Demand and supply forecasting Equilibrium

Demand forecasting

Meaning Of Demand Forecasting:

• It is the activity of estimating the quantity of a product or service that consumers will purchase in the future period of time. Demand forecasting is based on the statistical data about past behaviour and empirical relationships of the demand determinants.

Levels Of Forecasting

Micro Macro Industry

Significance Of Forecasting1) Production Planning.2) Sales Forecasting.3) Control of Business.4) Inventory Control.5) Stability.6) Economic Planning & Policy Making.7) Growth & Long Term Investment

Programmes.

Types of demand forecasting

Long Term Forecasting Short Term Forecasting

Methods Of ForecastingOpinion Survey

Expert Opinion

Delphi Method

Consumers Interview Method

Survey Method

Methods Of Forecasting

Statistical Method

Time SeriesBarometricRegression &

Correlation

supply

Willing to offer to the market at various

prices during period of time

Able to offer to the market at various

prices during period of time

Definition of supply • The supply of goods is the quantity offered for

sale in a given market at a given time at various prices.

By : Thomas• Supply refers to the amount of a goods that

producer in a given market desire to sell, during a given time period at various prices, ceteris paribus.

By : Samuelson

Determinates of supply

1. Price of the Product (Own Price).2. Price of Related Products.3. Cost of Factors of Production.4. Change in Technology.5. Time Periods.6. Government Policy.7. The Nature.8. Self Consumption. 9. Seller’s Expectations.10.Motives of Producer.

Law of supply • The Law of Supply simply expresses the

relation between the quantity of product supplied & its price and other things remaining constant.

According to S.E.Thomas, “ a rise in price tends to increase supply and a fall in price tends to reduce it.”

Sx = f (Px)

Assumptions to law of supply

• Law of supply holds goods when “other things remain the same” meaning thereby, the factors affecting supply, other than price, are assumed to be constant.

1. Cost of production is unchanged.2. Fixed scale of production.3. Government policies are unchanged.4. No change in the technique of production.5. No speculation.6. No change in transportation cost.7. The prices of all other goods remains constant.

Supply functions • The supply of a product can be mathematically expressed

as:

• Total supply of product x.• Price of product x.• Price of related products.• Prices of inputs.• Change in technology.• Time periods etc….

Sx = f (Px,Py,Pi,T,Mi,G,N etc.)

Individual supply schedule

• It is defined as a table which shows quantities of a given commodity which an individual producer will sell at all possible prices at a given time.

Price (Rs) (Per Kg) Quantity Supplied (Kg)

1 10

2 30

3 50

4 70

5 80

Market Supply Schedule• It is defined as the quantities of a given

commodity which all producers will sell at all possible prices at a given moment of time.

Price of commodity ‘X’ (In Rs)

A B Market Supply (Units)

100 40 50 40+50=90

200 60 70 60+70=130

300 65 80 65+80=145

400 80 100 80+100=180

Supply curve • A supply curve is a locus

of points showing various price-quantity combination of a sellers.

• it shows a direct relationship between price & quantity supplied.

• It slopes upward from right to left.

S

S

PRICE

QTY. SUPPLIED

Exceptions to the law of supply

Labor Supply

Immediate Need For

Cash

Rare Goods

Self Consumption

Future Expectation

Hoardings

Elasticity of supply • Elasticity of supply is defined as the

responsiveness of the quantity supplied of a good to change in its price.

Es = % Change in Q. Supplied % Change in Price

Es = Change in Q. Supplied Original Price Change in Price Q. Supplied

TYPES OF ELASTICITY OF SUPPLY

Perfectly Elastic Supply

Perfectly Inelastic Supply

Unitary Elastic Supply

Relatively Elastic Supply

Relatively Inelastic Supply

1. Perfectly Elastic Supply

• e = ∞

S

Q Q

S

Price

Quantity Supplied

When the supply for a product changes …… increases or decreases even when there is no change in price, it is known as perfectly elastic supply.

2. Perfectly Inelastic Supply

P

P

S

SQuantity Supplied

Price

e = 0When there is a heavy change in price level, but ……there is no change in quantity supplied, it is known as perfectly inelastic supply.

3. Unitary Elastic Supply

e = 1

P

P

S

S

QQ

Quantity Supplied

Price

When the proportionate change in supply is exactly equal to proportionate changes in price, it is known as unitary elastic supply.

4. Relatively Elastic Supply

e > 1S

S

Q Q

P

P

Quantity Supplied

Price

When the proportionate change in supply is greater than the proportionate changes in price, it is known as relatively elastic supply.

5. Relatively Inelastic Supply

e < 1S

S

P

P

Q QQuantity Supplied

Price

When the proportionate change in supply is less than the proportionate changes in price, it is known as relatively inelastic supply.

Determinants of Elasticity of Supply

1. Time Period.2. Scale of Production.3. Nature of Commodities.4. Technique of Production.5. Natural Factors.6. Nature of Production.7. Mobility of Factors.8. Size of Firm & number of products produced.

Market EquilibriumDefinition:

• 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.

Examples of market equilibrium

• Recall the demand and supply schedules for pizza delivered in Oswego in a week:

Price Quantity of pizza demanded

Quantity of pizza supplied

25 100 80020 210 70015 300 62510 500 5005 650 300

Diagram of market equilibrium

The supply and demand curves intersect at the point where quantity supplied = quantity demanded. This intersection is what we call an equilibrium price. This is the price where the intentions of both the buyer and seller are compatible: Buyers want to buy the exact amount the sellers want to sell.

Meaning :• A state of the market that exists when the opposing forces

of demand and supply do not balance out and there is an inherent tendency for change.For the market, disequilibrium is indicated by the existence of either a surplus or a shortage. The inherent tendency to change occurs because a surplus causes the price to decline and a shortage causes the price to rise. So long as market disequilibrium persists, the price will be induced to change.

Market disequilibrium

Revenue concept Meaning :

Types of revenue concept

Average revenue

Marginal revenue

Total revenue

(i) Total Revenue (TR)Definition: • By 'total revenue' of a firm is meant the total amount of sale proceeds or the total

receipts of the firm.•

Example: If a firm producing cloth sells one hundred meters of cloth in the market at $4 per meter, the

sale proceeds or the receipts of the firm win be $400. This total sale proceed which a firm has received by selling 100 meters of cloth is called its total revenue. The total revenue varies with the sales of a firm.

Formula: Total Revenue(TR) = Price(p) x Quantity Sold(q) TR = 4 x 100 Ans: TR = $400

(ii) Marginal Revenue (MR)

Definition:• Marginal revenue is the addition made to the total revenue by a

one unit increase in the volume of sales by the firm in the market.Example: • For example, if a firm sells 100 meters of cloth at $4 per meters, the total

revenue of the firm is $400. If it increases the volume of sale from 100 meters to 101 meters, i.e., by one meter, the total revenue of the firm goes up to $404. The addition of $4 which has taken place in the total revenue by a one unit increase in the rate of sales per period of time is known as marginal revenue. MR can be expressed as follows.

• Formula:• MR = ΔTR         Δq

(iii) Average Revenue (AR)

Definition:• Average revenue is revenue earned per unit of output. Average revenue is obtained by dividing the total

revenue by the number of units sold in the market.

• Example: For example, a firm sells 200 meters of cloth for $600, then the average, revenue will be 600 / 200 = $3 only.

Average revenue represents the average sale price per unit of the commodity. Average revenue curve can also be called demand curve.

 • Formula:    Average Revenue(TR) = Total Revenue (TR)                                     Total Output Sold(O)