Demand: Desire for a commodity backed by willingness and ability to pay for it. Demand has reference to 1.

A Price 2. A Period of time 3. A Place

Commodity angle: Want-satisfying property of a commodity. Consumers angle: It is the psychological feeling of satisfaction, pleasure, happiness or well-being which a consumer derives from the consumption, possession or the use of a commodity. Utility is a subjective Concept: 1. A commodity may not be useful for all 2. Utility varies from person to person 3. utility may not be same a person at different point of time

it is sum of the utilities derived by a consumer from the various units of goods & services he consumes.

Tux= u1+u2+u3+u4+u5
Marginal utility: it is addition to the total utility resulting from consumption( or accumulation) of one additional unit. MU = TU/ Q Law Of Diminishing Marginal Utility: this law states that as the quantity consumed of a commodity increases, the utility derived from each successive units decreases, consumption of all other commodities remaining the same

Total & Marginal Utility Schedules

No. of units Consumed

1 2 3 4 5

Total utility
30 50 60 65 60

Marginal Utility
30 20 10 5 -5

45

-15

 The unit of the consumer goods must be a standard one The consumers taste or preference must remain the same

during the period of consumption

there must be continuity in consumption The mental condition of the consumer must remain

normal during the period of consumption

Cardinal & Ordinal Utility

Cardinal utility
Classical & Neo-Classical economist to believe that utility is measurable and cardinally quantifiable. They coined and used a term util meaning Units of Utility. It is assumed that One util equals one unit of money Utility of money remains constant.

(i) (ii)

Ordinal utility
The Modern economist believed Ordinal utility and discarded the concept cardinal utility. This concept is based on the fact that it may not be possible for consumer to express the utility of a commodity, but it is always possible to tell introspectively whether a commodity is more or less or equally useful compared to another.

This theory states that the demand for a commodity increases when its price decreases and falls when its price rises, other things remaining constant.
Consumers income

Price of the substitutes

Tastes & Preferences of the Consumer

Price of the Complements

Demand Schedule:
It is a series of prices in descending or ascending order and the corresponding quantities which consumer would like to buy per unit of time.

Price per unit of chocolate

No.of units of Points chocolate demanded representing by a consumer per day price-quantity combination

7
6 5

1
2 3

a
b c

4
3 2 1

4
5 6 7

d
e f g

Demand Curve It is a locus of points showing various alternative price-quantity combinations. Factors behind the Law of Demand: 1. Substitution Effect 2. Income Effect 3. Utility- Maximizing Behaviour Exceptions to the Law of Demand: 1. Exceptions regarding further rise in price 2. Status Goods 3. Giffen goods

Types of Demand:
Individual Demand Market Demand Firms Demand Industry Demand Autonomous Demand Derived Demand

Demand for durable goods

Demand for non-durable goods Short-run Demand

Long-run Demand
Demand

Determinants of Demand
Price of the product Price of the related goods

-- Substitutes, complement, supplement Level of consumers income Consumers taste & preferences Advertisement of the product Consumers expectations about future price and supply positions Demonstration effect and band-wagon effect Consumer-credit facility Population of the country Distribution pattern of national income

Demand Function

Demand function states the relationship between the demand for the product (the dependent variable) and its determinants (independent variables).
D x = f (P x)

when the quantitative relationship is given the formula to find out demand for commodity is

 Linear Demand function

Dx=abp
Non-Linear Demand function

D x =( a/p x +c ) -b
Multi- Variate or Demand Function

Dx = f (p x, M, P y, P c, T, A )

Elasticity of Demand

1. 2. 3. 4. 5.

The degree of responsiveness to demand to the change in its determinants is called Elasticity of demand. Concepts of demand elasticities used in business decision are Price Elasticity Cross- Elasticity Income Elasticity Advertisement Elasticity Elasticity of price expectation

Price Elasticity of Demand

It is the percentage change in demand as a result of one percent change in the price of the commodity. To put in other words it is the proportionate change in the quantity demanded of a commodity to a given proportionate change in the price

ep = percentage change in the quantity demanded percent change in the price

ep = Q Q X P P

Classifications of Price Elasticity

Perfectly or infinitely Elastic Demand Perfectly Inelastic Demand Relatively Elastic Demand Relatively InElastic Demand Unit Elasticity of Demand

Measurement of elasticity of Demand 1.Total Expenditure or outlay method Demand schedules showing Different elasticities outlay Method
Price in rupees Quantity demanded Total Expenditure in units or outlay in purchasing that quantity 1,000 1,500 2,000 1,000 6,000 7,500 8.000 6,000 Elasticity demand Elasticity

Rs.6 Rs.5 Rs.4

Elasticity demand E>1

II

Rs.6

Rs.5
Rs.4 III Rs.6 Rs.5 Rs.4

1,200
1,500 1,000 1,100 1,300

6,000
6,000 6,000 5,500 5,200

E =1

Elasticity demand E <1

Arc Elasticity The measure of elasticity of demand between any two finite points on a demand curve is known as arc elasticity.

Point elasticity
it is the elasticity of demand at a finite point on a demand curve.

Determinants of price Elasticity of Demand

Availability of Substitutes Nature of Commodity Time factor in adjustment of consumption pattern Range of commodity use Proportion of market supplied.

Postponement of demand
Habits

Cross-Elasticity of Demand
The cross-elasticity is the measure of responsiveness of demand for a commodity to the changes in the price of its substitutes and complementary goods. e t,c = percentage change in demand for tea (Qt) Percentage change in price of coffee (pc)

Income Elasticity of Demand

the responsiveness of demand to the changes in income is known as income Elasticity of Demand
E y = percentage change in demand for a commodity (x)

Percentage change in income (y)

ey = Y
Xq

Xq Y

Income Elasticity of Demand

Consumer goods

Co-efficient of income Elasticity

Effect on sale
Less than proportionate change in sale
Almost proportionate change in sale More than proportionate change in sale

Essential goods

Less than one (ey < 1)

Almost equal to unity (ey = 1)

Comforts

Luxury

Greater than unity (ey < 1)

Advertisement or Promotional Elasticity of sales

it is percentage change in sales because of change in advertisement expenses. eA= S A Elasticities
eA = 0
eA > 0 but < 1 eA = 1 eA > 1

X A S Interpretation
Sales do not respond to the advertisement expenditure
Increase in total sales is less than proportionate to the increase in advertisement expenditure Sales increase in proportion to the increase in expenditure on advertisement Sales increase at a higher rate than the rate of increase of advertisement expenditure

Determinants of advertisement elasticity

The level of total sales 2. Advertisement by rival firms 3. Cumulative effect of past advertisements 4. Other factors
1.

Elasticity of Price Expectations The price expectation elasticity refers to the expected change in future price as a result of change in current prices of a product

Demand Forecasting
Demand forecasting is predicting demand for a product. Types of Forecasting:
Based on time span: Short-term demand forecasting Long-term demand forecasting Based on different levels Macroeconomic forecasting Industry forecasting Firm level forecasting

Forecasting Methods

Survey Method
Consumer survey Direct interview

Statistical Methods
Opinion Poll Methods

Complete enumeration method

Sample survey

End-use Method Market Studies & Experiments

Expert opinion Simple Method Delphi Method Market test

Laboratory test

Statistical Methods

Trend projections

Barometric methods

Econometrics Methods

Graphical Method

Trend fittings/ Least squares

Lead-lag indicators

Diffusion indices

Regression methods

Simultaneous equations

Graphical Method Year 1992 1993 1994 1995 1996 1997 Sales (000 tonnes) 10 12 11 15 18 14

1998
1999 2000 2001

20
18 21 25

Least Squares/Fitting Trend Equation

S= a + b T E* S = na + b E*T E* ST = a E* T +b E* T2 Year 1992 Sales 10 T 1 T2 1 ST 10

1993
1994 1995 1996

12
11 15 18

2
3 4 5

4
9 16 25

24
33 60 90

1997
1998 1999 2000

14
20 18 21

6
7 8 9

36
49 64 81

84
140 144 189

2001
Total

25
164

10
55

100
385

250
1024

Supply
Supply is the amount of some product, producers are willing and able to sell at a given price, all other factors being held constant.

The Law of Supply There is a direct relationship between price and quantity supplied.
Quantity supplied rises as price rises, other

things constant.
Quantity supplied falls as price falls, other

things constant.

Supply schedule
A supply schedule is a table which shows how much one

or more firms will be willing to supply at particular prices. The supply schedule shows the quantity of goods that a supplier would be willing and able to sell at specific prices under the existing circumstances

Supply schedule of Commodity X

Price in Rs 3 4 5 6 7 Quantity supplied in units 40 50 60 75 90

Supply Curve
The supply curve is the graphic representation of the law

of supply. The supply curve slopes upward to the right. The slope tells us that the quantity supplied varies directly in the same direction with the price. Factors affecting supply
Goods own price
Number of firms/sellers Price of related goods Technology

Expectations
Price of inputs Government policies and regulations

Supply function/equation
The supply function is the mathematical expression of the relationship between supply and those factors that affect the willingness and ability of a supplier to offer goods for sale.

X = f (Px, FE, FP, PR, W, E, N)

Px Product Price FE Factor Productivities /State of Technology FP Factor Prices PR - Price of related goods W Weather and other natural calamities E Expectations N number of firms

Elasticity of Supply
Price Elasticity of Supply measures the responsiveness of quantity supplied to changes in price, as the percentage change in quantity supplied induced by a one percent change in price.

ES

percentage change in the quantity supplied percent change in the price

 Elastic supply means that an increase in price causes a bigger %

increase in supply. It has a PES of greater than 1

Supply will be elastic if it is easy for a firm to increase supply e.g. spare

capacity, easy to employ more factors of production

.

Inelastic supply. This means that an increase in price causes a smaller % increase in supply. It has a PES of less than 1

Supply is often inelastic in the short term, when it is difficult for firms to increase their capacity. Fixed supply means that supply is not dependent on the price level. Whatever the price, the supply will remain the same. Supply is perfectly inelastic.

Unit Elasticity
Y

s1
s2