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INTRODUCTION TO ECONOMICSINTRODUCTION TO ECONOMICSAND INDIAN ECONOMYAND INDIAN ECONOMY
ByBy
Dr. JONARDAN KONERDr. JONARDAN KONER
ASSOCIATE PROFESSORASSOCIATE PROFESSOR
NATIONAL INSTITUTE OF CONSTRUCTIONNATIONAL INSTITUTE OF CONSTRUCTION
MANAGEMENT AND RESEARCH, PUNE.MANAGEMENT AND RESEARCH, PUNE.
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INTRODUCTIONINTRODUCTION
Economics is the study of how economic agents or societies
choose to use scarce productive resources that havealternative uses to satisfy wants which are unlimited and of
varying degrees of importance.
The main concern of economics is economic problem: its
identification, description, explanation and solution. The source of any economic problem is scarcity.
Scarcity of resources forces economic agents to choose
among alternatives.
Therefore, economic problem can be said to be a problem ofchoice and valuation of alternatives.
The problem of choice arises because limited resources with
alternative uses are to be utilized to satisfy unlimited wants,
which are of varying degrees of importance. 22
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INTRODUCTIONINTRODUCTION
Scarcity is a relative concept.
It can be define as excess demand, i.e., demand more than
the supply.
For example, unemployment is essentially the scarcity of
jobs. Inflation is essentially scarcity of goods.
Economics is essentially the study of logic, tools and
techniques of making optimum use of the available
resources to achieve the ends.
Economics thus provides analytical tools and techniques
that managers need to achieve the goals of the organization
they manage.
Therefore, a working knowledge of economics, not
necessarily a formal degree, is essential for mangers.
The job of any efficient manager is of economic one. 33
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INTRODUCTIONINTRODUCTION
Decision-making is the main job of management.
Decision-making involves evaluating various alternatives
and choosing the best among them.
For example, a marketing manager is to allocate his / her
advertising budget among various media in such a way soas to maximize the reach.
Managers are essentially practicing economists.
In performing his/her functions, a manager has to take a
number of decisions in conformity with the goals of thefirm.
Many business decisions are taken under the condition of
uncertainty and risk.44
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INTRODUCTIONINTRODUCTION Uncertainty and risk arise mainly due to uncertain behavior
of the market forces, changing business environment,
emergence of complexity of the modern business world andsocial and political, external influence on the domestic
market and social and political changes in the country.
The complexity of the modern business world adds
complexity to business decision-making.
However, the degree of uncertainty and risk can be greatly
reduced if market conditions are predicted with a high
degree of reality.
The prediction of the future course of business environment
alone is not sufficient.
It is important equally to take appropriate business decisions
and to formulate a business strategy in conformity with the
goals of the firm. 55
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A GENERAL LISTING OF DESIRED ECONOMIC GOODS & LIMITED RESOURCESA GENERAL LISTING OF DESIRED ECONOMIC GOODS & LIMITED RESOURCES
Economic Goods (Wants) Limited Resources
Food (Rice, Bread, Milk, Eggs,
Vegetables, Tea, Coffee, Sugar, etc.)
Clothing (Shirts, Pants, Shoes, Socks,
Coats, Sweaters, etc.)
Household Goods (Tables, Chairs, Rugs,
Beds, TV, Dressers, etc.)Education
National Defense
Recreation
Leisure Time
EntertainmentClean Air
Pleasant Environment (Trees, Lakes,
Rivers, Open Space, etc.)
Pleasant Working Conditions
More Productive Resources
Land (Various Degrees of Fertility)
Natural Resources ( Rivers, Trees,
Minerals, Oceans, etc.)
Machines and Other Human-
Made
Physical Resources
Non-Human Animal Resources
Technology (Physical and Scientific
Recipes of History)Human Resources (Knowledge, Skill,
And talent of Individual Human Beings)
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NATURE OF MANAGERIAL ECONOMICSNATURE OF MANAGERIAL ECONOMICS
Taking appropriate business decisions requires a clear
understanding of the technical and environmental conditionsunder which business decisions are taken.
Application of economic theories to explain and analyze the
technical conditions and the business environment
contributes a good deal to the rational decision-makingprocess.
Economic theories have, therefore, gained a wide range of
application in the analysis of practical problems of business.
With the growing complexity of business environment, the
usefulness of economic theory as a tool of analysis and its
contribution to the process of decision-making has been
widely recognized.88
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NATURE OF MANAGERIAL ECONOMICSNATURE OF MANAGERIAL ECONOMICS
Baumol has pointed out three main contributions ofeconomic theory to business economics.
First, 'one of the most important things which the economictheories can contribute to the management science' is building analytical models, which help to recognize thestructure of managerial problems, eliminate the minor
details, which might obstruct decision-making and help toconcentrate on the main issue.
Secondly, economic theory contributes to the businessanalysis 'a set of analytical methods' which may not be
applied directly to specific business problems, but they doenhance the analytical capabilities of the business analyst.
Thirdly, economic theories offer clarity to the variousconcepts used in business analysis, which enables the
managers to avoid conceptual pitfalls. 99
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SCOPE OF MANAGERIAL ECONOMICSSCOPE OF MANAGERIAL ECONOMICS
The problems in business decision-making and forward
planning can be grouped into four categories as follows: Problems of Resource Allocation: Source resources are to
be used with utmost efficiency to get the optimal results.
These include production programming and problems of
transportation, etc. Inventory and Queuing Problems: Inventory problems
involve decisions about holding of optimal levels of stocks
of raw materials and finished goods over a period. These
decisions have to be taken by considering demand andsupply conditions.
Queuing problems involve decisions about installation of
additional machines or not hiring labor, against the cost of
such machines or labor. 1010
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SCOPE OF MANAGERIAL ECONOMICSSCOPE OF MANAGERIAL ECONOMICS
Pricing Problems
Fixing prices for the products of the firm are important
decision-making problems.
Pricing problems involve decisions regarding variousmethods of pricing to be followed.
Investment Problems
It is related of allocating resources over time.
These normally relate to investing new plants, how much toinvest, expansion programs for the future, sources of funds,
etc.
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BRANCHES OF ECONOMICSBRANCHES OF ECONOMICS
MICROECONOMICS
Adam Smith is the founder of the field of Microeconomics,the branch of economics which today is considered with the
behavior of individual entities such as markets, firms and
households.
In The Wealth of Nations (1776), Smith considered howindividual prices are set, studied the determination of price
of land, labor, and capital, and enquired into the strengths
and weakness of the market mechanism.
He identified the most important efficiency properties ofmarkets and saw that economic benefit comes from the self-
interested actions of individuals. These remain important
issues today also.1212
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MACROECONOMICS
Macroeconomics started its journey when John Maynard
Keynes published his revolutionary General Theory ofEmployment, Interest and Money (1936).
It studies of the overall performance of the economy.
At the time, England and USA were still stuck in the Great
Depression of the 1930s, with over one-quarter of theAmerican labor force unemployed.
In his new theory, Keynes developed an analysis of whatcauses business cycles, with alternative spells of highunemployment and high inflation.
Now, macroeconomics examines a wide variety of areas,such as how total investment and consumption aredetermined, how central banks manage money and interestrates, what causes international financial crisis, and why
some nations grow rapidly while others stagnate.
BRANCHES OF ECONOMICSBRANCHES OF ECONOMICS
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BASICBASIC CONCEPTSCONCEPTS Every economy faces three fundamental questions in its
functioning. These are:
What goods and services are to produce and in whatquantity?
How to produce those goods and services? i.e., how thescarce resources are optimally allocated?
How the goods and services so produced are distributedamong the households?
The nature of an economic system depends on how theabove questions are resolved and who coordinates the
decisions of millions of economic agents. At the two extremes are the Market and Command
Economies.
In between lies the widely prevalent Mixed Economy,
which is a mixed of command and Market Economies. 1414
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Market Economy:
In a market economy, demand determines what goods andservices are to be produced and how much of each good andservices to be produced.
Consumers are assumed to act in a rational manner so as tomaximize their economic welfare.
They spend their income on various products in such a wayso as to maximize their economic welfare.
Demand as given condition, the firms decide how toproduce the required goods and services in a most efficient
manner so as to maximize their profits. This results in optimum allocation of scarce resources.
After that, the firms finalized that how the goods andservices are distributed for resolving the ownership pattern
of factor inputs and factor prices.
TYPES OF ECONOMYTYPES OF ECONOMY
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TYPES OF ECONOMYTYPES OF ECONOMY Command Economy:
A command mechanism is a method of determining what,
how, when, where and for whom goods and services are produced, using a hierarchical organization structure inwhich people carry out the instructions given to them.
The best example of a hierarchical organization structure is
the military in India. Commanders make decisions requiring actions that are
passed down a chain of command.
Soldiers and mariners on the front line take the actions they
are ordered. The examples of command economies are the former Soviet
Union and the former communist nations of Eastern Europe.
A command economy differs from a market economy in
two important ways. 1616
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TYPES OF ECONOMYTYPES OF ECONOMY
Firstly, in a command economy the state owns all the
productive resources, like land, factories, financial
institutions, retail stores, and the bulk of the housing stock.
Government enterprises and government ownership of
resources are the rule rather than the exception in acommand economy.
Secondly, in a command economy, authoritarian methods
are used to determined resource use and prices.
A centrally planned economy is one in which politically
appointed committees plan production by setting target
outputs for factory and enterprise managers are manage the
economy to achieve political objectives. 1717
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TYPES OF ECONOMYTYPES OF ECONOMY Mixed Economy: Most of the real world economies are mixed economy.
It is an economy that follows both the market and commandmechanism.
In most of the modern countries, governments control manyresources and criteria other than personal gain and business
profit are used to decide how resources will be employed. Most of modern nations have a government firms as well as private enterprises to provide goods and services for thecountry.
In such a country, government provides roads, defense,pensions and sometimes education.
In modern mixed economies, governments intervene themarkets to control prices and correct the shortcomings of asystem in which prices and the pursuit of personal gain
influence resource use and incomes. 1818
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BASIC MICROECONOMICSBASIC MICROECONOMICSBASIC CONCEPTS AND PRINCIPLES OF MICROBASIC CONCEPTS AND PRINCIPLES OF MICRO--ECONOMICECONOMIC
ANALYSISANALYSIS
Managerial economics deals with firms, more especially
with the environment in which firms operate, the decisions
they take and the effects of such decisions on themselvesand their stakeholders like customers, competitors,
employees and the society in which they operate.
The key economic concepts and principles that constitutethe broad framework of managerial economics are
explained in the next slides.
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BASIC MICROECONOMICSBASIC MICROECONOMICS
OPPORTUNITY COST
Economic decision is choosing the best alternative amongavailable alternatives.
Before choosing best alternative you rank them all based
on their priority and probable return.
This choice implies sacrificing the other alternatives.
The cost of this choice can be evaluated in terms of the
sacrificed alternatives.
If the best alternative was not chosen then you could havechosen the second best alternative.
So, the cost of this particular best choice is the benefit of
the next best alternative foregone. This is called
Opportunity Cost. 2121
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BASIC MICROECONOMICSBASIC MICROECONOMICS
DISCOUNTING TIME PERSPECTIVE
Discounting principle refers to time value of money, i.e., the fact
that the value of money depreciates with time. The core discounting principle is that a rupee in hand today is
worth more than a rupee received tomorrow.
One rationale of discounting is uncertainty about tomorrow, i.e.,future. Even if there is no uncertainty, it is necessary to discountfuture rupee to make it equivalent to current day rupee.
In business situations, most of the decisions relate to outflow andinflow of money and resources that take place at different pointof time.
Most outflows normally occur in the current period, whereasinflows occur only in future, therefore, in order to take the rightdecision it is necessary to discount future inflows to theirpresent value level. The simple formula for discounting is:
PVF = 1 / (1+rn), Where PVF = present value of fund, n= period(year, etc.) and r = rate of discount. 2222
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BASIC MICROECONOMICSBASIC MICROECONOMICS
RISK AND UNCERTAINTY
The uncertainty is due to unpredictable changes in thebusiness cycle, structure of the economy and governmentpolicies.
This means that the management must assume the risk of
making decisions for their organizations in uncertain andunknown economic conditions in the future.
Firms may be uncertain about production, market-prices,strategies of rivals, etc.
Under uncertain situation, the consequences of an actionare not known immediately for certain.
Economic theory generally assumes that the firm hasperfect knowledge of its costs and demand relationships
and its environment. 2323
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DEMAND ANALYSISDEMAND ANALYSIS
DEMAND
The amount of good that a consumer is willing to buy and
able to purchase over a period of time, at a certain price isknown as the quantity demanded of that good.
The quantity desired to be purchased may be different fromthe quantity of good actually bought by the consumer.
Quantity demanded is a flow concept, so the relevant timedimension has to be mentioned which will indicate thequantity demanded per unit of time.
DEMAND FUNCTION
Demand is a relationship between the price and the quantitydemanded, other things remaining the same.
If X1 denotes the quantity demanded and P1 its price perunit of the good, then other things remaining constant, the
demand function is; X1 = f (P1). 2525
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DEMAND ANALYSISDEMAND ANALYSIS
Which shows that quantity demanded depends on the price.This means that any change in price will result in acorresponding change in the quantity demanded.
DETERMINANTS OF DEMAND
The determinants of demand for a product and the nature ofrelationship between demand and its determinants are veryimportant factors for analyzing and estimating demand forthe product.
The most important determinants are as follows:
Price of the product. Price of the related goods Complements and Supplements.
Level of consumers' income.
Customers' taste and preference.
Advertisement of the product. 2626
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DEMAND ANALYSISDEMAND ANALYSIS
Consumers' expectations about future price and Supplyposition.
Demonstration effect and 'Band-Wagon' effect.
Consumer-credit facility.
Population of the country (Goods for mass consumption).
Distribution pattern of the National Income. LAW OF DEMAND
The law of demand states that other things being constant,price and quantity demanded have an inverse relationship;
i.e. as price of a product increases quantity demandeddecreases and vice versa.
This law states that there is an inverse relationship betweenprice and quantity demanded, as price increases, quantity
demanded will decrease. 2727
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DEMAND ANALYSISDEMAND ANALYSIS
The law of demand can be explained in terms of substitutionand income effects resulting from price changes.
The substitution effect reflects changing opportunity costs.When price of good increases, its opportunity cost in termsof other goods is also increases.
Consequently, consumers may substitute other goods for thegood that has become more expensive.
EXCEPTIONS TO THE LAW OF DEMAND
Though normally law of demand applies to all situations,
but there are few cases where the law does not hold goods,therefore these are regarded as exceptions to the law.
These are the goods which are demanded less at low priceand more at high price. Let us discuss some such exceptions
here. 2828
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DEMAND ANALYSISDEMAND ANALYSIS
Hence such goods which display direct price demand
relationship are called Giffin Goods. These goods are considered inferior by the consumer, but
they occupy a significant place in the individuals
consumption basket.
It so happens that people in this case, with the rise of priceof this good (say rice), are forced to reduce their purchase of
other expensive goods (say, chicken) and increase the
purchase of that good (rice) in larger quantity to supplement
the reduction in luxury food item (chicken).
These goods categorically are those on which major portion
of consumers income is spent, hence they are termed as
inferior. 3030
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DEMAND ANALYSISDEMAND ANALYSIS
SNOB APPEAL Opposite to Giffen Goods, there are certain goods which
have snob value, for which the consumer measures thesatisfaction derived from there commodities not by theirutility value, but by their social status.
The consumer of this particular commodity wants to show itoff to others, and as a result they buy less of it at lowerprices and more at higher prices.
Thus in this case, price and quantity move in the samedirection.
Diamond or antique works of art, latest model of mobile
phones, sports cars, and designer clothes are example ofsuch goods. Higher is the price of diamond, higher is the snob value
attached to it and higher is its demand. These goods are sometimes also known as Vevlen Goods
after the economist Thorstein Vevlen. 3131
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DEMAND ANALYSISDEMAND ANALYSISSHIFT OF DEMAND V/S EXPANSION OR CONTRACTION OF DEMANDSHIFT OF DEMAND V/S EXPANSION OR CONTRACTION OF DEMAND
EXPANSION OR CONTRACTION OF DEMAND
Demand curve shows the relationship between priceof a commodity and demand at that price, ceterisparibus.
If the price changes, the demand will also changealong the same demand curve.
Thus movement along the same demand curve isknown as a contraction or expansion in quantitydemanded, which occurs due to rise or fall in priceof the commodity.
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DEMAND ANALYSISDEMAND ANALYSIS
EXPANSION OR CONTRACTION OF DEMANDEXPANSION OR CONTRACTION OF DEMAND
Expansion or Contraction of Demand
O Quantity
PriceD
D
P1
P2
Q1 Q2
A
B
Movement from A to B: Expansion of demand
Movement from B to A: Contraction of demand
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DEMAND ANALYSISDEMAND ANALYSIS
SHIFT OF DEMAND V/S EXPANSION OR CONTRACTION OF DEMANDSHIFT OF DEMAND V/S EXPANSION OR CONTRACTION OF DEMAND
SHIFT OF DEMAND
When price of a good remain the same but any one of the
other determinants changed then we will get a new demand
curve.
So, when demand increases without any change in price of
that good, the demand curve will shift to the right and with a
reduction in demand, the demand curve will shift to the left.
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DEMAND ANALYSISDEMAND ANALYSISSHIFT OF DEMANDSHIFT OF DEMAND
OQuantity
Price
D
DD1
D1
D2
D2
Right ward shift of demand
Left ward shift of
demand
SHIFT IN DEMAND
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DEMAND ANALYSISDEMAND ANALYSIS
Elasticity of Demand
Law of demand gives us the direction of change in demandif the price of the product changes.
But this information is not of much practical use since weknow only the direction of change in the demand for a givenchange in the price.
For decision making, we need the magnitude of this demandand elasticity of demand can gives this changes.
The elasticity of demand helps to understand the extent towhich the quantity demanded will rise (fall) due to fall (rise)
in the price of the same good or a related good or due to rise(fall) in the income of the consumer.
This involves an analysis of demand sensitivity with respectto prices of goods and income which helps the business to
forecast market trends for the future. 3636
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DEMAND ANALYSISDEMAND ANALYSIS
TYPES OF ELASTICITY
There are many types of elasticity but the main and
important types are as follows.
i) Price elasticity of demand
ii) Income Elasticity of Demand
iii) The Cross-price Elasticity of demand
iv) Advertising Elasticity of Demand
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DEMAND ANALYSISDEMAND ANALYSIS
PRICE ELASTICITY OF DEMAND (ep)
ep = percentage change in quantity demanded resulting
from one percent change in the price of the good, otherthings remaining constant.
ep = Percentage change in quantity demanded / Percentagechange in price
Percentage change in quantity demanded = [change inquantity demanded / original quantity demanded] * 100
Percentage change in price = [change in price / originalprice] *100
Combining the two, we have, ep = [Q / P] * [P / Q], Where, Q = Infinitesimal change in quantity,
P = Infinitesimal change in price,
P = original price and
Q = original quantity demanded of the good. 3838
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DEMAND ANALYSISDEMAND ANALYSIS
SOME IMPORTANT CONCEPTS
Perfectly elastic demand: A very small amount of change inthe price will result in a change in the quantity demanded to theextent of infinity. Ep = .
Perfectly inelastic demand: A change in price, however largeit may be, causes no change in quantity demanded. Ep = 0.
Unit elasticity of demand: When a given change in the pricecauses an equally proportionate change in the quantity demandedthe value of price elasticity of demand id unitary. Ep = 1.
Relatively elastic demand: Here a change in the price resultsin more than proportionate change in the quantity demanded. Ep> 1.
Relatively inelastic demand: Here a change in the priceresults in less than proportionate change in the quantitydemanded. Ep < 1.
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DEMAND ANALYSISDEMAND ANALYSIS
Perfectly Elastic % P = 0 Ep = .
Relatively Elastic % Q > % P Ep > 1.
Unitary Elastic % Q = % P Ep = 1.
Relatively Elastic % Q < % P Ep < 1.
Perfectly Inelastic % Q = 0 Ep = 0.
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DEMAND ANALYSISDEMAND ANALYSIS INCOME ELASTICITY OF DEMAND
It is defined as the proportionate change in the quantity demanded
resulting from a proportionate change in income. Ey = [Q / Q] / [Y / Y] = [Q / Y] * [Y / Q]
It is clear that the sign of the elasticity depends on the sign of thederivative Q / Y as both of the expressions Q and Y are positive,i.e., Q>0 & Y>0.
The income elasticity is positive for normal goods. A commodity isconsidered to be a 'luxury' if its income elasticity is greater than unity.A commodity is considered to be a 'necessity' if its income elasticity isless than unity.
The main determinants of income elasticity are:
The nature of the need that the commodity covers: the percentage ofincome spent on food declines as income increases.
The initial level of income of a country: for example, a TV set is a'luxury' in an underdeveloped and poor country, while it is a'necessity' in a country with per-capita income.
The time period: consumption patterns adjust with a time lag to
changes in income. 4141
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DEMAND ANALYSISDEMAND ANALYSIS
THE CROSS-PRICE ELASTICITY OF DEMAND
The cross-price elasticity of demand is defined as the proportionate
change in the quantity demanded of product i resulting from aproportionate change in the price of the product j. Symbolically thecross-price elasticity is:
Ecij = [Percentage change in the quantity demanded of the ith good /Percentage change in the price of the jth good]
= [(Qi / Qi)*100] / [(Pj / Pj)*100] = [Qi / Pj] * [Pj / Qi], As price and quantity values cannot be negative terms, the sign of the
cross price elasticity is determined by the sign of the derivative Qi /Pj.
The sign of cross price elasticity is negative if i and j are
complementary goods, and is positive if i and j are substitute goods. The higher the value of the cross-price elasticity the stronger will be
the degree of substitutability or complementarities of i and j.
The main determinant of the cross elasticity is the nature of thecommodities relative to their uses. If two commodities can satisfy
equally well the same need, the cross elasticity is high and vice versa.4242
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DEMAND ANALYSISDEMAND ANALYSIS
DEMAND FORECASTING
There are so many methods for forecasting demand. Here we will
discuss the main methods. Broadly they are divided into twogroups:
1. Survey Methods.
2. Statistical Methods.
1. Survey Methods.
Survey methods are generally used where the purpose is to makeshort-run forecast of demand. Under the survey methods there aretwo types of survey: i) Consumer Survey Methods DirectInterviews, and ii) Opinion Poll Methods
i) Consumer Survey Methods Direct Interviews The customer survey method of demand forecasting involves of
the potential consumers. It may be in the form of:
Complete enumeration,
Sample survey,
End-use method.4444
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DEMAND ANALYSISDEMAND ANALYSIS
a) Complete enumeration method
By this method, almost all potential users of the product are contacted
and are asked about their plan of purchasing the product in question. The quantities indicated by the consumers are added together to obtain
the probable demand for the product.
The main limitation of this method is that it can be used successfully
only in case of those products whose consumers are concentrated in acertain region or locality.
b) Sample survey
In this method, only a few potential consumers and users selected
from the relevant market through a sampling method are surveyed.
Method of survey may be direct interview or mailed questionnaire to
the sample-consumers.
This method is generally used to estimate short-term demand frombusiness firm, government department and agencies and also by the
households who plan their future purchases. 4545
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DEMAND ANALYSISDEMAND ANALYSIS
c) End-use method
This method of demand forecasting has a considerabletheoretical and practical value, especially in forecastingdemand for inputs.
This method requires building up a schedule of probableaggregate future demand for inputs by consuming industriesand various other sectors.
This method has two exclusive advantages.
First, it is possible to work out the future demand for anindustrial product in considerable details by types and size.
Second, in forecasting demand by this method, it is possibleto trace and pinpoint at any time in future as to where andwhy the actual consumption has deviated from the estimateddemand.
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DEMAND ANALYSISDEMAND ANALYSIS
ii) Opinion Poll Methods
The opinion poll methods aim at collecting opinions of those
who are suppose to possess knowledge of the market, i.e., salesrepresentatives, professional marketing experts and consultants.This method includes;
Expert-opinion method.
Delphi Method. Market studies and experiments.
a) Expert-opinion method
The estimates of demand can obtain from different regions areadded up to get the overall probable demand for a product.
The firms are not having this facility; gather similarinformation about the demand for their products through theprofessional markets experts or consultants, who can, throughtheir experience and expertise, predict the future demand. This
is called opinion poll method. 4747
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DEMAND ANALYSISDEMAND ANALYSIS
b) Delphi Method
This method of demand forecasting is an extension of the
simple expert opinion poll method. Under this method, the experts are provided information on
estimates of forecasts of their experts along with theunderlying assumptions.
The experts may revise their own estimates in the light offorecasts constitutes the final forecast.
c) Market studies and experiments
It is an alternative method of collecting necessary
information regarding demand is to carry out market studiesand experiments on consumer's behavior under actual,though controlled, market conditions.
This method is known in common parlance as marketexperiment method.
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SUPPLY ANALYSISSUPPLY ANALYSIS
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SUPPLY ANALYSISSUPPLY ANALYSIS SUPPLY FUNCTION
Supply of a good refers to the various quantities of the good which a
seller is willing and able to sell at different prices in a given market, ata particular point of time, other things remaining the same.
Supply is related to scarcity.
It is only the scarce goods which have a supply price.
On the other hand, goods which are available freely have no supplyprice, i.e., air is available freely and hence does not have supply price.
The law of supply states that other things remaining the same, more ofa good are supplied at a higher price and less of it is supplied at a
lower price.
The law of supply takes into account only the most important
determinant of supply, viz., the price of the good.
So, the supply function is; Sx = f(Px), other things remaining thesame,
where, Sx = Amount of good X supplied, Px = Price of good X. 5050
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SUPPLY ANALYSISSUPPLY ANALYSIS
FACTORS AFFECTING SUPPLY
The followings are the major factors affecting the supply
of the good;
i) Price of the Good.
ii) Prices of other goods.
iii) Prices of factors of Production.
iv) State of Technology.
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SUPPLY ANALYSISSUPPLY ANALYSIS
ELASTICITY OF SUPPLY
Price Elasticity of Supply refers to the percentage change inquantity supplied due to one percentage change in the priceof that good.
Es = [Percentage change in quantity supplied / Percentagechange in the price]
= [Qs/Qs] / [P/P] = [Qs/P] * [P/Qs]
Where,
Qs = Original quantity supplied,P = Original price,
Qs = Change in quantity supplied,
P = Change in price.5252