M.TULASINADH MBA.,(Ph.D)Research Anayst

DEMAND ANALYSIS

Demand for a commodity refers to the quantity of the commodity which an individual consumer is willing to purchase at a particular time at a particular price.

A product or service is said to have demand when three conditions are satisfied. (a) Desire to acquire - Desire of the consumer to buy the + Product (b) Willingness to pay - His willingness to buy the product and (c) Ability to pay - Ability to pay the specified price for it.

Types of Demand: (1) Consumer goods v/s producer goods:

2. Autonomous Demand v/s Derived Demand:3. Durable Goods v/s Perishable Goods:4. Firm Demand v/s Industry Demand :Firm Demand :

5. New Demand v/s Replacement :6. Total market and segment market demand :Total Market Demand:Factors determining the Demand (or)Demand Determined The demand for a particular product depends on several factors. The following factors determine the demand for a given product.(a) Price of the product (P)(b) Income of the consumer (I)(c) Taste and performance of the consumer (T)(d) Price of related goods (Substitute or complementary) (Pr)(e) Expectations about the prices in future (Ep)(f) Expectations about the income in future (Ei)(g) Size of the population (Sp)(h) Distribution of consumers over different regions (Dei)(i) Advertising effort (Ac)(j) Any other factors capable of affecting the demand (O)

Demand Function: A mathematical expression of the relationship between quantity demanded of the commodity and its determinants. Demand function is a function which describes the relationship between demand and its determinants. Qd = f (P, I, T, PR, EP, EI, SP, DC, A, O)Where Qd = Quantity of demand P = Price of the product I = Income of the consumer T = Tastes and preference PR = Price of related goods EP = Expected price of the product in future

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EI = Expected income of the consumer in future SP = Size of the population DC = Distribution of consumers over various regions A = Advertisement expenditure O = Any another factor which influence the demand

LAW of Demand:

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.The law of demand may be explained with the help of the following demand schedule.Demand Schedule.

Price of Appel (In. Rs.) Quantity Demanded10 18 26 34 42 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.

Price

M.TULASINADH MBA.,(Ph.D)Research AnaystThe demand curve DD shows the inverse relation between price and quantity demand of apple. It is downward sloping.

Assumptions:Law is demand is based on certain assumptions:

1. This is no change in consumers taste and preferences.2. Income should remain constant.3. Prices of other goods should not change.4. There should be no substitute for the commodity 5. The commodity should not confer at any distinction6. The demand for the commodity should be continuous7. People should not expect any change in the price of the commodity

Exceptions to the law of Demand: There are certain exceptions to the law of demand in other words, the law of demand is not applicable in the following cases.(1) Giffen Goods: People whose incomes are low purchase more of a commodity such broken rice, bread, potato (which is their staple food) when its prices rises. Inversely 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 giffen goods.(2) Veblen Goods: Products such as jewels, diamonds and so on confer distinction on the part of the user. In such case, the consumers tend to buy more goods when price increased, and less purchase when price decreased. Such goods are called Veblen Goods.

(3) Where there is a shortage of necessities: If the consumers fear that these could be shortage of necessities, then this law of demand does not applicable. They may tend to buy more than what they require immediately, even if the price of the product increases.(4) In case of ignorance of price changes: When the customer is not familiar with the changes in the price, he tends to buy even if there is increase in price.

Why demand curve falls When a consumer buys more units of a commodity, the marginal utility of such commodity continue to decline. The consumer can buy more units of commodity when its price falls and vice versa. The demand curve falls because demand is more at lower price.Price effect:When there is increase in price of commodity, the consumers reduce the consumption of such commodity. The result is that there is decrease in demand for that commodity. The consumers consume mo0re or less of a commodity due to price effect. The demand curve slopes downward.Income effectReal income of consumer rises due to fall in prices. The consumer can buy more quantity of same commodity. When there is increase in price, real income of consumer falls. This is income effect that the consumer can spend increased income on other commodities. The demand curve slopes downward due to positive income effect.

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Same price of substitutesWhen the price of a commodity falls, the prices of substitutes remaining the same, consumer can buy more of the commodity and vice versa. The demand curve slopes downward due to substitution effect.Demand of poor peopleThe income of people is not the same, the rich people have money to buy same commodity at high prices. Large majority of people are poor, they buy more when price fall and vice versa. The demand curve slopes due to poor people.Different uses of goodsThere are different uses of many goods. When prices of such goods increase these goods are put into uses that are more important and their demand falls. The demand curve slopes downward due to such goods.

ELASTICITY OF DEMAND

In the words of Marshall, The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in the price and diminishes much or little for a given rise in PriceElastic 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.

Types of Elasticity of Demand:There are three types of elasticity of demand:

1. Price elasticity of demand2. Income elasticity of demand3. Cross elasticity of demand

1. Price elasticity of demand:Marshall was the first economist to define price elasticity of demand. Price elasticity of demand measures changes in quantity demand to a change in Price. It is the ratio of percentage change in quantity demanded to a percentage change in price.

Proportionate change in the quantity demand of commodity Price elasticity = ------------------------------------------------------------------ Proportionate change in the price of commodityThere are five cases of price elasticity of demand

A. Perfectly elastic demand: E=B. Perfectly Inelastic Demand In this case E=0.C. Relatively elastic demand:. In this case E > 1. D. Relatively in-elastic demand. Here E < 1E. Unit elasticity of demand E=1

2. Income elasticity of demand:

M.TULASINADH MBA.,(Ph.D)Research AnaystIncome elasticity of demand shows the change in quantity demanded as a result of a change in income. Income elasticity of demand may be slated in the form of a formula.

Proportionate change in the quantity demand of commodity Income Elasticity = ------------------------------------------------------------------ Proportionate change in the income of the peopleIncome elasticity of demand can be classified in to five types.

A. Zero income elasticity:it can be expressed as Ey=0B. Negative Income elasticity: i.e., Ey < 0.c. Unit income elasticity: Ey = 1d. Income elasticity greater than unity: Ey > 1.E. Income elasticity leas than unity : In this case E < 1.3. Cross elasticity of Demand:A change in the price of one commodity leads to a change in the quantity demanded of another commodity. This is called a cross elasticity of demand. The formula for cross elasticity of demand is:

Proportionate change in the quantity demand of commodity X Cross elasticity = ----------------------------------------------------------------------- Proportionate change in the price of commodity Y

Factors influencing the elasticity of demandElasticity of demand depends on many factors.1. Nature of commodity:

2. Availability of substitutes:3. Variety of uses:

4. Postponement of demand:

5. Amount of money spent:6. Time:7. Range of Prices:Importance of Elasticity of Demand:The concept of elasticity of demand is of much practical importance.1. Price fixation:

2. Production:

3. Distribution:4. International Trade:

5. Public Finance:

6. Nationalization:

Demand Forecasting

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Forecast: A prediction, projection, or estimate of some future activity, event, or occurrence.According to Cundiff and Still Demand forecast is an estimate of sales during a specified future period which is tied a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces

1. Opinion Polling Method:In this method, the opinion of the buyers, sales force and experts could be gathered to determine the emerging trend in the market.

The opinion polling methods of demand forecasting are of three kinds:

(a) Consumers Survey Method or Survey of Buyers Intentions:In this method, the consumers are directly approached to disclose their future purchase plans. I his is done by interviewing all consumers or a selected group of consumers out of the relevant population.. (i) Complete Enumeration Survey:Under the Complete Enumeration Survey, the firm has to go for a door to door survey for the forecast period by contacting all the households in the area. This method has an advantage of first hand, unbiased information, yet it has its share of disadvantages also. The major limitation of this method is that it requires lot of resources, manpower and time.

(ii) Sample Survey and Test Marketing:

Under this method some representative households are selected on random basis as samples and their opinion is taken as the generalized opinion. This method is based on the basic assumption that the sample truly represents the population. If the sample is the true representative, there is likely to be no

M.TULASINADH MBA.,(Ph.D)Research Anaystsignificant difference in the results obtained by the survey. Apart from that, this method is less tedious and less costly.

(iii) End Use Method or Input-Output Method:

This method is quite useful for industries which are mainly producers goods. In this method, the sale of the product under consideration is projected as the basis of demand survey of the industries using this product as an intermediate product, that is, the demand for the final product is the end user demand of the intermediate product used in the production of this final product.

(b) Sales Force Opinion Method:

This is also known as collective opinion method. In this method, instead of consumers, the opinion of the salesmen is sought. It is sometimes referred as the grass roots approach as it is a bottom-up method that requires each sales person in the company to make an individual forecast for his or her particular sales territory.

(c) Experts Opinion Method:This method is also known as Delphi Technique of investigation. The Delphi method requires a panel of experts, who are interrogated through a sequence of questionnaires in which the responses to one questionnaire are used to produce the next questionnaire.

2. Statistical Method:

Statistical methods have proved to be immensely useful in demand forecasting. The important statistical methods are:(i) Trend Projection Method:A firm existing for a long time will have its own data regarding sales for past years. Such data when arranged chronologically yield what is referred to as time series. Time series shows the past sales with effective demand for a particular product under normal conditionsTime series has got four types of components namely, Secular Trend (T), Secular Variation (S), Cyclical Element (C), and an Irregular or Random Variation (I). These elements are expressed by the equation O = TSCI. Secular trend refers to the long run changes that occur as a result of general tendency.

The trend can be estimated by using any one of the following methods:(a) The Graphical Method,(b) The Least Square Method.a) Graphical Method:This is the most simple technique to determine the trend. All values of output or sale for different years are plotted on a graph and a smooth free hand curve is drawn passing through as many points as possible.

(b) Least Square Method:

Under this method sales estimation are prepared on the basis of analysis of past data. The least square method is based on the assumption that the past rate of change of the variable under study will continue in the future.

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The estimated linear trend equation of sales written as : S=X+Y(T) X&Y CALCULATED FROM PAST DATA. SSALES, T---- THE YEAR NUMBER FOR WHICH THE FORECAST IS MADE.

C) MOVING AVERAGE METHOD--- under this method , the moving average of the sales of the past years is computed. The computed moving average is taken for the next year or period.

(ii) Barometric Technique:

It is also known as leading indicators forecasting. National bureau of economic research of U.S.A has identified three types of indicatorsLeading indicators, coincidental indicators and lagging indicators..

(iii) Regression Analysis:

This is a very common method of forecasting demand. Under this method a relationship is established between quantity demanded (dependant variable) and independent variables such as income, price of the good, prices of the related goods, etc.

(iv)Simultaneous equations Method/ Econometric Models: The econometric model forecasting involved estimating several simultaneous equations. Which are, generally, behavioral equations, mathematical identities, and market clearing equations.

Criteria of a Good Forecasting Method:There are thus, a good many ways to make a guess about future sales. They show contrast in cost, flexibility and the adequate skills and sophistication. Therefore, there is a problem of choosing the best method for a particular demand situation.

There are certain economic criteria of broader applicability. They are:(i) Accuracy, (ii) Plausibility, (iii) Durability, (iv) Flexibility, (v) Availability, (vi) Economy, (vii) Simplicity.

Supply Analysis:Supply as defined as the quantity of a product that a producer is willing and able to supply onto the market at a given price in a given period of time.Supply function: Sx = f( Px,Py, C,T,O,F,W,N,T)Exceptions to Law of Supply:1. Future expectation about the change in prices2. Increase of Agricultural Goods3. Perishable Goods4. Disposal of Old Stock5. Backward CountriesElasticity of supply: it is defined as a measure of the degree of responsiveness if supply to the change in price.