Module3-market Forces: Mr. Deepak Kulkarni

Module3- Market Forces Mr. Deepak Kulkarni

Meaning of Demand Demand implies 3 conditions : • Desire for a commodity or service • Ability to pay the price of it • Willingness to pay the price of it. Further demand has no meaning without reference to time period such as a week, a month or a year. The demand for a product can be defined as the “Number of units of an commodity that consumer will purchase at a given price during a specified period of time in the market.”

Determinants of Demand      

Price of Commodity Price of Related Goods Income of the Consumer Distribution of Wealth Tastes & Habits Population growth

 State of Business (Business Cycle)  Government Policy  Advertisement  Level of Taxation

The Law of Demand The law of demand expresses the relationship between the price & quantity demanded .It says that demand varies inversely with price. The Law can be stated in the following: “ Other things being equal, a fall in the price leads to expansion in demand and a rise in price leads to contraction in demand.”

Diagrammatical representation of the Law

Why does the demand curve slope downwards to right? OR Why does demand curve has a negative slope? • • • • •

Operation of the Law of Diminishing Marginal Utility Income Effect Substitution Effect Different Uses New Buyers

Assumptions to the Law of Demand • • • • •

Consumers Income remains Constant The Tastes & Preferences Of the Consumers remain the same Prices of other related Commodities remain Constant No new Substitutes are available for the Commodity. Consumers do not expect further change in the price of the commodity.

• The Commodity is not of Prestigious value Eg: Diamond • The size of population is constant • The rate of taxes remain the same • Climate & Weather Conditions do not change.

Exceptions to the law of demand

A few exceptions – Price Illusion – Fear of Future Rise in Prices – Emergency – Necessaries – Conspicious Necessaries (More Noticeable) Eg:- TV, Watch, Scooters, Car etc

– Fear of Shortage – Ignorance – Speculation (Stock Market)

- Giffen’s goods – An inferior good much cheaper than its superior substitutes consumed by the poor as an essential commodity. If prices of cheaper goods increases with the price of substitute remaining constant , consumption of cheaper good increases owing to the fact income effect of price rise is greater than the substitution effect.

Demand Schedule • •

Individual Demand Schedule Market Demand schedule

1. Individual Demand Schedule: It is a list of various quantities of a commodity which an individual consumer purchases at different prices at one instant of time. D= f (P) (or) D(x) = f(Px)

Individual Demand Schedule(Hypothetical)

2. Market Demand Schedule The market demand Schedule can be obtained by adding all the individual Demand Schedules of Consumers in the market. Hypothetical market demand schedule is as follows:

Diagrammatical representation

Shifts in Demand A. Extension & contraction of demand: When demand changes due to change in the price of the commodity, it is a case of either extension or contraction of demand. The Law of demand relates to the Extension & Contraction of Demand.

B. Increase and Decrease in Demand When demand changes, not due to changes in the price of the commodity or service but due to other factors on which demand depends. Eg:- Income, Population, Climate, Tastes & Habits etc.

Diagrammatical Representation

Diagrammatical Representation

Elasticity of Demand Elasticity of demand measures the responsiveness of demand for a commodity to a change in the variables confined to its demand.  For measuring the elasticity coefficient, ratio is made of two variables, ED = %change in quantity demanded % change in determinants of demand 

a

Important Kinds of Elasticity of Demand 1. Price ED: e = % change in quantity demanded % change in price 2. Income ED: e = % change in quantity demanded % change in income 3. Cross ED: e = % change in quantity demanded % change in price of Y

4. Advertising / Promotional ED: eA = % change in sales % change in advertisement expenditure

Factors Influencing Elasticity of Demand 1. Nature of Commodity:  Necessaries --- inelastic  Comforts and Luxuries --- elastic

2. Availability of Substitute:  A commodity which has more substitutes demand is ------ more elastic. Ex: Tea , Coffee, Milk ,Bournvita etc, 3. No of users of a commodity:  More no of users ---elastic Ex: Electricity, Iron and Steel etc.  Only one use --- inelastic Ex: Printing machine , stitching machine

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4. Proportion of Income Spent on the Goods:  Small proportion of income --- inelastic Ex: Salt, Match box, Postcard 5. Habit: Ex: Coffee ,Tea --- inelastic 6. Level of Income of the People:  Rich People --- inelastic  Poor People --- elastic

7. Period of time:  Short period --- inelastic Habit and prices of commodities do not change much.  Long period --- elastic 8. Durability of a commodity:  Durable goods --- elastic Ex: fan, table, Chair  Perishable goods --- inelastic Ex: Milk, flower

9. Postponement of Purchase:  Postponement --- elastic Ex: Fan, TV, Fridge  Cannot be postponed --- inelastic Ex: Medicine, Rice, Wheat 10. Level of Prices:  High priced --- elastic Ex: Cars, TV , Air conditioners  Low priced --- inelastic Ex: Newspaper, Nails, Needle

DEMAND FORECASTING METHODS

Demand Forecasting Meaning: Demand forecasting means estimating the expected future demand for a product , related to a particular period of time. Methods of forecasting: The methods of forecasting can be broadly classified into two categories. They are: 1. Survey Method 2. Statistical Method

DEMAND FORECASTING METHODS

Survey Method

Statistical Method

Expert opinion Direct interview method method (Collective opinion)

Trend projection method

indicator method) Complete enumeration method

Sample survey method

End User method

Regression method

Barometric method (Economic

(A) Survey Method The survey method consists of two methods: • Survey of experts opinion • Survey of consumers intentions through direct interview with them.

(1) Experts Opinion Method (or) Collective Opinion Method •

This method is also known as Sales Force Composite Method. Advantages: 1. It is a simple method of forecasting. 2. It involves minimum statistical work. 3. It is less expensive. 4. It is based on the first hand knowledge of the salesmen who are directly connected with the sales.

Contd… 5. It is more useful for short term forecasting rather than long term forecasting. 6. It is particularly useful in forecasting the sales of new products. Disadvantages: 1. It is subjective approach. 2. The salesmen may underestimate the demand. 3. The salesmen may not be able to judge the future trends in the economy and their impact on the sales of the product of the firm.

(2) Direct Interview Method (or) Customers Interview Method Under this method ,consumers are directly interviewed to find out the future demand or demand trends for a product by a firm. They are three types of consumers’ interview:  Complete Enumeration Method  Sample Survey Method (Stratified = Society divided into different classes)  End Use Method

Continued…… A. Complete Enumeration Method under this method ,almost all the consumers of the product are interviewed and are asked to inform about their future plan of purchasing the product in question. Advantages: • This method is true from any bias of the salesmen ,as they only collect the information and aggregate it. • This method seems to be ideal, since almost all the consumers using the product are contacted.

Contd… Disadvantages: 1. This method is however very costly and tedious. 2. It is also too much time consuming, since every potential customer is to be interviewed. 3. It would be very difficult and impractical if the consumers who are spread over the entire country are to be contacted. Hence this method is highly cumbersome in nature.

Contd… B. Sample Survey Method: When the demand of consumers is very large this method is used by selecting a sample of consumers for interview . Advantages: 1. This method is single and less costly and hence it is widely used. 2. It is less time consuming ,since only a few selected consumers are contacted.

Contd… 3. It is used to estimate short term demand by business firms, governments departments and household customers. 4. It is highly useful in case of new products. 5. This method is of greater use in forecasting where consumers behaviour is subject to frequent changes. However the success if this method depends on the sincere co-operation of the selected consumers.

Contd… Disadvantages: 1. This method is less reliable , because it does not give opinion of all the consumers. 2. A sudden change in the price of the product in future may upset the calculations of consumers. 3. The rich consumers may not bother to fill the details in the questionnaire. These are the practical problems faced in using this method to forecast demand.

Contd… C. End Use Method: Under this method, the sale of the product under consideration is projected on the basis of the demand survey’s of the industries using this given product or intermediate product.

Contd… Advantages: 1. This method is used to forecast the demand for intermediate products only. 2. It is quite useful for industries which largely produces goods like aluminium, steel, etc. Disadvantages: The main limitation of this method is that , as the number of end- users of a product increases, it becomes more difficult to estimate demand under this method.

(B) Statistical Method Under these methods, statistical or mathematical techniques are used to forecast the demand for a product in the long period. The following are the important statistical methods used in forecasting: 1. Trend Projection Method 2. Regression Method 3. Barometric Method

(1) Trend Projection Method

   

This method is also known as Time Series Analysis. Time series refers to the data over a period of time. During this time period, fluctuations and turning points may occur in demand conditions .These fluctuations in demand occur due to the following four factors. They are: Secular Trends Seasonal Variations Cyclical Fluctuations Random Variations

Table - Sales of Transistors for 5 years

YEAR

SALES in lakhs of Rs

1991

50

1992

60

1993

55

1994

70

1995

75

DIAGRAMATIC REPRESENTATION Y 75 70

Trend line

65 60

Sales curve

55 50

0

X 91

92

93

94

95

Contd… Advantages : 1. Trend projection method is quite popular in business forecasting, because it is a simple method. 2. The use this method requires only the simple working knowledge of statistics. 3. It is also less expensive , as its data requirements are limited to the internal records. 4. This method yields fairly reliable estimates if future course of demand.

Contd… Disadvantages: • The most important limitation of this method arises out of its assumption that the past rate of change in the dependent variable ( demand). • This method is not useful for short run forecasting and cyclical fluctuations. • This method does not explain the relationship between dependent and independent variables.

(2)Regression Method It combines the economic theory and statistical techniques of estimation.

(3) Barometric Method This method is also known as Economic Indicators Method. Under this method , a few economic indicators become the basis for forecasting the sales of a company. Some of the most commonly used indicators are given below: • Construction contracts • Personal Income • Automobile registration

Contd… Limitations • It is difficult to find out an appropriate economic indicator • It is not suitable for new products as past data not available • It is best suited where relationship of demand with a particular indicator is characterized by time-lag

Significance of Demand Forecasting • • • • • • •

Production planning Sales Forecasting Control of business Inventory control Growth and Long term Investment Programs Stability Economic planning and Policy making

SUPPLY ANALYSIS Meaning: Supply of a commodity may be defined as the quantity of that commodity which the sellers or producers are able and willing to offer for sale at a particular price during a certain period of time. For eg: At the price of Rs.10 per litre , diary farms’ daily supply of milk is 200 liters.

Distinction between stock & supply Stock refers to total quantity of output kept in the warehouse which can be offered for sale in the market by the seller. On the other hand, the term supply refers to that part of the stock which is actually offered for sale in the market at a price per unit of time.

Law of supply “ Other things remaining the same, the supply of a commodity expands (rises) with a rise in its price and contracts (falls) with a fall in its price.” Thus supply varies directly with the price. In other words, the relationship between supply & price is direct.

Explanation of the law The Law can be explained clearly with the help of supply schedule and a diagram.

Graph:

Assumptions underlining the Law of Supply: 1. 2. 3. 4. 5. 6.

Cost of Production is Unchanged No Change in techniques of Production Fixed scale of Production Government policies are unchanged No change in Transport Cost The prices of related goods are constant

INCREASE & DECREASE IN SUPPLY The 2 terms are introduced to explain the changes in Supply without any change in price are: 1. Increase in Supply 2. Decrease in Supply

1. Increase In Supply

2. Decrease in supply

Extension & Contraction in supply

Determinants of supply 1.Price of the commodity 2. Price of the related goods 3. Cost of production 4. Technology 5. Natural factors 6. Tax & subsidy 7. Development of transport & communication 8. Agreement among producers 9. Future Expectations

Elasticity of supply

It means responsiveness of supply to change in price. ES= Proportionate change in the quantity supplied Proportionate change in price

=

Illustration For example, as a result of a change in the price of a product X from Rs.40 to Rs.45, per unit, the total supply of ‘X’ is increased from 1000 units to 1200 units. Then Elasticity of Supply may be calculated as,

Degrees of Elasticity of Supply 1. Perfectly Elastic Supply: When sellers are prepared to sell all they can at same price and none at all even at a slightly lower price.

2. Perfectly Inelastic Supply When quantity supplied does not change as price changes.

3. Relatively Elastic Supply When quantity supplied changes by a larger % than price.

4. Relatively Inelastic Supply When quantity supplied changes by a smaller % than price.

5. Unitary Elastic Supply When quantity supplied changes by exactly the same % as price.

Factors determining Elasticity of Supply 1. 2. 3. 4. 5. 6. 7. 8.

Price of Commodity Cost of Production Price of Other Products Change in Technology Time Period Objective of the Firm Size of the Firm Imposition of Taxes

Continued….. 9. 10. 11. 12. 13. 14.

Number of Producers Agreement among Producers Political Disturbances Mobility of factors of Production Availability of Markets Nature of Commodities (perishable & Durable goods) 15. Improvement in the means of Communication 16. Nature of production (paintings)