CHAPTER 2

DEMAND ESTIMATION
• TOTAL UTILITY- Defined as the sum of the satisfaction that a person can
receive from the consumption of all units of a specific product or service.
• MARGINAL UTILITY- additional utility gained from the consumption of
one additional unit of a good or service or the additional use that a person has
for an additional unit.
• LAW OF DIMINISHING MARGINAL UTILITY- as the consumer consumes
more and more units of a commodity, the additional utility obtained from each
additional units goes on decreasing.
• MEANING – Demand is desire backed by ability and willingness to pay for a
commodity at the prevailing price in a given period of time.
• Demand for a Particular commodity implies- (1) Desire of the customer to
buy the product (2) The customers willingness to buy the product (3)
Sufficient purchasing power in the customers possession to buy the product.
• The demand for a particular commodity by an individual customer is known
as individual demand and Summation of the individual demand is known as
market demand.

MEANING OF DEMAND
DEMAND SCHEDULE AND
DEMAND CURVE
REASON FOR DOWNWARD SLOPING OF
DEMAND CURVE

CHANGE IN
LAW OF NUMBER ORF DIFFERENT
DIMINISHING CUSTOMERS USES OF
MARGINAL
CONSUMERS
UTILITY

SUBSTITUTION
PRICE EFFECT
EFFECT
INCOME EFFECT
 Giffen goods

Veblen goods

Anticipation regarding
change in price

Exceptions to the law of Depression

demand

Change in fashion

Brand loyalty

Emergencies
MOVEMENT Vs. SHIFT IN DEMAND

Movements of demand ( Extension and contraction of demand)

2. SHIFT IN DEMAND(INCREASE AND DECREASE IN DEMAND)
Elasticity of demand refers to the rate of change in demand for a commodity in
response to the change in its demand determinants.
Types/ kinds of elasticity
1. Price elasticity
2. Income elasticity
3. Advertisement elasticity
4. Cross elasticity

ELASTICITY OF DEMAND
Price elasticity of demand is a measurement of the change in the consumption of a
product in relation to a change in its price. Expressed mathematically, it is:
Price Elasticity of Demand = Percentage Change in Quantity Demanded /
Percentage Change in Price
Degrees of Price elasticity of demand
1. Perfectly elastic demand
2. Perfectly inelastic demand
3. Unit elasticity
4. Relatively elastic demand
5. Relatively inelastic demand
Price elasticity of
demand
 PERCENTAGE
METHOD

MEASUREMEN
T OF PRICE
ELASTICITY OF
TOTAL DEMAND
EXPENDITUR ARC
E METHOD METHOD
PERCENTAGE METHOD
Used to measure elasticity of demand when change in price is very
small
TOTAL EXPENDITURE METHOD

Total Outlay = Price X Quantity Demanded

• (i) If with a fall in price (demand increases) the total expenditure increases or with a
rise in price (demand falls), the total expenditure falls, in that case the elasticity of
demand is greater than one i.e. ED > 1.
• (ii) If with a rise or fall in the price (demand falls or rises respectively), the total
expenditure remains the same, the demand will be unitary elastic or ED = 1.
• (iii) If with a fall in price (Demand rises), the total expenditure also falls, and with a
rise in price (Demand falls) the total expenditure also rises, the demand is said to be
less classic or elasticity of demand is less than one (ED < 1).
IMPORTANCE OF PRICE ELASTICITY

• Determination of price and output

• Price discrimination
• Price determination in cases of joint supply
• Paradox of poverty
• Decisions relating to mechanisation
• Decisions related to taxation policy
Positive income elasticity is
classified into:-
1. Unit income elasticity
2. Income elasticity more
than unity
3. Income elasticity less
than unity
USES OF INCOME ELASTICITY

• Demand forecasting
• Product line planning
• Advertisement planning
• Planning production according to business cycle
Advertisement elasticity
• Degree of responsiveness of demand to change in advertisement expenditure
• Also known as promotional elasticity
• Stage of the product
• Reaction of competitors
• Effect of past advertisement
• Influence of other determinants
• Quality and mode of advertisement

Factors affecting
advertisement elasticity
• Cross elasticity helps to understand the market of the product :
Cross elasticity is Zero - monopoly market
Cross elasticity is high - monopolistic market
Cross elasticity is infinite - perfect competition

Cross elasticity and

business decisions
 • Demand forecasting is a combination of two words; the
first one is Demand and another forecasting. Demand
means outside requirements of a product or service. In
general, forecasting means making an estimation in the
present for a future occurring event.
• Demand forecasting may be defined as the process of
making objective assessment of demand for the product
during a given future period in order to evolve an
effective production plan for the period.

DEMAND FORECASTING
LEVELS OF DEMAND FORECASTING

Macro-level forecasting: It deals with the general economic environment relating to the economy as
measured by the Index of Industrial Production(IIP), national income and general level of employment, etc.
Industry level forecasting: Industry level forecasting deals with the demand for the industry’s products as a
whole. For example demand for cement in India, demand for clothes in India, etc.
• Firm-level forecasting: It means forecasting the demand for a particular firm’s product. For example,
demand for Birla cement, demand for Raymond clothes, etc

TYPES OF DEMAND FORECASTING

Short-term forecasting: It covers a short period of time, depending upon the nature of the industry. It is
done generally for six months or less than one year. Short-term forecasting is generally useful in tactical
decisions.
• Long-term forecasting : Long-term forecasts are for a longer period of time say, two to five years or
more. It gives information for major strategic decisions of the firm. For example, expansion of plant
capacity, opening a new unit of business
• Production planning
• Sales forecasting
• Control of business
• Inventory control
• Growth and long term investment programme
• Stability
• Economic planning and policy making

Importance of demand
forecasting
• Determination of production policy
• Determination of sales policy
• Reduction of cost of production
• Fixation of sales target
• For ensuring steady flow of finance

Purposes of short term

demand forecasting
Long term demand forecasting includes:
• Planning for new unit or expansion of the existing unit
• Long term financial planning
• Man power planning
 Direct
interview
Survey method
Delphi
methods
method
Opinion
survey
method
Techniques Market
studies and
of demand experiment
Trend
forecasting method
projection
method
Barometric
technique
Statistical Correlation
method and
regression
analysis
• EVOLUTIONARY APPROACH
• SUBSTITUTE APPROACH
• GROWTH CURVE APPROACH
• OPINION POLL APPROACH
• SALES EXPERIENCE APPROACH
• VICARIOUS APPROACH

FORECASTING DEMAND
FOR NEW PRODUCTS