Demand and Elasticity

Business Economics and Financial Analysis Unit -II
UNIT – II
DEMAND and ELASTICITY OF DEMAND
Elasticity is a measure of how much the quantity demanded or supplied would be affected by a
proportionate change in its determinants.
Demand: The demand for a product can be elastic or inelastic. Demand is said to be elastic when the
quantity demanded for a product changes with a change in any of its determinant.
Elasticity of demand:
Elasticity of demand explains the relationship between a change in price and consequent change in amount
demanded. “Marshall” introduced the concept of elasticity of demand. Elasticity of demand shows the
extent of change in quantity demanded to a change in price.
“The elasticity (or responsiveness) of demand in a market is great or small according as the amount
demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in
price.” - Dr. Alfred Marshall
Definitions:
“Elasticity of demand may be defined as the ratio of percentage change in demand to the percentage
change in the price”. - Lipsey
“The elasticity of demand is the proportionate change of amount purchased in response to a small
change in price, divided by the proportionate change in price.” -Jone Robinson
“The elasticity of demand may be defined as the percentage change in the quantity demanded which
would result from one percent change in price”. - Prof. Boulding
Elastic demand: A small change in price may lead to a great change in quantity demanded. In this case,
demand is elastic.
In-elastic demand: If a big change in price is followed by a small change in demanded then the demand in
“inelastic”.
Factors influencing the elasticity of demand:
Various factors which affect the elasticity of demand of a commodity are:
1. Availability of substitutes: Demand for a commodity with large number of substitutes will be more
elastic. The reason is that even a small rise in its prices will induce the buyers to go for its substitutes.
Ex: A rise in the price of Pepsi encourages buyers to buy Coke and vice-versa.
2. Postponement of Consumption: Commodities like biscuits, soft drinks, etc. whose demand is not urgent,
have highly elastic demand as their consumption can be postponed in case of an increase in their prices.
However, commodities with urgent demand like life saving drugs have inelastic demand because of their
immediate requirement.
3. Share in total Expenditure: Proportion of consumer’s income that is spent on a particular commodity
also influences the elasticity of demand for it. Greater the proportion of income spent on the commodity,
more is the elasticity of demand for it and vice-versa. Demand for goods like salt, needle, soap, match box,
etc. tends to be inelastic as consumers spend a small proportion of their income on such goods.
Dr. M.Kondala Rao, Associate Professor Department of Management Studies

4. Nature of commodity: Elasticity of demand of a commodity is influenced by its nature. A commodity for
a person may be a necessity, a comfort or a luxury. Normally the demand for necessaries like salt, rice etc is
inelastic. On the other band, the demand for comforts and luxuries is elastic.
5. Different uses of commodity: If the commodity under consideration has several uses, then its demand
will be elastic. When price of such a commodity increases, then it is generally put to only more urgent uses
and, as a result, its demand falls. When the prices fall, then it is used for satisfying even less urgent needs
and demand rises. Ex: Electricity
6. Time Period: Price elasticity of demand is always related to a period of time. It can be a day, a week, a
month, a year or a period of several years. Elasticity of demand varies directly with the time period. Demand
is generally inelastic in the short period. It happens because consumers find it difficult to change their habits,
in the short period, in order to respond to a change in the price of the given commodity.
7. Change in income of the consumer: Elasticity of demand for any commodity is generally less for higher
income level groups in comparison to people with low incomes. It happens because rich people are not
influenced much by changes in the price of goods. But, poor people are highly affected by increase or
decrease in the price of goods. As a result, demand for lower income group is highly elastic.
8. Habits of the customer: Commodities, which have become habitual necessities for the consumers, have
less elastic demand. It happens because such a commodity becomes a necessity for the consumer and he
continues to purchase it even if its price rises. Alcohol, tobacco, cigarettes, etc. are some examples of habit
forming commodities.
9. Price of the product: Level of price also affects the price elasticity of demand. Costly goods like laptop,
Plasma TV, etc. have highly elastic demand as their demand is very sensitive to changes in their prices.
However, demand for inexpensive goods like needle, match box, etc. is inelastic as change in prices of such
goods do not change their demand by a considerable amount.
10. Size of population: Increase in the size of population leads to increase in the quantity demand of a
product or service and vice versa.
Types of Elasticity of Demand
The following are the various types of elasticity of demand. Such as
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Advertisement elasticity of demand
1. Price elasticity of demand: Price elasticity of demand is a measure of a change in the quantity demanded
of a product due to change in the price of the product in the market. It is also defined as the rate of
responsiveness changes on quantity demand of a commodity due to change in price of the commodity.
In other words, it can be defined as the relationship between proportionate changes in quantity
demanded of a commodity and proportionate changes in prices of the same commodity. Mathematically it is
also expressed as follows:

Thus, the formula for calculating the price elasticity of demand is as follows:
Where,
Q2 = Quantity demand of commodity after change in price
Q1= Quantity demand of commodity before change in price
P2= Price after change
P1= Price before change
Different types or measurements of price of elasticity of demand

The extent of responsiveness of demand with change in the price does not remain the same under
every situation. The demand for a product can be elastic or inelastic, depending on the rate of change in the
demand with respect to change in price of a product. Based on the rate of change, the price elasticity of
demand is grouped into five main categories. Such as
1. Perfectly Elastic Demand
2. Perfectly Inelastic Demand
3. Relatively Elastic Demand
4. Relatively Inelastic Demand
5. Unitary Elastic Demand
1. Perfectly Elastic Demand: In case of this type of elasticity, there is no change in price of the commodity
even though any changes on quantity demand of a commodity is said to be perfectly elastic demand. In other
words, when a small change (rise or fall) in the price results in a large change (fall or rise) in the quantity
demanded, it is known as perfectly elastic demand. In such a case, the demand is perfectly elastic or Ed
=∞.
In perfectly elastic demand, the demand curve is represented as a horizontal straight line (in parallel to X-
axis), which is shown in the following graph:
In the above graph, DD is the demand curve. Thus, demand rises from OQ to OQ1 and so on, if the
price remains at OD. A slight fall in price will increase the demand to OX, whereas a slight rise in price will
bring demand to zero.

2. Perfectly Inelastic Demand: In case of this type of elasticity, there is no change in quantity demand of a
commodity even though any changes in prices of a commodity is said to be perfectly inelastic demand.
In other words, when a change (rise or fall) in the price of a product does not bring any change (fall
or rise) in the quantity demanded, the demand is called perfectly inelastic demand. In this case, the elasticity
of demand is zero and represented as Ed = 0.
Graphically, perfectly inelastic demand curve is represented as a vertical straight line (parallel to Y-
axis). The following graph shows the perfectly inelastic demand curve:
In the above graph, DD is the demand curve. Thus, it can be observed that even when there is change
in the price from OP1 to OP2, quantity demanded remains the same at OQ1.
3. Relatively Elastic Demand: When a proportionate or percentage change (fall or rise) in price results in
greater than the proportionate or percentage change (rise or fall) in quantity demanded, the demand is said to
be relatively elastic demand.
In other words, a change in demand is greater than the change in price. Therefore, in this case,
elasticity of demand is greater than 1 and represented as Edp > 1.
The demand curve of relatively elastic demand is gradually sloping, which is shown in the following
graph:
In the above graph, DD is the demand curve that slopes gradually down with a fall in price. When price
falls from OP to OP1, demand rises from OQ to OQ1. However, the rise in demand QQ1 is greater than the
fall in price PP1.
4. Relatively Inelastic Demand: When a percentage or proportionate change (fall or rise) in price results in
less than the percentage or proportionate change (rise or fall) in demand, the demand is said to be relatively
inelastic demand.

In other words, a change in demand is less than the change in price. Therefore, the elasticity of
demand is less than 1 and represented as Ed < 1.
The demand curve of relatively inelastic demand is rapidly sloping, which is shown in the following
graph:
In the above graph, DD is the demand curve that slopes steeply with a fall in price. When price falls
from OP to OP1, the demand rises from OQ to OQ1. However, the rise in demand QQ1 is less than the fall
in price PP1.
5. Unitary Elastic Demand: Unitary elastic demand occurs when a change (rise or fall) in price results in
equivalent change (fall or rise) in demand. The numerical value for unitary elastic demand is equal to one,
i.e., Ed =1.
The demand curve for unitary elastic demand is a rectangular hyperbola, which is shown in the
following graph:
In the above graph, DD is the unitary elastic demand curve sloping uniformly from left to the right.
Here, the demand falls from OQ to OQ2 when the price rises from OP to OP2. On the contrary, when price
falls from OP to OP1, demand rises from OQ to OQ1.

The different types of price elasticity (mentioned above) are summarised in the following Table:
2. Income elasticity of demand: An increase in the income of consumers increases the demand for the
product even if the price remains constant. The responsiveness of quantity demanded with respect to the
income of consumers is called the income elasticity of demand.
It is also defined as the rate of responsiveness changes on quantity demand of a commodity due to
change in income level of the consumers. In other words, it can be defined as the relationship between
proportionate changes in quantity demanded of a commodity and proportionate changes in income level of
the consumers.
Mathematically it is also expressed as follows:
Thus, the formula for calculating the income elasticity of demand is as follows:
Where,
Q2 = Quantity demand of commodity after change in income
Q1= Quantity demand of commodity before change in income
I2 = Income after change
I1= Income before change
Types of Income Elasticity of Demand

Similar to the price elasticity of demand, the degree of responsiveness of demand with change in
consumer’s income is not always the same. The income elasticity of demand varies for different products
and under different situations.
On the basis of numerical value, income elasticity of demand is classified into three groups as
follows:
1. Positive income elasticity of demand
2. Negative income elasticity of demand
3. Zero income elasticity of demand

1. Positive income elasticity of demand: When a proportionate change in the income of a consumer
increases the demand for a product and vice versa, income elasticity of demand is said to be positive. In case
of normal goods, the income elasticity of demand is generally found positive, which is shown in the
following graph:
In the above graph, DYDY is the curve representing positive income elasticity of demand. The curve
is sloping upwards from left to the right, which shows an increase in demand (OQ to OQ1) as a result of rise
in income (OB to OA).
There are three types of positive income elasticity of demand, such as
2. Negative income elasticity of demand: When a proportionate change in the income of a consumer
results in a fall in the demand for a product and vice versa, the income elasticity of demand is said to be
positive. It generally happens in case of inferior goods.
Ex: Consumers may prefer small cars with a limited income. However, with a rise in income, they may
prefer using luxury cars.
The following graph shows the negative income elasticity of demand:
In the above graph, DYDY is the curve representing negative income elasticity of demand. The
curve is sloping downwards from left to the right, which shows a decrease in the demand as a result of a rise
in income. As shown in graph, with a rise of income from 10 to 30, the demand falls from 3 to 2.
3. Zero income elasticity of demand: When a proportionate change in the income of a consumer does not
bring any change in the demand for a product, income elasticity of demand is said to be zero. It generally
occurs for utility goods such as salt, kerosene, electricity.

The following graph shows the zero income elasticity of demand:
In the above graph, DYDY is the curve representing zero income elasticity of demand. The curve is
parallel to Y-axis that shows no change in the demand as a result of a rise in income. As shown in graph,
with a rise of income from 10 to 20, the demand remains the same i.e. 4.
3. Cross elasticity of demand: The cross elasticity of demand can be defined as a measure of a
proportionate change in the demand for goods as a result of change in the price of related goods. It is also
defined as the rate of responsiveness changes on quantity demand of a commodity “X” due to change in
price of the commodity “Y”.
The cross elasticity of demand can be measured as follows:
Thus, the formula for calculating the cross elasticity of demand is as follows:
Where,
QX2 = Quantity demand of commodity after change in price of Y
QX1= Quantity demand of commodity before change in price of Y
PY2= Price of Y after change
PY1= Price of Y before change
Cross elasticity of demand can be categorised into three types, which are as follows:
A. Positive cross elasticity of demand: When an increase in the price of a related product results in an
increase in the demand for the main product and vice versa, the cross elasticity of demand is said to be
positive. Cross-elasticity of demand is positive in case of substitute goods. In this case, Edc > 0.
B. Negative cross elasticity of demand: When an increase in the price of a related product results in the
decrease of the demand of the main product and vice versa, the negative elasticity of demand is said to be
negative. In complementary goods, cross elasticity of goods is negative. In this case, Edc < 0.
C. Zero cross elasticity of demand: When a proportionate change in the price of a related product does not
bring any change in the demand for the main product, the negative elasticity of demand is said to be
negative. In simple words, cross elasticity is zero in case of independent goods. In this case, Edc = 0.

4. Advertisement Elasticity of Demand: The advertisement elasticity of demand is a degree of

responsiveness of a change in the sales of a product with respect to a proportionate change in advertisement
expenditure.
It is also defined as the rate of responsiveness changes on quantity demand of a commodity due to
change in cost of expenditure.
The advertisement elasticity (EdA) can be calculated using the following formula:
Thus, the formula for calculating the advertisement elasticity of demand is as follows:
Where,
Q2 = Quantity demand of commodity after change in cost of advertisement
Q1= Quantity demand of commodity before change in cost of advertisement
A2= Cost of advertisement after change
A1= Cost of advertisement before change
Advertisement elasticity of demand can be categorised into three types, which are as follows:
A. Positive Advertisement elasticity of demand: When an increase in the cost of advertisement of a
product results in an increase in the demand for the product and vice versa, the advertisement elasticity of
demand is said to be positive. In this case, EdA > 0.
B. Negative Advertisement elasticity of demand: When an increase in the cost of advertisement of a
product results in the decrease of the demand of the product and vice versa, the negative elasticity of
demand is said to be negative. In this case, EdA < 0.
C. Zero Advertisement elasticity of demand: When a proportionate change in the cost of advertisement of
a product does not bring any change in the demand for the product, the negative elasticity of demand is said
to be negative. In this case, EdA = 0.
Measurement of Elasticity of Demand
In practical applications, it is not sufficient to determine whether the demand is elastic or inelastic.
An organisation needs to estimate the numerical value of change in demand with respect to change in the
given price for making various business decisions.
The numerical value of elasticity of demand can only be estimated by its measurement.
Organisations use various methods for measuring price elasticity of demand.

The following Figure shows some commonly used methods of measuring the elasticity of demand:
1. Percentage or proportionate method: It is also known as the ratio method. Using this method, a ratio of
proportionate change in quantity demanded to the price of the product is calculated to determine the price
elasticity.
Where,
Q1 = Original quantity demanded before change
Q2 = New quantity demanded after change
P1 = Original price or before change
P2 = New price after change
2. Total outlay or expenditure method: This method was introduced by Dr. Alfred Marshall. According to
this method, the price elasticity of a product is measured on the basis of the total amount of money spent
(total expenditure) by consumers on the consumption of that product.
Using this method, price elasticity is determined by comparing consumers’ expenditure or outlay
before change in the price with that of after change in the price.
The following table shows the calculation of price elasticity of demand using the total outlay
method:

3. Point elasticity or geometric method: This method is used to measure the elasticity at a specific point on
a demand curve. The point elasticity method is also known as geometric method or slope method. In this
method, different points are taken on the demand curve to find the price elasticity of demand at different
prices. The points at which elasticity is measured are lower and upper segments of the curve.
The point price elasticity of demand is measured on linear curves and non-linear curves.
4. Arc elasticity method: This method is used to calculate the elasticity of demand at the midpoint of an arc
on the demand curve. In this method, the average of prices and quantities are calculated for finding
elasticity. It is assumed that the elasticity would be same over a range of values of variables considered. The
formula of the arc elasticity method is:
Where,
Q1 is original quantity demanded or quantity before change
Q2 is new quantity demanded or quantity after change
P1 is original price or before change
P2 is the new price or after change
DD is the demand curve for the good. R1 (p1, q1) and R2 (p2, q2)
are any two p points on DD. Initially, at the point R1, when the
price is p1, demand is q1. Now if the price decreases by a consid-
erable amount from p1 to p2, the demand for the good increases
from q1to q2 at the point R2. The elasticity of demand that is
obtained in the case of this price change is called the arc-elasticity
of demand—here over the arc R1R2 of the demand curve.
Significance and Elasticity of Demand in Decision Making
The concept of elasticity of demand is of much practical importance.
1. Price fixation: Each seller under monopoly and imperfect competition has to take into account elasticity
of demand while fixing the price for his product. If the demand for the product is inelastic, he can fix a higher
price.

2. Production: Producers generally decide their production level on the basis of demand for the product.
Hence elasticity of demand helps the producers to take correct decision regarding the level of cut put to be
produced.
3. Distribution: Elasticity of demand also helps in the determination of rewards for factors of production.
For example, if the demand for labour is inelastic, trade unions will be successful in raising wages. It is
applicable to other factors of production.
4. International Trade: Elasticity of demand helps in finding out the terms of trade between two countries.
Terms of trade refers to the rate at which domestic commodity is exchanged for foreign commodities. Terms
of trade depends upon the elasticity of demand of the two countries for each other goods.
5. Public Finance: Elasticity of demand helps the government in formulating tax policies. For example, for
imposing tax on a commodity, the Finance Minister has to take into account the elasticity of demand.
6. Nationalization: The concept of elasticity of demand enables the government to decide about
nationalization of industries.
7. Fixation of Wages: It guides the producers to fix wages for labourers. They fix high or low wages
according to the elastic or inelastic demand for the labour.
8. Effect on Employment: The effect of machines on employment opportunities depends on elasticity of
demand for the goods produced by such machines. In the initial stage, use of such machines cause
unemployment and prices will also fall. But when demand for such commodities is more elastic, then fall in
prices will generate more increase in its demand.
DEMAND
Demand can be defined as a quantity of a product an individual is willing to purchase at a specific
point of time. Demand refers to willingness or effective desire of individuals to buy a product supported by
their purchasing power.
“The demand for anything, at a given price, is the amount of it, which will be bought per unit of time, at that
price.” - Frederic Charles Courtenay Benham
Demand refers to willingness or effective desire of individuals to buy a product supported by their
purchasing power. Here, effective desire is the quantity of a commodity or service that is purchased at a
given time period at a given price from the market.
The following are the conditions to satisfy to said that there is a demand for the commodity or the
product.
 Desire for the specific commodity
 Sufficient sources of funds to purchase the desired product or commodity
 Willingness to spend the resources
 Availability of the product
 at certain price
 at certain place
 at certain time

Unless satisfying the above conditions no product has the demand from a individual
The following points should be considered while defining the term demand:
 Desire, want, and demand are different from each other.
 The quantity demanded is the amount that a customer is willing to purchase. However, the quantity
demanded is not always equal to the actual purchase. This is because the commodity or service may
not be available in the required quantity.
 Demand is always referred to in terms of price and bears no meaning if it is not expressed in relation
to price.
 Demand is always referred in terms of a time period and bears no meaning if it is not expressed in
relation to a time period.
Types of Goods Demand
 Individual demand Vs Market demand
 Consumer goods Demand Vs Producer goods Demand
 Perishable goods Demand Vs Durable goods demand
 Autonomous goods demand Vs Dependent goods demand
 Firm goods demand Vs Industry goods demand
 Prestigious goods demand Vs Inferior goods demand
 Substitutes goods demand Vs Complementary goods demand
 Direct goods demand Vs Indirect goods demand
 Short run demand Vs Long run demand
 New goods demand Vs Replacement goods demand
 Total Market and Segment Market Demand
Individual demand Vs Market demand
The individual demand is the demand of one individual or firm. It represents the quantity of a good that a
single consumer would buy at a specific price point at a specific point in time.
Market demand provides the total quantity demanded by all consumers. In other words, it represents the
aggregate of all individual demands.
Consumer Goods vs. Producer Goods
Consumer goods refer to such products and services which are capable of satisfying human need. Consumer
goods are those which are available for ultimate consumption. These give direct and immediate satisfaction.
Ex: bread, apple, rice, and so on.
Producer goods are those which are used for further processing or production of goods/services to earn
income. These are used to produce consumer goods. These goods yield satisfaction indirectly. Ex:
machinery, tractor and such others.
Durable vs. Perishable Goods
Durable goods are those goods which give service relatively for a long period.
Ex: Rice, wheat, sugar, TV, Fridge etc..

The life of perishable goods is very less, may he in hours or days.

Ex: milk, vegetables, fish and others.
Autonomous Demand vs. Derived Demand
Autonomous demand refers to the demand for products and services directly. The demand for the services
of a super specialty hospital can be considered as autonomous whereas the demand for the hotels around that
hospital is called a derived demand.
In case of a derived demand the demand for a product arises out of the purchase of a patent product. If there
is no demand for houses, there may not be demand for steel, cement, bricks and so on. Demand for houses is
autonomous whereas demand for these inputs is derived demand.
Firm Demand VS Industry Demand
The firm is a single business unit whereas industry refers to the group of firms carrying on similar activity.
The quantity of goods demanded by a single firm is called firm demand and the quantity demanded by the
industry as a whole is called industry demand.
Ex: One construction company may use 100 tonnes of cement during a given month. This is firm demand.
The construction industry in a particular state may have used ten million tones. This is industry demand.
Prestigious goods demand Vs Inferior goods demand
Superior goods or luxury goods make up larger proportion of consumption as income rises, and therefore
are a type of normal goods in consumer theory. Ex: Gold, Diamond and luxury cars etc.
Inferior good is a good whose demand decreases when consumer income rises (or demand increases when
consumer income decreases), unlike normal goods, for which the opposite is observed.
Substitute goods demand Vs Complementary goods demand
A substitute good is a good that can be used in place of another. In consumer theory, substitute goods
or substitutes are goods that a consumer perceives as similar or comparable, so that having more of one
good cause the consumer to desire less of the other good.
Complementary good is a good whose appeal increases with the popularity of its complement. Technically
it displays a negative cross elastic of demand and that demand for it increases when the price of another
good decreases.
Short-run Demand vs. Long-run Demand
Short-run demand is the demand with its immediate reaction to price changes, income fluctuations and so
on.
Long-run demand is that demand which will ultimately exist as a result of the changes in pricing, promotion
or product improvement, alter enough time is allowed to let the market adjust itself to the given situation.
The demand for a particular product or service in a given region for a particular day can be viewed as short-
run demand. The demand for a longer period for the same region can be viewed as long-run demand.
New Demand VS Replacement Demand
New demand refers to the demand for the new products and it is the addition to the existing stock.
Replacement demand, the item is purchased to maintain the asset in good condition.

Ex: The demand for new mobile is new demand and the demand for mobile accessories is replacement
demand.
Replacement demand may also refer to the demand resulting out of replacing the existing assets with the
new ones. Many companies announce exchange schemes for TVs, washing machines and so on. They would
like to tap the replacement demand.
Total Market and Segment Market Demand
Let us take the consumption of sugar in a given region. The total demand for sugar in the region is the total
market demand. The demand for sugar from the sweet-making industry from this region is the segment
market demand.
Demand Schedule and Curve
Demand schedule: In economics, the demand schedule is a table showing the quantity demanded of a good
or service at different price levels. The following table called a demand schedule.
Price (Rs.) Quantity of EGGs
80 2
70 4
60 6
50 9
40 14
Demand Curve: The demand curve is a graphical representation depicting the relationship between a
commodity's different price levels and quantities which consumers are willing to buy. The curve can be
derived from demand schedule, which is essentially a table view of the price and quantity pairings that
comprise the demand curve.
The demand schedule can be graphed as a continuous demand curve on a chart where the Y-axis
represents price and the X-axis represents quantity of demand. The following graph reveals the demand
curve.

Determinants of Demand
Determinants of demand are the factors that influence the decision of consumers to purchase a
commodity or service. It is essential for organisations to understand the relationship between the demand
and its each determinant to analyse and estimate the individual and market demand for a commodity or
service.
The quantity demanded for a commodity or service is influenced by various factors, such as price,
consumers’ income and preferences, and growth of population.
The following are the various determinants of demand. Such as
1) Price of Commodity or product
2) Price of substitutes Goods and Complementary Goods
3) Income of Consumers
4) Tastes and Preferences of Consumers
5) Consumers’ Expectations
6) Size of population
7) Expected price, income and taste and preferences
8) Others
1. Price of the Commodity: The most important factor-affecting amount demanded is the price of the
commodity. The amount of a commodity demanded at a particular price is more properly called price
demand. The relation between price and demand is called the Law of demand. It is not only the existing
price but also the expected changes in price, which affect demand.
2. Prices of related goods: The demand for a commodity is also affected by the changes in prices of the
related goods also. Related goods can be of two types:
(i). Substitute goods which can replace each other in use; for example, tea and coffee are
substitutes. The change in price of a substitute has effect on a commodity’s demand
in the same direction in which price changes.
(ii). Complementary goods are those which are jointly demanded, such as pen and ink. In
such cases complementary goods have opposite relationship between price of one
commodity and the amount demanded for the other.
3. Income of the Consumer: The second most important factor influencing demand is consumer income.
The demand for a normal commodity goes up when income rises and falls down when income falls. But in
case of Giffen goods the relationship is the opposite.
4. Tastes of the Consumers: The amount demanded also depends on consumer’s taste. Tastes include
fashion, habit, customs, etc. A consumer’s taste is also affected by advertisement. If the taste for a
commodity goes up, its amount demanded is more even at the same price. This is called increase in demand.
The opposite is called decrease in demand.

5. Expectations regarding the future: If consumers expect changes in price of commodity in future, they
will change the demand at present even when the present price remains the same. Similarly, if consumers
expect their incomes to rise in the near future they may increase the demand for a commodity just now.
6. Population: Increase in population increases demand for necessaries of life. The composition of
population also affects demand. Composition of population means the proportion of young and old and
children as well as the ratio of men to women. A change in composition of population has an effect on the
nature of demand for different commodities.
8. Others
i) Climate and weather: The climate of an area and the weather prevailing there has a decisive effect on
consumer’s demand. In cold areas woolen cloth is demanded. During hot summer days, ice is very much in
demand. On a rainy day, ice cream is not so much demanded.
ii) Wealth: The amount demanded of commodity is also affected by the amount of wealth as well as its
distribution. The wealthier are the people; higher is the demand for normal commodities. If wealth is more
equally distributed, the demand for necessaries and comforts is more.
iii). Government Policy: Government policy affects the demands for commodities through taxation. Taxing
a commodity increases its price and the demand goes down. Similarly, financial help from the government
increases the demand for a commodity while lowering its price.
iv). State of business: The level of demand for different commodities also depends upon the business
conditions in the country. If the country is passing through boom conditions, there will be a marked increase
in demand. On the other hand, the level of demand goes down during depression.
Demand Function
Demand function is a function which describes a relationship between one variable and its determinants. It
describes how much quantity of goods is bought at alternative prices of good and related goods, alternative
income levels, and alternative values of other variables affecting demand. Thus, the demand function for a
good relates the quantity of a good which consumers demand during a given period to the factors which
influence the demand. The above factors can be built up into a demand function.
Mathematically, the demand function for a product A can be expressed as follows:
The following function explains the demand function.
Qd = f ( P, I, T&P, Ce, Cp, Sp, Ep, Ei, Et, Epr, o)
LAW OF DEMAND
According to Robertson, “Other things being equal, the lower the price at which a thing is offered,
the more a man will be prepared to buy it.”
In the words of Marshall, “The greater the amount to be sold, the smaller must be the price at 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.” The
law states that the quantity demanded of a commodity increases with a fall in the price of the commodity
and vice versa while other factors like consumers’ preferences, level of income, population size, etc. are
constant.
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)
Where,
D= Demand
P= Price
f = Functional Relationship
Law of demand shows the relation between price and quantity demanded of a commodity in the
market. In the words of Marshall, “the amount demand increases with a fall in price and diminishes with a
rise in price”.
A rise in the price of a commodity is followed by a reduction in demand and a fall in price is
followed by an increase in demand, if a condition of demand remains constant.
Assumptions of law of demand
The law of demand is based on the following assumptions:
 The income of the consumer remains constant.
 Consumer tastes and preferences remain constant.
 Price of related goods remains unchanged.
 Population size remains constant.
 Consumer expectations do not change.
 Credit policies remain unchanged.
 Income distribution remains constant.
 Government policies remain unchanged.
 The commodity is a normal commodity.
The law of demand can be understood with the help of certain concepts, such as demand schedule, demand
curve, and demand function.
Operation of Law of Demand
Other things remaining the same are the main assumption of law of demand. Other things include all
the determinants of quantity demand of the product except the price of the product.
The law of demand may be explained with the help of the following demand schedule and curve.
Demand Schedule
A demand schedule is a tabular representation of different quantities of commodities that consumers
are willing to purchase at specific price and time while other factors are constant.

The following table is a demand schedule.

Price of Appel (In. Rs.) Quantity Demanded
10 1
8 2
6 3
4 4
2 5
When the price falls from Rs. 10 to 8 quantity demand increases from 1 to 2. In the same way as
price falls, quantity demand increases on the basis of the demand schedule we can draw the demand curve.
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. The following graph explains the law of demand curve.
The demand curve DD shows the inverse relation between price and quantity demand of apple. It is
downward sloping.
Exceptions of Law of Demand Curve
The universal law of demand states that rise in the price of a product would lead to a fall in the
demand for that product and vice versa. However, there are certain exceptions that with a fall in price, the
demand also falls and there is an increase in demand with an increase in price. This situation is paradoxical
in nature and regarded as exception to the law of demand.
In simple words, exception to law of demand refers to conditions where the law of demand is not
applicable. In case of exceptions, demand curve shows an upward slope and referred as exceptional demand
curve.

When price increases from OP to Op1 quantity demanded also increases from to OQ1 and vice versa.
The reasons for exceptional demand curve are as follows.
 Prestigious goods
 Giffen Paradox (Robert Giffen (1837- 1910))
 In case of necessary commodities
 Ignorance of price changes
 Future price expectations
 Extraordinary situations and
 Fear of shortage
1. Prestigious goods or Veblen or Demonstration effect: “Veblen’ has explained the exceptional demand
curve through his doctrine of conspicuous consumption. Rich people buy certain good because it gives
social distinction or prestige for example diamonds are bought by the richer class for the prestige it possess.
2. Giffens’paradox People whose incomes are low purchase more of a commodity such as broken rice,
bread etc (which is their staple food) when its price rises. Conversely when its price falls, instead of buying
more, they buy less of this commodity and use the savings for the purchase of better goods such as meat.
This phenomenon is called Giffens’ paradox and such goods are called inferior or Giffen goods.
3. Necessaries: In the case of necessaries like rice, vegetables etc. people buy more even at a higher price.
4. In case of ignorance of price changes At times, the customer may not keep track of changes in price. In
such a case, he tends to buy even if there is increase in price.
5. Situations of crisis: 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.
6.Speculative effect: If the price of the commodity is increasing the consumers will buy more of it because
of the fear that it increase still further, Thus, an increase in price may not be accomplished by a decrease in
demand.
7. Fear of shortage: During the times of emergency of war, people may expect shortage of a commodity.
At that time, they may buy more at a higher price to keep stocks for the future.
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 helps an organisation to take various business decisions, such as planning the
production process, purchasing raw materials, managing funds, and deciding the price of its products.
Demand can be forecasted by organisations either internally by making estimates called guess
estimate or externally through specialised consultants or market research agencies.
Types of Demand Forecasting
I. Level of forecasting: Demand forecasting can be done at the firm level, industry level, or economy level.
At the firm level, the demand is forecasted for the products and services of an individual
organisation in the future.
At the industry level, the collective demand for the products and services of all organisations in a
particular industry is forecasted.
At the economy level, the aggregate demand for products and services in the economy as a whole is
anticipated.
II. Time period involved: On the basis of the duration, demand is forecasted in the short run and long term,
which is explained as follows:
Short-term forecasting involves anticipating demand for a period not exceeding one year. It is focused
on the short term decisions (for example, arranging finance, formulating production policy, making
promotional strategies, etc.) of an organisation.
••Long-term forecasting involves predicting demand for a period of 5-7 years and may extend for a
period of 10 to 20 years. It is focused on the long-term decisions (for example, deciding the production
capacity, replacing machinery, etc.) of an organisation.
III. Nature of products: Products can be categorised into consumer goods or capital goods on the basis of
their nature. Demand forecasting differs for these two types of products, which is discussed as follows:
••Consumer goods are goods that are meant for final consumption by end users are called consumer
goods. These goods have a direct demand. Generally, demand forecasting for these
goods is done while introducing a new product or replacing the existing product with an improved one.
••Capital / producer goods are required to produce consumer goods; for example, raw material. Thus,
these goods have a derived demand. The demand forecasting of capital goods depends on the demand for
consumer goods. For example, prediction of higher demand for consumer goods would result in the
anticipation of higher demand for capital goods too.

Features or characteristics of Demand Forecasting

Good forecasting method should process the following salient features:
1. Simplicity: Any method of demand forecasting can be said well only when it is it has the merit of
simplicity. The application and understanding of the method should be simple.
2. Accuracy: A method by which we can get the accurate forecasting will be more useful. It will help
business managers to take decisions during upward and downward fluctuations in trade cycles.
3. Reliable: The method of demand forecasting should be such on which the business managers can rely and
can take business decisions accordingly. Thus, the reliability of the method will also make it more accurate
in drawing inferences. Such method will also be accepted generally.
4. Flexibility: A method of demand forecasting should have the feature of flexibility so that necessary
changes may be made during the study period when there are fluctuations in economic activities.
5. Economy: The method of demand forecasting should possess the merit of the economy. It means it
should not be expensive. There should be less time, money and energy involved while calculating the
demand forecasting.
6. Universal Applicability: A good method of demand forecasting should have Universal applicability. It
should provide the same results Inferences in different situations provided the variables included in the study
are the same.
7. Availability of Information: A good method demand forecasting is one in which the information to be
collected is easily available and when required. All the variables should be quantifiable. In such a situation
the business managers can take decisions on time.
Limitations of Demand Forecasting
Demand forecasting is used in trade, modern business, and industry. The various methods of demand
forecasting are good but the overall study of demand forecasting reveals that it has the following limitations:
1. Much Extensive: Most of the methods of demand forecasting require more time, money and energy in
the collection of data and information from money. Hence, an ordinary firm of small means cannot use the
methods of demand.
2. Unrealistic Assumptions: Most of the methods of demand forecasting are based on several assumptions.
Such assumptions are related to the past and present happening of events which may not prove correct in
future as well. The conclusions drawn from so many assumptions will not give reliable and accurate results.
STEPS IN DEMAND FORECASTING

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). If an 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. 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
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: After 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.
METHODS OF DEMAND FORECASTING
Forecasting demand is not an easy exercise. It may be easy only in the case of a very few products
or services where the demand for the product does not change from time to time or competition is not
significant, it may be relatively easy to forecast demand for a particular product or service.
The more the demand is sensitive, the more important it is to forecast it accurately. This calls for an
elaborate forecasting process.
There are many methods of forecasting demand. The different methods of forecasting demand can be
grouped under (1) survey methods (2) statistical methods and (3) Other methods
1. Survey methods
(a) Survey of buyer intentions
i) Census method
ii) Sample method
(b) Sales force opinion method
2. Statistical methods
(a) Trend projection method
i) Trend line by observation
ii) Least square method
iii) Time series analysis
iv) Moving averages method
v) Exponential smoothing

(b) Barometric techniques

(c) Simultaneous equations method
(d) Correlation and regression methods
3. Other methods
(a) Expert Opinion method
(b)Test marketing
(c) Controlled experiments
(d) Judgmental approach
1. Survey Methods
a) Survey of Buyers Intentions To anticipate what buyers are likely to do under a given set of
circumstances a most useful source of information would be the buyers themselves. It is better to draw a list
of all potential buyers, approach each buyer to ask how much does he plans to buy of the given product at a
given point of time under particular conditions. This is the most effective method because the buyer is the
ultimate decision-maker and we are collecting the information directly from him.
(i) Census method: The Census Method is also called as a Complete Enumeration Survey Method wherein
each and every item in the universe is selected for the data collection. The universe might constitute a
particular place, a group of people or any specific locality which is the complete set of items and which is of
interest in any particular situation.
(ii) Sample method: A certain group of representative items is selected from the universe, called as a
sample, on the basis of which the conclusion for the entire population is drawn. In sampling, the data are
collected from few representative items of the universe that best describes the characteristics of the
population. This method is used to overcome the limitation of the census method which is both costly and
time-consuming.

(b) Sales Force Opinions Another source of getting reliable information about the possible level of sales or
demand for a given product or service is the group of people who sell the same. Thus, we can control the
limitations of cost and delays in contacting the customers.
The sales people are those who are in constant touch with the main and large buyers of a particular
market, and hence they constitute another valid source of information about the likely sales of a product. It is
less costly as the survey can be conducted instantaneously through telephone, fax or video-conferencing, and
so on. The data, thus collected, forms another valid source of reliable information.
This method is appropriate when
 Sales persons are likely to be most knowledgeable sources of information
 The salesmen are cooperative
 Bias factor can be corrected by means of growth factor.
2. Statistical Methods
For forecasting the demand for goods and services in the long-run, statistical and mathematical
methods are used considering the past data.
(a) Trend Projection Methods These are generally based on analysis of past sales patterns. These methods
dispense with the need for costly market research because the necessary information is often already
available in company files in terms of different time periods, that is, a time series data.
There are five main techniques of mechanical extrapolation. In extrapolation, it is assumed that
existing trend will maintain all through.
(i) Trend line by observation This method of forecasting trend is elementary, easy and quick as it involves
merely the plotting the actual sales data on a chart and then estimating just by observation where the trend
line lies. The line can be extended towards a future period and corresponding sales forecast read from the
graph.
(ii) Least Squares Method Certain statistical formulae are used here to find the trend line which ‘best fits’
the available data. The trend line is the basis to extrapolate the line for future demand for the given product
or service on graph. Here it is assumed that there is a proportional (linear) change in sales over a period of
time.
The estimating linear trend equation of sales is written as:
S = x + y (T)
Where x and y have been calculated from past data S is sales and T is the year number for which the forecast
is made.
To find the values of x and y, the following normal equations have to be stated and solved:
∑S = Nx + y ∑T
∑ST = x∑T+ y ∑T2
Where S is the sales; T is the year number, n = number of years
(iii) Time series analysis Where the surveys or market tests are costly and time-consuming, statistical and
mathematical analysis of past sales data offers another method to prepare the forecasts, that is, time series

analysis. One major requirement to administer this technique is that the product should have actively been
traded in the market for long time in the past.
Time series emerge from such a data when arranged chronologically. Given significantly large data,
the cause and effect relationships can be discovered through quantitative analysis. The following are the four
major components analysed from time series while forecasting the demand:
Trend (T) also called the long-term trend is the result of basic developments in the population, capital
formation and technology. These developments relate to over a period of long time say five to ten years, not
definitely overnight.
Cyclic Trend (C) is seen in the wave like movement of sales. The sales data is quite often affected by
swings in the levels of general economic activity, which tend to be somewhat periodic. For instance, during
the period of inflation, prices of the products go up and hence the demand slows down.
Seasonal Trend (S) refers to a consistent pattern of sales movements within the year. More goods are sold
during the festival seasons. The seasonal component may be related to Weather factors, holidays, and so on.
Erratic Trend (E) results from the sporadic occurrence of strikes. These erratic components can even
damage the impact of more systematic components, and thus make the forecasting process much more
complex.
One model states that these components interact linearly, that is,
Y = T+ C+ S + E
Another model states that Y is the product of all these components that is,
Y=TxCxSxE
(iv) Moving average method This method considers that the average of past events determine the future
events. In other words, this method provides consistent results when the past events are consistent and
unaffected by wide changes. As the name itself suggests, under this method, the average keeps on moving
depending up on the number of years selected. Selection of the number of years is the decisive factor in this
method. Moving averages get updated as new information flows in.
This method is easy to compute. One major advantage with this method is that the old data can be
dispensed with, once the averages are computed. These averages, not the original data, are further used as
the forecast for next period
(b) Barometric Techniques Under the barometric technique, one set of data is used to predict another set.
In other words, to forecast demand for a particular product or service, use some other relevant indicator
(which is known as a barometer) of future demand.
(c) Simultaneous Equation Method In this method, all variables are simultaneously considered, with the
conviction that every variable influences the other variables in an economic environment. Hence, the set of
equations equal the number of dependent (controllable) variable which is also called endogenous variables.
In other words, it is a system of ‘n’ equations with ‘n’ unknowns. It can be solved; the moment the model is
specified because it covers all the unknown variables, it is also called complete systems approach to demand
forecasting.

(d) Correlation and Regression Methods Correlation and regression methods are statistical techniques.
Correlation describes the degree of association between two variables such as sales and
advertisement expenditure. When the two variables tend to change together, then they are said to be
correlated. The extent to which they are correlated is measured by correlation coefficient. Of these two
variables, one is a dependent variable and the other is an independent.
Ex: if the sales have gone up as a result of increase in advertisement expenditure, we can say that the sales
and advertisement are positively correlated.
Correlation coefficient ranges between +1 and -1. It does not exceed this range. Where the
correlation coefficient is zero, it indicates that the variables under study are not related at all.
Regression analysis, an equation is estimated which best fits in the sets of observations of dependent
variables and independent variables. The best estimate of the true underlying relationship between these
variables is thus generated. The dependent (unknown) variable is then forecast based on this estimated
equation, for a given value of the independent (known) variable.
The main advantage of this method is that it provides the values of independent variable from within
the model itself. Thus it frees the forecaster from the difficulty of estimating them exogenously.
C. Other Methods
(a) Expert Opinion Well-informed persons are called experts. Experts constitute yet another source of
information. These persons are generally the outside experts and they do not have any Vested interests in the
results of a particular survey.
(b) Test Marketing It is likely that opinions given by buyers, salesmen or other experts may be, at times,
misleading. This is the reason why most of the manufacturers favour to test their product or service in a
limited market as test-run before they launch their products nationwide. Based on the results of test
marketing, valuable lessons can be learnt on how consumers react to the given product and necessary
changes can be introduced to gain wider acceptability.
Ex: Automobile companies maintain a panel of consumers who give feedback on the style and design and
specifications of the new models.
(c) Controlled Experiments Controlled experiments refer to such exercises where some of the major
determinants of demand are manipulated to suit to the customers with different tastes and preferences,
income groups, and such others. It is further assumed that all other factors remain the same. In this method,
the product is introduced with different packages, different prices in different markets or same markets to
assess which combination appeals to the customer most.
(d) Judgemental Approach When none of the above methods are directly related to the given product or
service, the management has no alternative other than using its own judgement.

SUPPLY
Supply can be defined as the quantity of a product that a seller is willing to 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, government policies, and technology.
It is 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
supply of a product increases with an increase in its price, while other factors at constant and vice versa.
The two forces demand and supply play a major role in influencing the decisions of consumers and
producers. The interaction between demand and supply helps in determining the market equilibrium price of
a product.
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 supply 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, in a given market, at given time.”
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 a product depends on its price and cost of production.
It can be said that supply is the function of price and cost of production. These factors that influence
the supply are called the determinants of supply. Such as
Price of a product: The major determinant of the supply of a product is its price. An increase in the price of
a product increases its supply and vice versa while other factors remain the same. Producers increase the
supply of the product at higher prices due to the expectation of receiving increased profits. Thus, price and
supply have a direct relationship.

Cost of production: It is the cost incurred on the manufacturing of goods that are to be offered to
consumers. Cost of production and supply are inversely proportional to each other. This implies that
suppliers do not supply products in the market when the cost of manufacturing is more than their market
price. In this case, sellers would wait for a rise in price in the future.
Natural conditions: The supply of certain products is directly influenced by climatic conditions. For
instance, the supply of agricultural products increases when the monsoon comes well on time. On the
contrary, the supply of these products decreases at the time of drought. Ex: 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 and vise versa. This is because high tax rates increase
overall productions costs, which will make it difficult for suppliers to offer products in the market.
Production techniques: The supply of goods also depends on the type of techniques used for production.
Outdated techniques result in low production, which further decreases the supply of goods.
Factor prices and their availability: The production of goods is dependent on the factors of production,
such as raw material, machines and equipment, and labour. An increase in the prices of the factors of
production increases the cost of production. This will make 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 a
product to a large extent. Ex: 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 restrict the supply of his/her goods
with an aim to raise the prices of goods and increase profits. On the other hand, in case of a perfectly
competitive market structure, there would be a large of number of sellers in the market. Consequently, the
supply of a product would increase.
Supply Function
Supply function is the mathematical expression of law of supply. In other words, supply function
quantifies the relationship between quantity supplied and price of a product, while keeping the other factors
atconstant. The law of supply expresses the nature of relationship between quantity supplied and price of a
product, while the supply function measures that relationship.
Qs = f (P, Pr, Pf, T, Tp)

Where,
Qs = Supply, P = Price of the good supplied, Pr = Price of other goods, Pf = Price of factor input
T = Technology, Tp = Time Period

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.
Thus, the law of supply states a direct relationship between the price of a product and its supply.
Therefore, both price and supply moves in the same direction. To understand the law of supply, it is
important to discuss the concepts of demand schedule and demand curve.
Supply Schedule
Supply schedule can be defined as a tabular representation of the law of supply. It represents the
quantities of a product supplied by a supplier at different prices and time periods, keeping all other factors
constant.
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. Let us
understand the supply schedule with the help of an example.
The following table shows the supply schedule of a firm supplying commodity A:
Price of the product A Demand of the product A
5 3000
10 8000
15 12000
20 15000
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.
Assumptions in Law of Supply

• 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 of all 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.
• Expectations of producers and the government policy do not change over a period of time.
************
Descriptive questions:
PART-A
1. Demand and conditions of demand
2. Elasticity
3. Elasticity of demand
4. Law of demand
5. Demand schedule and curve
6. Price elasticity
7. Assumptions of law of demand
8. Demand forecasting
9. Features of demand forecasting
10. Law of supply
11. Factors determining the demand
12. Factors determining the supply
13. Experts opinion method of demand forecasting
14. Survey methods of demand forecasting
15. Trend projection method of demand forecasting
PART –B
1. What is meant by elasticity of demand? How do you measure it? What are determinates of elasticity
of demand?
2. What is the utility of demand forecasting? What are the criteria for a good forecasting method?
Forecasting of demand for a new product? ‘ Economic indicators’
3. What is promotional elasticity of demand? How does if differ from cross elasticity of demand.
4. Explain in law of demand. What do you mean by shifts in demand curve?
5. What is cross elasticity of demand? Is it positive for substitute or complements? Show in a diagram
relating to the demand for coffee to the price of tea?
6. Income elasticity of demand and distinguish its, various tapes. How does it differ from pure elasticity
of demand?
7. What is meant by demand? Everyone desires a Maruti 800 Car – Does this mean that the demand for
Maruti Car is large?

8. Calculate price elasticity of demand:

Q1= 4000 P1= 20
Q2= 5000 P2= 19

9. What is demand analysis? Explain the factor influencing the demand for a product? What are the
various factors that influence the demand for a computer?
10. What is supply? Explain assumptions.
11. Explain supply schedule and curve.
12. What are the features of good demand forecasting?
13. Explain measurements of elasticity of demand.
14. Briefly explain various factors affecting elasticity of demand.
15. Explain steps in demand forecasting.
Objective Questions
Multiple choice questions:
1. Who explained the “Law of Demand”
(a) Joel Dean (b) Cobb-Douglas (c) Marshall(d) C.I.Savage & T.R.Small
2. Demand Curve always sloping.
(a) Positive (b) Straight line (c) Negative (d) Vertical
3. Geffen goods, Veblan goods and speculations are exceptions to .
(a) Cost function (b) Production function
(c) Law of Demand (d) Finance function
4. Who explained the “Law of Demand”?
(a) Cobb-Douglas (b) Adam smith (c) Marshall (d) Joel Dean
5. When PE = ∞ (Price Elasticity of Demand is infinite), we call it .
(a) Relatively Elastic (b) Perfectly Inelastic
(c) Perfectly Elastic (d) Unit Elastic
6. Income Elasticity of demand when less than ‘O’, it is termed as .
(a) Income Elasticity less than unity (b) Zero income Elasticity
(c) Negative Income Elasticity (d) Unit Income Elasticity
7. The other name of inferior goods is .
(a) Veblan goods (b) Necessaries
(c) Geffen goods (d) Diamonds
8. Estimation of future possible demand is called .
(a) Sales Forecasting (b) Production Forecasting
(c) Income Forecasting (d) Demand Forecasting
9. How many methods are employed to forecast the demand
(a) Three (b) Four (c) Two (d) Five

10. What is the formula for Price Elasticity of Demand?
(a) % of change in the Price (b) % of change in the Demand

% of change in the Demand % of change in the Income
(c) % of change in the Demand (d) % of change in the Demand of ‘X’
% of change in the Price % of change in the Price of ‘Y’
11. When a small change in price leads great change in the quantity demand, we call it_
(a) Inelastic Demand (b) Negative Demand
(c) Elastic Demand (d) None
12. When a great change in price leads small change in the quantity demand, we call it
(a) Elastic Demand (b) Positive Demand
(c) Inelastic Demand (d) None
13. “Coffee and Tea are the goods”.
(a) Relative (b) Complementary
(c) Substitute (d) None
14. Consumers Survey method is one of the Survey Methods to forecast the .
(a) Sales (b) Income
(c) Demand (d) Production
15. What is the formula for Income Elasticity of Demand?
(a) % of change in the Income (b) % of change in the Demand

% of change in the Demand % of change in the Price
(c) % of change in the Demand (d) % of change in the Demand of ‘X’
% of change in the Income % of change in the Price of ‘Y’
16. What is the formula for Cross Elasticity of Demand?
(a) % of change in the Price of ‘X’ (b) % of change in the Demand

% of change in the Demand of ‘Y” % of change in the Price
(c) % of change in the Demand of ‘X’ (d) % of change in the Demand
% of change in the Price of ‘Y’ % of change in the Income
17. When PE = 0 (Price Elasticity of Demand is Zero), we call it .
(a) Relatively Elastic demand (b) Perfectly Elastic demand
(c) Perfectly Inelastic demand (d) Unit Elastic demand
18. When PE =1 (Price Elasticity of Demand is one), we call it .
(a) Perfectly Elastic demand (b) Perfectly inelastic demand
(c) Unit elastic demand (d) Relatively Elastic demand
19. When Income Elasticity of demand is Zero (IE = 0), It is termed as .
(a) Negative Income Elasticity (b) Unit Income Elasticity
(c) Zero Income Elasticity (d) Infinite Income Elasticity

Fill in the blanks:

1. The tabular representation of the relationship between the price and the demand of the commodity is
Demand Schedule.
2. Factoring is a financial service in which the business entity sells its bill receivables to a third party
at a discount in order to raise funds.
3. If there is a shortage of a product there is too much demand and not enough supply of the product.
4. Economic efficiency also means supply equals demand.
5. The law of demand states that the quantity of a good demanded varies inversely with its price.
6. The law of demand states that other things remaining the same, the higher the price of a good, the
smaller is the quantity demanded.
7. The law of demand implies that demand curves slope downwards.
8. A complement is a good used in conjunction with another good.
9. The demand curve for normal good shifts leftward if income decreases or the expected future price
falls.
10. Normal goods are those for which demand decreases as income decreases.
11. An inferior good is a good for which demand decreases when income increases.
12. A fall in the price of a good causes producer to reduce the quantity of the good they are willing to
produce is law of supply.
13. The registration of the cooperative society is compulsory.
14. Earning Profit is the objective of the sole trade.
15. The utility derived from the last consumption of a unit is termed as marginal utility.

Demand and Elasticity

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Demand and Elasticity

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Business Economics and Financial Analysis Unit -II

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Different types or measurements of price of elasticity of demand

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Types of Income Elasticity of Demand

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

The following graph shows the zero income elasticity of demand:

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

4. Advertisement Elasticity of Demand: The advertisement elasticity of demand is a degree of

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

The concept of elasticity of demand is of much practical importance.

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

The life of perishable goods is very less, may he in hours or days.

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Qd = f ( P, I, T&P, Ce, Cp, Sp, Ep, Ei, Et, Epr, o)

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

The following table is a demand schedule.

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Features or characteristics of Demand Forecasting

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

(b) Barometric techniques

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Qs = f (P, Pr, Pf, T, Tp)

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Assumptions in Law of Supply

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

• The time period under consideration is short.

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

8. Calculate price elasticity of demand:

Q2= 5000 P2= 19

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

10. What is the formula for Price Elasticity of Demand?

(a) % of change in the Price (b) % of change in the Demand

(a) % of change in the Income (b) % of change in the Demand

(a) % of change in the Price of ‘X’ (b) % of change in the Demand

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Fill in the blanks:

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

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