Engineering & Managerial

Economics

Assignment on Unit-2
(Basic Concept)

Submitted By-

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Name-Mayank Gupta
Roll no.- 16521

Question no.1-
Define demand. Discuss the various types of demand.

Answer-1
The Demand for a product refers to the quantity of goods and services that the
consumers are willing to buy at a particular price for a given point of time.

Types of Demands-

1.Individual Demand and Market Demand:

The individual demand refers to the demand for goods and services
by the single consumer, whereas the market demand is the demand for
a product by all the consumers who buy that product.

2.Total Market Demand and Market Segment Demand:

The total market demand refers to the aggregate demand for a product by
all the consumers in the market who purchase a specific kind of a product.

3.Derived Demand and Direct Demand:

When the demand for a product/outcome is associated with the demand for another
product/outcome is called as the derived demand or induced demand. Such as the
demand for cotton yarn is derived from the demand for cotton cloth. Whereas, when the
demand for the products/outcomes is independent of the demand for another
product/outcome is called as the direct demand or autonomous demand.

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4.Industry Demand and Company Demand:

The industry demand refers to the total aggregate demand for the products
of a particular industry, such as demand for cement in the construction
industry. While the company demand is a demand for the product which is
particular to the company and is a part of that industry.

5.Price Demand:

The demand is often studied in parlance to price, and is therefore

called as a price demand. The price demand means the amount of
commodity a person is willing to purchase at a given price.

6.Income Demand:
The income demand refers to the willingness of an individual to buy a certain quantity at
a given income level. Here the price of the product, customer’s tastes and preferences
and the price of the related goods are expected to remain unchanged.

7.Cross Demand:
It is one of the important types of demand wherein the demand for a
commodity depends not on its own price, but on the price of other related
products is called as the cross demand. Such as with the increase in the price
of coffee the consumption of tea increases, since tea and coffee are
substitutes to each other. Also, when the price of cars increases the demand
for petrol decreases, as the car and petrol are complimentary to each other.

Question no.2-
What are the factors that influence the demand for a commodity? Explain.

Answer-2
These are several factors which influence the quantity demanded of a commodity-

1.Price of Commodity:
There is inverse relationship between the price of the commodity and the quantity
demanded.As the price of commodity increases its demand decreases and vice versa.

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2.Prices of Complementary Goods and substitutes:
The demand for a commodity is affected by the prices of complementary goods and
also of substitutes. When the price of petrol increases the demand for scooter or
motor cycle and car will decrease. Similarly, when the prices of motor cars increased
people demanded more of scooters. The prices of scooters increased.

3.Taste, Preference and Habits:

The demand of a particular commodity depends to a great extent, upon

the tastes, habits, advertisements, new inventions, customs, fashions
and preference of the people.

4.Population:
An increase in population of region will result in an increased demand of various goods.

5.Income:
When income of the consumers rise their entire consumption increases.
They consume more at the prevailing price or even at the same price.

6.Government Policy:

Economic policy adopted by the government also influences the demand

for commodities. If the government imposes taxes on various
commodities in the form of sales.

7.Advertisement:

In this age of advertisement demand for many fashionable items are created by
advertising agents through T.V., newspapers, radios etctax, excise duties, octroi etc.

Question no.3-
Why does a demand curve slope downwards?

Answer-3

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When price fall the quantity demanded of a commodity rises and vice versa, other
things remaining the same. It is due to this law of demand that demand curve slopes
downward to the right.Now, the important question is why the demand curve slopes
downward, or in other words why the law of demand describing inverse price-
demand relationship is valid. We can explain this with marginal utility analysis and
also with the indifference curve analysis.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 as 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 the fall in the price of the 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 whose price falls.
The other important reason why the quantity demanded of a commodity rises
as its price falls, is the substitution effect. When the price of a commodity falls,
it becomes relatively cheaper than other commodities. This induces the
consumer to 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 the income effect of the price change. But in some cases even the
income effect of the price change is very significant and cannot be ignored.

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Question no.4-
Explain the price, income & cross elasticity of demand.

Answer-4
Price Elasticity of Demand:

Elasticity of demand refers to price elasticity of demand. It is the

degree of responsiveness of quantity demanded of a commodity due to
change in price, other things remaining the same.

Where,

EP= Price elasticity of demand

q= Original quantity demanded

∆q = Change in quantity demanded

p= Original price

∆p = Change in price

Income Elasticity of Demand:

Income elasticity of demand is the degree of responsiveness of quantity

demanded of a commodity due to change in consumer’s income, other
things remaining constant. In other words, it measures by how much the
quantity demanded changes with respect ot the change in income.

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Where, EY = Elasticity of demand

q = Original quantity demanded

∆q = Change in quantity demanded

y = Original consumer’s income

∆y= Change in consumer’s incom

Cross Elasticity of Demand:

The cross-price elasticity of demand is the degree of responsiveness of quantity
demanded of a commodity due to the change in price of another commodity

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Question no.5-
Write a short note on how elasticity of demand helpful in managerial decision making.

Answer-5
Economists compute several different elasticity measures, including the price elasticity of
demand, the price elasticity of supply, and the income elasticity of demand. Elasticity is
typically defined in terms of changes in total revenue since that is of primary importance
to managers, CEOs, and marketers. For managers, a key point in the discussions of
demand is what happens when they raise prices for their products and services. It is
important to know the extent to which a percentage increase in unit price will affect the
demand for a product. With elastic demand, total revenue will decrease if the price is
raised. With inelastic demand, however, total revenue will increase if the price is
raised.The possibility of raising prices and increasing dollar sales (total revenue) at the
same time is very attractive to managers. This occurs only if the demand curve is
inelastic. Here total revenue will increase if the price is raised, but total costs probably will
not increase and, in fact, could go down. Since profit is equal to total revenue minus total
costs, profit will increase as price is increased when demand for a product is inelastic. It
is important to note that an entire demand cure is neither elastic or inelastic; it only has
the particular condition for a change in total revenue between two points on the curve
(and not along the whole curve).

Demand elasticity is affected by the availability of substitutes, the urgency of need, and
the importance of the item in the customer's budget. Substitutes are products that offer
the buyer a choice. For example, many consumers see corn chips as a good or
homogeneous substitute for potato chips, or see sliced ham as a substitute for sliced
turkey. The more substitutes available, the greater will be the elasticity of demand. If
consumers see products as extremely different or heterogeneous, however, then a
particular need cannot easily be satisfied by substitutes. In contrast to a product with
many substitutes, a product with few or no substitutes—like gasoline—will have an
inelastic demand curve. Similarly, demand for products that are urgently needed or are
very important to a person's budget will tend to be inelastic. It is important for managers
to understand the price elasticity of their products and services in order to set prices
appropriately to maximize firm profits and revenues.

Question no.6-

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Explain demand forecasting.

Answer-6
Demand forecasting is a combination of two words; the first one is Demand and another
forecasting. Demand means outside requirements of a product or service. In general,
forecasting means making an estimation in the present for a future occurring event.
Here we are going to discuss demand forecasting and its usefulness.
It is a technique for estimation of probable demand for a product or services in the
future. It is based on the analysis of past demand for that product or service in the
present market condition. Demand forecasting should be done on a scientific basis
and facts and events related to forecasting should be considered.

Usefulness of Demand Forecasting

Demand plays a vital role in decision making of a business. In competitive market
conditions, there is a need to take correct decision and make planning for future events
related to business like sale, production etc. The effectiveness of a decision taken by
business managers depends upon the accuracy of the decision taken by them.

Demand is a most important aspect for a business for achieving its

objectives. Many decisions of business depend on demand like
production, sales, staff requirement etc. Forecasting is the necessity of
business at an international level as well as domestic level.

Significance of Demand Forecasting:

Fulfilling objectives of the business

Preparing the budget

Taking management decision

Evaluating performance etc.

Question no.7-
Discuss various methods of demand forecasting.
Answer-7
There is no easy or simple formula to forecast the demand. Proper judgment along with

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the scientific formula is needed to correctly predict the future demand for a
product or service. Some methods of demand forecasting are discussed below:

1] Survey of Buyer’s Choice

When the demand needs to be forecasted in the short run, say a year,
then the most feasible method is to ask the customers directly that what
are they intending to buy in the forthcoming time period. Thus, under this
method, the potential customers are directly interviewed.

2] Collective Opinion Method

Under this method, the salesperson of a firm predicts the estimated future sales in
their region. The individual estimates are aggregated to calculate the total estimated
future sales. These estimates are reviewed in the light of factors like future changes in
the selling price, product designs, changes in competition, advertisement campaigns,
the purchasing power of the consumers, employment opportunities, population, etc.

3] Barometric Method
This method is based on the past demands of the product and tries to project the
past into the future. The economic indicators are used to predict the future trends of
the business. Based on the future trends, the demand for the product is forecasted.
An index of economic indicators is formed. There are three types of economic
indicators, viz. leading indicators, lagging indicators, and coincidental indicators.

4] Market Experiment Method

Another one of the methods of demand forecasting is the market experiment
method. Under this method, the demand is forecasted by conducting market
studies and experiments on consumer behavior under actual but controlled,
market conditions. Certain determinants of demand that can be varied are
changed and the experiments are done keeping other factors constant.
However, this method is very expensive and time-consuming.

5] Expert Opinion Method

Usually, the market experts have explicit knowledge about the factors affecting the
demand. Their opinion can help in demand forecasting. The Delphi technique, developed
by Olaf Helmer is one such method. Under this method, experts are given a

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series of carefully designed questionnaires and are asked to forecast the demand.
They are also required to give the suitable reasons. The opinions are shared with the
experts to arrive at a conclusion. This is a fast and cheap technique.

6] Statistical Methods
The statistical method is one of the important methods of demand forecasting.
Statistical methods are scientific, reliable and free from biases.

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