Meaning & Definition of Demand

Forecasting
Demand forecasting is a systematic process
that involves anticipating the demand for the
product and services of an organization in
future under a set of uncontrollable and
competitive forces.

Accurate demand forecasting is essential for

a firm to enable it to produce the required
quantities at the right time and arrange well in
advance for various inputs.
 Process

Defining objectives of forecasting

Analyzing the determinants for a product

Selection of forecasting Methods or technique

Data Collection and compilation

Decision making
METHODS OF DEMAND
FORECASTING
A) Qualitative Techniques/
Opinion Polling Method
-In this method, the opinion of the buyers,
sales force and expert could be gathered to
determine the emerging trend in the market.
-Suited for short term demand forecasting.
-Demand forecasting for new product can b
made by qualitative techniques.

The opinion polling methods of demand

forecasting are of following kinds:

1) Consumer Survey Method

2) Sales Force Opinion Method
3) Delphi Method
 1) Consumer Survey Method

In this method, organization conducts surveys with

consumers determine the demand for their existing
products and services and anticipate the future
demand accordingly.

Survey method include:

a) Complete Enumeration Survey
b) Sample Survey and Test Marketing
c) End Use
 1) Consumer Survey Method

a) Complete Enumeration Survey:

In this method records the data &
aggregates of
consumers
If the data is wrongly recorded than Demand
Forecasting going wrong, than this method will be
totally useless.

b) Sample Survey & Test Marketing:

Only few customers selected and their views
collected.
Based on the assumption that the sample truly
represents the population.
This method is simple and does not cost much
The main disadvantage is that the sample may not
be a true representation of the entire population.
1) Consumer Survey Method

c) End Use Method:

This method Focuses on Forecasting the
demand for
intermediary Goods.
Under this method, the sales of a Product are
projected through a survey of its end users.

Example:
Milk is a commodity which can be used as an
intermediary good for the production of ice cream,
and other dairy products.
 B) Quantitative Techniques/
Statistical or Analytical Methods
These are forecasting techniques that
make use of historical quantitative data.

A statistical concept is applied to the existing data in

order to generate the predicted demand in the
forecast period.

The statistical methods, which arefrequently used,

for making demand projection are:
1) Trend Projection Method
2) Barometric Method
3) Regression Method
4) Econometric Method
 1) Trend Projection
Method
-An old firm can use its own data of past years regarding
sales in past years.
-These data are known as time series of sales.
-Assumes that past trend will continue in future.
-Past trend is extrapolated (generalised).

The trend can be estimated by using any one of the

following methods:
a) Graphical Method
b) Least Square Method
c) Time Series Data
d) Moving Average Method
e) Exponential Smoothing
“ELASTICITY OF DEMAND”
“ELASTICITY OF DEMAND”
“Meaning”
•Elasticity of demand is the
measurement of change in the
quantity of demand of a
commodity in response to a
certain change in price.

• Thus we can conclude that

Elasticity of demand is the Ratio
of percentage change in the
quantity demanded to a
percentage change in the price of
 SYMBOLICALLY IT CAN BE
DERIVED AS FOLLOWS
• ED = DQ * P
DP * Q
• Where; ED = Elasticity of Demand.
• P = Original price.
• Q = Original quantity.
• DP = Change in price.
• DQ = Change in quantity demanded.
 PRICE ELASTICITY OF DEMNAD
•It Expresses the relationship between
change in the price of a commodity and
Proportionate change in the quantity
demanded.

• Therefore while Calculating Elasticity of

demand, the income of the consumers
,their tastes and habits and Prices of all
other related products are assumed to be
constant.
 “FORMULAE”
Price elasticity of demand
 INCOME ELASTICTY OF
DEMAND
•It measures the change in the Quantity
demanded of a commodity in relation to the
change in the Income of the consumers;
Proportionately.
 CROSS ELaSTICITY OF DEMAND
• It measures a change in the quantity
demanded of a particular commodity
in RESPONSE to a change in the
price of a related commodity;
proportionately.
 How would you respond?
• If the price of Nikes dropped by 25%, how likely would
you be to buy more Nikes?
• If the price of a Starbucks lattes increased by 25%,
how likely would you be to buy fewer lattes?
• If the price of electricity in your home changed by
25%, how likely would you be to change your
electricity usage?
• What are three reasons why salt is more inelastic than
fresh tomatoes?
• Why would the demand for toothpicks be inelastic? Are
the reasons the same as the reasons for salt?
TYPES OF ELASTICITY OF
DEMAND
• Perfectly Elastic demand.
• Highly Elastic demand.
• Elastic demand.
• Less Elastic demand.
• Perfectly Inelastic demand.
 Perfectly Elastic demand
• When without any change in price or just a small
change in price, the demand increases or decreases
to any extent is known as Perfectly Elastic demand.
• For eg:- Price
(Rs. Per kg)
(Quantity Demanded)

10 100
10 110
10 120
 Highly Elastic demand
• When proportionate change in demand for a
commodity is more than proportionate change in
change in its price,then its known as highly elastic
demand.
Price (Quantity Demanded)
• For eg:- (Rs. Per kg)
10 100
8 140
6 200
 Elastic demand
• When Proportionate change in price of a
commodity equals to proportionate change in its
demand, its known as Elastic demand.
• For eg:- Price
(Rs. Per kg)
(Quantity Demanded)

10 100
8 120
6 140
 Less Elastic demand
• When Proportionate change in price of a
commodity leads to less proportionate change in
the quantity demanded, its known as Less elastic
demand.
Price (Quantity Demanded)
• For eg:- (Rs. Per kg)
10 100
8 105
6 110
 Perfectly Inelastic demand
• When the demand of a commodity does not change
at all even after change in its price ,its known as
Perfectly inelastic demand.
• For eg: - Price
(Rs. Per kg)
(Quantity Demanded)

10 100
8 100
6 100
• NATURE OF THE COMMODITY. (Necessity or Luxury)
• SUBSTITUTE GOODS.(Close or No Substitutes)
• Different uses of commodity.(Several / Specific use)
• Price of a commodity. ( Very high or Very low)
• Habits of Consumers.
• Complementary Goods. ( Inelastic demand)
• Time effect. ( Inelastic in short run- Elastic in
Long-run)
 sum1
• The demand equation for sugar is given as Q=500-5p
and the price of the sugar is given below
Price Quantity demanded
5
10
15
20
• Calculate quantity demanded for sugar at given price
• Draw a demand curve
• Calculate price elasticity when price increase from 10
to 15
 Solution

Price Quantity demanded Quantity demanded

5 500-(5*5) 475

10 500-(5*10) 450

15 500-(5*15) 425

20 500-(5*20) 400
Price Quantity demanded

5 475

10 450

15 425

20 400
Calculate price elasticity when price
increase from 10 to 15.
Price Quantity demanded

10 450

15 425

Ed = Change in quantity demanded / change in price* p/q

= 25/5 * 10/450
=5 *0.022222
= 0.111111
Laws of Returns to Scale
 In long run, all factors are variable. The law of returns
to scale examines the relationship between output and
the scale of inputs in the long run when all the inputs
are increased in the same proportion.
Three phases of returns to scale
Unit Scale of Production Total Returns Marginal Returns

1 1 Labor + 2 Acres of Land 4 4 (Stage I - Increasing Returns)

2 2 Labor + 4 Acres of Land 10 6

3 3 Labor + 6 Acres of Land 18 8

4 4 Labor + 8 Acres of Land 28 10 (Stage II - Constant Returns)

5 5 Labor + 10 Acres of Land 38 10

6 6 Labor + 12 Acres of Land 48 10

7 7 Labor + 14 Acres of Land 56 8 (Stage III - Decreasing Returns)

8 8 Labor + 16 Acres of Land 62 6

Economies of Scale

 Economies of scale refer to the cost advantage brought

about by an increase in the output of a product
 Example of Economies of Scale
A family wants to print wedding
invitation cards for their daughter’s
wedding. Printing 500 cards costs
$1,000. However, printing 1,000
invitation cards will cost them $1,500.
Therefore, while printing 500 cards will
cost them $2 per invitation card,
printing 1,000 copies will cost $1.5 per
card. This is because the price will fall
after the initial set-up costs of the
printer have been covered. As a result,
this leaves only a marginal extra
printing cost for every additional card.
Diseconomies of Scale
Diseconomies of scale occur when
the cost per unit increases with an
increase in the quantity produced.
This means that any attempt by a
firm to increase its output will
transcend to a corresponding
increase in the unit cost associated
with the unit increase in output.
This usually happens when a firm
becomes too big. It is represented
on the following graph when going
from Q1 to Q2. Beyond point Q1,
which is the ideal firm size,
producing more goods increases
per-unit costs.
 Definition

Generally market is the place where buyers and

sellers are physically present and finalize the
transaction.

• Prof Stonier and Prof Hague:-

By a market economist mean any organization

whereby buyers and sellers of a goods are kept in
close touch with each other.
 Features of Market
• One Area:- Denote to a area or a region in which
no of buyers and sellers are scattered. They are
connected with one another via brokers, agents,
letters. Etc.
• Buyers and Sellers:- Buyers and Sellers are
must for market. In Transaction Physical Presence
is not necessary.
• One Commodity:- For the existence of a market
there should be at least one commodity like Wheat,
vegetables, etc and the market is termed as wheat
market, vegetables market and so on.
• CONT…
 CONT…
• Perfect Competition:- Acc to
Prof. Coornot, market must
posses the characteristic of
perfect competition where in
buyers and sellers are free to
enter in the market.
• One Price:- In Perfect
competition between buyers
and sellers. The market area
should have one price only.
Factors Affecting the Size and
Extent of Market.
The Size and extent of market is affected by the
following factors:-
1. Characterics of commodity:-
a. Nature of Demand
b. Durability
c. Portability
d. Cognigability
e. Sampling and grading of goods.
f. Adequate Supply
g. Substitutes.
h. Multi Uses.
Classification of Market

Area Time Competit Function Commo Legality

1. Very ion 1.Mixed dity 1. Legal
1. Local
Short 2.Specialized
2. Regional
2. Short 1.Perfect 1.Product 2. Illegal
3.Sample
3.National 2. Imperfect 2.Stock
3. Long 4.Grading
4.Internati 3.Bullion
onal 4. Very long
 On the basis of Area/Region.
1. Local Market- When buyers and sellers are
limited to an area or region then the market is
called local market.
2. Regional Market- When buyers and sellers are
concentrated to a certain region/area. The area is
wide then the local market.
3. National Market- When the demand of a
commodity is limited the boundary of the
country.Eg. Market of Gandhi cap , Nehru Cap.
4. International Market- When the demand of a
commodity crosses the boundary of a country.
 On the basis of Time Element
1. Very Short- Supply of a Good is limited. Cannot
increase the supply. Demand determines the
price of such commodities.
2. Short Period- Production can be increased.
Demand plays an important role in price
determination.
3. Long Period- Supply can be adjusted to the
quantity demanded. Supply plays an imp role in
price deter. Also called Normal Price.
4. Very long- Both demand and supply can be
changed. Demand Inc with the inc in tastes,
habits, fashion etc. and Supply inc with the inc in
variable inputs.
 Market based on competition
• Perfect Market- Where there is
Homogeneous products. Free Entry
and exit from market of a firm.
Perfect knowledge of market
condition, and perfect mobility of
factors of production.
• Imperfect- Where perfect
competition is not in existence.
Number of buyers and sellers are
small. No perfect Knowledge of
market conditions. There is no single
price in this market.
 On the basis of Functions
• Mixed/General market- Where all types of good
are bought and sold. Found in cities.
• Specialized market- Where particular
commodity is sold, e.g. vegetables, food grains
cloths etc.
• Marketing by Samples- When goods are
bought and sold on the basis of samples. E.g. Oil
seeds, raw cotton.
• Marketing by grades- When the goods are
graded then different buyers and sellers deal in
such goods on the basis of their grades.
Market Structure
 Perfect Competition

Perfect Competition is a market structure in which there is

a large number of sellers and buyers
having homogenous product and
there is single price in the market
Salient Features :-
 Large no. of buyers and sellers.

 Homogeneous product.

 Free entry and exist of firms in an industry..

 Perfect knowledge of market conditions.

 No transport cost.

 Firms are price takers.

 Uniform Price
 Imperfect
• In this market there are small no of
firms. Having Large no. of buyers and
sellers with product differentiation.
Monopolistic

 A large number of buyers and sellers.

 Product differentiation.
 Free entry and exit of firm.
 Non Price competition.
 Varying preference of consumers.
 Facilities to the customers.
 Oligopoly
• Another kind of imperfect competition. No. of
sellers are few. Each seller’s supply affects the
market prices and each seller knows it. Oligopoly
market structure characteristics are quite similar to
that of a monopoly and market dominated by a few
firms.

 A few sellers.
 Homogeneous Product.
 Interdependence.
 Advertisement and sales promotion costs.
Cont…
…Cont

 Cut throat competition.

 Restriction on the entry and exit of firms.
 Price rigidity.
 Complicate market structure.
 Monopoly

When there is single seller

or producer in market. Has
full control on supply and
there is no close substitute.
R.S.E.B (Rajasthan State
Electricity Board) , Railways,
post and Telegraph are the
examples of this type of
market structure.
Cont…
Cont…

 Single seller and large

number of buyers.
 No close substitute.
 One firm on industry.
 Restrictions on the entry.
 Control over the supply.
 Either price or supply
fixation.
Price and output determination

• During short period

1. profit making situation
2. Normal proit situation
3. loss incurring situation
• During long period
1. Profit making situation
Profit making situation

E
Normal profit situation

E
Loss incurring situation

E
During long period
Profit making situation

E
Pricing Practices

You don’t sell through price. You sell the

price.
Factors influence Price of a
Commodity

1. The demand for a commodity

2. Cost of production
3. Objectives of the firm
4. Competition and
5. Government’s policy
Marginal Pricing

 Marginal-cost pricing, in economics, the

practice of setting the price of a product to
equal the extra cost of producing an extra unit
of output
Mark up Pricing

 Mark up refers to the value that a player adds

to the cost price of a product. The value added
is called the mark-up
Transfer Pricing

 Transfer pricing is the price which is paid for

goods or services transferred from one unit of
an organization to its other units situated in
different countries (with exceptions).
Product Line Pricing

 Product line pricing involves the separation of

goods and services into cost categories in
order to create various perceived quality levels
in the minds of consumers.
Examples: new-product pricing

 Market-skimming pricing
 Market-penetration pricing
Market-skimming pricing

 Setting a high price for a new product to skim

maximum revenues layer by layer from the
segments willing to pay the high price: the
company makes fewer but more profitable
sales.
Market-penetration pricing

 Setting a low price for a new product in order to

attract a large number of buyers and a large
market share.
What is Production Function?

The basic relationship between the factors of production and the

output is reffered to as a Production Function.
The firm’s production function for a particular good (q) shows the
maximum amount of the good that can be produced using
alternative combinations of capital (K) and labor (L)
q = f(K,L)
 TYPES OF PRODUCTION
FUNCTION
The nature of production function, ie.how output varies with change in the
quantity of inputs,depends upon the time period allowed for the adjustement of
inputs.
On this basis Production function is classified into two types:
Production function
short run production function- Time when one input (say,
capital) remains constant and an addition to output can be obtained only
by using more labour.
long run production function= Both inputs become variable
Law of Variable Proportions
Law of Variable Proportions (Short run Law
of Production)
Assumptions:
One factor (say, L) is variable and the other factor
(say,
K) is constant
Labour is homogeneous
Technology remains constant
Input prices are given

6
 Three stages of production
Stage 2
Total
Stage 1: average Output
product rising.
Stage 1
Stage 2: average
product declining (but
marginal product
positive).
Stage 3
Stage 3: marginal
product is negative, or
total product is L
declining.
RELATIONSHIP BETWEEN DIFFERENT
PRODUCTS
Between AP and MP
WHEN MP > AP,AP INCREASES
WHEN MP < AP,AP DECREASES
WHEN MP = AP,AP IS MAXIMUM
Between TP and MP
WHEN TP INCREASES AT INCREASING RATE,MP INCREASES
WHEN TP INCREASES AT DECREASING RATE,MP
DECREASES
WHEN TP IS MAXIMUM,MP IS 0
WHEN TP DECREASES,MP IS NEGATIVE
 Relationship between MP and
AP
MP 7
MP = AP, AP
doesn’t change
AP 0 and
MP above AP is max
AP
6
6
0 AP
0 MP below
AP
MP

9/29/201 1
3 3
 ISOQUANTS
Production function with two variable
inputs or equal product curves

According to Ferguson, “ An isoquant is a

curve showing all possible combinations
of inputs physically capable of producing
a given level of output”
1
An isoquant represents all those
combinations of inputs which are
capable of producing the same
level of output

An isoquant is also known as

Production-Indifference curve

1
Various combination of X and Y to produce a given level of
output
Factor Factor X Factor Y
Combination
A 1 12
B 2 08
C 3 05
D 4 03
E 5 02

Each of the factor combinations A,B,C,D and E represents the same level of
production Say 100 units.

1
When we plot them, we get a isoquant curve :
Y-axis

12

8
FACTOR-

6
Y

X-axis
0 1 2 3 4 5

FACTOR-X

ISOQUANT
CURVE 5
Assumptions of Isoquants
Only two factors or inputs of production
Factors of production are divisible into small
units and used in various proportions
Technical conditions of production are
not possible to change at any point of
time
Different factors of production are used in a
most efficient way
1
1. Iso-Product Curves
Slope Downward
from Left to Right
2. Isoquants are Convex to the Origin.

Thus it may be observed that due to

falling MRTS, the isoquant is always
3. Two Iso-Product Curves Never
Cut Each Other:

Therefore two curves which represent two

levels of output cannot intersect each
4. Higher Iso-Product
Curves Represent Higher
Level of Output:
5. Isoquants Need
Not be Parallel to
Each Other:
6. No Isoquant can Touch
Either Axis:
An Isoquant map can be defined as the set of
isoquant curves that show technically
efficient combinations of inputs that can
produce different levels of output.
 Isoquant Curve Indifference Curve

Related with Production Related with Demand

theory. theory.

Shows various combination

of two inputs on an equal Shows the various
output. combination of two
commodities

It shows constant level of

output It shows the constant
which can be measured. level of satisfaction
which can’t be measured.
FC is 100 qty 5

cost per unit 100/5 = 20

FC is 100 qty 10
cost per unit 100/10 =10
 Concept of Supply
Supply is 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 time period.

Note: Throughout this study companion, the terms firm,

business, producer and seller have the same meaning.

Supply is the amount of a good that producers are willing and

able to offer for sale at various price.
Concept of Supply
 The law of Supply
All else equal, the quantity supplied is positively
related to price.
Prices quantity supplied
Prices quantity supplied
The law of supply explains that if people are willing to pay
more money for a product, a company will produce or
manufacture more of that product to capitalize on the
increased revenue.
The opposite also holds true that as the price of a product
drops, a company is likely to manufacture less of that
product. In fact, if sales drop too far, the company may
discontinue the product altogether.
 Equilibrium of Supply and Demand
A situation in which the supply of an item is exactly
equal to its demand. Since there is neither surplus nor
shortage in the market, price tends to remain stable
in this situation.
 Equilibrium of Supply and Demand
A situation in which the supply of an item is exactly equal to
its demand. Since there is neither surplus nor shortage in the
market, price tends to remain stable in this situation.
Price

Supply

Equilibriumprice Equilibrium
$2.00

Demand

Equilibriu
m quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity