. Therefore, an appropriate selection of forecasting technique would ensure the accuracy of results. Timeliness: As discussed earlier, demand forecasting can be short term or long term, The demand forecasting methods used for both the time periods vary. For example, the demand for a new product, which needs to be introduced in a month’s time, cannot be assessed using the time series analysis method. This is because this method requires data collected over long periods, * Affordability: The cost for different demand forecasting methods vz ‘aries based on its implementation, expertise required, the time period involved, etc. Thus organisati ions.d requirements without compromising on should select a method that suits their budget an \thod of demand forecasting yields meration m the outcome. For example, the complete em accurate results but could prove expensive for small-scale organisations. Ease of interpretation: Outcomes generated using demand forecasting methods are al or mathematical equations. Therefore, it generally represented in the form of st should be ensured that personnel carrying out forecasting are trained and efficient to use forecasting methods and interpret the results s the market is susceptible to a number of uncontrollable variables, flexibility Flexibil in using demand forecasting techniques would be a necessary condition for making an effective forecast. Ease in using available data: Forecasting is made on the basis of the availability of primary or secondary data. Therefore, for an effective forecast, it is important that the required data is easily available to forecasters. Ease of use: Demand forecasting methods can be complex to use if the forecaster is not trained to apply them. Therefore, depending on the objective of forecasting, the forecaster should use a simple yet effective method of forecasting. For example, not all sales representatives are trained to use regression analysis for demand forecasting. Therefore. in such cases using a simple technique, such as the sample survey method, would yield better results. Ease of implementation: One of the most important criteria for selecting a demand forecasting method is the ease of implementation. Many organisations lack personnel who are trained or have experience in using demand forecasting methods. In such cases, the outcome of a forecast may remain void due to improper implementation in spite of the availability of adequate data and resources. Therefore, forecasting methods that are easy to implement should be selected to make the required forecast.* Reliability: A time tested method of forecasting is generally assumed to be more effective than the other less used methods. If a certain method has yielded reliable outcomes in the Past, the same method could be used for forecasting in the future too. * Durability of outcomes: Forecasts made using a demand forecasting technique should be valid in the long run. For example, in case of a new product, there is a certain time lag between the period when a forecast is made and the period when the product is likely to enter the market. In such a case, the results of the forecast should remain valid in the course of time.Important Questions from the Chapter Answer the following questions: 1, 2, 3 Cen awHe Define Demand. What is Price Demand? What is Cross Demand? What is Joint Demand and Composite Demand? What is Derived Demand and Autonomous Demand? What is Law of Demand? What is Law of Supply? What is Demand Schedule? What is Supply Schedule? 10. What a demand function? ML. 12. 13. 14, 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. What is supply function? What is Giffen Goods? Define Veblen Effect. Define Demand forecasting. Whaat is Delphi method? What is expert's opinion method? Explain the factors influencing the demand? Why does demand curve slopes downwards? Explain the factors influencing the supply? Explain the exceptions to the law of demand? Explain the exceptions to the law of supply? Explain the significance of demand forecasting. Explain the need for demand forecasting. Explain the steps involved in demand forecasting. Explain the objectives of demand forecasting. Explain the techniques of demand forecasting. Explain the criteria of good demand forecasting. . Explain the survey methods of demand forecasting . Explain the statistical method of demand forecasting.