Me - Unit 2

1MANAGERIAL ECONOMICS UNIT-II
DEMAND ANALYSIS
DEMAND CONCEPTS
Introduction:-
Demand analysis seeks to identify and measure the factors that determine, sales demand
analysis has two main marginal purpose
1) Forecasting Sale
2) Manipulating demand
Any directing with regard to production, advertising, cost allocation, pricing, inventory
levels.
In generally demand means “How much Quantity will be purchased by the consumer at a
particular price, at a particular place and at a particular time, when other factors remains
constant”
Definition:
Demand means “It is a strong desire, ability and willingness to pay for purchasing of a
commodity at a particular price demand”
Demand for a commodity this implies these three things. They are
1) strong desire
2) ability
3) willingness to pay
The term “The demand refers” it become meaningful, only when it has deference to a price,
aperiod, and place.
DEMAND FUNCTION
Demand function refers to the factors are influenced a particular commodity. Demand
functions depend on a term keeping other factors being constant. It refers the relation
between the demand of commodity and it influence factors.
Demand function Dn= f (Pn, P1, P2, P3, ---------Pn-1Y, T)
Dn=Demand of ‘n’ commodity

F=function
Pn=price of ‘n’ commodity
P1, P2, P3------Pn-1=price of substitute goods
Y= Income of a consumer
T= Technology
LAW OF DEMAND
Demand law refers ‘keeping other factors being constant if price rises the demand will
be decreases and if price decreases the demand will be increases, so it shows the inverse
relation believe the demand and price.
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DEMAND SCHEDULE
The law of demand may be explained with the help of the following demand schedule.
Price of Appel (In. Rs.) Quantity Demanded

10 1
8 2
6 3
4 4
2 5
When the price falls from Rs. 10 to 8 quantity demand increases from 1 to 2. In the same
way as price falls, quantity demand increases on the basis of the demand schedule we can
draw the demand curve.
Price
The demand curve DD shows the inverse relation between price and quantity demand of
apple. It is downward sloping.
Assumptions:
Law of demand is based on certain assumptions:
1) This is no change in consumers taste and preferences.

2) Income should remain constant.
3) Prices of other goods should not change.
4) There should be no substitute for the commodity
5) The commodity should not confer at any distinction
6) The demand for the commodity should be continuous
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7) People should not expect any change in the price of the commodity
Exceptions to law of demand:
1. Giffen paradox:-
The Giffen good or inferior good is an exception to the law of demand. When the price of
an inferior good falls, the poor will buy less and vice versa. For example, when the price of
broken rice falls, the poor are willing to spend more on superior goods than on broken rice
if the price of broken rice increases. Thus a fall in price is followed by reduction in quantity
demanded and vice versa. “Giffen” first explained this and therefore it is called as Giffen’s
paradox.
2. Veblen or Demonstration effect:-
Rich people buy certain good because it gives social distinction or prestige for example
diamonds are bought by the richer class for the prestige it possess. It the price of diamonds
falls poor also will buy is hence they will not give prestige. Therefore, rich people may stop
buying this commodity.
3. Ignorance:-
Sometimes, the quality of the commodity is Judge by its price. Consumers think that the
product is superior if the price is high. As such they buy more at a higher price.
4. Speculative effect:-
If the price of the commodity is increasing the consumers will buy more of it because of
the fear that it increase still further, Thus, an increase in price may not be accomplished by
a decrease in demand.
5. War period:-
During the times of emergency of war People may expect shortage of a commodity. At
that time, they may buy more at a higher price to keep stocks for the future.
6. Necessaries:-
In the case of necessaries like rice, vegetables etc. people buy more even at a higher
price.
Factors Affecting Demand:
There are factors on which the demand for a commodity depends. These factors are
economic, social as well as political factors. The effect of all the factors on the amount
demanded for the commodity is called Demand Function.
These factors are as follows:
1) Price of the Commodity (P):

The most important factor-affecting amount demanded is the price of the commodity.
The amount of a commodity demanded at a particular price is called price demand. The
relation between price and demand is called the Law of Demand.
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(i)Income of the Consumer (I):

The second most important factor influencing demand is consumer income. The demand
for a normal commodity goes up when income rises and falls down when income falls. But
in case of Giffen goods the relationship is the opposite.
2) Prices of related goods (PR):

The demand for a commodity is also affected by the changes in prices of the related
goods also. Related goods can be of two types:
(I). Substitutes which can replace each other in use; for example, tea and coffee are
substitutes. The change in price of a substitute has effect on a commodity’s demand
in the same direction in which price changes. The rise in price of coffee shall raise
the demand for tea;
(ii).Complementary goods are those which are jointly demanded, such as pen and ink. In
Such cases complementary goods have opposite relationship between price of one
commodity and the amount demanded for the other. If the price of pens goes up,
their demand is less as a result of which the demand for ink is also less.
3) Tastes of the Consumers (T):

The amount demanded also depends on consumer’s taste. Tastes include fashion, habit,
customs, etc. If the taste for a commodity goes up, its amount demanded is more even at
the same price.
4. Size of Population (SP):

Increase in population increases demand for necessaries of life.
5. Government Policy (G):

Government policy affects the demands for commodities through taxation. Taxing a
commodity increases its price and the demand goes down.
6. Climate and weather:

The climate of an area and the weather influence consumer’s demand. In cold areas woolen
cloth is demanded. During hot summer days, ice is very much in demand. On a rainy day,
ice cream is not so much demanded.
ELASTICITY OF DEMAND
Elasticity of demand explains the relationship between a change in price and consequent
change in amount demanded. “Marshall” introduced the concept of elasticity of demand.
In simple words, the change in quantity demand due to change in price is called as
elasticity of demand
Definition:
In the words of “prof. Boulding”, “it measures the responsiveness of the quantity demand
to change in price”
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“Elasticity of demand may be define as the ratio of percentage (%) change in quantity
demanded to percentage (%) change in price” according to Prof.R.G.Lipsey
Elastic demand: A small change in price may lead to a great change in quantity
demanded. In this case, demand is elastic.
In-elastic demand: If a big change in price is followed by a small change in demanded then
the demand in “inelastic”.
Types of Elasticity of Demand:
There are 4 types of elasticity of demand:
1) Price elasticity of demand

2) Income elasticity of demand
3) Cross elasticity of demand
4) Advertisement or promotional elasticity of demand
1. Price elasticity of demand:
Price elasticity of demand measures changes in quantity demand to a change in Price. It is

the ratio of percentage change in quantity demanded to a percentage change in price.
Proportionate change in the quantity demand of commodity
Price elasticity = ------------------------------------------------------------------
Proportionate change in the price of commodity
Measurement of elasticity (or) types of price elasticity of demand
a. Perfectly elastic demand (E=∞)

b. Perfectly Inelastic Demand (E=0)
c. Relatively elastic demands (E > 1)
d. Relatively in-elastic demand (E < 1)
e. Unit elasticity of demand (E=1)
a. Perfectly elastic demand (E=∞):

When “small change in price leads to an infinitely large change is quantity demand”, it is
called perfectly or infinitely elastic demand. In this case E=∞
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From above graph it reveals that the quantity demanded increase from OQ to OQ1 from
OQ1 to OQ2 etc even there is no change in price
B. Perfectly Inelastic Demand (E=0):

In this case, even “a large change in price leads little or no change in quantity demanded, is
called perfectly inelasticity demand”.
From above graph it reveals that there is no change in quantity demanded though there is
change in price. The increase in price from OP to OP1, the quantity demanded has not fall
down. Similarly, though there is fall in price from OP3 to OP2, the quantity demanded
remain unchanged
C. Relatively elastic demand (E > 1):

Demand changes more than proportionately to a change in price, is called relatively
elasticity demand In this case E > 1. This demand curve will be flatter.
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It reveals that the quantity demanded increased from OQ to OQ1, because of decrease in
price from OP to OP1
D. Relatively in-elastic demand (E < 1):
Quantity demanded changes less than proportional to a change in price is called “relatively
in-elastic demand “. Here E < 1. Demanded carve will be steeper.
It reveals that the quantity demanded increased from OQ to OQ1, because of decrease in
price from OP to OP1which is smaller than change in price.
E. Unit elasticity of demand (E=1):
”The change in demand is exactly equal to the change in price”. When both are equal E=1
and elasticity is said to be unitary.
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When price falls from

‘OP’ to ‘OP1’ quantity
demanded increases
from ‘OP’ to ‘OP1’,
quantity demanded increases
from ‘OQ’ to ‘OQ1’. Thus a change in price has resulted in an equal change in quantity
demanded so price elasticity of demand is equal to unity.
2. Income elasticity of demand:
Income elasticity of demand shows the change in quantity demanded as a result of a change
in income. Income elasticity of demand may be slated in the form of a formula.
Proportionate change in the quantity demand of commodity

Income Elasticity = ------------------------------------------------------------------
Proportionate change in the income of the people
3. Cross elasticity of Demand:
A change in the price of one commodity leads to a change in the quantity demanded of
another commodity. This is called a cross elasticity of demand. The formula for cross
elasticity of demand is:
Proportionate change in the quantity demand of commodity “X”

Cross elasticity = -----------------------------------------------------------------------
Proportionate change in the price of commodity “Y”
4) Advertisement or promotional elasticity of demand;
It refers to change in quantity demand to change in advertisement cost. The formula for
calculating advertisement is
Ed = % change in quantity demand

% change in advertisement cost
Factors influencing the elasticity of demand
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Elasticity of demand depends on many factors.
1. Nature of commodity:
Elasticity or in-elasticity of demand depends on the nature of the commodity i.e. whether
a commodity is a necessity, comfort or luxury, normally; the demand for Necessaries like
salt, rice etc is inelastic. On the other band, the demand for comforts and luxuries is elastic.
2. Availability of substitutes:
Elasticity of demand depends on availability or non-availability of substitutes. In case of
commodities, which have substitutes, demand is elastic, but in case of commodities, which
have no substitutes, demand is in elastic.
3. Variety of uses:
If a commodity can be used for several purposes, than it will have elastic demand. Eg:
Electricity. On the other hand, demanded is inelastic for commodities, which can be put to
only one use.
4. Time:
Elasticity of demand varies with time. Generally, demand is inelastic during short period
and elastic during the long period. Demand is inelastic during short period because the
consumers do not have enough time to know about the change is price. Even if they are
aware of the price change, they may not immediately switch over to a new commodity, as
they are accustomed to the old commodity.
5. Durability of product:
When the product is durable such as T.V, the demand is elastic. In case of non-durable or
perishable goods as milk the demand is in-elastic
DEMAND FORECASTING
Introduction:
The information about the future is essential for both new firms and those planning to
expand the scale of their production. Demand forecasting refers to an estimate of future
demand for the product.
It is an ‘objective assessment of the future course of demand”. In recent times,

forecasting plays an important role in business decision-making. Demand forecasting has
an important influence on production planning. It is essential for a firm to produce the
required quantities at the right time.
It is essential to distinguish between forecasts of demand and forecasts of sales. Sales

forecast is important for estimating revenue cash requirements and expenses. Demand
forecasts relate to production, inventory control, timing, reliability of forecast etc.
However, there is not much difference between these two terms.
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DEMAND FORECAST AND SALES FORECAST
Due to the dynamic and complex nature of marketing phenomenon, demand forecasting
has become an important and regular business exercise. It is essential for profit
maximisation and the survival and expansion of a business. However, before selecting any
vendor a retailer should well understand the requirement and the importance of demand
forecasting. In management circles, demand forecasting and sales forecasting are used
interchangeably. Sales forecasts are first approximations in production and forward
planning. These provide a platform upon which plans could be prepared and amendments
may be made. According to American Marketing Association, “Sales forecast is an estimate
of sales in monetary or physical units for a specified future period under a proposed
business plan or programmer or under an assumed set of ‘economic and other environment
forces, planning premises, outside business/ antiquate which the forecast or-estimate is
made”.
OBJECTIVES OF DEMAND FORECAST
1. Short Term Objectives:
a. Drafting of Production Policy: Demand forecasts facilitate in drafting appropriate

Production policy so that there may not be any space between future demand and
Supply of a product. This can in addition ensure:
*.Routine Supply of Materials: Demand forecasting assists in figuring out the

Preferred volume of production. The essential prerequisite of raw materials in
future can be calculated on the basis of such forecasts. This guarantee regular
and continuous supply of the materials in addition to managing the amount of
Supply at the economic level.
*Best Possible Use of Machines: Demand forecasting in addition expedites cutting

Down inactive capacity because only the necessary amount of machines and
Equipments are set up to meet future demands.
*Regular Availability of Labor: As soon as demand forecasts are made, supplies

Of the necessary amount of skilled and unskilled workers can be organized well
Beforehand to meet the future production plans.
b. Drafting of Price Policy: Demand forecasts facilitate the management to prepare a

Few suitable pricing systems, so that the level of price does not rise and fall to a great
Extent during depression or inflation.
c. Appropriate Management of Sales: Demand forecasts are made area wise and after
that the sales targets for different regions are set in view of that. This abets the
Calculation of sales performances.
d. Organising Funds: On the basis of demand forecast, an individual can find out the
Monetary requirements of the organisation in order to bring about the desired output.
This can make it possible to cut down on the expenditure of acquiring funds.
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2. Long Term Goals:

If the demand forecast period is more than a year, in that case it is termed as long term
forecast. The following are the key goals of such forecasts:
a) To settle on the production capacity: Long term decisions are entwined with capacity
variations by adding or discarding capacity in the form of capital assets - manufacturing
plants, new technology implementation etc. Size of the organization should such that output
matches with the sales requirements. Organisations that are extremely small or large in size
might not be in the financial interest of the company. Inadequate capability can hasten
declining delivery performance, needless rise in Work-in-process and disturb sales
personnel and those in the production unit. Nevertheless, surplus capacity can be
expensive and pointless. The incompetence to appropriately deal with capacity can be an
obstacle to attaining the best possible performance. By examining the demand pattern for
the product as well as the forecasts for the future, the company can prepare for a company's
output of the desired capacity.
b. Labour Requirements: Spending on labor is one of the most vital elements of cost of
production. Dependable and correct demand forecasts can facilitate the Management to
evaluate suitable labor requirements. This can ensure finest labor Supply and uninterrupted
production procedures.
c. Production Planning: Long term production planning can aid the management in
organizing long term finances on practical terms and conditions. The study of long term
sales is accorded greater importance as compared with short-term sales. Long term sales
forecast facilitates the management to take a few policy decisions of huge importance and
any mistake carried out in this could be extremely different or costly to be corrected.
Types of demand Forecasting:
Based on the time span and planning requirements of business firms, demand forecasting
can be classified in to 1. Short-term demand forecasting and
2. Long – term demand forecasting.
1. Short-term demand forecasting:
Short-term demand forecasting is limited to short periods, usually for one year. It relates
to policies regarding sales, purchase, price and finances. It refers to existing production
capacity of the firm. Short-term forecasting is essential for formulating is essential for
formulating a suitable price policy. If the business people expect of rise in the prices of raw
materials of shortages, they may buy early. This price forecasting helps in sale policy
formulation. Production may be undertaken based on expected sales and not on actual
sales. Further, demand forecasting assists in financial forecasting also. Prior information
about production and sales is essential to provide additional funds on reasonable terms.
2. Long – term forecasting:
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In long-term forecasting, the businessmen should now about the long-term demand for
the product. Planning of a new plant or expansion of an existing unit depends on long-term
demand. Similarly a multi product firm must take into account the demand for different
items. When forecast are mode covering long periods, the probability of error is high. It is
vary difficult to forecast the production, the trend of prices and the nature of competition.
Hence quality and competent forecasts are essential.
Prof. C. I. Savage and T.R. Small classify demand forecasting into time types. They are 1.
Economic forecasting, 2. Industry forecasting, 3. Firm level forecasting. Economics
forecasting is concerned with the economics, while industrial level forecasting is used for
inter-industry comparisons and is being supplied by trade association or chamber of
commerce. Firm level forecasting relates to individual firm.
DEMAND FORECASTING
The methods of demand forecasting are Opinion survey methods and statistical methods.
I Opinion survey methods
(1) Consumers opinion survey

(2) Expert opinion survey
(3) Collective opinion survey
(4) Test marketing or controlled experimentation method
(5) End use method
1) Consumers opinion survey:-

The consumer opinion survey can be either census or sample survey where the numbers
of buyers are limited, census survey methods hold. In this case, the opinion of the entire
universe is obtained. On the other hand, where the number of buyers is large, universal
survey is not feasible; hence, sample survey methods are used The results obtained through
the sample surveys are blown up to the entire universe to obtain the forecasted demand
However, it should be borne in mind that consumer opinion surveys are not perfectly
reliable as there are consumers biases and based on the likely hood of some future changes
that mayor may not materialize. Further, consumer opinion surveys are expensive and time
taking.
2) Expert opinion method or Delphi method:-

Expert opinion method is a variant of the consumer’s opinion survey method. It was also
popular as Delphi method and first used by Rand Corporation in USA for predicting the
demand under conditions of intractable technological changes. It is used under conditions
of nonexistence of data or when a new product is being launched. The fairest step in this
method is the identification of experts and eliciting their opinions about the likely demand
for the product. The experts may difter in their views in which case the firm has to pass on
the opinions of one expert to the other, of course under strict anonymity and seek their
reactions. This exercise should go on until a common line of thinking emerges.
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3) Collective opinion surveyor sales force opinion survey method:-

In this method, the firm will extract the opinions of the sales team, which is on the
payrolls of the company about the future demand for the product. The sales personnel are
very close to the consumers and dealers. They express their opinions about the future
demand for the product. The opinions so gathered are tabulated and the demand forecasts
will be arrived at. However, care be taken before forming an opinion about the future
demand. The opinions of the sales team should not be taken on the face value as an
ambitious sales man gives an over estimate of the demand for the product while a skeptic
fearing the fixation of higher sales targets always quotes a lesser figure. This can resolved
by maintaining a track record of accomplishment of the previous targets and achievements
of each member of the sales team and make necessary adjustments in the forecasted sales
and arrive at a conclusion. This method is an inexpensive but more reliable method of
demand forecasting
4) Test marketing or controlled experimentation:-

Firms resort to test marketing while launching a new product or likely to change the
design or model of the existing products. This is also known as controlled experimentation
method as the product is likely to be launched in a segmented market to identity its demand
potential. The essential prerequisites of test marketing are that the product price, its design,
quality, level of advertisement and sales promotion campaign should be equal in promotion
to that of what the firm is likely to incur had it been released in the dilatational market. Test
marketing should be continued until the repurchase cycle commences. The geographical,
economic, sociological and even the demo Topic features of the test marketing region
should represent all the features of the national market.
Test marketing can be under taken in a single market or different markets with different
features of the product. Test marketing will no doubt be useful method as it ventilates the
consumer preferences and facilitates the model or design changes if necessary but at the
same time, it is an expensive proposition. The forecasted sales in the test marketing area
should not be taken on their face values.
5) End-use or input-output method

The end-use method applies for forecasting the demand for intermediate products. These
are products used in the manufacture of some other final goods. The demand for the final
product is an indicator of the demand for intermediate product, subject to the availability of
the input/output coefficients. Once the demand for the final goods estimated, the demand
for the intermediate product can be easily arrived at using the input-output coefficients. The
major problem of using this method is that one product is an intermediate product for
producing not one commodity but several other commodities as in the case of iron and
steel. In such cases. The input-output coefficient in all the uses and the estimated demand
for all those products should be available, failing which the demand forecasts become
useless.
II STATISTICAL METHODS
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Trend projection methods:

An old firm operating in the market for a long period will have the accumulated previous
data on either production or sales pertaining to different years.
Economics indicators:
Under this method a few economics indications became the basis for forecasting the
sales of a company. An economics indicant or change in the magnitude of an economics
variable.
Supply analysis
Unlike a demand curve, a supply curve has a positive slope, reflecting the law of supply.
The law of supply states that quantity supplied is positively related to price; i.e., firms offer
larger amounts at higher prices and smaller amounts at lower prices. In this case, price is
the reward for production so that higher market prices bring forth larger quantities. Higher
prices provide firms with extra funds to purchase more resources or inputs to increase
production. Higher prices also act as a signal to producers that consumers value their goods
highly and desire more of them.
Producer or manufacturer of the goods always thinks to supply more goods at high
price for the consumer to get more income .Like demand, supply is not a given quantity—
that is called quantity supplied. It is a relationship between price and quantity. As the price
of a good rises, producers are generally wants to sell in larger quantity. The reverse is
equally true: as price decreases, so the supplier don’t like to sell or supply in large quantity.
Like demand, supply can also be described in a table or a graph.
Supply Function
The supply function is the mathematical expression of the relationship between supply and those factors that
willingness and ability of a supplier to offer goods for sale
SX = Supply of goods
PX = Price
PF = Factor input employed (used) for production.

· Raw material
· Human resources
· Machinery
O = Factors outside economic sphere.:T = Technology; .t = Taxes.; S = Subsidies
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There is a functional (direct) relationship between price and supply
Law of supply
The relationship between price and quantity supplied is usually a positive relationship. A rise in price is assoc
a rise in quantity supplied.
Definitions
— In the words of Dooley. "The law of supply states that other things being equal the higher the price, the
quantity supplied or the lower the price, the smaller the quantity supplied."
— According to Lipsey, "The law of supply states that other things being equal, the quantity of any comm
firms will produce and offer for sale is positively related to the commodity's own price, rising when pric
falling when price falls."
As the price of good increases, suppliers will attempt to maximize profits by increasing the quantity of the pr
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Elasticity of supply
The Price Elasticity of Supply measures the rate of response of quantity demand due to a price change. If you
read Elasticity of Demand and understand it, you may want to just skim this section, as the calculations are si
Definitions
— According to Lipsey, "Elasticity of supply is the ratio of percentage change in quantity supplied over the
change in price."
— In the words of Prof. Bilas, "Elasticity of supply is defined as the percentage change in quantity supplied
percentage change in price."
Price elasticity of supply measures the relationship between change in quantity supplied and a change in
formula for price elasticity of supply is:
 ∆Q =change in the demand.(difference in demand)

 ∆P=change in the price.(difference in the price)
 P1=initial price. (first price/ old price)
 Q1=initial demand. (first demand/ old demand)
The value of elasticity of supply is positive, because an increase in price is likely to increase the quantity sup
market and vice versa.
Calculating the Price Elasticity of Supply
You may be asked "Given the following data, calculate the price elasticity of supply when the price changes
to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question.
First we need to find the data we need. We know that the original price is $9 and the new price is $10,
Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity supplied (make sure to look a
data, not the demand data) when the price is $9 is 150 and when the price is $10 is 110. Since we're going
$10, we have Q Supply(OLD)=150 and Q Supply(NEW)=210, where "Q Supply" is short for "Quantity Su
we have:
 Price(OLD)=9
 Price(NEW)=10
 QSupply(OLD)=150
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 QSupply(NEW)=210
To calculate the price elasticity, we need to know what the percentage change in quantity supply is an
percentage change in price is. It's best to calculate these one at a time.
Calculating the Percentage Change in Quantity Supply
The formula used to calculate the percentage change in quantity supplied is:
[QSupply(NEW) - QSupply(OLD)] / QSupply(OLD)
By filling in the values we wrote down, we get:
[210 - 150] / 150 = (60/150) = 0.4
So we note that % Change in Quantity Supplied = 0.4 (This is in decimal terms. In percentage terms i
40%). Now we need to calculate the percentage change in price.
Calculating the Percentage Change in Price
Similar to before, the formula used to calculate the percentage change in price is:
[Price(NEW) - Price(OLD)] / Price(OLD)
By filling in the values we wrote down, we get:
[10 - 9] / 9 = (1/9) = 0.1111
We have both the percentage change in quantity supplied and the percentage change in price, so we can c
price elasticity of supply.
Final Step of Calculating the Price Elasticity of Supply
We go back to our formula of:
PEoS = (% Change in Quantity Supplied)/(% Change in Price)
We now fill in the two percentages in this equation using the figures we calculated.
PEoD = (0.4)/(0.1111) = 3.6
When we analyze price elasticities we're concerned with the absolute value, but here that is not an issue since
positive value. We conclude that the price elasticity of supply when the price increases from $9 to $10 is 3.6.
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Five Types of Elasticities of Supply:
1. Unit Elastic Supply: When change in price of X brings about exactly proportionate change in
supplied then supply is unit elastic i.e. elasticity of supply is equal to one, e.g. if price rises by 10% and supp
by 10% then, change in the quantity supplied the supply is relatively inelastic or elasticity of supply is less th
Es = % change in Quantity Supplied of X
% change in price of X
2. Relatively Elastic Supply: When change in price brings about more than proportionate change in t
supplied, then supply is relatively elastic or elasticity of supply is greater than one.
3. Perfectly Inelastic Supply: When a change in price has no effect on the quantity supplied then
perfectly inelastic or the elasticity of supply is zero.
4. Perfectly Elastic Supply: When a negligible change in price brings about an infinite change in t
supplied, then supply is said to be perfectly elastic or elasticity of supply is infinity.
All the five types of Elasticities of supply can be shown by different slopes of the supply curve. Fig. (1)
supply is unit elastic because change in price from OP to OP1 brings about exactly proportionate change in t
supplied of commodity X viz., from OM to OM1. In this case Es = 1.
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Fig (2) shows that supply is relatively inelastic because change in price of from OP to OP1 brings about less
proportionate change in quantity supplied of X. in this case Es < 1.
Fig (3) shows that supply is relatively elastic because change in price of X from OP to OP1 brings about
proportionate change in quantity supplied of X. in this case Es > 1.
Fig (4) shows that supply is perfectly inelastic because change in price of X from OP to OP1 has absolutely n
quantity supplied of X. in this case Es = 0. Thus, if the supply curve is vertical, i.e. parallel to Y-axis it repres
perfectly inelastic supply.
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Fig (5) shows that supply is perfectly elastic because a small change in price of X brings about infinite chang
Thus, if the supply curve is horizontal or parallel to X- axis it represents perfectly elastic supply.
Hence, the five different types of elasticities of supply can be shown by five different slopes of supply curve.
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1MANAGERIAL ECONOMICS UNIT-II

Demand function Dn= f (Pn, P1, P2, P3, ---------Pn-1Y, T)

Dn=Demand of ‘n’ commodity

Price of Appel (In. Rs.) Quantity Demanded

Law of demand is based on certain assumptions:

1) This is no change in consumers taste and preferences.

Exceptions to law of demand:

Factors Affecting Demand:

1) Price of the Commodity (P):

(i)Income of the Consumer (I):

2) Prices of related goods (PR):

3) Tastes of the Consumers (T):

4. Size of Population (SP):

5. Government Policy (G):

6. Climate and weather:

Types of Elasticity of Demand:

There are 4 types of elasticity of demand:

1) Price elasticity of demand

1. Price elasticity of demand:

Price elasticity of demand measures changes in quantity demand to a change in Price. It is

Measurement of elasticity (or) types of price elasticity of demand

a. Perfectly elastic demand (E=∞)

a. Perfectly elastic demand (E=∞):

B. Perfectly Inelastic Demand (E=0):

C. Relatively elastic demand (E > 1):

D. Relatively in-elastic demand (E < 1):

E. Unit elasticity of demand (E=1):

When price falls from

2. Income elasticity of demand:

Proportionate change in the quantity demand of commodity

3. Cross elasticity of Demand:

Proportionate change in the quantity demand of commodity “X”

4) Advertisement or promotional elasticity of demand;

Ed = % change in quantity demand

Factors influencing the elasticity of demand

Elasticity of demand depends on many factors.

It is an ‘objective assessment of the future course of demand”. In recent times,

It is essential to distinguish between forecasts of demand and forecasts of sales. Sales

DEMAND FORECAST AND SALES FORECAST

a. Drafting of Production Policy: Demand forecasts facilitate in drafting appropriate

*.Routine Supply of Materials: Demand forecasting assists in figuring out the

*Best Possible Use of Machines: Demand forecasting in addition expedites cutting

*Regular Availability of Labor: As soon as demand forecasts are made, supplies

b. Drafting of Price Policy: Demand forecasts facilitate the management to prepare a

2. Long Term Goals:

Types of demand Forecasting:

1. Short-term demand forecasting:

2. Long – term forecasting:

I Opinion survey methods

(1) Consumers opinion survey

1) Consumers opinion survey:-

2) Expert opinion method or Delphi method:-

3) Collective opinion surveyor sales force opinion survey method:-

4) Test marketing or controlled experimentation:-

5) End-use or input-output method

Trend projection methods:

PF = Factor input employed (used) for production.

O = Factors outside economic sphere.:T = Technology; .t = Taxes.; S = Subsidies

There is a functional (direct) relationship between price and supply

 ∆Q =change in the demand.(difference in demand)

Calculating the Price Elasticity of Supply

Calculating the Percentage Change in Quantity Supply