Demand

Desire backed up by willingness and ability to pay is demandDemand is always at a price.Ordinary meaning is desire Kinds of demandPrice demand various quantities purchased at different prices

Individual demand and Industry demand Income demandVarious quantities purchased at different incomes.- superior goods and inferior goods. Cross demandChange in the quantity purchased of one commodity due to the change in the price of another commodity. E.g tea and coffee

Demand scheduleQuantity of commodity purchased at different prices.Individual demand schedule Price of sugar Qty.demanded Rs 30 per kg. 1 kg. 28 3 kgs. 25 6 20 10

Market demand schedule

Total quantity purchased in the whole market at different prices. Add all individual demand schedules or multiply the average schedule with the number of consumers.

Demand curveQuantity is measured on the x axis and price on the y axis.Downward sloping curve obtained. why demand curve slope downwards?

law of diminishing marginal utility New purchasers come to the market Old purchasers buy more Cheaper commodity is used as substitute Unit of money can command more Commodity is put to new uses.

Exceptional demand curve

Slopes upwardsWhen serious shortage anticipated, people buy more even when price rises. When the use confers a distinctionOut of ignorance, people buy more, even if price rises.Necessaries of life are purchased , even if price rises.

Law of demand

Demand varies inversely with price.As price rises, demand contracts.Demand extends as price falls. Demand for a commodity or service at the prevailing price is greater than it would be at a higher price

Assumptions of the law of demandThe income of the consumer remain constant.There is no change in taste and fashion of the consumer.The price of substitute products remain the same. The commodity in question does not confer any distinction.

Exceptions to the law

When shortage fearedWhen fashion changesProvides distinctionIgnorance about price.

Increase and extension of demand

Increase means more demand at the same price or same quantity at higher price. Extension means more demand at less price. Decrease in demand means less demand at the same price or same quantity at lower price. Contraction less demand at higher price.

Factors determining demand

Change in fashion,weather,population. Change in quantity of money in circulationChange in wealth distributionChange in real incomeChange in habits, taste and customTechnical progressIntroduction of cheap substitutes.Advertisement.

Elasticity of demand

The quality of demand by virtue of which it changes, when price changes is called elasticity of demandIt is sensitiveness or responsiveness of demand to a change in price. Demand is elastic, when with a small change in price, there is a great change in demand. It is inelastic, when even a great change in price induces only a slight change in demand.

Types of elasticity

Price elasticityIncome elassticityCross elasticity Price elasticity - change in the quantity demanded due to a change in price.

ep. = %change in qty. demanded ------------------------------- % change in price

Income elasticity change in demand occurring due to change in income. ei. = %change in qty. demanded ____________________ % change in income. Cross elasticity Change in the quantity demanded due to a change in the price of a related commodity.

ec. = % change in qty. of X _________________ % change in price of Y

Degree of elasticityInfinite or perfectly elastic demand a negligible change in price brings about infinite change in the quantity. Perfectly inelastic demand A great change in price brings no change in the quantity demanded.

Relatively elastic [very elastic] A small change in price brings about more then proportionate change in the quantity demanded. Relatively inelastic demand[less elastic]- A substantial change in price brings only a small change in demand. Unitary elastic when change in price brings about equal change in quantity demanded

Factors on which elasticity depends:

Necessaries, luxuries Existence of substitutes Several uses Possibility of postponement Ranges of prices Proportion of income spent

Measurement of elasticity

Total expenditure methodProportional methodGeometrical method

Total expenditure method Elasticity is measured by examining changes in total expenditure due to change in price. Unit elasticity total amount of money remains the same. Greater than unity total amount spent is moreLess than unity total amount spent decreases.

Proportional method

Elasticity is measured by comparing change in price with % change in demand. Elasticity = % change in demand _________________ = %change in price %change in demand / %change in price_________________ ______________ amount demanded price

Geometric method or point method

Elasticity of demand at any given point is measured. Elasticity is represented by the fraction distance from lower point of the demand curve to the particular point divided by the distance from the other end to that point.

Importance of elasticity of demand

For business and monopoliesFor finance ministerIn industrial productionParadox of poverty in plentyDetermination of wagesIn international trade

Demand forecastingDemand forecasting is predicting future demand a product. This information is necessary for :PlanningScheduling productionPurchase of raw materialsAcquisition of financeAdvertising and avoiding over or under production.

Demand forecasting must for large firmsTechniques of demand forecasting :Survey methods used for short term forecastsSurveys are conducted to collect consumers intentions.Opinion polling of experts.

_Statistical methods:Historical (time series ) data utilized.Trend projection methods.

Barometric methodsEconometric methods. APPLICATION AND USEFULNESS OF A METHOD DEPEND ON THE PURPOSE OF FORECASTING.Reliability of data importantAnalysts own judgment is important.

Chance of error is high in demand forecasting.Continuous revision is necessary for prompt forecasting.