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Demand and Law of Demand:

Meaning of Demand:

The demand for a commodity is its quantity which consumers are able and willing to buy at various prices
during a given period of time.

So, for a commodity to have demand the consumer must possess willingness to buy it, the ability or means
to buy it, and it must be related to per unit of time i.e. per day, per week, per month or per year. Demand is a
function of price (p), income (y), prices of related goods (pr) and tastes (f) and is expressed as D=f (p, y, pr,
t). When income, prices of related goods and tastes are given, the demand function is D=f(p). It shows the
“quantities of a commodity purchased at given prices. In the Marshallian analysis, the other determinants of
demand are taken as given and constant.
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Factors Influencing Demand:

The factors which determine the level of demand for any commodity are the following:

1. Price:

The higher the price of a commodity, the lower the quantity demanded. The lower the price, the higher the
quantity demanded.
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2. Prices of other Commodities:

There are three types of commodities in this context.

Substitutes:

If a rise (or fall) in the price of one commodity leads to an increase (or decline) in the demand for another
commodity, the two commodities are said to be substitutes. In other words, substitutes are those
commodities which satisfy similar wants, such as tea and coffee.

If the price of coffee falls, the demand for coffee rises which brings a fall in the demand for tea because the
consumers of tea shift their demand to coffee which has become cheaper. On the other hand, if the price of
coffee rises, its demand will fall. But the demand for tea will rise because the consumers of coffee will shift
their demand to tea.
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Complementary Commodities:

Where the demand for two commodities is linked to each other, such as cars and petrol, bread and butter, tea
and sugar, etc., they are said to be complementary goods. Complementary goods are those which cannot be
used without each other. If, say, the price of cars rises and they become expensive, the demand for them will
fall and so will the demand for petrol. On the contrary, if the price of cars falls and they become cheaper, the
demand for them will increase and so will the demand for petrol.

Unrelated Goods:

If the two commodities are unrelated, say refrigerator and bicycle, a change in the price of one will have no
effect on the quantity demanded of the other.

3. Income:
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A rise in the consumer’s income raises the demand for a commodity, and a fall in his income reduces the
demand for it.

4. Tastes:

When there is a change in the tastes of consumers in favour of a commodity, say due to fashion, its demand
will rise, with no change in its price, in the prices of other commodities, and in the income of the consumer.
On the other hand, a change in tastes against a commodity leads to a fall in its demand, other factors
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affecting demand remaining unchanged.

5 Population Size:

Demand increases with the increase in population and decreases with the decrease in population. This is
because with the increase (or decrease) in population size, the number of buyers of the product tends to
increase (or decrease). Composition of population also affects demand. If composition of population
changes, namely, female population increases, demand for goods meant for women will go up.

6 . Distribution of Income:

Market demand is also influenced by change in distribution of income in the society. If income is not
equally distributed, there will be less demand. If income is equally distributed, there will be more demand.

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7.Demonstration Effect:

When commodities or new models enter into market some people buy them because they have genuine
demand for them, while others buy them not because they have a genuine need for them but because their
friends or relatives have bought these goods. The purchases made by the latter category of buyers are made
of such feelings as jealousy, competition, social inferiority or desire to raise their social status. Purchases
made on account of these factors are the result of demonstration effect. These effects have positive effects
on demand.

(8) Weather Conditions:

It is found that demand for a commodity must change with the change in season. In winter there is greater
demand for warm clothing, for certain types of tonics and for coal or fuel and also hot drink. In summer
there is greater demand for electric fans, room coolers and cooling drinks, ice etc.
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9.Conditions of Trade:

During period of boom or prosperity more goods are demanded, whereas Lower quantity is purchased at the
time of recession or depression.

10.Consumer Credit policy:

Availability of credit to the consumers from commercial banks mainly and other sources encourage the
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consumers to buy more than what they would buy in the absence of credit availability. Credit facility affects
mostly the demand for durable goods, particularly those which require bulk payment at the time of payment

11.Customs Duties and Trade Barriers by the State:

Trade between different countries Would be more if the trade restrictions are less. Artificial trade barriers,
heavy custom duties, quota etc. would reduce economic transactions. This in turn will affect the demand for
the imported products.

12.Savings:

Large savings means less money available for the purchase of goods. demand will therefore decrease and
vice-versa.

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The Law of Demand:

The law of demand expresses a relationship between the quantity demanded and its price. It may be defined
in Marshall’s words as “the amount demanded increases with a fall in price, and diminishes with a rise in
price.” Thus it expresses an inverse relation between price and demand.

The law refers to the direction in which quantity demanded changes with a change in price. On the figure, it
is represented by the slope of the demand curve which is normally negative throughout its length. The
inverse price-demand relationship is based on other things remaining equal. This phrase points towards
certain important assumptions on which this law is based.

It’s Assumptions. These assumptions are:

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(i) there is no change in the tastes and preferences of the consumer; (ii) the income of the consumer remains
constant;

(iii) there is no change in customs;

(iv) the commodity to be used should not confer distinction on the consumer;

(v) there should not be any substitutes of the commodity;

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(vi) there should not be any change in the prices of other products; (vii) there should not be any possibility
of change in the price of the product being used;

(viii) there should not be any change in the quality of the product; and

(ix) the habits of the consumers should remain unchanged. Given these conditions, the law of demand
operates. If there is change even in one of these conditions, it will stop operating.

An Individuals Demand Schedule and Curve:

An individual consumer’s demand refers to the quantities of a commodity demanded by him at various
prices, other things remaining equal (y, pr and t). An individual’s demand for commodity “is shown on the
demand schedule and on the demand curve. A demand schedule is a list of prices and quantities and its
graphic representation is a demand curve.
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Demand Schedule:

Price (Rs.) Quantity (units)

6 10

5 20

4 30

3 40

2 60
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1 80

The demand schedule reveals that when the price is Rs. 6, the quantity demanded is 10 units. If the price
happens to be Rs 5, the quantity demanded is 20 units, and so on. In Figure 10.1, DD1 is the demand curve
drawn on the basis of the above demand schedule. The dotted points D, P, Q, R, S, T and U show the various
price-quantity combinations.
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Marshall calls them “demand points”. The first combination is represented by the first dot and the remaining
price- quantity combinations move to the right toward D1.

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The Market Demand Schedule and Curve:

In a market, there is not one consumer but many consumers of a commodity. The market demand of a
commodity is depicted on a demand schedule and a demand curve. They show the sum total of various
quantities demanded by all the individuals at various prices.

Suppose there are three individuals A, В and С in a market who purchase the commodity. The demand
schedule for the commodity is depicted in Table

The last column (5) of the Table represents the market demand of the commodity at various prices. It is
arrived at by adding columns (2), (3) and (4) representing the demand of consumers A, В and С
respectively. The relation between columns (1) and (5) shows the market demand schedule. When the price
is very high Rs. 6 per kg. the market demand for the commodity is 70 kgs. As the price falls, the demand
increases. When the price is the lowest Re. 1 per kg., the market demand per week is 360 kgs.
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Price A Quantity С Total
per kg. Demanded in
(2) (4) Demand
(Rs.) kgs.

(5)
(1) В
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+ (3) +

6 10 20 40 70

5 20 40 60 120

4 30 60 80 170

3 40 80 100 220

2 60 100 120 280

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1 80 120 160 360

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DM is the market demand curve which is the horizontal summation of all the individual demand curves DA
+ DB + DC. The market demand for a commodity depends on all factors that determine an individual’s
demand.

But a better way of drawing a market demand curve is to add together sideways (lateral summation) of all
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the individual demand curves. In this case, the different quantities demanded by consumers at one price are
represented on each individual demand curve and then a lateral summation is done, as shown in Figure

Suppose there are three individuals A,В and С in a market who buy OA, OB and ОС quantities of the
commodity at the price OP, as shown in Panels (A), (В) and (C) respectively in Figure In the market, OQ
quantity will be bought which is made up by adding together the quantities OA, OB and ОС. The market
demand curve, DM is obtained by the lateral summation of the individual demand curves DA, DB and Dc in
panel (D).

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Exceptions to the Law of Demand:

In certain cases, the demand curve slopes up from left to right, i.e., it has a positive slope. Under certain
circumstances, consumers buy more when the price of a commodity rises, and less when price falls, as
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shown by the D curve in Figure . Many causes are attributed to an upward sloping demand curve.

(i) War:

If shortage is feared in anticipation of war, people “may start buying for building stocks or for hoarding even
when the” price rises.
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(ii) Depression:

During a depression, the prices of commodities are very low and the demand for them is also less. This is
because of the lack of purchasing power with consumers.

(iii) Giffen Paradox:

If a commodity happens to be a necessity of life like wheat and its price goes up, consumers are forced to
curtail the consumption of more expensive foods like meat and fish, and wheat being still the cheapest, food
they will consume more of it. The Marshallian example is applicable to developed economies. It the case of
an underdeveloped economy, with the fall in the price of an inferior commodity like maize, consumers will
start consuming more of the superior commodity like wheat. As a result, the demand for maize will fall. This
is what Marshall called the Giffen Paradox which makes the demand curve to have a positive slope.

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(iv) Demonstration Effect:

If consumers are affected by the principle of conspicuous consumption or demonstration effect, they will
like to buy more of those commodities which confer distinction on the possessor, when their prices rise. On
the other hand, with the fall in the prices of such articles, their demand falls, as is the case with diamonds.

(v) Ignorance Effect:

Consumers buy more at a higher price under the influence of the “ignorance effect”, where a commodity
may be mistaken for some other commodity, due to deceptive packing, label, etc.

(vi) Speculation:

Marshall mentions speculation as one of the important exceptions to the downward sloping demand curve.
According to him, the law of demand does not apply to the demand in a campaign between groups of
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speculators. When a group unloads a great quantity of a thing on to the market, the price falls and the other
group begins buying it. When it has raised the price of the thing, it arranges to sell a great deal quietly. Thus
when price rises, demand also increases.

Why does demand curve slopes downward?

1. Diminishing marginal utility:

According to Gossen, of a consumer goes on consuming more units of same commodity without time
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gap, marginal utility diminishes. It means 2nd unit gives less utility or satisfaction than 1st unit, 3rd
gives less than 2nd and so on. Therefore, the consumer demands more only if prices are reduced.

2. Real income effect:

if price falls real income increases even if the money is constant. Therefore, consumers demand
more. If the price rises, real income falls even if money income is constant. Therefore, consumers
demand less.

3. Substitution effect:
if a commodity becomes cheaper the commodity is substituted for other substituting goods. If the
commodity becomes expensive, it is substituted by other substitutes.

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4. No. of uses:
If the price falls, the commodity is used for least important purposes too. That’s why demand
increases. If price rises, the commodity is used only for important purposes. That’s why demand
decreases.

5. No. of consumers:
If price falls, the consumers who were unable to purchase the commodity because of high price, will
also be able to consume the commodity. That’s why demand increases and vice versa.

6. New buyers and Old Buyers

Due to the fall in the prices of a commodity new buyers get attracted towards it and buy it.
Thus, this increases the demand for the commodity. When the prices of the goods fall the old buyers tend to
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buy more goods than usual thereby increasing its demand. This causes the downward sloping of demand
curve.

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Changes in Demand and Quantity Demanded

In economics the terms change in quantity demanded and change in demand are two different concepts.
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Change in quantity demanded refers to change in the quantity purchased due to increase or decrease in the
price of a product.

In such a case, it is incorrect to say increase or decrease in demand rather it is increase or decrease in the
quantity demanded.

On the other hand, change in demand refers to increase or decrease in demand of a product due to various
determinants of demand, while keeping price at constant.

Changes in quantity demanded can be measured by the movement of demand curve, while changes in
demand are measured by shifts in demand curve. The terms, change in quantity demanded refers to
expansion or contraction of demand, while change in demand means increase or decrease in demand.

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1. Expansion and Contraction of Demand:

The variations in the quantities demanded of a product with change in its price, while other factors are at
constant, are termed as expansion or contraction of demand. Expansion of demand refers to the period when
quantity demanded is more because of the fall in prices of a product. However, contraction of demand takes
place when the quantity demanded is less due to rise in the price o a product.

For example, consumers would reduce the consumption of milk in case the prices of milk increases and vice
versa. Expansion and contraction are represented by the movement along the same demand curve.
Movement from one point to another in a downward direction shows the expansion of demand, while an
upward movement demonstrates the contraction of demand.

demonstrates the expansion and contraction of demand:

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When the price changes from OP to OP1 and demand moves from OQ to OQ1, it shows the expansion of
demand. However, the movement of price from OP to OP2 and movement of demand from OQ to OQ2
show the contraction of demand.
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2. Increase and Decrease in Demand:

Increase and decrease in demand are referred to change in demand due to changes in various other factors
such as change in income, distribution of income, change in consumer’s tastes and preferences, change in
the price of related goods, while Price factor is kept constant Increase in demand refers to the rise in demand
of a product at a given price.

On the other hand, decrease in demand refers to the fall in demand of a product at a given price. For
example, essential goods, such as salt would be consumed in equal quantity, irrespective of increase or
decrease in its price. Therefore, increase in demand implies that there is an increase in demand for a product
at any price. Similarly, decrease in demand can also be referred as same quantity demanded at lower price,
as the quantity demanded at higher price.

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Increase and decrease in demand is represented as the shift in demand curve. In the graphical representation
of demand curve, the shifting of demand is demonstrated as the movement from one demand curve to
another demand curve. In case of increase in demand, the demand curve shifts to right, while in case of
decrease in demand, it shifts to left of the original demand curve.

shows the increase and decrease in demand:

In the Diagram the movement from DD to D1D1 shows the increase in demand with price at constant
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(OP). However, the quantity has also increased from OQ to OQ1.

Figure-13 shows the decrease in demand:

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In Figure-13, the movement from DD to D2D2 shows the decrease in demand with price at constant (OP).
However, the quantity has also decreased from OQ to OQ2

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Elasticity of Demand

Elasticity of demand is a measure of relative changes in the amount demanded in response to a small
change in price. Certain goods are said to have an elastic demand while others have an inelastic demand.
The demand is said to be elastic when a small change in price brings about considerable change in demand.
On the other hand, the demand for a good is said to be inelastic when a change in price fails to bring about
significant change in demand.

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The concept of elasticity can be expressed in the form of an equation as:

Ep = [Percentage change in quantity demanded / Percentage change in the price]

Types of Price Elasticity

The concept of price elasticity reveals that the degree of responsiveness of demand to the change in price
differs from commodity to commodity. Demand for some commodities is more elastic while that for
certain others is less elastic. Using the formula of elasticity, it possible to mention following different types
of price elasticity:

1.Perfectly inelastic demand (ep = 0)

2.Inelastic (less elastic) demand (e < 1)

3.Unitary elasticity (e = 1)
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4.Elastic (more elastic) demand (e > 1)

5.Perfectly elastic demand (e = ∞)

1. Perfectly inelastic demand (ep = 0)

This describes a situation in which demand shows no response to a change in price. In other words,
whatever be the price the quantity demanded remains the same. It can be depicted by means of the
alongside diagram.

2.Inelastic (less elastic) demand (e < 1)

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In this case the proportionate change in demand is smaller than in price. The alongside figure shows this
type.

3.Unitary elasticity demand (e = 1)

When the percentage change in price produces equivalent percentage change in demand, we have a case
of unit elasticity. The rectangular hyperbola as shown in the figure demonstrates this type of elasticity. In
this case percentage change in demand is equal to percentage change in price.

4.Elastic (more elastic) demand (e > 1)

In case of certain commodities the demand is relatively more responsive to the change in price. It means a
small change in price induces a significant change in, demand

5. Perfectly elastic demand (e = ∞)

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This is experienced when the demand is extremely sensitive to the changes in price. In this case an
insignificant change in price produces tremendous change in demand. A small change in price produces
infinite change in demand. A perfectly competitive firm faces this type of demand.

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Determinants of Elasticity

1.Nature of the Commodity:

Humans wants, i.e. the commodities satisfying them can be classified broadly into necessaries on the one
hand and comforts and luxuries on the other hand. The nature of demand for a commodity depends upon
this classification.

2.Number of Substitutes Available: The large the number of substitutes, the higher is the elastic. It means
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if a commodity has many substitutes, the demand will be elastic.

3.Number Of Uses: If a commodity can be put to a variety of uses, the demand will be more elastic. When
the price of such commodity rises, its consumption will be restricted only to more important uses and
when the price falls the consumption may be extended to less urgent uses, e.g. coal electricity, water etc.

4.Possibility of Postponement of Consumption: This factor also greatly influences the nature of demand
for a commodity. If the consumption of a commodity can be postponed, the demand will be elastic.

5.Range of prices: The demand for very low-priced as well as very high-price commodity is generally
inelastic. When the price is very high, the commodity is consumed only by the rich people. A rise or fall in
the price will not have significant effect in the demand. Vice Versa.

6.Proportion of Income Spent: Income of the consumer significantly influences the nature of demand. If
only a small fraction of income is being spent on a particular commodity, say newspaper, the demand will
tend to be inelastic.

7.According to Taussig, unequal distribution of income and wealth makes the demand in general, elastic.
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8.In addition, it is observed that demand for durable goods, is usually elastic.

9.The nature of demand for a commodity is also influenced by the complementarities of goods.

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Measurement of Elasticity

For practical purposes, it is essential to measure the exact elasticity of demand. By measuring the elasticity
we can know the extent to which the demand is elastic or inelastic. Different methods are used for
measuring the elasticity of demand.

1.Percentage Method: In this method, the percentage change in demand and percentage change in price
are compared.

ep = [Percentage change in demand / Percentage change in price]

In this method, three values of ‘ep’ can be obtained. Viz., ep = 1, ep > 1, ep > 1.

1.If 5% change in price leads to exactly 5% change in demand, i.e. percentage change in demand is equal to
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percentage change in price , e = 1, it is a case of unit elasticity.

2.If percentage change in demand is greater than percentage change in price, e > 1, it means the demand is
elastic.

3.If percentage change in demand is less than that in price, e > 1, meaning thereby the demand is inelastic.

2. Total Outlay Method:

Total Outlay Method

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Total outlay method, also known as total expenditure method of measuring price elasticity of demand was
developed by Professor Alfred Marshall. According to this method, price elasticity of demand can be
measured by comparing total expenditure on a commodity before and after the price change.

While comparing the expenditure, we may get one of three outcomes. They are

Elasticity of demand will be greater than unity (Ep > 1).When total expenditure increases with fall in price
and decreases with rise in price

Elasticity of demand will be equal to unity (Ep = 1).When total expenditure on commodity remains
unchanged in response to change in price of the commodity

Elasticity of demand will be less than unity (Ep < 1).When total expenditure decreases with fall in price and
increases with rise in price.

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Total outlay or Price elasticity

Quantity expenditure
Cases Price (P) of demand
demanded (Q)
(E = PXQ) (PED)

6 1 6
I PED = 10/6, > 1
5 2 10

4 3 12
II PED = 12/12, = 1
3 4 12

2 5 10
III PED = 6/10, < 1
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1 6 6

When the information from the above table is plotted in the graph, we get graph like the one shown
below.
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3.Point Method

The point method of measuring price elasticity of demand was also devised by prof. Alfred Marshall. This
method is used to measure the price elasticity of demand at any given point in the curve.

Algebrically,

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4. Arc Elasticity of Demand

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In the words of Prof. Baumol, “Arc elasticity is a measure of the average responsiveness to price
change exhibited by a demand curve over some finite stretch of the curve.”

Any two points on a demand curve make an arc. The area between P and M on the DD curve in Figure. is an
arc which measures elasticity over a certain range of price and quantities.

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Types Of Elasticity of demand

1. Income Elasticity of Demand

The discussion of price elasticity of demand reveals that extent of change in demand as a result of change
in price. However, as already explained, price is not the only determinant of demand. Demand for a
commodity changes in response to a change in income of the consumer. In fact, income effect is a
constituent of the price effect. The income effect suggests the effect of change in income on demand.

EY = [Percentage change in demand / Percentage change in income]

The following types of income elasticity can be observed:

1.Income Elasticity of Demand Greater than One: When the percentage change in demand is greater than
the percentage change in income, a greater portion of income is being spent on a commodity with an
increase in income- income elasticity is said to be greater than one.

2.Income Elasticity is unitary: When the proportion of income spent on a commodity remains the same or
when the percentage change in income is equal to the percentage change in demand, EY = 1 or the income
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elasticity is unitary.

3.Income Elasticity Less Than One (EY< 1): This occurs when the percentage change in demand is less than
the percentage change in income.

4.Zero Income Elasticity of Demand (EY=o): This is the case when change in income of the consumer does
not bring about any change in the demand for a commodity.

5.Negative Income Elasticity of Demand (EY< o): It is well known that income effect for most of the
commodities is positive. But in case of inferior goods, the income effect beyond a certain level of income
becomes negative.
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2.Cross Elasticity of Demand

While discussing the determinants of demand for a commodity, we have observed that demand for a
commodity depends not only on the price of that commodity but also on the prices of other related goods.

This can be expressed as:

EC = [Percentage Change in demand for X / Percentage change in price of Y]

In short, cross elasticity will be of three types:

1.Negative cross elasticity – Complementary commodities.

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2.Positive cross elasticity – Substitutes.

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3.Zero cross elasticity – Unrelated goods.
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2.Price elasticity of Demand

(Discussed Above)

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Importance of Elasticity

The concept of elasticity is of great importance both in economic theory and in practice.

1.Theoretically, its importance lies in the fact that it deeply analyses the price-demand relationship. The
law of demand merely explains the qualitative relationship while the concept of elasticity of demand
analyses the quantitative price-demand relationship.

2.Helps in determine the price

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The Pricing policy of the producer is greatly influenced by the nature of demand for his product. If the
demand is inelastic, he will be benefited by charging a high price

3.Helps in Determinng the price of joint products

The price of joint products can be fixed on the basis of elasticity of demand. High price is charged for a
product having inelastic demand (say cotton) and low price for its joint product having elastic demand (say
cotton seeds).

4.The concept of elasticity of demand is helpful to the Government in fixing the prices of public utilities.

5.The Elasticity of demand is important not only in pricing the commodities but also in fixing the price of
labour viz., wages.

6.The concept of elasticity of demand is useful to Government in formulation of economic policy in

various fields such as taxation, international trade etc. (a) The concept of elasticity of demand guides the
finance minister in imposing the commodity taxes (b) The concept of elasticity of demand helps the
Government in formulating commercial policy.
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7.The concept of elasticity of demand is very important in the field international trade. It helps in solving
some of the problems of international trade such as gains from trade, balance of payments etc. policy of
tariff also depends upon the nature of demand for a commodity.

In nutshell, it can be concluded that the concept of elasticity of demand has great significance in economic
analysis. Its usefulness in branches of economic such as production, distribution, public finance,
international trade etc., has been widely accepted.

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Demand forecasting
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Meaning

According to Evan J. Douglas, “Demand estimation (forecasting) may be defined as a process of finding
values for demand in future time periods.”

In the words of Cundiff and Still, “Demand forecasting is an estimate of sales during a specified future
period based on proposed marketing plan and a set of particular uncontrollable and competitive forces.”

Demand forecasting enables an organization to take various business decisions, such as planning the
production process, purchasing raw materials, managing funds, and deciding the price of the product. An
organization can forecast demand by making own estimates called guess estimate or taking the help of
specialized consultants or market research agencies. Let us discuss the significance of demand forecasting in
the next section.

Objectives/ Significance

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I Short-term Objectives:

a. Formulating production policy:

Helps in covering the gap between the demand and supply of the product. The demand forecasting helps in
estimating the requirement of raw material in future, so that the regular supply of raw material can be
maintained. It further helps in maximum utilization of resources as operations are planned according to
forecasts. Similarly, human resource requirements are easily met with the help of demand forecasting.

b. Formulating price policy:

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Refers to one of the most important objectives of demand forecasting. An organization sets prices of its
products according to their demand. For example, if an economy enters into depression or recession phase,
the demand for products falls. In such a case, the organization sets low prices of its products.

c. Controlling sales:

Helps in setting sales targets, which act as a basis for evaluating sales performance. An organization make
demand forecasts for different regions and fix sales targets for each region accordingly.
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d. Arranging finance:

Implies that the financial requirements of the enterprise are estimated with the help of demand forecasting.
This helps in ensuring proper liquidity within the organization.

ii. Long-term Objectives:

a. Deciding the production capacity:

Implies that with the help of demand forecasting, an organization can determine the size of the plant
required for production. The size of the plant should conform to the sales requirement of the organization.

b. Planning long-term activities:

Implies that demand forecasting helps in planning for long term. For example, if the forecasted demand for
the organization’s products is high, then it may plan to invest in various expansion and development projects
in the long term.

c. To plan manpower requirements:

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Long term demand forecasting is useful for manpower planning. Training and personnel development can
be started well in advance on the basis of estimates of manpower requirements assessed according to long
term demand forecasts.

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Methods/Techniques Of Demand Forecasting

Demand forecasting is the art as well as the science of predicting the likely demand for a product or service
in future. This prediction is based on the past behavior patterns and the continuing trends in the present.
Hence, it is not simply guessing the future demand but is estimating the demand scientifically and
objectively. Thus, there are various methods of demand forecasting which we will discuss here.

I Opinion Polling method

1. Simple Survey Methods

For forecasting the demand for existing product, such survey methods are often employed. In this set of
methods, we may undertake the following exercise.
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a. Consumers Survey – Complete Enumeration Method:
Under this, the forecaster undertakes a complete survey of all consumers whose demand he
intends to forecast, Once this information is collected, the sales forecasts are obtained by
simply adding the probable demands of all consumers. The principle merit of this method is
that the forecaster does not introduce any bias or value judgment of his own. He simply
records the data and aggregates.

b. Consumer Survey – Sample Survey Method:

Under this method, the forecaster selects a few consuming units out of the relevant
population and then collects data on their probable demands for the product during the
forecast period. The total demand of sample units is finally blown up to generate the total
demand forecast. Compared to the former survey, this method is less tedious and less costly,
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and subject to less data error

c. End-user Method of Consumers Survey:

Under this method, the sales of a product are projected through a survey of its end-users. A
product is used for final consumption or as an intermediate product in the production of other
goods in the domestic market, or it may be exported as well as imported.

2. Consensus Methods

As an alternative to the “bottom-up” survey approaches, consensus methods use a small group of individuals
to develop general forecasts.

a. Experts Opinion Poll:

In this method, the experts on the particular product whose demand is under study are requested to
give their ‘opinion’ or ‘feel’ about the product. These experts, dealing in the same or similar product,
are able to predict the likely sales of a given product in future periods under different conditions based
on their experience.

b. Reasoned Opinion – Delphi Technique:

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This is a variant of the opinion poll method. Here is an attempt to arrive at a consensus in an uncertain
area by questioning a group of experts repeatedly until the responses appear to converge along a single
line. The participants are supplied with responses to previous questions (including seasonings from
others in the group by a coordinator or a leader or operator of some sort). Such feedback may result in
an expert revising his earlier opinion. This may lead to a narrowing down of the divergent views (of
the experts) expressed earlier.

c. Judgmental techniques of demand forecasting -are important in that they are often used to determine an
enterprise’s strategy. They are also used in more mundane decisions, such as determining the quality of a
potential vendor by asking for references, and there are many other reasonable applications. It is true that
judgment based techniques are an inadequate basis for a demand forecasting system, but this should not be
construed to mean that judgment has no role to play in logistics forecasting or that salespeople have no
knowledge to bring to the problem

3. Experimental Approaches to Forecasting

In the early stages of new product development it is important to get some estimate of the level of potential
demand for the product. A variety of market research techniques are used to this end.

a. Customer Surveys are sometimes conducted over the telephone or on street corners, at shopping malls,
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and so forth. The new product is displayed or described, and potential customers are asked whether they
would be interested in purchasing the item. While this approach can help to isolate attractive or unattractive
product features, experience has shown that “intent to purchase” as measured in this way is difficult to
translate into a meaningful demand forecast.

b. Consumer Panels are also used in the early phases of product development. Here a small group of
potential customers are brought together in a room where they can use the product and discuss it among
themselves. Panel members are often paid a nominal amount for their participation.

c. Test Marketing is often employed after new product development but prior to a full-scale national
launch of a new brand or product. The idea is to choose a relatively small, reasonably isolated, yet somehow
demographically “typical” market area. The total marketing plan for the item, including advertising,
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promotions, and distribution tactics, is “rolled out” and implemented in the test market, and measurements
of product awareness, market penetration, and market share are made.

d. Panel Data procedures have recently been developed that permit demand experimentation on existing
brands and products. In these procedures, a large set of household customers agrees to participate in an
ongoing study of their grocery buying habits. Panel members agree to submit information about the number
of individuals in the household, their ages, household income, and so forth. Whenever they buy groceries at
a supermarket participating in the research, their household identity is captured along with the identity and
price of every item they purchased.

II Complex Statistical Methods

We shall now move from simple to complex set of methods of demand forecasting. Such methods are taken
usually from statistics. As such, you may be quite familiar with some the statistical tools and techniques, as
a part of quantitative methods for business decisions.

1. Time Series Analysis or Trend Method

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Under this method, the time series data on the under forecast are used to fit a trend line or curve either
graphically or through statistical method of Least Squares. The trend line is worked out by fitting a trend
equation to time series data with the aid of an estimation method. The trend equation could take either a
linear or any kind of non-linear form.

2. Barometric Techniques or Lead-Lag Indicators Method

This consists in discovering a set of series of some variables which exhibit a close association in their
movement over a period or time.

For example, it shows the movement of agricultural income (AY series) and the sale of tractors (ST series).
The movement of AY is similar to that of ST, but the movement in ST takes place after a year’s time lag
compared to the movement in AY. Thus if one knows the direction of the movement in agriculture income
(AY), one can predict the direction of movement of tractors’ sale (ST) for the next year. Thus agricultural
income (AY) may be used as a barometer (a leading indicator) to help the short-term forecast for the sale of
tractors.

3. Correlation and Regression

These involve the use of econometric methods to determine the nature and degree of association
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between/among a set of variables. Econometrics, you may recall, is the use of economic theory, statistical
analysis and mathematical functions to determine the relationship between a dependent variable (say, sales)
and one or more independent variables (like price, income, advertisement etc.). The relationship may be
expressed in the form of a demand function, as we have seen earlier. Such relationships, based on past data
can be used for forecasting. The analysis can be carried with varying degrees of complexity

4. Simultaneous Equations Method

Here is a very sophisticated method of forecasting. It is also known as the ‘complete system approach’ or
‘econometric model building’. this method is normally used in macro-level forecasting for the economy as a
whole. Involve several simultaneous equations. There are two types of variables that are included in this
model, which are as follows
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i. Endogenous ii. Exogenous Variables

CRITERIA OF A G0OD FORECASTING METHTHOD

forecasting can be effective if the predicted demand equal the actual demand. For better results, a good technique
to forecast demand is of vital importance.

(1) Accuracy

Almost all the methods of demand forecasting yield accurate results under different circumstances. However, not all
methods are appropriate to be used for all kinds of forecasting. For example, a lack of statistical data limits the use
of regression analysis in order to predict demand. Therefore, an appropriate selection of forecasting technique
would ensure the accuracy of results.

(2) Timeliness

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As discussed earlier, demand forecasting can be short term or long term. The demand forecasting methods used for
both the time periods vary. For example, the demand for a new product, which needs to be introduced in a month's
time, cannot be assessed using the time series analysis method.

3) Affordability

The cost for different demand forecasting methods varies based on its implementation, expertise required, the time
period involved, etc. Thus, organizations should select a method that suits their budget and requirements without
compromising on the outcome. For example, the complete enumeration method of demand forecasting yields
accurate results but could prove expensive for small-scale organisations.

4) Ease of interpretation

Outcomes generated using demand forecasting methods are generally represented in the form of statistical or
mathematical equations. Therefore, it should be ensured that personnel carrying out forecasting are trained and
efficient to use forecasting methods and interpret the results.

(5) Longevity or Durability

Since a forecast takes a lot of time and money, it should be usable for
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longer span of time or multiple years. A forecast for short span of may not be effective for the organisation.

6. Acceptability and Simplicity:.

Demand forecast is one of the most important criteria of a good demand forecasting method. That means a forecast
Should be acceptable to all good. It should also be as simple as possible. A business firm should forecast its market
demand by using simple and easy methods.

7. Availability

A good a good demand forecasting method should have adequate and up-to-date data available. The forecasts
should be done in timelymanner so that necessary arrangements could be made related to the
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market demand.

8) Plausibility and Possibility

It denotes that the demand forecasts should be reasonable, so that they are easily understood by individuals who
will use it. Again, it should have the quality of application in the changing business
conditions.

9.Quickness

It should be capable of yielding quick and useful results. This helps the management to take quick and effective
decisions

………………………………………………………………………………………………………………………………………………………………..How to
forecast demand for new products? Demand forecasting for new product

Demand forecasting for the new products requires special skill and techniques as they are new products and no previous
data will be available about their sales.

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The method or techniques should be carefully tailored for the product. Joel Dean makes six possible approaches towards
forecasting of new products. They are as follows:

1. The Evolutionary approach in forecasting demand

The principle behind this approach is that the demand for a new product is only an outgrowth and evolution of the
existing product. It means that the demand conditions of the existing product should be taken into account while
accessing the demand for the product.
Examples: Color TV sets from black and white TV sets; Left-side steering cars from right-side steering cars, etc. But
this approach is useful only when the new product is very close to the old existing product.

2. Substitute approach in forecasting demand

By this the new product is analyzed as a substitute for the old existing product or service.

3. Growth curve approach in forecasting demand

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The estimates of rate of growth and ultimate level of demand for the new product will be established on the basis of
some growth patterns of an already established product.
For example, the average sales of Talcum powder will give an idea as to how a new cosmetic will be received in the
market.

4. Opinion Poll approach in forecasting demand

Under this, the demand for the new product will be estimated by making direct enquiries from the ultimate consumers.
This is done by sample survey method. But, this is a very complicated process as there will be problems of sampling,
probing the real intentions of the consumers, etc..

5. Sales Experience approach in forecasting demand

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According to Sales experience approach method, samples of new products shall be offered in a sample market to forecast
demand. This is done through distributive channels like departmental stores or cooperative society, etc., or by direct
mailing. Total demand is predicted on the basis of the sample market. But, the difficulty in this lies in determining the
allowance to make for the immaturity of the sample market and full-fledged market.

6. Vicarious approach in forecasting demand

Through vicarious approach method, the reaction of the customer towards new product can be found out indirectly
through the specialized dealers who are able to judge the needs, tastes and preferences of customers.

The dealers being the link between the producer and the ultimate consumers, will be able to know how the customers
will receive the new product.

Steps in Demand Forecasting

Demand Forecasting is a systematic process of predicting the future demand for a firm’s product. Simply, estimating
the potential demand for a product in the future is called as demand forecasting.

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The demand forecasting finds its significance where the large-scale production is involved. Such firms may often face
difficulties in obtaining a fairly accurate estimation of future demand. Thus, it is essential to forecast demand
systematically and scientifically to arrive at desired objective. Therefore, the following steps are taken to facilitate a
systematic demand forecasting:

Steps in Demand Forecasting

Specifying the Objective: The objective for which the demand forecasting is to be done must be clearly specified.
The objective may be defined in terms of; long-term or short-term demand, the whole or only the segment of a
market for a firm’s product, overall demand for a product or only for a firm’s own product, firm’s overall market
share in the industry, etc. The objective of the demand must be determined before the process of demand
forecasting begins as it will give direction to the whole research.

Determining the Time Perspective: On the basis of the objective set, the demand forecast can either be for a short-
period, say for the next 2-3 year or a long period. While forecasting demand for a short period (2-3 years), many
determinants of demand can be assumed to remain constant or do not change significantly. While in the long run,
the determinants of demand may change significantly. Thus, it is essential to define the time perspective, i.e., the
time duration for which the demand is to be forecasted.
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Making a Choice of Method for Demand Forecasting: Once the objective is set and the time perspective has been
specified the method for performing the forecast is selected. There are several methods of demand forecasting
falling under two categories; survey methods and statistical methods.

The Survey method includes consumer survey and opinion poll methods, and the statistical methods include trend
projection, barometric and econometric methods. Each method varies from one another in terms of the purpose of
forecasting, type of data required, availability of data and time frame within which the demand is to be forecasted.
Thus, the forecaster must select the method that best suits his requirement.

Collection of Data and Data Analysis: Once the method is decided upon, the next step is to collect the required data
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either primary or secondary or both. The primary data are the first-hand data which has never been collected
before. While the secondary data are the data already available. Often, data required is not available and hence the
data are to be adjusted, even manipulated, if necessary with a purpose to build a data consistent with the data
required.

Estimation and Interpretation of Results: Once the required data are collected and the demand forecasting method
is finalized, the final step is to estimate the demand for the predefined years of the period. Usually, the estimates
appear in the form of equations, and the result is interpreted and presented in the easy and usable form.

Thus, the objective of demand forecasting can only be achieved only if these steps are followed systematically.

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