DEMAND Desire refers to the mere wish of @ person to have a particular commodity. A desire becomes 2 demand only when itis ‘effective’ which means that, given the 19 and able to pay for the towards @ purchasing a demand can be defined as the amount of commodity that a consumer will purchase or will be ready to purchase at various given prices during a specific period. This period may be a day, month, year, or any given time period. The three things essential for a desire for 2 commodity to become effective demand are: desire for a commodity willingness to pay ability to pey for the commodity For instance, demand for Mercedez Benz cen be considered as demend only when it is backed by desi \gness, and ability to pay. Quantity Demand: Quantity demanded refers to the willingness of consumers to buy a specific quantity of a specific product or service at a specitic price. Utility: Utility refers to the want satisfying poner of a commodity. TYPES OF DEMAND In economics, Demand is generally classified besed on verious f number of consumers for a given product, the nature of products, the products, and the interdependence of different demands. The various types of demand are 1. Price demand 2. Income demand 3. Cross demand Individual demand and Market demand Joint demand Composite demand Nowe Direct and Derived demand 1.Price Demand Price Demand is a demand for different quantities of a product or service that consumers intend to purchase at a given price and time period assuming other factors, such as prices of the related goods, level of income of consumers, and consumer preferences, remain unchanged. Price demand is inversely proportional to the price of a product or service. As the price of a product or service rises, its demand falls end vice versa. Therefore, price demend indicates the functional relationship between the price of a product or service and the quantity demanded. Price demand can be mathematically expressed as follows DA=f (PA) where, DA=Demand for product A f= Function PA-=Price of product A 2. Income Demand Income demand is a demand for different quantities of a commodity or service that consumers intend to purchase et different levels of income assuming other factors remain the same. , the demand for e commodity or service increases with an increase in the \come of individuels except for inferior Goods. Therefore, demand and ‘ectly proportional to normal goods whereas dem: ncome are ‘The relationship between demand and income can be mathematically expressed as, follows. Da= (Ms) where,D.= Demand for commodity A =Funetion Ya= Income of consumer A 3. Cross Demand: Cross demand refers to the demand for different quantities of a commodity or service whase demand depends not only on Rs awn price Duk also the price af other related commodities or services For example, tea and coffee are considered to be the substitutes of each other. Thus, ‘when the price of coffee increases, people switch to tea. Consequently, the demand for tea increases. Thus, it can be said that tea and coffee have cross demand, Mathematically, ross demand can be expressed as follows Dy= (Pale where, Dy= Demand for commodity A f=Function p= Price of commodity B 4,Joint Demand 12 quantity demanded for two or more commodities or services ly and are, thus demanded together. For example, car and petrol, bread and butter, pen and refill, etc. are commodities ‘that are used jointly and are demanded together. The demand for such com changes proportionately. For example, a rise in the demand for cars results in a proportionate rise in the demand for petrol However, in the ease of joint demand, rise in the price of one commodity results in {he fall of demand for te other commodity. In the above example, an increase in the price of cars will cause a fall in the demand of not only of ears but also of petrol. 5.Composite Demand Composite Demand is the demand far commodities ar services that have muttiple Uses. For example, the demand far steel is a result of its use for various purposes like making utensils, car bodies, pipes, cans, etc In the case of a commodity or service having composite demand, a change in price recuits in a large change in the demand, This is because the demand for the commodity of service would change across its verious usages. In the above example, if the price of steel increases, the price of other products made of steal also increases. In such a case, people may restrict their consumption of products made of steel 6.Direct Demand Direct demandis the demend for commodities or services meant for final consumption. This demand arises out of the natural desire of an individual to consume a particular product For exemple, the demand for food, shelter, clothes, and vehicles is direct demand as it arises out of the biological, physical, and other personal needs of consumers, 7.Derived Demand Derived demand refers to the demand for a product that arises due to the demand for other products. For example, the demand for cotton to produce cotton fabrics is derived demand. Derived demand is applicable to manutacturers’ goods, such as raw materials, intermediate goods, or machines and equipment. Apart from this, the factors of production (land, labour, capital, and enterprise) also have derived demand. For example, the demnand for labour in the construction of buildings is a derived demand INDIVIDUAL DEMAND Individual demand refers to the demand for a good or a service by an individuel (or a isehold), Individual derrand comes from the interaction of an individual's desires with the quantities of goods and services that he or she is able to afford. By desires, we mean the likes and dislkes of an individual Individual Demand Function: Individual demend function refers to the functional relationship between individual demend and the factors affecting individual demand. It is expressed as: D(f) =f (Px, Pr, Y,T, F) where, Ds = Demand for Commodity x; Py = Price of the given Commodity x; P:= Prices cf Related Goods; Y = Income of the Consumer 7 = Tastes and Preferences: E = Expectation of Change in Price in future: On the basi of the income of a customer, the geods can be further classitied into: Inferior Goods ics, inferior goods do net mean sub-standard goods but is related to the yy of the goods. Such goods are called inferior goods and have better quality alkematives. The demand for inferior goods is mostly determined by explained by different reasens, such a3 prestigious socioeconomic status.‘Normal Goods Normal goods are type of goods whose demand shows a direct relationship with a consumes income. it means that the demand for normal goods increases with an increase in the consumers income or expansion of the economy (which generally will norease the income ofthe population). As income increases, consumers may be able to afford goods that were not previously available to them, In such a case, the demand for the goods increases due to their attractiveness to consumer. It may be explained by the higher qualty ofthe goods, higher functionality, or more prestigious socioeconomic value BASIS FOR ay NORMAL GOODS INFERIOR GOODS Meaning Normal goods are the Inferior goods are the ‘goods whose demand Demand Curve Income E sticity —Pasitive Negative Relationship Inverse Relationship between income changes and demand curve Direct Relationship Praterrad when Prices ara low Prices are high Examples iphone, LG LED TV, etc. Coarse Cloth, Cycle, ete. MARKET DEMAND Market deman refers othe demand of all consumers of a good or service at 9 So, the market demand function canbe expressed a! Bq) = (Pu Py YT E PB) P= Price of given commodity x = Sizeand Gompositon ofthe population 0-os LAW OF DEMAND, The Law of Demand expresses the functional relationship between the price and the quantity of the commodity demanded According to the Law of Demand: “If the price of a commodity fails, the quantity demanded of the commodity will rise, and if the price of a commodity rises, the quantity demanded of the commodity will decline, while other things rem constant’ The other things include the Income of the consumer, the taste, and preferences of the consumer, and the prices of the related goods. The constancy of these other things is an important qualification of the law of demand. According to the Law of Demand, the price and demand of a commodity are inversely related, provided all other things remain unchanged. ‘The Law of Demand represents the negative relationship between price and demand, DEMAND SCHEDULE A demand schedule is a tabular form of describing the relationship between quantities demanded of a good in response to its price per unit, while all non-price variables remain unchanged. A demand schedule has two columns, namely 1. price per unit of the good (Px) I. quantity demanded per period (0x)‘ice par unit of Commodi X ‘Guanty Demanded of Commodi X t (Wnty = ae o 2000) © 700 DEMAND CURVE ‘The law of demand can also be presented through a curve called the demand curve. The demand curve is locus of points showing various ‘lternative price quantity combinations. It showe the quantities of a ‘Commodity that oncumers or usere would buy at aferent prices pet Lnitof time under the aseumptions of the taw of demana “The Law of demand is gener However, the fliowing exce pointed! Goods having Prestige Value: One exception tothe law of demand Is associated with the name of an economist Thorstein Veblen 10 the law of demandhave been ‘who put forward the view of conspicuous consumption. According 10 Veblen, someconsumers measure the utility of a commodity entirely by its price ie. for them, the greater the price of a ‘commodity the greater its utility. Diamonds are often given as an ‘example of this case, Diamonds are considered prestige goods in society and for the upper strata of society the higher the price of «diamonds, the higher is their prestige value and therefore the greater their utilly or desirability of them, In this case, the consumer will uy less of diamonds at a ow price because with the fallin price their prestige value goes down, ‘On the other hand, when the price of diamonds goes up, their Prestige value will go up and therefore their utilty and desirabilty. ‘Asa result at ahigher price, the quantity demanded of diemonds bya consumer will increase, Giffen Goods: Another exception to the lav oF demand was Pointed out by Sir Robert Giffin who observed that when the price of bread increased, the low-paid British workers in the early 19th century purchased more bread and not less of it, and this was contrary to the law of demand described above The reason given for this is that Giffen goods are inferior goods in whose case the negative income effect is very large Which more than offset the substitution effect. So, in their case quantity demanded varies directly with the price. But is important to note that when with the rise in the price of a commodity, its quantity demanded increases, and with the fallin the price of a commodity, its quantity demanded decreases, as in the case of Giffen goods, the demand curve will slope upward to the right and not downvvard Ignorance: In some cases, the consumers suffer from the false Notion thet a higher priced good is of better quality. This happens ‘mainly in the case of those goods where a typical consumer is not able to judge the quality easily. In such cases, the sellers may be able to sell more not by lowering the price but by raising it. Change in Fashion/Trend: A change in fashion and tastes affects the market for a commodity. When a broad toe shoe replaces a Narrow toe, no amount of reduction in the price o’ the letter is sufficient to clear the stocks. Broad toe, on the other hand, wi have more customers even though its price may be going up. The law of demand becomes ineffective. Necessity Goods: We cannot reduce the consumation of necessaries of life and conventional necessaries even if their prices have increased sharply. Articles of Distinction: According to Prof. Veblen articles of distinction such as diamonds, gems, costly carpets, ete, are in more demand when their prices are high. The reason is that rich people measure the desirability of these articles in terms of their prices alone and consider these goods as honor possession Therefore, rich people demand more articles of dstinction when their prices are high. INCOME ELASTICITY OF DEMAND. Income elastic of demands @ measure ofthe responsiveness ofthe {uantty demanded to a change in consumer income. The laity of demand measures how facto suchas price and income fect the demand fora commodity Te income elasticity of lemand measures how the change i a consumer's income affects the mand for a commodity I, the income elasticity of demand canbe stated as: E,= Change n Quant Demanded ‘Change in ene Mathemati ‘TYPES OF INCOME ELASTICITY OF DEMAND Simiar to herpes of pce esti of demand, the degree of responsiveness of demand win a change a consune'sncameis nt always thesame, Typesof eame Basti of Demand 1. Postveneome clstii of demand 2 Negatveincome catty of demand 3. Zeroinemelastty of demandPositive Income Elasticity of Demand When a proportionate change in the income of @ consumer increases the demand for a product and vice versa, the income elasticity of demand is said to be positive. In the case of normal goods, the income elasticity of demand is generally found positive. In Figure, 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 (0Q to 01) as a result of arise in income (OB to 0A). Types of Positive Income Elasticity of Demand There are three types of positive income elasticity of demand: 1. Unitary income elasticity of demand 2. Less than unitary income elasticity of demand 3, More than unitary income elasticity of demand Unitary Income Elasticity of Demand The income elasticity of demand is said to be unitary when a proportionate change in an (increase) for a product Eyl Less than Unitary Income Elasticity of Demand The income elasticity of demand is said to be less ther unitary when a proportionate change in a consumer's income causes comparatively less increase in the demand for a product. Eve More than Unitary Income Elasticity of Demand ‘The income elasticity of demand is said to be more than unitary when a proportionate change in a consumer's income causes a comparatively large increase in the demand for a product Ey Negative Income Elasticity of Demand When a proportionate change in the income of consumers 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 the case of inferior goods.In Figure, DYDY is the curve representing the negative income elasticity of demand, The curve is sloping downwards from left to the right, which shows a decrease in demand as a result of a rise in income. As shown in Figure, with a rise in income from 10 to 30, the demand falls from 3 to 2 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, the income elasticity of demand is said to be zero. It generally occurs for utility goods such as salt, kerosene, and electricity. In Figure, DYDY is the curve representing zero income elasticity of demand. The curve is parallel to the Y-axis which shows no change in the demand as a result of arise in income. DEMAND FORECASTING Demand forecasting serdoss ina a process of predicting the demand for an organization's products or ime period in the future, Demand forecasting Ie hell for both new ing organizations inthe market Demand forecesting anabiee an ergenisation to arrange forthe requirad input 98 per the predicted demand, without any wastage of materials and ume DEMAND FORECASTING TECHNIQUES Methods of demand forecasting ara broadly categorized into two types Qualitative Techniques include Survey Methods Quantitative Techniques include Time Series Analysis SURVEY METHODS Under this approach, surveys are conducted about the intentions of consumers (individuals, firme or industries), opinions of exports or of markots. ‘When taking sample surveys, a selected subset is surveyed and through study, inferences are drawn. These mothods aro usually suitable for chort term forecasts due to tho natura of consumers’ intentions, Some of the survey methods include: Consumer Survey Method Market Experiment Method Expert Opinion Nethod 8 Consumer Survey Method under hod, a sample of potential buyets are chosen se! chosen are interviewed tically and only those vrhen the demand needs 10 be forecasted in the short run, say 2 year, then the most feacible method is to ask the customers cirectly that whet are they intending to buy in the forthcoming time period, Thus, under thie method, potential customers are directly Interviewed. Market Experiment Method Under this method, the demand ts forecasted by conducting market studies and experirrents on consumer behaviour under actual but controlled, market conditions. Cartain determinants of damand that can be varied are changed and the experiments are done keeping other factors constant. Under this method, the main determinants of the demand of a product like price, advertising, product design, packaging, quality, ete., are Identified ‘These factors are then varied separately over different markets or over different t periods, nelaing other factors ©: Is studied under actual or contr purpose. However, this method is very expensive and time-consuming, © Expert Opinion Method Usually, market experts have explicit knowledge about the factors affecting demand. Their opinion can help in camand forecasting, The Delphi technique, developed by Olat Heime” Is one such method, Under this method, experts are given a series of carefully designed quostionnaires and are asked to forecast the demand. They are also required :o give the sultable reasans. Thepions ate shared hth empets oat at acondsin Tiss fastandcheap technique STATISTICAL METHODS “These methods mle use ft tate sees or rose et) a bas fr quate atonstip to aie atte re cama pats and trends. Thedetamay lobe atl sed through erate mde ‘Tas ae uel forlorn forecasting fol products and forges of axa They ae based on scenic es of estiatn, hich at lngical unbiased and rved io be useful Hove te bigest datvartage thai fut py these mato EL TineSates Anajis Tis methods wel where th ganze has sufficient amount of accurate past cataftte sas. Thi dates ranged conlogealt ob time eri, Tu, the testis dei he past en andonthebasis fhe fue ma |reticed Itis assumed thatthe past trend wll continue in the future. ‘Thus, on the basis ofthe predicted funure tend, the demand for @product or service is ‘frecasted, tees the dmc pace of steady mre of phenomenon, oa eid of tne ‘CONSUMER EQUILIBRIUM Consumer Equitrium refers toa stuation where the consumer has achieved the matimum possible satisfaction from the quantity ofthe commas pucased given his/her income an the prices ofthe commodities inte market INDIFFERENCE SCHEDULE An indifference schedules a statement of various combinations of two commodities that will equally be accepted by the consumer. The various combinations give equal satisfaction tothe consumer. Therefore, he is indifferent to varius combinations. Letus assume thatthe consumer buys two commodities -benanas and biscuits. Then te indifference schedule willbe Indifference Schedule GoodX | Goody (Biscuits) (Banana) A 7 2 8 2 8 c 3 3 D 7 3 E 5 z INDIFFERENCE CURVE ‘An indifference cure, with respect toto commodities, isa graph showing those combinations ofthe two commodities that leave the consumer equaly well off or equalysatsfied~hence indifferent—in having any combination on the curve. The data in the indifference schedule can be representedin the graph with one commotity an the X-axis and another commodity onthe V-axis ‘The various combinations ofthe two commodities ae plotted and joined ference curve showing combinations of the two commodities given in the schedule represents a higher satis 2 Curves are convex 0 theo 2 Curves do not intersect Inciffecence curve does not touch the X-exis orthe Y-axis 1 Indifference Curves are downward sloped ‘The indifference curves are sloped downwards othe right, The reason for the downward slope is that as a consumer increases the consumption of commodity X he she sacrifices same units af ommactty Yin order to ‘maintain the game level of satisfaction, To increase the quantity of X goad from OX to OX1, the consumer has to reduce the quantity of good ¥ from OY to OVI 11 Higher IC represents a higher satisfaction levelA higher IC lying above anc'to the right of another IC implies @ higher le of satisfaction and vice versa. In simple words, the combination of commodities cn the higher IC Is preferred by a consumer to the Combination trat lies on a lower IC. Since Ais on ahigher indifference curve and to the right of N, the Consumer wil be having more of both the goods X and Y. Even ifthe tw points on these curves are on the same plane as Mand A, the consume will prefer the latter combination, because he will be having more of gor X though the quantity of goods ¥ is the same 8 Indiffereice Curves are convex to the origin ICs are curvedinwards; thus, they are convex to the origin. This implies as the consumer continues to substitute commodity X for commodity Y MRS (Marginal Rate of Substitution) of X for ¥ diminishes along the IC. ‘The MRS (Marginal Rate of Substitution) for two substitute goods X an may be defined as the quantity of commodity X required to replace one of commodity ¥ (or quantity of commodity ¥ required to replace one un X) such that the derived from either combination remains the sant MRS of X and ¥ is denoted as AY/ AX as It continues to diminish as the consumer continues to substitute X for ¥ or vice versa, MRSy.x (or MRSxy) decreases which means that the quantity of @ commodity an individual is willing to give up for an additional unit of the other commodty continues to decrease with each substitution. v Comm ¥ oro 8 Indifference Curves do not intersect This can be expiained by considering a hypothetical situation where two indifference curves intersect. The point of intersection would then imply ‘that 8 combination of commodities on the higher curve would offer the same level of satisfaction as that on the lower indifference curve, which Violates the basic assumption of ICs Point A on thel: curve indicates a higher level of satisfaction than point B ‘on the le curve as it lies farther away from the origin. But point C which lies ‘on both the curves yields the same level of satisfaction as point A and B Thus, on the curve li: A=C and on the curve IgB=C ATB This is absurd because A is preferred to B, being on a higher indifference curve |: Since each indifference curve represents a different level of satisfaction, indifference curves can never intersect at any point, The same reasoning applies if two indifference curves touch each other at point ¢ in Panel (8) of the figure. [Indifference curve does not touch the X- axis or the Y-axis An indifference curve cannot touch either axis fit touches X-axis, as 12 at U, the consumer willbe having OM quantity of good X and none of Y. Similaiy, if an indifference curve | touch the taxis at L, the consumer will have only OLof Y good and no amount of X. Such curves are in contradiction to the assumption that the consumer buys tiwo goods in combinationsCHANGE IN QUANTITY SUPPLIED Change in quantity supplied occurs due to rise or fallin product prices while other factors are constant. It can be measured by the Movement along Supply Curve, The term, change in quantity supplied refers to expansion or contraction of supply, Expansion or extension of Supply: When there are large quantities of ‘8 good supplied at higher prices It is known as expansion or extension of supply. 1) Expansion of Supply 1 Contraction Of Supply Contraction of supply occurs when smaller quantities of goods are supplied even at reduced prices. 2) Contraction of Supply Price ELASTICITY OF SUPPLY Elasticity of supply is a measure of the degree of change in the quantity supplied of a commodity in response to a change in its price The supply of a commodity is said to be elastic when as a result of a change in price, the supply changes sufficiently as a quick response. Contranly, if there is no change or negligible change in supply or supply pays no response. it is elastic Mathematical , the elasticity of supply is expressed as: Po tage chongy n quantity supped = _Porwontage change spliod of commodity X dity X Percentage change in price of con Percentage change in quantity supplied = quantity($) ity supplied (S) oF os OP 5? “APS TYPES OF ELASTICITY OF SUPPLY Based on the rate of change, the types of price elasticity of supply is grouped into five main categories as follows: Perfectly elastic supply Perfectly Inelastic Supply Relatively Elastic Supply Relatively Inelastic Supply Unitary Elastic Supply eaeno1, Perfectly Elastic Supply When a proportionate change (nereese/ decrease) nthe price ofa commodity results in anincrease/decrease of quantty supplied tis called a perfectly eesti supply. E00 Ths tuations imaginary as there sno such commodty whose supply isperectly esti count @ 2. Perfectly Inelastic Supply The quantity supplied does not change with respect toa proportionate change inthe price of a product. nother words, the quantity supplied remains constant atthe change in price when supply is perfectly inelastic, E-0 However, tis situation is imaginary as there can be no commodity ‘whose supply could be perfectly inelastic 3. Unitary Elastic Supply ‘When the proportionate change in the quantity supplied is equal to the proportionate change in the price of a preduct, the supply is unitary elastic. Eat 4, More than Unitary Elastic The elasticity of supply is said to be more than unitary when a proportionate change in a price of commodity causes increase in the supply of a commodity —* 5. Les than Unitary Elastic The lst of sup isa eles than uty when a potion changin pce of commody causes compact ss ineaseinthe sup of comma. if Pra