module 3-Market Forces

8/14/2019 module 3-Market Forces

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Module3- Market Forces

Mr. Deepak Kulkarni


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Meaning of DemandDemand 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 referenceto time period such as a week, a month or a year.

The demand for a product can be defined as theNumber of units of an commodity that consumer willpurchase at a given price during a specified period of time in the market.


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Determinants of Demand

Price of CommodityPrice of Related Goods

Income of the Consumer Distribution of WealthTastes & Habits

Population growth


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State of Business (Business Cycle)Government Policy

AdvertisementLevel of Taxation


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The Law of Demand

The law of demand expresses therelationship between the price & quantitydemanded .It says that demand varies inversely

with price.

The Law can be stated in the following:

Other things being equal, a fall in the priceleads to expansion in demand and a rise inprice leads to contraction in demand.


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Diagrammatical representationof the Law


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Why does the demand curveslope downwards to right?

OR Why does demand curve has a negativeslope?

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


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Assumptions to the Law of Demand

Consumers Income remains Constant The Tastes & Preferences Of the Consumers

remain the same

Prices of other related Commodities remainConstant

No new Substitutes are available for the

Commodity. Consumers do not expect further change in the

price of the commodity.


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The Commodity is not of Prestigious valueEg: Diamond

The size of population is constant The rate of taxes remain the same Climate & Weather Conditions do not

change.


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Exceptions to the law of demand


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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)


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- Giffens goods An inferior good muchcheaper than its superior substitutesconsumed by the poor as an essentialcommodity. If prices of cheaper goodsincreases with the price of substituteremaining constant , consumption of

cheaper good increases owing to the factincome effect of price rise is greater thanthe substitution effect.


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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)


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Individual DemandSchedule(Hypothetical)


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2. Market Demand Schedule

The market demand Schedule canbe obtained by adding all the individual

Demand Schedules of Consumers in themarket.

Hypothetical market demand

schedule is as follows:


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Diagrammatical representation


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Shifts in Demand

A. Extension & contraction of demand:

When demand changes due to changein the price of the commodity, it is a caseof either extension or contraction of demand. The Law of demand relates to

the Extension & Contraction of Demand.


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B. Increase and Decrease inDemand

When demand changes, not due tochanges in the price of the commodity or

service but due to other factors on whichdemand depends.

Eg:- Income, Population, Climate, Tastes& Habits etc.


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Diagrammatical Representation


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Diagrammatical Representation


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Important Kinds of Elasticityof Demand

1. Price ED:e = % change in quantity demanded

% change in price2. Income ED:e = % change in quantity demanded

% change in income3. Cross ED:e = % change in quantity demanded

% change in price of Y


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

% change in advertisementexpenditure


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Factors Influencing Elasticityof Demand

1. Nature of Commodity:Necessaries --- inelastic

Comforts and Luxuries --- elastic


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2. Availability of Substitute:A commodity which has more substitutes thedemand is ------ more elastic.

Ex: Tea , Coffee, Milk ,Bournvita etc,3. No of users of a commodity:

More no of users ---elasticEx: Electricity, Iron and Steel etc.

Only one use --- inelasticEx: Printing machine , stitching machine


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4. Proportion of Income Spent on the Goods:Small proportion of income --- inelasticEx: Salt, Match box, Postcard

5. Habit:Ex: Coffee ,Tea --- inelastic

6. Level of Income of the People:

Rich People --- inelasticPoor People --- elastic


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7. Period of time:Short period --- inelasticHabit and prices of commodities do not

change much.Long period --- elastic8. Durability of a commodity:

Durable goods --- elasticEx: fan, table, Chair Perishable goods --- inelasticEx: Milk, flower


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9. Postponement of Purchase:Postponement --- elasticEx: Fan, TV, Fridge

Cannot be postponed --- inelasticEx: Medicine, Rice, Wheat

10. Level of Prices:High priced --- elastic

Ex: Cars, TV , Air conditionersLow priced --- inelastic

Ex: Newspaper, Nails, Needle


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DEMAND FORECASTING METHODS


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Demand ForecastingMeaning :Demand forecasting means estimating theexpected future demand for a product , related to aparticular period of time.Methods of forecasting:

The methods of forecasting can be broadlyclassified into two categories. They are:

1. Survey Method2. Statistical Method


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DEMAND FORECASTING METHODS

Survey Method Statistical Method

Expert opinion Direct interview Trend Regression Barometric

method method projection method method(Collective opinion) method (Economic

indicator method)

Complete Sample survey End User enumeration method methodmethod


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(A) Survey Method

The survey method consists of twomethods:

Survey of experts opinion Survey of consumers intentions through

direct interview with them.


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

This method is also known as SalesForce 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 connectedwith the sales.


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Contd5. 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 onthe sales of the product of the firm.


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(2) Direct Interview Method (or)Customers Interview Method

Under this method ,consumers are directlyinterviewed to find out the future demand or demand trends for a product by a firm. They arethree types of consumers interview:Complete Enumeration MethodSample Survey Method

(Stratified = Society divided into differentclasses)

End Use Method


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ContinuedA. Complete Enumeration Method

under this method ,almost all the consumers of the product are interviewed and are asked to inform abouttheir future plan of purchasing the product in question.

Advantages:

This method is true from any bias of the salesmen ,asthey only collect the information and aggregate it. This method seems to be ideal, since almost all the

consumers using the product are contacted.


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Contd

Disadvantages:1. This method is however very costly and

tedious.

2. It is also too much time consuming, sinceevery 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.


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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 selectedconsumers are contacted.


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Contd

3. It is used to estimate short term demandby 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 tofrequent changes.

However the success if this methoddepends on the sincere co-operation of theselected consumers.


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Contd

C. End Use Method:Under this method, the sale of the

product under consideration is projectedon the basis of the demand surveys of the industries using this given product or intermediate product.


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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 thenumber of end- users of a product increases, itbecomes more difficult to estimate demand under this method.


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(B) Statistical Method

Under these methods, statistical or mathematicaltechniques are used to forecast the demand for aproduct in the long period. The following are theimportant statistical methods used in forecasting:

1. Trend Projection Method2. Regression Method3. Barometric Method


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(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 turningpoints may occur in demand conditions .Thesefluctuations in demand occur due to the followingfour factors. They are:Secular TrendsSeasonal VariationsCyclical FluctuationsRandom Variations


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Table - Sales of Transistors for 5 years

YEAR SALES inlakhs of Rs

1991 50

1992 60

1993 55

1994 70

1995 75


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DIAGRAMATIC REPRESENTATIONY

75

70 Trend line

65

60 Sales curve

55

50

0 X91 92 93 94 95


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Contd

Advantages :1. Trend projection method is quite popular in

business forecasting, because it is a simplemethod.

2. The use this method requires only thesimple working knowledge of statistics.

3. It is also less expensive , as its datarequirements are limited to the internalrecords.

4. This method yields fairly reliable estimatesif future course of demand.


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Contd

Disadvantages:

The most important limitation of this method arises outof its assumption that the past rate of change in thedependent variable ( demand).

This method is not useful for short run forecasting andcyclical fluctuations.

This method does not explain the relationship betweendependent and independent variables.


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(2)Regression Method

It combines the economic theory andstatistical techniques of estimation.


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(3) Barometric Method

This method is also known asEconomic Indicators Method. Under thismethod , 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


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Contd

Limitations It is difficult to find out an appropriate

economic indicator

It is not suitable for new products as past datanot available

It is best suited where relationship of demand

with a particular indicator is characterized bytime-lag


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Significance of DemandForecasting

Production planning Sales Forecasting Control of business Inventory control Growth and Long term Investment Programs

Stability Economic planning and Policy making


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SUPPLY ANALYSIS

Meaning:Supply of a commodity may be

defined as the quantity of that commodity

which the sellers or producers are ableand 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 , diaryfarms daily supply of milk is 200 liters.


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Distinction between stock & supply

Stock refers to total quantity of output keptin the warehouse which can be offered for sale in the market by the seller.

On the other hand, the term supply refersto that part of the stock which is actuallyoffered for sale in the market at a price per unit of time.


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Law of supply

Other things remaining the same, thesupply 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 theprice. In other words, the relationshipbetween supply & price is direct.


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Explanation of the law

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


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A i d li i h L f


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Assumptions underlining the Law of Supply:

1. Cost of Production is Unchanged2. No Change in techniques of Production3. Fixed scale of Production4. Government policies are unchanged5. No change in Transport Cost

6. The prices of related goods are constant

INCREASE & DECREASE IN


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INCREASE & DECREASE INSUPPLY

The 2 terms are introduced to explain thechanges in Supply without any change inprice are:

1. Increase in Supply

2. Decrease in Supply


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1. Increase In Supply


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2. Decrease in supply


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Extension & Contraction in supply


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Determinants of supply

1.Price of the commodity2. Price of the related goods3. Cost of production

4. Technology5. Natural factors6. Tax & subsidy7. Development of transport & communication8. Agreement among producers9. Future Expectations

El ti it f l


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Elasticity of supply

It means responsiveness of supply tochange in price.

ES= Proportionate change in the quantity suppliedProportionate change in price

=


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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 evenat a slightly lower price.


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3. Relatively Elastic Supply

When quantity supplied changes by alarger % than price.


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Factors determining Elasticity of


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Factors determining Elasticity of Supply

1. Price of Commodity2. Cost of Production3. Price of Other Products4. Change in Technology5. Time Period6. Objective of the Firm7. Size of the Firm8. Imposition of Taxes

Continued


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Continued..

9. Number of Producers10. Agreement among Producers11. Political Disturbances12. Mobility of factors of Production

13. Availability of Markets14. Nature of Commodities (perishable &

Durable goods)15 . Improvement in the means of Communication16 . Nature of production (paintings)

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module 3-Market Forces