slidesharedemandanalysisdemandforecasting-220721013607-b7e524c5.pptx

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1. Demand Analysis –Demand Forecasting Dr Anisha Mahindrakar

2. Demand Characteristcs Desire to buy (for both use and satisfaction) Willingness to pay for the commodity (Readiness) Ability to pay for the commodity ( Buying capacity)

3. TYPES OF DEMAND T here are four types of demand. They are: Price demand ( Demand based on price ) Income demand ( Demand based on income ) Cross demand ( Demand based on substitutes ) Promotional demand ( Demand based on promotion)

4. PRICE DEMAND (Law of demand): D x = f ( P x ) This function tells us that, other things remaining constant; there exists an inverse relationship between price of X and the demand for X. As the price of X falls, the demand for X extends and as the price of X rises; the demand for X contracts assuming that there is no change in other determinants of demand . These are called Normal goods.

5. DEMAND SCHEDULE The demand schedule is a table showing the number of units of a commodity that would be purchased at different prices, at any given point of time.

6. Price of X commodity (Rs) 10 20 30 40 Demand for X (Units) 100 90 80 70

7. P r i c e Quantity Demanded

8. Demand curve It is a graphic representation of demand schedule. In the demand curve, we measure demand for X along horizontal axis and price on vertical axis The main feature of the price demand curve is, it slopes downward (from left to right). The quantity demanded is inversely related to price.

9. ESTIMATION OF DEMAND Pr i ce (Rs) 10 Quantity Purchased (Units) 10.0 • 11 9.50 • 12 9.00 • 13 8.50 • 14 8.00 • 15 7.50

10. Causes for Negative Slope of the Demand Curve 1. Law of Diminishing Marginal Utility: As the price of the commodity falls, consumer purchases more of the commodity, so that the marginal utility from the commodity also falls to equal the reduced price and vice-versa

11. 2. Income effect As the price of a commodity falls, the real income of a consumer increases in terms of the commodity whose price has fallen. As a result, a part of the increase in real income is used to buy more of the commodity

12. 3. Substitution effect According to ordinal utility approach, the substitution effect (because of change in price) is the basic reason for the application of Law of Demand. When the price of a commodity falls, it becomes cheaper compared to “other commodities which the consumer is purchasing”. As a result, the consumer would like to substitute this cheaper commodity ( Tea) for any other commodity ( Coffee) whose price whose price remains is relatively higher. ( Tea is preferred to coffee )

13. 4. New consumers When the price of a commodity is reduced, then a large number of new consumers who were not consuming the commodity earlier, now start purchasing it now, because they can now afford to buy it.

14. 5. Different uses of the commodity Commodities have different uses. If their price rises, they are used only for “important and limited” purposes. As a result the demand for such commodities contracts. On the other hand, when the price is reduced, the commodity may be purchased more and used for satisfying different needs as well. Ex: If Tomato price is high, it is purchased for cooking just curry only. But if the price falls down, then tomato pickles, tomato sauce, ketchup etc can also be made along with curries (Unlimited uses).

15. EXCEPTIONS TO THE LAW OF DEMAND The inverse relationship between price and quantity demand (the law of demand) does not hold good with respect to all types of commodities and under all conditions. With respect to some commodities, there exists direct relationship between price and quantity demanded i.e. as price rises, demand extends and as price falls, demand contracts. Such commodities are to be treated as exceptions to the law of demand

16. 1. GIFFEN GOODS There are certain commodities for survival sake, which are relatively inferior from the poor consumers view point. Sir Robert Giffen discussed such exceptions. Giffen stated that with a fall in price of bread its quantity demanded was reduced rather than increased. This is known as Giffen Paradox.

17. A poor man who has to spend a major portion of his income ( Say, 10 kgs per month , Rs 80 out of his budget Rs 100) on low quality coarse grain and is therefore, able to spend a very small part of it (Rs 20) on other goods (say eggs). If the price of this coarse grain rises ( Now he spends Rs 90 for the same 10 kgs per month), he will be left with still less money (Rs 10) to spend on other goods ( eggs). As a result he may be forced to spend this part of his income ( Rs 10 out of Rs 20)also on the grain whose price has risen Inference: As price of survival-commodity is rising, even the demand for the commodity is not falling . Because hike in price of that commodity reduced the purchase of other commodity (substitute), it is positive substitution effect wrt that survival-commodity whose price is increased.

18. On the other hand, if the price of the grain falls ( Rs 60 for 10 kgs), the real income of the poor consumer rises ( now he is left with Rs 40 in his pocket) and now, he can go for the consumption of relatively better quality goods ( He may purchase more number of eggs or he may meat which is costly). Inference : Extra money saved on reduction in price of the survival- commodity is not used by the consumer for purchasing more of that commodity. Hence it is NEGATIVE SUBSTITUTION EFFECT which resulted in low sales for that survival-commodity whose price is dropped but high sales for the other (relatively costly substitutes) commodities

19. 2. ARTICLES OF DISTINCTION ( Veblen Goods) These are prestige goods or status goods or Veblen goods . According to Veblen, the demand for diamonds and jewellery is more as their price is higher. This is because, a rich man’s desire for distinction (STATUS NEEDS) is satisfied better when the articles of distinction are highly priced and the poor people cannot afford to buy.

20. 3. EXPECTATIONS These expectations are basically related to rise and fall in price in future. If consumers expect a rise in price of an important commodity, they rush to purchase more of the commodity at the current price even though the current price is much higher than the previous price. (Purchases such as Rice bags, sweaters just before winter season, umbrellas just before rainy season are expected to rise in prices later) If they expect a fall in price, they purchase less of the commodity at present in the hope of buying it in future at a lesser price.( Mangoes in the beginning of summer season are costlier)

21. Income demand Income function as Dx = f (y). Here Dx is the demand for x commodity and y is the income of consumer. Superior goods: In case of superior goods, there exist direct relationship between change in income and demand Inferior goods: Demand is inversely related to change in income with respect to inferior goods. Qd = a +by.

22. CROSS DEMAND This shows the relationship between changes in demand for one commodity as a result of change in the price of another commodity, assuming other things remaining constant. These two commodities may be either substitutes or complementary goods. We can write the cross demand function as shown below. D A = f (P SC ) Where DA = Demand for commodity - A (Dependent variable) P sc = Prices of substitutes and complementary goods to A ( Independent variable)

23. Substitutes If two commodities are substitutes, then we can use A commodity (or B commodity) for the same purpose. Examples of substitutes are Televisions, fans, watches, AC coolers, bikes, four wheelers from two companies etc. In the case of substitutes, if the price of B rises, the demand for A increases and if the price of B falls, the demand for A decreases Cross demand curve for substitute goods, slopes upward from left to right

24. Complementary goods These goods also known as jointly demanded products. Examples are petrol and automobiles, pen and ink, pen and paper etc. Let us assume that A and B are complementary goods. Then, if price of B ( Shoes)rises the demand for A ( Socks) falls and vice versa. In case of complementary goods, the cross demand curve slopes downward from left to right.

25. PROMOTIONAL DEMAND This shows the relationship between changes in demand as a result of change in advertisement expenditures, assuming other things remaining constant. Companies spend large amounts on promoting the sales of their products. The promotional demand function as shown below. D x = f (AE) In the above function D x = Demand for commodity -X (Dependent variable) AE = Advertisement expenditures.

26. In general elasticity means the degree of responsiveness of the dependent variable to a given proportionate change in the independent variable. This we can write as: Proportionate change in the dependent variable Elasticity of demand = (Proportionate change in the independent variable ) / (Proportionate change in the independent variable)

27. Price Elasticity of demand (Change in quantity d e mande d / O r i ginal quantity) Price Elasticity of demand = ------------------- (Change in pr i ce/Orig i nal price)

28. 1.Perfectly elastic demand In this case, the value of elasticity will be equal to infinity and the demand curve will be parallel to horizontal axis. The price is constant.

29. 3. Unitary elasticity If the proportionate change in quantity demanded is exactly equal to proportionate change in price, then it is called as unitary elastic demand. In this case the value of elasticity is equal to one(1) and the demand curve will be like rectangular hyperbola

30. 4. Relatively elastic demand If the proportionate change in demand is more than the proportionate change in price, it is known as relatively inelastic demand. In this case the value of elasticity will be less than one

31. Relatively inelastic demand If the proportionate change in demand is less than the proportionate change in price, it is known as relatively inelastic demand. In this case the value of elasticity will be less than one.

32. 2. Perfectly inelastic demand The demand curve will be parallel to vertical axis The demand curve will be parallel to vertical axis

33. Need for demand forecasting Sales constitute the primary source of revenue for the business firm. Thus sales forecasts are needed for production planning, inventory planning, profit planning etc

34. Steps in demand forecasting 1 . Nature of forecast: The business firm should be clear about the use of forecast data. At the same time it has to state it objective in terms of time period i.e. short run or long run

35. Nature of product It indicates whether the firm is producing final product like food, or intermediary product like chemical which is to be used as an input in final product such as paint

36. 3. Life cycle of the product If the product is in the initial years of life cycle, forecast may show an upward trend, if it is in the last years, forecast may show downward trend

37. 4. Identification of determinants Business firm has to identify the determinants such as price, income, promotional expenditure,etc

38. 5 . Analysis of determinants Researcher has to analyse all those determinants as whether they are cyclical, seasonal or random variables.

39. 6. Choice of technique: To conduct the analysis of demand forecast, researcher may use different techniques. But the choice of appropriate technique depends on the nature of the product. The accuracy and relevance of forecast data depends on the choice of technique.

40. 7. Testing of accuracy The testing is needed to reduce the margin of error and there by improve its validity for practical decision making purpose

41. Techniques of demand forecasting Broadly speaking there are two approaches to demand forecasting. They are: Collect information about the likely purchase behavior of consumer through conducting opinion polls or interviews. Use past experience as a guide through a set of statistical techniques

42. Survey method Consumer survey : Under this method, the company collects information through personal interviews on consumers’ preferences regarding their product, from the respondents (census of population or from sample population). Census method yields reliable results compare to sample method. But census method needs more time and money compared to sample method.

43. Experts’ Opinion Method It consists of an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the response appears to converge along a single line (or issues causing disagreement are clearly defined). The participants are provided with “responses to previous questions” from other experts in the group by a coordinator. This is also known as Delphi method .

44. Collective Opinion Method This method also called sales force polling . The salesmen estimate future sales in their respective areas. The salesmen being closest to the consumers know the pulse of consumers and have the most intimate feel of the market i.e. customers reaction to the products of the firm and their sales trends.

45. Time series and trend projection A firm which has been in production process, accumulates data related to price and corresponding sales. Such data when arranged in a chronological order yields the time series. The time series relating to sales represents the past pattern of demand for a particular product.

46. Use of economic indicators (Barometric) method This method is useful to forecast cyclical swings in economic activity or business cycles. Under this method we have to identify leading economic indicators. These are time series that tend to precede or lead changes in general economic activity (like changes in the mercury in a barometer precede weather conditions, hence it is called barometric method).

47. Steps in Baraometric Method Identify if a relationship exists between the demand (Y) for a product and certain economic indicators (X) Assuming the relationship to be linear, we can write the equation as Y = a + b X Once the regression equation is derived, the value of Y(dependent variable) can be estimated for any given values of X.

48. Controlled Experiments The researcher varies separately d e t ermin a n ts ( f o r ex ampl e : pr i ce, advertisement expenditures etc) of which c an b e mani p u l a t ed and cer t ain income, d e ma n d conduct experiments assuming other factors remaining constant. Thus, the effect of demand determinants like price, advertisement etc can be assessed by either varying them over different markets

49. Judgmental Approach Management may have to use its own judgment when (a) analysis of time series and trend projection is not feasible. The company asks the advice from an expert in the industry.

50. Smoothing techniques: These techniques predict future values of a time series on the basis of some average of its past values only. Smoothing techniques are useful when the time series exhibit little trend or seasonal variations. There are two different smoothing techniques. They are: Moving Averages: In this method the forecasted value of a given period is equal to the average value of ( year or quarter or month) time series in a number of previous periods. Exponential smoothing: In exponential smoothing method, the forecast for period t+1 is a weighted average of actual and forecasted values of the time series in period t.

51. Law of Supply We can write the simplified supply function as: Sn = f ( Pn). The function tells us that the supply of ‘n’ units of a commodity depends on price of ‘n’ commodity. There exists direct relationship between price of ‘n’ units and supply of ‘n’ units, other things remaining constant (Ceteris Paribus). That is as price of ‘n’ units of commodity rises the supply of ‘n’ units goes up and as the price of ‘n’ units falls; the supply of ‘n’ units goes down. This relationship between price and supply is known as ‘Law of Supply’.

52. Th e basi c f e a tu r e of su p pl y c u r v e i s th a t it slopes upward from left to right. Thi s r e v eals the f act th a t, the q ua n tity supplied is directly related to price.

53. Elasticity of supply In general elasticity refers to degree of responsiveness in dependent variable as a result of given proportionate change in the independent variable

54. Degrees of Elasticity of Supply: 1. Perfectly Elastic supply 2. Perfectly Inelastic Supply 3. Unitary Elastic Supply 4. Relatively Elastic Supply 5. Relatively Inelastic Supply

55. Measurement of Elasticity of Supply: Two methods are generally used to measure supply elasticity. They are; 1. Mathematical Method 2. Graphic Method. Mathematical Method: By using this method it is possible to find out the exact value supply elasticity. We can understand this method with the help of following example. At price Rs.50, suppliers offered 100 units for sale and at price Rs 100 they offered 300 units. Supply elasticity is S = 100 units S 2 –S 1 = 300 – 100 • = 200 units P 2 = Rs 50 P 2 -P 1 = 100 – 50 • = Rs 50

56. By substituting the values in the following principle we can get the value of supply elasticity. Elasticity of supply = [(S 2 –S 1 ) /S 1 ] [(P 2 –P 1 )/P 1 ] = 2/1 Value of elasticity 2/1 means 1% change in price causes 2% change in supply. This is a case of relatively elastic supply ( elasticity ≥ 1)

57. Using the linear supply function Qs = a + bPx, we can find out elasticity of supply at any given price. For example the estimated supply function is Qs=15 + 1.5 Px. At price Rs 100, find out supply elasticity Hint: SLOPE is given which is (S2-S1)/(P2-P1)

58. Determination of equilibrium price: Equilibrium price is determined at a point where demand is equal to supply. Ex: The given estimated demand function is Qd = 10 - 0.5 Px, Where as the given supply function is Qs= 5 + 0.5Px. When Qd = Qs then we can identify the equilibrium price. Now we shall equate Qd with Qs to identify price. 10- 0.5Px = 5+ 0.5Px 10 – 5 = 0.5Px + 0.5 Px 5 = 1 Px So the equilibrium price is Rs 5. Equilibrium price implies the price that equates demand with supply. Given the demand and supply functions at price Rs 5, the demand = 7.5 units and the supply = 7.5 units.

59. If Qd = 200 - 1.5Px and Qs = 100 + 1.5Px, find out equilibrium price. Estimate equilibrium demand and supply