Theoretical foundation for demand analysis

Consumer’s equilibrium :

Cardinal Utility:

• Law of Diminishing marginal Utility

• Law of equimarginal Principle

• Consumers equilibrium and derivation demand curve

Ordinal utility Analysis:

• Indifference Curve, Budget line,

• Equilibrium using indifference curves

• Changes in Equilibrium

• Due to change in Income – ICC Curve - Engel Curve• Due to change in Price - PCC Curve – Demand Curve

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

1. Demand Analysis : Meaning of demand : No. of units of a commodity that customers

are willing to buy at a given price under a set of conditions. Demand function : Qd = f (P, Y, Pr W)

Demand Schedule : A list of prices and quantitives and the list is so arranged that at each price the corresponding amount is the quantity purchased at that price

Demand curve : Slops down words from left to right.

Law of demand : inverse relation between price and quantity Exceptions to the law of demand :

Giffens paradoxThorsten Veblen's “ Doctrine of conspicuous consumption Price expectations

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Elasticity : Measure of responsiveness - Qd = f (P, Y, Pr W)

E = percentage change in DV/ percentage change in IV Concepts of price, income, and cross elasticity

Price Elasticity :

Ep =

Types of price elasticity :

1. Perfectly elastic demand Ep = ∞

2. Elastic demand Ep > 1

3. Inelastic demand Ep < 1

4. Unit elastic demand Ep = 1

5. Perfectly inelastic demand Ep = 0

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Elasticity and expenditure : If demand is elastic a given fall in price causes a relatively larger increase in the total expenditure.

P↓ - TR↑ when demand is elastic. P↓ - TR↓ when demand is inelastic. P↓ ↑ - TR remains same when demand is Unit elastic.

Elastic Demand Unit Elastic Demand Inelastic Demand

P Q PQ P Q PQ P Q PQ 10 1,000 units 10,000 10 1,000 units 10,000 10 1,000 units

10,000

9 2,000 units 18,000 9 1,111 units 10,000 9 1,050 units 9,450

8 3,000 units 24,000 8 1,250 units 10,000 8 1,100 units 8,800

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Measurement of elasticity : Point and Arc elasticity

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Measurement of elasticity : Point Elasticity

Arc elasticity :

Ep =

PRICE QUANTITY 10 1 8 3

PRICE QUANTITY 8 3 10 1

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Elasticity when demand is linear

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Elasticity and Change in Linear Demand :

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Determinants of elasticity :

(1) Number and closeness of its substitutes,

(2) the commodity’s importance in buyers’ budgets,

(3) the number of its uses.

Other Elasticity Concepts

Income elasticity =

Cross elasticity =

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Forecasting : Meaning and Importance

Types of Forecast : 1. Short Run Forecast 2. Long Run Forecast

1. Forecasting the Demand for existing ProductsMethods of Forecasting

1. Survey of Buyers’ intensionsa. Complete Enumerationb. Sample Survey

2. Survey of Experts Opinionsa. Opinions of Sales Personsb. Opinions of Experts/Wholesalers/Dealers

3. Market experimentsa. Pilot Testingb. Laboratory Experiments

4. Delphi Method5. Statistical Methods

a. Trend Analysis b. Regression Analysis

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao

Trend Projection Method:

Year Sales (in 000 Rs.)

Y

DeviationsX

XY(2 x 3)

X2 Trend Value

s

1980 3 -3 -9 9 4.57

1981 7 -2 -14 4 5.43

1982 6 -1 -6 1 6.29

1983 8 0 0 0 7.14

1984 9 1 9 1 8.00

1985 7 2 14 4 8.86

1986 10 3 30 9 9.71

n = 7 ∑Y=50 ∑X=0 ∑XY=24

∑X2=28

The equation for the straight line trend = Y = a + bXTo determine the values of ‘a’ and ‘b’ the following two equations are to be solved.Equation -1: ∑Y = na + b ∑X Equation – 2: ∑XY = a ∑X + b ∑X2

50 = 7a + b x 0 24 = 7.143 x 0 + b x 28 50 = 7a, = 7a = 50, a = 50/7 = 7.143 → 24 = 28b, 28b = 24

b = 24/28 = 0.857

Projected sales for the year 1990 = Y = a + bX → 7.143 + 0.857 x 7 = 13.142

2. Forecasting the Demand for new Products

a. Evolutionary Approach

b. Substitute Approach

c. Growth-Curve Approach

d. Opinion Poll Approach

e. Sales Experience Approach

f. Vicarious Approach

3. Criteria of a Good Forecasting Method:

a. Accuracy

b. Plausibility

c. Durability

d. Flexibility

e. Availability

f. Economy

DEMAND ANALYSIS AND FORECASTING - Prof. V. Chandra Sekhara Rao