SAI VIDYA INSTITUTE OF TECHNOLOGY

MODULE -2

DEMAND ANALYSIS AND DEMAND FORECASTING

Law of Demand, Exceptions to the Law of Demand, Elasticity of Demand – Classification of

Price, Income & Cross elasticity, Advertising and promotional elasticity of demand. Uses of
elasticity of demand for Managerial decision making, Measurement of elasticity of demand. Law
of supply, Elasticity of supply, Demand forecasting: Meaning & Significance, Methods of
demand forecasting.

INTRODUCTION:

The economy relies on the willingness of consumers to make purchases and the ability of
companies to supply them. When consumers make more purchases, inflation and interest rates
decrease. When consumers decrease their purchases or if producers are unable to supply, inflation
and interest rates increase. Consumer demand drives production and supports a thriving economy.
In this article, we provide the demand definition in economics, explore the different types of
demand and explain the factors that influence it.

MEANING OF DEMAND:
Demand is an economic principle referring to a consumer's desire to purchase goods and services
and willingness to pay a price for a specific good or service.
Demand refers to the willingness and ability of consumers to purchase a given quantity of a good
or service at a given point in time or over a period in time. Demand is a consumer want or a need
supported by an ability to pay.

DEFINITION OF DEMAND:

• Demand refers to consumers' desire to purchase goods and services at given prices.
• Demand can mean either market demand for a specific good or aggregate demand forthe total
of all goods in an economy.

TYPES OF DEMAND:
• Joint demand
• Composite demand
• Short-run and long-run demand
• Price demand
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• Income demand
• Competitive demand
• Direct and derived demand
1. Joint demand

Joint demand is the demand for complementary products and services. These can be products
that are accessories for others or that people commonly purchase together. Forexample, cereal
and milk or peanut butter and jelly. The two are linked but demand for one is not necessarily
dependent on the demand for the other.
2. Composite demand
Composite demand happens when there are multiple uses for a single product. For example, corn can
be used as animal feed, ethanol and food in its whole form. The rise in demand for any of these
products leads to a shortage in supply for the others. This shortage can lead to a rise in price.
3. Short-run and long-run demand

Short-run demand refers to how people will immediately react to price changes while elements
are fixed. For example, if the demand for a product drastically decreases anda manufacturer has
high overhead costs, they have no choice but to absorb the profits lost. Over time, or in the long
run, companies have a chance to adjust to the new situation by decreasing labor or increasing
price and supplies.
4. Price demand

Price demand relates to the amount a consumer is willing to spend on a product at a given price.
Businesses use this information to determine at what price point a new product should enter the
market. Consumers will buy items based on their perception
of that product's value. Price elasticity refers to how the demand will change with fluctuations
in price.
5. Income demand

As consumers make more income, quantity demand increases. This means people will buy more
overall when they earn more income. Tastes and expectations also change with an increase in
income, reducing the size of one market and increasing the size of another. Consumers will
often buy a product or service because it is what they can afford but may deem lower quality.
The demand for those lower-quality products will decrease as income increases.
6. Competitive demand

Competitive demand occurs when there are alternative services or products a customer can
choose from. From a business's perspective, they can use fluctuations in the price of their

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competitors to determine how their own will sell. An example of this is between name-brand
and store-brand medicine. If a consumer prefers a name brand but it is out of stock or the price
increases significantly, the store brand will see a rise in sales.
7. Direct and derived demand

🞂 Direct demand is the demand for a final good. Food, clothing and cell phones are an example of
this. Also called autonomous demand, it's independent of the demand for other products.
🞂 Derived demand is the demand for a product that comes from the usage of others. For
example, the demand for pencils will result in the demand for wood, graphite, paint and eraser
materials. In this example, the demand for wood is dependent on the demand for its uses.

FACTORS THAT INFLUENCE DEMAND:

Demand is influenced by the activities of consumers and businesses. Businesses attempt to drive
demand through marketing efforts. Consumers drive demand through their tastes, incomelevels and
resistance to price increases.
1. Price:
Price is the value of product or service expressed in monetary terms.
In other words, the price is the amount of money whose payment is expected or required for buying a
product or accessing a service. A price of a product has a maximum effect on its demand.
If other factors remaining constant (do not change) then the relationship between price and demand is as
follows:
If a product's price is low, then its demand is high.
If a product's price is high, then there is low demand for it.
Hence, it can be said that price and demand are inversely proportional to each other, provided other
determinants remain constant or do not change. In other words, if price increases then demand falls and
vice-versa.
2. Income
Income of an individual is his capacity to earn money. A person with a higher income makes more
money and vice-versa. After the determinant of price, income is the second most significant factor that
affects demand. The relation between income and demand is as follows:
If income is high, then demand is also high.
If income is low, then demand is minimum. So, we can say, income is directly proportional to
demand.

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3. Tastes
Tastes, Preferences, Habits, Fashion, and Popularity, also has an impact on the demand. Tastes of
people i.e. their likes and dislikes affect demand: If people like a product, then its demand is high even
when charged at higher prices.
If people dislike a product, then its demand is low even when charged at lower prices.
Fashion or current trend in the market has an impact on the demand for a type of product. For example,
now, young generation in India prefers to wear fashionable and comfortable western apparels over
traditional and cheaper Indian clothes.
Popularity or fame also affects the demand for a product. For example, people prefer to buy regularly
advertised and popular branded products over lesser known alternatives.

4. Price of Related Goods

Related Goods exhibit some relationship with each other.
These are of two types:
Substitute Goods, and
Complementary Goods.
Substitute Goods are products that can easily replace each other. That is, they can take each other's
place. In other words, they act as an alternative to each other to satisfy a similar want or desire. They
are even called Supplementary Goods because they readily supplement each other's role or function just

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in case of unavailability, scarcity, higher market price, etc.
5. Consumers' Expectations
Consumers' expectations arise out of their predictions about:
Future Price, and
Future Income.
If there is an expectation of a rise in the future price of an essential commodity, then current demand for
it increases. If consumers are expecting a fall in the future price of an essential commodity, then current
demand for it will also fall.
If consumers are expecting a rise in their future income, then their current demand will increase. If
consumers are expecting a fall in their future income, then their current demand will decrease.

6. Number of Buyers
The number of buyers or consumers' population is another determinant of demand:
If buyers are more, then their demand will also be more.
If buyers are few, then their demand will also be small.
So, the population of consumers is directly proportional to the demand they generate in the market.

7. Climatic Condition
The climatic condition or weather of an area is also a determinant of demand. For example:
In colder regions, there is a high demand for woolen clothes.
In hotter areas, there is more demand for cotton clothes.

8. Level of Economic Activity

The level of economic activity is a determinant of demand: A high level of economic activity
usually comprises of huge investments in infrastructure development, high rate of employment, high
consumption power, rising standard of living of people, etc. It increases demand. Contrarily, a low level
of economic activity displays characteristics like lack of investments, increase in the unemployment
rate, low purchasing power, plunging living standards of people, so on. It decreases demand.
If economic activity increases, demand also increases and vice-versa.

DEMAND ANALYSIS:

Demand analysis is the process of understanding the customer demand for a product or service in a
target market. Companies use demand analysis techniques to determine if they can successfully
enter a market and generate expected profits to expand their business operations. It also gives a
better understanding of the high-demand markets for the company’s offerings, using which

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businesses can determine the viability of investing in each of these markets.
Steps in market demand analysis:

❖ Market identification
❖ Business cycle
❖ Product Niche
❖ Evaluate competition

LAW OF DEMAND:

The Law of demand explains the functional relationship between price of a commodity and the
quantity demanded of the commodity. It is observed that the price and the demand are inversely
related which means that the two move in the opposite direction.
An increase in the price leads to a fall in quantity demanded and vice versa. This relationship can
be stated as “Other things being equal, the demand for a commodity varies inversely as theprice”.
Chief Characteristics of the Law of Demand
The following are the chief characteristics of the Law of Demand.
1. Inverse Relationship. The relationship between price and the demand of a particular commodity is
inverse i.e., the demand of a commodity will fall with the increase in the price of the commodity or it
will increase with the fall in-the price.
2. Price an Independent Variable and Demand a Dependent Variable. In the Law of Demand, price
is regarded as an independent variable that affects the demand inversely. Thus, it is the effect of price
on demand that is to be examined and not the effect of demand on price.
3. It is a Qualitative Statement. The Law of Demand simply explains the direction of change in the
demand with the increase or decrease in the price of a commodity. It does not explain the quantum of
change. The law is thus, a qualitative statement and not a quantitative statement.
4. Other thing remains the same. The Law of Demand applies only when other things remain the
same. In other words, there should be no change in factors influencing demand except price.

Exceptions to the law of demand:

1. Giffen Goods: Giffen goods are the inferior goods whose demand increases with the increase in its
prices. There are several inferior commodities, much cheaper than the superior substitutes often
consumed by the poor households as an essential commodity. Whenever the price of the Giffen
goods increases its quantity demanded also increases because, with an increase in the price, and the
income remaining the same, the poor people cut the consumption of superior substitute and buy
more quantities of Giffen goods to meet their basic needs.

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2. Veblen Goods: Another exception to the law of demand is given by the economist Thorstein
Veblen, who proposed the concept of “Conspicuous Consumption.” According to Veblen, there
are a certain group of people who measure the utility of the commodity purely by its price, which
means, they think that higher priced goods and services derive more utility than the lesser priced
commodities.
3. Expectation of Price Change in Future: When the consumer expects that the price of a
commodity is likely to further increase in the future, then he will buy more of it despite its
increased price in order to escape himself from the pinch of much higher price in the future.
On the other hand, if the consumer expects the price of the commodity to further fall in the future,
then he will likely postpone his purchase despite less price of the commodity in order to avail the
benefits of much lower prices in the future.
4. Ignorance: Often people are misconceived as high-priced commodities are better than the low-
priced commodities and rest their purchase decision on such a notion. They buy those commodities
whose price are relatively higher than the substitutes.
5. Emergencies: During emergencies such as war, natural calamity- flood, drought, earthquake, etc.,
the law of demand becomes ineffective. In such situations, people often fear the shortage of the
essentials and hence demand more goods and services even at higher prices.
6. Change in fashion and Tastes & Preferences: The change in fashion trend and tastes and
preferences of the consumers negates the effect of law of demand. The consumer tends to buy those
commodities which are very much ‘in’ in the market even at higher prices.
7. Conspicuous Necessities: There are certain commodities which have become essentials of the
modern life. These are the goods which consumer buys irrespective of an increase in the price. For
example TV, refrigerator, automobiles, washing machines, air conditioners, etc.
8. Bandwagon Effect: This is the most common type of exception to the law of demand wherein the
consumer tries to purchase those commodities which are bought by his friends, relatives or
neighbors. Here, the person tries to emulate the buying behavior and patterns of the group to which
he belongs irrespective of the price of the commodity.
ASSUMPTIONS OF THE LAW OF DEMAND:
The Law of Demand is based on the following assumptions :
(1) No change in taste, habits, preferences : It is assumed that there is no change in the taste, habits,
preferences of a rational consumer. Thus, consumers' choice of product must remain the same.
(2) No change in the income level: If the consumer's income rises, he will demand more though the
prices of commodities rise. In such a situation, the law will not hold good.
(3) No change in population : The law is based on the assumption that there should be no change in
population, size, sex ratio, age composition, etc.

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(4) No change in prices of related goods : The law assumes that the prices of close substitutes and the
complementary products should remain constant.
(5) No expectation of future change in the price: If the consumers expect high rise in the price in
future, they demand more though current price is high. In such condition,the Law of Demand cannot be
verified.
(6) No change in taxation : It is assumed that the structure of direct and indirect taxes remain constant.
Thus, the disposable income of a consumer should remain the same.
(7) No introduction of new product: It is assumed that there is no introduction of a new product in the
market. Thus, the consumer's taste, habits and preferences remain constant.
(8) No change in technology : The law assumes that the present technology of production remains
constant.

Elasticity of Demand:
 Elasticity is a measure of a variable's sensitivity to a change in other variables—or a single
variable. Most commonly this sensitivity is the change in quantity demanded relative to
changes in other factors, such as price.
 Elasticity is defined as a ratio of the percentage change in the dependent variable to the
percentage change in the independent variable

1. Price Elasticity of Demand:

Price Elasticity of Demand: The price elasticity of demand, commonly known as the
elasticity of demand refers to the responsiveness and sensitiveness of demand for a product
to the changes in its price.
The response of the consumers to a change in the price of a commodity is measured by the
price elasticity of the commodity demand.

Types of price Elasticity of Demand

The following are the main types of price elasticity of demand:

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1. Perfectly Elastic Demand (Ep = ∞): The demand is said to be perfectly elastic when a slight change in
the price of a commodity causes a major change in its quantity demanded. Such as, even a small rise in
the price of a commodity can result into fall in demand even to zero. Whereas a little fall in the price
can result in the increase in demand to infinity. In perfectly elastic demand the
demand curve is a straight horizontal line which shows, the flatter the demand
curve the higher is the elasticity of demand.

2. Perfectly Inelastic Demand (Ep =0): When there is no change in the demand for
a product due to the change in the price, then the demand is said to be perfectly inelastic. Here, the
demand curve is a straight vertical line which shows that the demand remains
unchanged irrespective of change in the price., i.e. quantity OQ remains
unchanged at different prices, P1, P2, and P3.

3. Relatively Elastic Demand (1 to ∞): The demand is relatively elastic when the
proportionate change in the demand for a commodity is greater than the
proportionate change in its price. Here, the demand curve is gradually
sloping which shows that a proportionate change in quantity from OQ0 to OQ1 is greater than the
proportionate change in the price from OP1 to Op2.

4. Relatively Inelastic Demand (0-1): When the proportionate change in the

demand for a product is less than the proportionate change in the price, the
demand is said to be relatively inelastic demand. It is also called as the elasticity
less than unity, i.e. 1. Here the demand curve is rapidly sloping, which shows that
the change in the quantity from OQ0 to OQ1 is relatively smaller than the change
in the price from OP1 to Op2.

5. Unitary Elastic Demand (Ep =1): The demand is unitary elastic when the
proportionate change in the price of a product results in the same change in the
quantity demanded. Here the shape of the demand curve is a rectangular
hyperbola, which shows that area under the curve is equal to one.

FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

The Factors affecting Price Elasticity of Demand are as follows:
1. Nature Of Commodity

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Nature of the commodity is the most important factor that affects the price elasticity of demand.
There are three types of commodities: Necessaries, Comforts and luxuries. Necessaries are those
goods which are mandatory for survival of human being. Comforts are those which make our life
smooth and happy living. Luxuries are the goods considered as status symbol. The price elasticity of
demand of these three kinds of goods is:
NATURE OF GOODS PRICE ELASTICITY OF DEMAND
Necessaries Less elastic
Comforts Unitary elastic
Luxuries Highly elastic

2. Availability Of Substitutes
Substitutes are those which can be used in place of one another. Example: Tea and Coffee, Pepsi
and Coke etc. The price elasticity in case of availability of substitutes is:
Easy Availability of Substitutes Highly Elastic Demand
Less Substitutes Available Less Elastic Demand

3. Alternative Or Multiple Uses

There are some commodities which can be used alternatively or these commodities have
multiple uses like milk, coal etc. The demand for these goods rises as the price falls and vice versa.
The price elasticity of demand in this case is as follows:
Goods having Multiple uses Highly Elastic Demand
Goods having Single use Less Elastic Demand

4. Time Period
In Economics, the time is divided into two horizons: Short Period and Long Period. The
elasticity of demand is also get affected by the duration of time.
Long time period Highly elastic demand
Short time period Less elastic demand

5. Income Of Consumer
Elasticity of demand for a commodity also depends upon the income level of the consumers. If
the buyers are high end consumers i.e. rich, they will not care for the price. Accordingly, elasticity
of demand is expected to be low. Example: Demand for cars by multi-billionaires. On the other
hand, if income level of the buyers is low, elasticity of demand is expected to be high. Example:

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Demand for small cars by the middle class people in India.
6. Level Of Price
Elasticity of demand also depends upon the level of price of the commodity. The commodities
having the highest or lowest price carry less elasticity of demand. On the contrary, the commodities
with medium ranged price have highly elastic demand.
High price Less elastic demand
Medium price Highly elastic demand
Low price Less elastic demand

7. Standard Of Living
The society where the standard of living of the people is high, the elasticity of demand is low
and where the standard of living is low, the elasticity of demand is high.
8. Postponement Of Use Of Commodity
The commodities whose demand can be postponed in near future have more elastic demand.
Example: Demand for luxury furniture or car etc. Whereas for those goods whose demand cannot be
postponed have less elastic or inelastic demand. Example: Demand for food.
9. Habits Of Consumer
Commodities which have become habits of consumer have inelastic demand because demand
does not get affected by change in price.

10. Proportion Of Income Spent On A Commodity

Goods on which consumer spend a small proportion of their income like toothpaste, newspaper
etc. will have an inelastic demand. On the other hand, goods on which the consumers spend a large
proportion of their income like clothes, scooter etc. tends to have elastic demand.

INCOME ELASTICITY OF DEMAND:

It measures the responsiveness of demand after a change in income level of individuals. Income
elasticity of demand refers to the sensitivity of the quantity demanded for a certaingood to a change
in real income of consumers who buy this good, keeping all other things constant.

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“It is the ratio of percentage change in quantity demanded over the percentage change in income
level of individuals”.

In the given figure, quantity demanded and consumer’s income is measured along X-axis and Y-
axis respectively. The small rise in income from OY to OY1 has caused greater rise in the
quantity demanded from OQ to OQ1 and vice versa. Thus, the demand curve, DD shows income
elasticity greater than unity.

CROSS ELASTICITY OF DEMAND:

It measures the responsiveness of demand of one product, after a change in price level of other
product. “It is the ratio of percentage change in quantity demanded of any one product (X) over the
percentage change in price level of other product (Y)”.
The cross elasticity of demand for substitute goods and complimentary goods is always positive
because the demand for one good increases when the price for the substitute goods and
complimentary goods increases.
For example: if there is an increase in the price of tea by 10%. and the quantity demanded for
coffee increases by 2%, then the cross elasticity of demand = 2/10 = +0.2.
If two commodities are unrelated goods, the increase in the price of one good does not result in any
change in the demand for the other goods.
% increase in quantity demanded of product A
Cross Elasticity of Demand =
% increase in price of product B

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In the above figure, quantity demanded

for Coke and price of Pepsi are
measured along X- axis and Y-axis
respectively. When the price of Pepsi
increases from OP to OP1, quantity
demanded for coke rises from OQ to
OQ1 and vice versa. Thus, the demand
curve DD shows positive cross
elasticity of demand.

ADVERTISING AND PROMOTIONAL ELASTICITY OF DEMAND:

In the modern competitive or partial competitive market economy, advertising has a great
significance. Under advertising, various visible or verbal activities are done by the firm for the
purpose of creating or increasing demand for its goods or services. Informative advertising is very
helpful for the consumer in making rational purchase decisions.

“It is a ratio of percentage change in quantity demanded of any goods and services over the
percentage change in expenses incurred for advertising and promotion”.

Following is the formula for advertising elasticity. EA = Percentage ΔQ/Percentage Δ A

% increase in quantity demanded

Cross Elasticity of Demand =
% increase in advertisement expenses

The extension of demand through advertising can be measured by advertising or promotional

elasticity of demand (EA) which measures the expected changes in demand as a result of change
in other promotional expenses. The demand for some goods is affected more by advertising.

• Advertising elasticity of demand (AED) measures the impact advertising expenditure has
in generating new sales for a company.

• Companies want a positive AED because this indicates their advertising efforts are
resulting in an increased demand for their goods and services.

• AED may not be the most accurate predictor of advertising's impact on sales because it
does not take into account other factors that affect demand, such as changes in consumer
tastes and spending habits.
Consumer demand can also be impacted by the price of products and the availability of lower-priced
substitutes.

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USES OF ELASTICITY OF DEMAND FOR MANAGERIAL DECISION MAKING:

• Determination of Price policy: Determination of Prices means to determine the cost of goods
sold and services rendered in the free market. A manufacturer has to consider the elasticity of
demand for the product.

• Price discrimination: it is an act of selling same products at different prices to different section
of customers or in different sub-markets. A monopolist adopts a price discrimination policy
only when the elasticity of demand of different consumers or sub- markets is different.
Consumers whose demand is inelastic can be charged a higher price than those with more
elastic demand.

• Public utility pricing: In case of public utilities which are run as monopoly undertakings
e.g. elasticity of water supply, railways, postal services, price discrimination is generally
practiced, charging higher prices from consumers or users with inelastic demand and lower
prices in case of elastic demand.

• Shifting of tax burden: It is possible for a business to shift a commodity tax in case of inelastic
demand to his customers. But if the demand is elastic, he will have to bear the tax burden
himself, otherwise demand for his goods will go down sharply.

• Pricing of Joint supply products: Certain goods, being products of the same process are jointly
supplied, e.g. wool and mutton. Here if the demand for wool is inelastic compared to the
demand for mutton, a higher price for wool can be charged with advantage.

• Super Markets: Super-markets are a combined set of shops run by a single organization selling
a wide range of goods. They are supposed to sell commodities at lower prices than charged by
shopkeepers in the bazaar. Hence, price policy adopted is to charge slightly lower price for
goods with elastic demand.

• Use of machines on employment: Workers often oppose use of machines out of fear of
unemployment. Machines need not always reduce demand for labor as this depends on price
elasticity of demand for the commodity produced. When machines reduce costs and hence
price of products, if the products demand is elastic, the demand will go up, production will
have to be increased and more workers may be employed for the product

is inelastic, machines will lead to unemployment as lower prices will not increase the demand.

• Factor pricing: The factors having price inelastic demand can obtain a higher price than those
with elastic demand. Workers producing products having inelastic demand can easily get their
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wages raised.

• Taxation policy: Government can easily raise tax revenue by taxing commodities which are
price inelastic.

DEMAND FORECASTING:
A forecast is a prediction or estimation of a future situation, under given conditions.
Demand forecasting is a technique that is used for the estimation of what can be the demand for the
upcoming product or services in the future.
Demand forecasting is a field of predictive analytics which tries to understand and predict customer
demand to optimize supply decisions by corporate supply chain and business management.
Demand estimation and forecasting means when, how, where, by whom and how much will be the
demand for a product or service in near future. The process of demand estimation/forecasting can be
broken into two parts i.e. analysis of the past conditions and analysis of current conditions with
reference to a probable future trend. It helps in estimating the most likely demand of a good or service
under given business conditions.

Significance of demand forecasting is shown in the following points

i. Fulfilling objectives:
 Implies that every business unit starts with certain pre-decided objectives. Demand forecasting
helps in fulfilling these objectives. An organization estimates the current demand for its
products and services in the market and move forward to achieve the set goals.
 For example, an organization has set a target of selling 50, 000 units of its products. In such a
case, the organization would perform demand forecasting for its products. If the demand for the
organization’s products is low, the organization would take corrective actions, so that the set
objective can be achieved.

ii. Preparing the budget:

Plays a crucial role in making budget by estimating costs and expected revenues. For instance, an
organization has forecasted that the demand for its product, which is priced at Rs. 10, would be 10, 00,
00 units. In such a case, the total expected revenue would be 10* 100000 = Rs. 10, 00, 000. In this way,
demand forecasting enables organizations to prepare their budget.

iii. Stabilizing employment and production:

Helps an organization to control its production and recruitment activities. Producing according to the
forecasted demand of products helps in avoiding the wastage of the resources of an organization. This
further helps an organization to hire human resource according to requirement. For example, if an
organization expects a rise in the demand for its products, it may opt for extra labor to fulfill the
increased demand.

iv. Expanding organizations:

Implies that demand forecasting helps in deciding about the expansion of the business of the
organization. If the expected demand for products is higher, then the organization may plan to expand
further. On the other hand, if the demand for products is expected to fall, the organization may cut
down the investment in the business.

v. Taking Management Decisions:

Helps in making critical decisions, such as deciding the plant capacity, determining the requirement

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of raw material, and ensuring the availability of labor and capital.

vi. Evaluating Performance:

Helps in making corrections. For example, if the demand for an organization’s products is less, it
may take corrective actions and improve the level of demand by enhancing the quality of its products or
spending more on advertisements.

vii. Helping Government:

Enables the government to coordinate import and export activities and plan international trade.

Methods of demand forecasting:

1. Opinion Polling Method/Qualitative methods
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) Consumer’s Survey Method or Survey of Buyer’s Intentions:

In this method, the consumers are directly approached to disclose their future purchase plans. This
is done by interviewing all consumers or a selected group of consumers out of the relevant popu-
lation. This is the direct method of estimating demand in the short run.

(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 generalised 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 significant difference in the results obtained by the survey. Apart from that, this
method is less tedious and less costly.

A variant of sample survey technique is test marketing. Product testing essentially involves
placing the product with a number of users for a set period. Their reactions to the product are
noted after a period of time and an estimate of likely demand is made from the result.

(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 and intermediate product, that is, the demand for the final product is the end
use demand of the intermediate product used in the production of this final product.

(b) Sales Force Opinion Method:

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This is also known as collective opinion method. In this method, instead of consumers, the opinion
of the salesmen is sought. Sales person in the company to make an individual forecast for his or
her particular sales territory. These individual forecasts are discussed and agreed with the sales
manager. The composite of all forecasts then constitutes the sales forecast for the organisation.

(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. Thus any information available to
some experts and not to others is passed on, enabling all the experts to have access to all the
information for forecasting.

2. Statistical Method/ Quantitative methods

Statistical methods have proved to be immensely useful in demand forecasting. In order to main-
tain objectivity, that is, by consideration of all implications and viewing the problem from an
external point of view, the statistical methods are used.

(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 conditions. Such data can
be given in a tabular or graphic form for further analysis. This is the most popular method among
business firms, partly because it is simple and inexpensive and partly because time series data
often exhibit a persistent growth trend.

The trend can be estimated by using any one of the following methods:

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. The direction of this free hand curve—upward or downward— shows the trend.

(b) Least Square Method:

Under the least square method, a trend line can be fitted to the time series data with the help of
statistical techniques such as least square regression. When the trend in sales over time is given by
straight line, the equation of this line is of the form: y = a + bx.

(ii) Barometric Technique:

This method is based on the notion that “the future can be predicted from certain happenings in the
present.” In other words, barometric techniques are based on the idea that certain events of the
present can be used to predict the directions of change in the future. This is accomplished by the
use of economic and statistical indicators which serve as barometers of economic change.

(iii) Regression Analysis:

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It attempts to assess the relationship between at least two variables (one or more independent and
one dependent), the purpose being to predict the value of the dependent variable from the specific
value of the independent variable.

The basis of this prediction generally is historical data. This method starts from the assumption
that a basic relationship exists between two variables. An interactive statistical analysis computer
package is used to formulate the mathematical relationship which exists.

(iv) Econometric Models:

Econometric models are an extension of the regression technique whereby a system of independ ent
regression equation is solved. The requirements for satisfactory use of the econometric model in
forecasting is under three heads: variables, equations and data.

The appropriate procedure in forecasting by econometric methods is model building. Econometrics

attempts to express economic theories in mathematical terms in such a way that they can be
verified by statistical methods and to measure the impact of one econo mic variable upon another
so as to be able to predict future events.

LAW OF SUPPLY

The law of supply is the microeconomic law that states that, all other factors being equal, as the
price of a good or service increases, the quantity of goods or services that suppliers offer will
increase, and vice versa.

The law of supply says that as the price of an item goes up, suppliers will attempt to maximize
their profits by increasing the number of items for sale.

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• An economic law stating that as the price of a good or service increases, the quantity
supplied increases, and vice versa .
• The law of supply says that a higher price will induce producers to supply a higher quantity
to the market.
• Because businesses seek to increase revenue, when they expect to receive a higher price for
something, they will produce more of it.
• When college students learn that computer engineering jobs pay more than English professor
jobs, the supply of students with majors in computer engineering will increase

FACTORS AFFECTING SUPPLY:

There are many factors affecting the supply of a commodity in the market including
1. Input costs,
2. Price of the commodity,
3. The state of technology at a given time, taxation,
4. Prices of other goods,
5. Objective of the seller,
6. Number of firms selling the same commodity among others.

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EXCEPTIONS TO THE LAW OF SUPPLY:

🞂 The law will not apply if there are future expectations for further change in prices.
🞂 If sellers expect further fall in prices in future, they would be ready to sell more
even atlow prices.
🞂 For perishable goods like milk, vegetables, fish, eggs, etc. the supply is
not affected bytheir prices. Sellers cannot hold these goods for long.
Even for agricultural goods, the supply depends more on natural factors such as drought,
floods, natural calamities etc. and less on their prices.

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