MBA132-ME

Prof. Raman
080822
 at
• Goods &Serviches
aling
s u m er various prices de
Ccon s to pay of
gn es within a period
willin
for time
i

Desire Means Willingness

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Definition of Demand
 2.Law of Demand

• When the price of a product is high, the quantity demanded

is low
• When the price of a product is low, the quantity is high

P
Price

P1

Q Q1
Quantity demanded

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 2.Nature of Demand Curve

• For normal product, the demand curve slopes downwards to

the right

D
• It shows inverse relationship between price and quantity
demanded
P
Price

P1
D

Q Q1
Quantity demanded

5
2.Elasticity of Demand

• Price elasticity of demand

• Cross elasticity of demand
• Income elasticity of demand
• Advertising or promotional elasticity of demand

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 2.Determinants

• 1.Price Elasticity
• Change in quantity demanded of goods with
respect to a change in Price with the given
income, his tastes& prices of all other goods

• 2.Cross elasticity
• Change in demand of that good due to change in
price of another good(Pepsi vs Coca-Cola)
 2.Determinants

• 3.Income elasticity
• Percentage change in the quantity demanded of
a good divided by the percentage in income of
consumer(When income is Rs100 demand is 25
units. If it is Rs150 then demand is to be 30 units)

• 4.Advertising elasticity
• Measurement of degree of responsiveness of
demand for a commodity with respect to change
in advertisement expenses
 2.Determinants of Demand

Price of Commodity Tastes &Preferences

Expectation regarding future Special influence
price changes

Advertisement&Sales Growth of Population

propaganda

Income of Consumer Price of related goods

Tax rate Pattern of Saving

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 2.Determinants of Demand

Consumer’s expectations Weather conditions

Availability of Credit Circulation of Money

Price of Complimentary Special Influence

Product

Change in Policy Existing wealth of the

Consumer

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 2.Exceptions to Law of Demand

Conspicuous Goods Giffen goods

Necessities of Life Conspicuous necessities

Future expectation of Prices

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 2.Exceptions

• 1.Conspicuous Goods
• Certain goods are purchased for
prestige .Example- Gold. If the price goes up still
the demand goes up.

• 2.Giffen goods:Named after Robert Giffen

• Demand for essential goods like Bread will go up
when Price goes up. Why?
• When Purchasing power comes down demand
for meat will be less but because bread is
cheaper demand will go up
 2.Exceptions

• 3.Necessities of Life
• One can afford or not, there will be still demand for necessities like food
and clothing

• 4.Conspicuous necessities:
• The demand will go up in certain prestigious goods like TV/Fridge even
when price goes up as they are seen as necessities

• 5.Future expectations about Prices

• When the household expects any price rise in a commodity in future, then
they tend to buy larger quantities
• Example :Demand when man made, and natural disasters happen .
 3.Movement along the Demand curve
• Extension of Demand

• Other things remaining the same, demand of a commodity

tends to increase due to fall in its price
Price Quantity
10 1
8 2
6 3
4 4
2 5
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 3.Movement along the Demand curve

• Contraction of Demand
• Other things remaining the same ,demand of a commodity
tends to decrease due to rise in prices

Price Quantity

2 5
4 4
6 3
8 2
10 1

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.

• Income
• Rise in price of substitutes

• Fall in the price of compliments

• Changes in tastes
• Technological change

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 3.Shift in Demand Curve
• Increase in Demand :
Price Demand

10 2
• Same price more demand
10 4
• Ex:Necessities
10 6

Price Demand

2 8

• More Price same demand 4 8

• Ex: Quality goods/Cars 6 8

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 3.Shift in Demand Curve

• Decrease in Demand: Price Demand

• Same Price less Demand
6 4
• Ex: Entry of Competitors
6 3
6 2

Price Demand
• Less Price same demand
6 4
• Ex:Luxury goods/nonessential goods
4 4
2 4

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4.Demand &Supply Relationship

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 4.Demand &Supply Relationship

• It's a fundamental economic principle that when supply

exceeds demand for a good or service, prices fall.

• When demand exceeds supply, prices tend to rise.

• There is an inverse relationship between the supply and prices

of goods and services when demand is unchanged.

• Demand is the willingness and ability of consumers to BUY

goods, while supply is the willingness and ability of producers
to SELL goods.

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 5.Definition of Supply

• The supply of goods is the quantity offered for sale in each

market at a given time at various prices(Thomas)
• Supply means the amount offered for sale at a given
price(Meyers)
• Supply is a f(Price, specific period)
• Price and Quantity supplied are positively correlated
• A higher price leads to a higher quantity supplied and a
lower price leads to a lower quantity supplied—the law of
supply.

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 6.Law of Supply

• Other factors remaining constant, higher the price of, greater

the quantity supplied and lower the price, lower the quantity
supplied
S
P1
Price

O Q Q1
Quantity supplied
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 6.Law of Supply
Part 1. As PRICE increases, SUPPLY increases

SUPPLY goes
PRICE goes
up

up
Then…

Part 2. As PRICE decreases, SUPPLY decreases

SUPPLY goes
PRICE goes

Then…
down
down

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 6.Law of Supply

• According to the law of supply, suppliers will offer more of a

good at a higher price

• Think about it: If people are willing to pay more for what I am
selling, then I want to make as much of that product available
as possible.

• Ex. The price of samosa goes up from Rs10 to Rs11, but it still
only costs me Rs8 to make, I want to make as many as I can to
maximize my profit (make as much money as I can!)

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 6.Law of Supply-Assumptions

• Production cost remains constant

• Price of substitute goods remain unchanged

• Objective of the firm does not change

• No change in price in the forthcoming future

• Technology remains unchanged

• Number of Producers do not change

• No change in Government policy

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 7.Movement along supply curve/shift

• Supply curve: Graphical rep of the supply schedule. It shows

the various quantities of a commodity that the producer is
willing to sell at different prices in the market
• 2 types-Individual supply curve and Market supply curve.
• Aggregate of all individual supply curves gives the market
supply curve
• As a result, there is a direct relationship between quantity
supplied and the price
• As the price increases quantity also increases

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 7.Supply Curves

• A supply curve is a
graph of the
quantity supplied
of a good at
different prices.

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 7.Movement along supply curve/shift

• Movement : can be due to

• Expansion of Supply:
• A rise in price, other things being constant, leads to a rise in
supply
• Contraction of supply :
• A fall in price offered, other things remaining constant , leas to
a fall in supply

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 7.Movement along supply curve/shift

• Shift in Supply
• A supply curve is only accurate if there are no changes other
than price that could affect a consumer’s decision

• When factors other than price (non-price factors) affect the

supply curve, the entire curve shifts to the left or to the right

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 7.Movement along supply curve/shift

• Shift in Supply happens when ‘other factors remaining constant’

changes .Increase in Demand/change in Price will not affect supply

• Increase in supply: When supply of a commodity increases without

change in price it is called rise in supply

• Decrease in Supply:
• In case of decrease in supply(Demand remaining the same),increase in
price happens due to competition from buyers. When price increases,
demand increases and therefore supply increases.
• When supply curve decreases, quantity demanded reduces and
equilibrium price rises, and a new equilibrium is achieved

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 7.Non-Price Factors that affect Supply

• These factors will cause the supply curve to shift to the left
(less quantity supplied) or to the right (more quantity
supplied)
• There are 3 non-price factors that influence supply
1. Change in Costs of Production
If a producer can find a cheaper way to produce an item, it’s
supply curve will change
• Ex. Humans writing books- long and expensive
• Computers print books faster and cheaper
• RESULT: More books offered at a lower price

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 7.Non-Price Factors that affect Supply

• 2. Price of Resources Change Human Resources: pay worker

more, changes supply (produce less pizzas).
• Natural Resources: price of cheese increases, produce less pizzas
• Capital Resources: Rent increases, produce less pizzas
3. Maximize Profit
If a producer makes more profit selling one product instead of
another, the supply for both products changes.
• Ex. Price of Micro oven and Induction stove remain the same ,
but I can make more profit selling Micro ovens
• RESULT: Reduce the supply of Induction stove and increase
supply of Micro ovens

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 8.Factors affecting supply
• 1.Product Price
• Supply increases when price rises, to earn more revenue
• 2.Prices of related Products
• Price of complimentary good is expected to affect supply of good
under consideration in a direct manner
• Ex: Tyre & tube, Cement & Steel
• 3..Cost&Technology(C&T)
• Any increase in factor price increases cost of production and
decreases the supply.
• Ex: Handmade dolls
• Technological improvement reduces the total cost, and it increases
the supply of the products/services
• Ex: Automation

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 8.Factors affecting supply
• 4.Objectives of the firm
• Firms set various goals to achieve.
• Ex: One firm may have a goal of Revenue
maximization/Increased customer base ,so it will increase
supply
• Another may have Profit maximization as the goal and may not
follow suit
• 5.Future expectations
• Consumer expectation affects supply
• (Launch price of electronic goods/e-cars)
• Seller's expectations on Cost, sales and other economic factors
• If he expects the price to go up in future, then he shrinks the
present supply
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 8.Factors affecting supply

• 6.Weather conditions
• Supply gets adversely affected by floods, droughts, strikes,
lockouts, Carona virus
• 7.Short term factors
• Fridge/AC supply spikes in summer
• School uniform supply spikes in school admission/opening time
• 8.Number of sellers
• If number of sellers is high, then supply will be more and vice
versa
• Cartels also come together to control supply
•

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 8.Factors affecting supply
• 9.Taxation Policy
• If heavy taxes are imposed on a commodity, then production
will be discouraged, and supply will decrease and vice versa
• 10.Change in Stock:
• Supply and Price are in positive relationship. So, when Price
increases ,quantity of supply also increases and vice versa.
This results in increase in Inventory with the rise in Prices
• 11.Profit &Loss:
• With rise in Price ,Profits and Production increases. But withy
reduction in Price ,supply reduces resulting in loss and loss of
confidence of Producer .Hence cost of production is reduced
considerably

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 8.Factors affecting Supply

• 12.Entry &Exit of the Firms:

• Increased price with increased profits encourages new firms
to join the industry resulting in rise in supply
• In a situation of loss, existing firms try to move out which
leads to reduction in supply because producers do not expect
to earn any profit. Hence supply curve slopes upward from
left to right
• 13.Incentive for Innovation:
• Today, scientific researcher uses modern technology for
production process to get positive effects

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 9.Equilibrium of Supply & Demand

• Equilibrium at point E
Y
• Excess Supply AB
D
• Excess demand CD S
A
• Equilibrium price P B
P1

P
Price

P2 D
C
S
D

O
Demand & Supply X
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 9.Equilibrium-Supply and Demand for Umbrellas
Surplus
$12

$10

$8

Demand
Price per Umbrellas

Supply
$6

$4

$2

$0
1 2 3 4 5 6 7 8 9 10 11

Quantity of Umbrellas
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 9.Equilibrium of Supply & Demand
$12

$10

$8
Price per Umbrella

Demand
$6 Supply

$4

$2
Shortage

$0
1 2 3 4 5 6 7 8 9 10 11
Quantity of Umbrellas
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 9.Equilibrium-Supply and Demand for Umbrellas
$12

Market Equilibrium
$10

$8
Price per Umbrella

Demand
$6 Supply

$4

$2 6

$0
1 2 3 4 5 6 7 8 9 10 11

Quantity of Umbrellas
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 10.Floor/Ceiling

• Government Policies:
• Price controls
Price ceiling: a legal maximum on the price of a good or
service. Example: rent control.
• Price floor: a legal minimum on the price of a good or
service. Example: minimum wage.
• Ceiling- Below Equilibrium- Shortage- Benefits Buyers
Floor-Above Equilibrium- Surplus- Benefits Sellers

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 10.Floor/Ceiling

• Effects of Price Controls

Prices are the signals that guide the allocation of society’s
resources.
• This allocation is altered when policymakers restrict prices.
• Price controls are often intended to help the poor, but they
often hurt more than help them:
• The min. wage can cause job losses.
• Rent control can reduce the quantity and quality of affordable
housing.

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 11.Application of Demand&Supply Analysis

• Supply and demand have an important relationship because

together they determine the prices and quantities of most
goods and services available in a given market.
• According to the principles of a market economy, the
relationship between supply and demand balances out at a
point in the future.

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 11.Application of Demand&Supply Analysis

• Example of how the law of supply and demand works in the

real world.
• A company sets the price of its product at Rs100. No one
wants the product, so the price is lowered to Rs90.
• Demand for the product increases at the new lower price
point and the company begins to make money and a profit.
• Price adjusts to equate quantity supplied and quantity
demanded. Competition drives this adjustment. When there
is excess demand, buyers compete with each other to access
to scarce goods.

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 12.Elasticity of Supply

• Def. The degree to which a change in price will change supply

Or
• If we change the price, will supply change a lot or a little?

• Elasticity depends on how easy it is to change production

• Items that have supplies that are increased easily are ELASTIC,
the supply will go up/down a lot with a change in price.

• Ex. CDs, Books, Samosa (all can increase supply with little
difficulty; resources are easy to come by)

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 12.Inelastic Supply
• Items that have supplies that are increased with great
difficulty are INELASTIC, the supply will go up/down very little
with a change in price.

• Ex. Cars (to increase production, need to build a new factory,

hire 100s of workers, etc.)
• Apples (to increase production, would have to plant more
trees, taking years to grow and produce apples)

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 12.Determinants of elastic supply

• Nature of inputs used

• Natural Constraints
• Risk taking
• Nature of the commodity
• Laws of Production
• Time
• Techniques of Production

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 12.Types of Price elasticity of supply

• Perfectly elastic supply

• Perfectly inelastic supply
• Unitary elasticity
• More than Unitary(Relatively elastic)
• Relatively inelastic

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 13.Practical Implementation of Elasticity

• 1. Economic Policy
• Ex: A country suffering from balance of payments problems
may try to tackle the imbalance by devaluing its currency.
• 2. Price Determination of Joint-cost Products
• where the cost of each cannot be separately determined, the
criterion of demand elasticity is applied in determining their
individual prices. (e.g., cotton fibre and cotton seeds)

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 13.Practical Implementation of Elasticity

• 3. Importance in Determining the Incidence of Taxation

• Concept of the elasticity of demand, along with that of
supply, is used to determine the shifting and incidence
of a tax
• 4.Importance in Taxation:
• the concept is a useful tool in taxation. If excise duty
rates up too much the consequent increase in price may
make the total tax yield even lower than before.
• On the other hand, a small tax reduction may result in
an increase in the tax yield

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 13.Practical Implementation of Elasticity

• 5.Wage Bargaining by Trade Unions:

• The bargaining power of the trade unions in raising the wages
of a group of labour in a particular industry also depends,
among other things, on the elasticity of demand for their
services to the employer.
• 6.Price Discrimination
• It can be profitably practised only when price elasticity of
demand differs from market to market or from one segment
of the market to another.

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 13.Practical Implementation of Elasticity

• 7.Monopoly Pricing:
• The concept is useful in monopoly price- decisions. One will fix the price at
a low level when the demand is elastic and at a high level when it is
inelastic.
• 8.Effects of Changes in Price on Revenue:
• The concept enables us to determine the condition of equilibrium of a
firm. And a firm reaches equilibrium when revenue = marginal cost.
• 9.Effects of Changes in Price Upon Demand
• The concept is very useful to study the reactions of the demand for
a commodity to the changes in its price. If the demand is elastic, a
small change in the price brings about a considerable change in the
quantity demanded

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 14.Relationship of Revenue Elasticity of
Demand
• The changes in total revenue are based on the price elasticity
of demand, and there are general rules for them:

• Price and total revenue have a positive relationship when

demand is inelastic (price elasticity < 1), which means that
when price increases, total revenue will increase too.

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 15.Demand forecasting-uses in Demand

• -is a technique that is used for the estimation of what can be the
demand for the upcoming product or services in the future.
• It is based upon the real-time analysis of demand which was there in the
past for that particular product or service in the market present today

• Forecasting is a decision-making tool used by many businesses to help in

budgeting, planning, and estimating future growth.

• - helps reduce risks and make efficient financial decisions that impact
profit margins, cash flow, allocation of resources, opportunities for
expansion, inventory accounting, operating costs, staffing, and overall
spend. All strategic and operational plans are formulated around
forecasting demand.

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 16.Qualitative&Quantitative interpretation of Demand
techniques

• What are the qualitative and quantitative techniques of

demand forecasting?

• Qualitative methods are used in traditional forecasting and

involve a lot of experience, intuition and subjectivity.

• Quantitative methods use data and analytical tools for

prediction and are the types of methods used in automated
demand forecasting software.

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 16.Qualitative&Quantitative interpretation of Demand
techniques

• Qualitative techniques
• Opinion polling method: Opinion of buyers/experts/retailers/
• 1.Consumer survey method
• a)Complete enumeration survey-visiting all houses
• b)Sample survey &test marketing-households selected at random
• c)End use method. Survey is conducted for the industries that are
actively using the product as an intermediate

• 2.Salesforce opinion method-Survey shopkeepers and the salesman

• 3.Delphi technique-structural surveys with experts

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 16.Qualitative&Quantitative interpretation of Demand
techniques
• Quantitative /Statistical/Analytical
• 1.Trend projection method-Trend over past figures

• a)Graphical-Past data on sales in different regions plotted on a graph and the

sales trend line is drawn by joining all points

• b)Least square-A trend line is drawn mathematically considering the past data in
a manner that the difference between calculated and that of observed value is
minimum

• c)Time series-Using methods like moving average and weighted moving average

• d)Exponential smoothing - The past data of demand is used considering the

weights. Weights used are exponential in nature Higher weight allotted to most
recent period

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 16.Qualitative&Quantitative interpretation of Demand
techniques

• 2.Barometric method-3 Indicators-Leading indicator/co-incidental

indicator/lagging indicator
• Relation between sale of a product and economic indicators need to be
studied

• 3.Regression method-Most common method .Relation between

quantity demanded being dependent variable and other independent
variables like price, income, price of substitute is established and a
regression equation like Y=A+BX is established .X is the dependent
variable

• 4.Econometric method-a complete system approach to forecasting.

Involves many simultaneous equations

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 17.Model specification using Regression &OLS

• What is model specification?

• Model specification is the process of determining which independent variables to
include and exclude from a regression equation

• What is OLS?
• In statistics, ordinary least squares (OLS) is a type of linear least squares method
for estimating the unknown parameters in a linear regression model. OLS chooses
the parameters of a linear function of a set of explanatory variables by the
principle of least squares: minimizing the sum of the squares of the differences
between the observed dependent variable (values of the variable being observed)
in the given dataset and those predicted by the linear function of the
independent variable.

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 17.Model specification using Regression &OLS

• What is the most common type of regression technique?

• linear regression.OLS is a type of Linear regression
• The most extensively used modelling technique is linear
regression, which assumes a linear connection between a
dendent variable (Y) and an independent variable (X).

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 Unit 2

• Thanks

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