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    Managerial Economics 1

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    vinodrawat74
    Demand refers to the desire and ability to purchase a product and the willingness to pay the price. There are individual demand schedules that show the inverse relationship between price and quantity demanded, and a market demand schedule that is the total of individual demands. The law of demand states that, all else equal, as price increases quantity demanded decreases, and vice versa. There are exceptions to this law such as Giffen goods and Veblen effects. Demand can shift due to non-price factors. Elasticity measures the responsiveness of demand to price changes and helps with production, pricing, and tax decisions. Forecasting estimates future demand using statistical methods like time series analysis and surveys.

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    Managerial Economics 1

    Uploaded by

    vinodrawat74
    69 views9 pages
    Demand refers to the desire and ability to purchase a product and the willingness to pay the price. There are individual demand schedules that show the inverse relationship between price and quantity demanded, and a market demand schedule that is the total of individual demands. The law of demand states that, all else equal, as price increases quantity demanded decreases, and vice versa. There are exceptions to this law such as Giffen goods and Veblen effects. Demand can shift due to non-price factors. Elasticity measures the responsiveness of demand to price changes and helps with production, pricing, and tax decisions. Forecasting estimates future demand using statistical methods like time series analysis and surveys.

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    Demand refers to the desire and ability to purchase a product and the willingness to pay the price. There are individual demand schedules that show the inverse relationship between price and quantity demanded, and a market demand schedule that is the total of individual demands. The law of demand states that, all else equal, as price increases quantity demanded decreases, and vice versa. There are exceptions to this law such as Giffen goods and Veblen effects. Demand can shift due to non-price factors. Elasticity measures the responsiveness of demand to price changes and helps with production, pricing, and tax decisions. Forecasting estimates future demand using statistical methods like time series analysis and surveys.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    69 views9 pages

    Managerial Economics 1

    Uploaded by

    vinodrawat74
    Demand refers to the desire and ability to purchase a product and the willingness to pay the price. There are individual demand schedules that show the inverse relationship between price and quantity demanded, and a market demand schedule that is the total of individual demands. The law of demand states that, all else equal, as price increases quantity demanded decreases, and vice versa. There are exceptions to this law such as Giffen goods and Veblen effects. Demand can shift due to non-price factors. Elasticity measures the responsiveness of demand to price changes and helps with production, pricing, and tax decisions. Forecasting estimates future demand using statistical methods like time series analysis and surveys.

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    of 9

    UNIT : DEMAN ANALYSIS

    Definition
    Demand refers to desire to buy + ability to pay + willingness to pay.

    Individual Demand Schedule:


    This shows functional relationship between price & quantity & it is generally show inverse relationship
    between price & quantity demanded.

    Market Demand Schedule


    The total quantity of commodity demanded at difference price in the market by the whole consumers at
    a particular period of time is called market demand schedule. (Just totaling of individual demand
    schedules).

    Demand Function
    Demand of x commodity is functionally related to different factors/determinants that can be
    represented as Dx = f(Px, Ps, Pc, Ep, Y, Ey, T, W, A, U….etc)

    Dx = Demand for commodity x

    Px = Price of commodity

    Ps = Price of subsitute

    Pc = Price of compliments

    Ep= Expected future price

    Y= Income

    Ey= Expected income in future

    T= Taste & preference

    W=Wealth of the consumer

    A= Advertisement & its impact

    U= All other determinants

    LAW OF DEMAND
    Keeping other factors that affect demand constant, a fall in the price of a product leads to increase in
    quantity demanded & a rise in price leads to decrease in quantity demanded for the product.
    IMPORTANT FEATURES:
    1. Inverse relationship between price & quantity.
    2. Price in independent variable & Demand is dependent variable.
    3. Law of demand is a qualitative statement.
    4. Demand curve slopes downwards from left to right.

    Demand curve
    It is a graphical representation of the demand schedule.

    Exception of Law of Demand:


    Giffen’s Paradox : when the price of inferior goods decreases its demand not increased accordingly
    because people will spend the saved amount in superior goods instead of spending more money on
    inferior goods. Example : Fall in the price of potato not increase its demand whereas consumer spent
    the save money on paneer/mutton.

    Vebelen’ Effect: It states that demand for precious / antique items goes high despite the rise in their
    price because of prestige issue.

    Fear of Shortage

    Fear of future rise in price

    Speculation in market

    Conspicuous consumption: Fashionable products.

    Emergencies

    Ignorance

    Necessaries.

    CHANGE OR SHIFT IN DEMAND


    If the change in demand is due to price in that case there would be either expansion or contraction in
    demand in the same curve. But if demands changes not due to price but of other factors in that case
    there would be increase or decrease in the demand. In this case demand curve upward in case of
    increase & shift backward in case of decrease in demand.

    Elasticity of demand :
    It defines the responsiveness/senstivness of demand to a given change in the price of the commodity.

    It is quantitative statement.
    Price elasticity of demand : Ep = %changes in quantity demanded/% change in price

    Degree of elasticity

    Perfect Elasticity of demand : very small change in price leads to an infinate change in demand. This is
    horizontal line & parallel to ox axis. Ed =

    Perfect Inelastic demand : whatever may be the change in price quantity remain constant this is vertical
    line & parallel to oy axis. Ed = 0

    Relatively Elastic : A small change in price leads to more proportionate change in demand. Ed > 1

    Relatively Inelastic : A large change in price leads to proportionate less change in demand . Ed<1

    Unitary elastic demand : Proportionate change in price leads to equal proportionate change in demand .
    Ed = 1

    Determinants of price elasticity :


    Nature of commodity

    Existence of substitute

    Number of uses of commodity

    Durability & reparability of commodity

    Possibility of postponing the use of commodity

    Level of the income of the people.

    Range of prices

    Proportion of the expenditure of a commodity

    Habits

    Period of time

    Level of knowledge

    Existence of complimentary goods

    Purchase frequency of a product.

    Measurement of price elasticity of demand


    Total Expenditure method :- We measure price elasticity by examining the change in total expenditure
    as a result of change in price & quantity demanded.
    When new expenditure is greater than the original expenditure then Ed >1

    When new expenditure is equal to the original expenditure then Ed = 1

    When new expenditure is less than the original expenditure then Ed <1

    Point Method
    Point method measures price elasticity of demand at different points on demand curve. This method use
    to measure the small changes in both price & demand.

    POINTS PRICE IN RS DEMAND IN UNITS


    A 10.00 40
    B 09.00 46

    PED = Percentage change in demand d**/percentage change in price++

    ** CHANGE IN DEMAND/ORIGINAL DEMAND X 100

    ++ CHANGE IN PRICE/ORIGINAL PRICE X 100

    Price elasticity = Lower segment of demand curve/upper segment of demand curve.

    Arc method :

    This method is suggested to measure large changes in both price and demand. It is also called average
    elasticity of demand.

    Formula q2-q1/q2+q1 x p2 +p1/p2-p1


    Price Elasticity helps us for production planning, fixing the price of different goods, fixing, the rewards
    for factor inputs, determining the foreign exchange rates, deterring the terms of trade, fixing the rate of
    taxes, declaration of public utilities.

    Income elasticity of demand =

    Ey = % change in demand/%change in income

    Ey positive = commodity is normal

    Ey negative= Commodity is inferior

    Ey is positive grate then 1 the commodity is luxary.


    Ey is positive but less then on commodity is essential

    Ey is zero commodity is neutral.

    It helps in
    determining the rate of growth of the firm

    Demand forecasting of a firm

    Production planning and marketing

    Ensuring stability in production

    Estimating construction of houses.

    Cross elasticity of demand


    It is the propotionate change in the quantity demanded of a particular commodity in response to a
    change in the price of another related commodity.

    Ec = %change in demand of commodity x / % change in price of y

    Cross elasticity is positive in case of substitutonal goods i.e tea & coffee

    Cross elasticity if negative in case of complimentary goods i.e. car & petrol.

    Cross elasticy is zero when commodity is indepndent to each other. Stainless steel & Alumunium.

    Hight cross elasticy of demand exist in case of close substitute i.e. cola/ pepsi & colgate/pepsodent.

    SUBSITUTIONAL ELASTICY OF DEMAND


    Propotionate change in the demand ratios of two substitue goods x & y to the prpotionate change in
    the price ratio of two goods x & y

    Es = %change

    ?????????
    DEAMND FORECASTING

    IT IS AN ESTIMATION OF MOST LIKELY FUTURE DEMAND FOR PRODUCT UNDER GIVEN CONDITION

    Features :-

    Informed and well thought out guess work.

    In terms of specific quantities

    For a specific period of time which would be sufficient to take a decision and put it into action.

    It is based upon past information/data.

    Demand forecasting in short run :

    It helps in Production planning, formulate right purchase policy, frame realistic pricing policy, set sale
    targets, estimating short run financial requirements, determine the exact number o labour required.

    Demand forecasting in long run :

    Helps in expansion of existing unit or establishing new production unit, planning long run financial
    requirements, manpower planning, determine the volume of business, reduce production uncertainities,
    it is basis for demand forecast of other related industries.

    Level of Demand forecasting :-

    Micro Lavel : Demand forecasting of a firm.

    Industry Lavel : Demand forecasting for the product of an industry which helps in determining its
    market share.

    Macro Lavel :Estimating industry demand for the economy as a whole , it helps govt. in determining the
    volume of export and imports, control of prices.

    Criteria for good demand forecasting :

    It should be ACCURATE, SIMPLE, VALID TO MANAGEMENT, DURABLE, FLEXIBLE, AVAILABILITY OF DATA,


    ECONOMY, QUICKNESS.
    METHODS OF FORECASTING

    SURVEY METHOD (HEART OF THIS METHOD IS QUESTIONNAIRE)


    Survey of buyers intentions or prferences. Its success depends upon how the question asked, ability of
    the buyer, samples,nature of product, market characterstics, consumer attitude, technique of analysis,
    how the conculsion arrived.

    Direct interview method : It has been done by two ways

    COMPLETE ENUMERATION METHOD : POTENTIAL CUSTOMERS ARE INTERVIEWED OF A PARTICULAR


    CITY OR REGION. THIS METHOD IS USEFUL FOR THOSE PRODUCTS WHOSE CUSTOMERS ARE LIMITED TO
    A CITY OR REGION. ITS COSTLY AND TIME TAKING.

    SAMPLE SURVEY METHOD (CONSUMER PANEL METHOD): SELECTED COUNSUMER FROM THE
    RELEVANT MARKET ARE INTERVIEED OR SURVEYED. ITS SIMPLE,LESS TIME CONSUMING.

    COLLECTIVE OPINION METHOD (SALES-FORCE POLLINGOR OPINION POLL METHOD) :

    SALES REPRESENTATIVES, PFORESSIONAL EXPERTS AND MARKET CONSULTANTS ARE ASKED TO EXPRESS
    THIE OPIION. ITS DEPENDS UPON THE THE INTELLIGENCE AND AWARENESS OF THE SALESMAN.

    DELPHI METHOD OR EXPERTS OPINION METHOD :

    OUTSIDE EXPERTS ARE APPOINTED, SUPPLIED WITH ALL KINDS OF DATA & ASKED FOR THEIR OPINION.

    END USE OR INPUT-OUT PUT METHOD :

    IT BASED ON DEMAND SURVEY OF INDUSTRIES USING THE GIVEN PRODUCT AS AN INTERMIDIATE


    PRODUCT.

    STATISTICAL METHOD (HEART OF THIS METHOD IS TIME SERIES)

    STATISTICAL MATHEMATICAL MODELS, EQUATION ARE EXTENSIVELY USED.

    TO FIND THE PATTERN OF CHANGE IN TIME SERIES FOLLOWING METHODS ARE ADOPTED

    LEAST SQUARES METHOD, MOST POPULAR (EQUATION Y=a+bx)

    FREE HAND METHOD,

    MOVING AVERAGE METHOD,

    METHOD OF SEMI AVERAGES.


    ECONOMIC INDICATORS :

    AN ECONOMIC INDICATOR INDICATES CHANGE IN THE MAGNITUDE OF AN ECONOMIC VARIABLE.

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