Demand in common parlance means the desire for an object.

But in economics demand is something more

than this. According to Stonier and Hague, “Demand in economics means demand backed up by enough
money to pay for the goods demanded”. This means that the demand becomes effective only it if is backed
by the purchasing power in addition to this there must be willingness to buy a commodity.
Thus demand in economics means the desire backed by the willingness to buy a commodity and the
purchasing power to pay. In the words of “Benham” “The demand for anything at a given price is the
amount of it which will be bought per unit of time at that Price”. (Thus demand is always at a price for a
definite quantity at a specified time.) Thus demand has three essentials – price, quantity demanded and time.
Without these, demand has to significance in economics.
Definition: The Demand for a product refers to the quantity of goods and services that the consumers are
willing to buy at a particular price for a given point of time.

Types of Demand
The demand can be classified on the following basis:

1. Individual Demand and Market Demand: The individual demand refers to the demand for goods and
services by the single consumer, whereas the market demand is the demand for a product by all the
consumers who buy that product. Thus, the market demand is the aggregate of the individual demand.
2. Total Market Demand and Market Segment Demand: The total market demand refers to the aggregate
demand for a product by all the consumers in the market who purchase a specific kind of a product. Further,
this aggregate demand can be sub-divided into the segments on the basis of geographical areas, price
sensitivity, customer size, age, sex, etc. are called as the market segment demand.
3. Derived Demand and Direct Demand: When the demand for a product/outcome is associated with the
demand for another product/outcome is called as the derived demand or induced demand. Such as the
demand for cotton yarn is derived from the demand for cotton cloth. Whereas, when the demand for the
products/outcomes is independent of the demand for another product/outcome is called as the direct demand
or autonomous demand. Such as, in the above example the demand for a cotton cloth is autonomous.
4. Industry Demand and Company Demand: The industry demand refers to the total aggregate demand for
the products of a particular industry, such as demand for cement in the construction industry. While the
company demand is a demand for the product which is particular to the company and is a part of that
industry. Such as demand for tyres manufactured by the Goodyear. Thus, the company demand can be
expressed as the percentage of the industry demand.
5. Short-Run Demand and Long-Run Demand: The short term demand is more elastic which means that the
changes in price or income are reflected immediately on the quantity demanded. Whereas, the long run
 demand is inelastic, which shows that demand for commodity exists as a result of adjustments following
changes in pricing, promotional strategies, consumption patterns, etc.
6. Price Demand: The demand is often studied in parlance to price, and is therefore called as a price demand.
The price demand means the amount of commodity a person is willing to purchase at a given price. While
studying the demand, we often assume that the other factors such as income of the consumer, their tastes,
and preferences, the prices of other related goods remain unchanged. There is a negative relationship
between the price and demand Viz. As the price increases the demand decreases and as the price decreases
the demand increases.
7. Income Demand: The income demand refers to the willingness of an individual to buy a certain quantity at
a given income level. Here the price of the product, customer’s tastes and preferences and the price of the
related goods are expected to remain unchanged. There is a positive relationship between the income and
demand. As the income increases the demand for the commodity also increases and vice-versa.
8. Cross Demand: It is one of the important types of demand wherein the demand for a commodity depends
not on its own price, but on the price of other related products is called as the cross demand. Such as with
the increase in the price of coffee the consumption of tea increases, since tea and coffee are substitutes to
each other. Also, when the price of cars increases the demand for petrol decreases, as the car and petrol
are complimentary to each other.
These are some of the important types of demand that the firms must cater to before deciding on the price
and other factors related to their products.

LAW of Demand:
Law of demand shows the relation between price and quantity demanded of a commodity in the market. In
the words of Marshall, “the amount demand increases with a fall in price and diminishes with a rise in
price”.
A rise in the price of a commodity is followed by a reduction in demand and a fall in price is followed by an
increase in demand, if a condition of demand remains constant.
The law of demand may be explained with the help of the following demand schedule.
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 is 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
7. People should not expect any change in the price of the commodity

Exceptions to the Law of Demand

Definition: There are certain situations where the law of demand does not apply or becomes ineffective, i.e.
with a fall in the price the demand falls and with the rise in price the demand rises are called as
the exceptions to the law of demand.

1. Giffen Goods: Giffen goods are the inferior goods whose demand increases with the increase in its prices.
There are several inferior commodities, much cheaper than the superior substitutes often consumed by the
poor households as an essential commodity. Whenever the price of the Giffen goods increases its quantity
demanded also increases because, with an increase in the price, and the income remaining the same, the poor
people cut the consumption of superior substitute and buy more quantities of Giffen goods to meet their
basic needs.
For Example, Suppose the minimum monthly consumption of food grains by a poor household is 20 Kg
Bajra (Inferior good) and 10 Kg Rice (superior good). The selling price of Bajra is Rs 5 per kg, and the rice
is Rs 10 per kg, and the household spends its total income of Rs 200 on the purchase of these items.
Suppose, the price of Bajra rose to Rs 6 per kg then the household will be forced to reduce the consumption
of rice by 5 Kg and increase the quantity of Bajra to 25 Kg in order to meet the minimum monthly
requirement of food grains of 30 kg.
2. Veblen Goods: Another exception to the law of demand is given by the economist Thorstein Veblen, who
proposed the concept of “Conspicuous Consumption.” According to Veblen, there are a certain group of
people who measure the utility of the commodity purely by its price, which means, they think that higher
priced goods and services derive more utility than the lesser priced commodities.
For example, goods like a diamond, platinum, ruby, etc. are bought by the upper echelons of the society
(rich class) for whom the higher the price of these goods, the higher is the prestige value and ultimately the
higher is the utility or desirability of them.
3. Expectation of Price Change in Future: When the consumer expects that the price of a commodity is
likely to further increase in the future, then he will buy more of it despite its increased price in order to
escape himself from the pinch of much higher price in the future.
 On the other hand, if the consumer expects the price of the commodity to further fall in the future, then he
will likely postpone his purchase despite less price of the commodity in order to avail the benefits of much
lower prices in the future.
4. Ignorance: Often people are misconceived as high-priced commodities are better than the low-priced
commodities and rest their purchase decision on such a notion. They buy those commodities whose price are
relatively higher than the substitutes.
5. Emergencies: During emergencies such as war, natural calamity- flood, drought, earthquake, etc., the law of
demand becomes ineffective. In such situations, people often fear the shortage of the essentials and hence
demand more goods and services even at higher prices.
6. Change in fashion and Tastes & Preferences: The change in fashion trend and tastes and preferences of
the consumers negates the effect of law of demand. The consumer tends to buy those commodities which are
very much ‘in’ in the market even at higher prices.
7. Conspicuous Necessities: There are certain commodities which have become essentials of the modern life.
These are the goods which consumer buys irrespective of an increase in the price. For example TV,
refrigerator, automobiles, washing machines, air conditioners, etc.
8. Bandwagon Effect: This is the most common type of exception to the law of demand wherein the consumer
tries to purchase those commodities which are bought by his friends, relatives or neighbors. Here, the person
tries to emulate the buying behavior and patterns of the group to which he belongs irrespective of the price
of the commodity.
For example, if the majority of group members have smart phones then the consumer will also demand for
the smartphone even if the prices are high.
Thus, these are some of the exceptions to the law of demand where the demand curve is upward sloping, i.e.
the demand increases with an increase in the price and decreases with the decrease in 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:
Price of the Commodity:
The most important factor-affecting amount demanded is the price of the commodity. The amount of a
commodity demanded at a particular price is more properly called price demand. The relation between price
and demand is called the Law of Demand. It is not only the existing price but also the expected changes in
price, which affect demand.
Income of the Consumer:
The second most important factor influencing demand is consumer income. In fact, we can establish a
relation between the consumer income and the demand at different levels of income, price and other things
remaining the same. 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.
Prices of related goods:
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:
 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;
 Complementary foods 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. The price and demand go in opposite direction. The effect of changes in
price of a commodity on amounts demanded of related commodities is called Cross Demand.
Tastes of the Consumers:
The amount demanded also depends on consumer’s taste. Tastes include fashion, habit, customs, etc. A
consumer’s taste is also affected by advertisement. If the taste for a commodity goes up, its amount
demanded is more even at the same price. This is called increase in demand. The opposite is called decrease
in demand.
Wealth:
The amount demanded of commodity is also affected by the amount of wealth as well as its distribution. The
wealthier are the people; higher is the demand for normal commodities. If wealth is more equally
distributed, the demand for necessaries and comforts is more. On the other hand, if some people are rich,
while the majorities are poor, the demand for luxuries is generally higher.
Population:
Increase in population increases demand for necessaries of life. The composition of population also affects
demand. Composition of population means the proportion of young and old and children as well as the ratio
of men to women. A change in composition of population has an effect on the nature of demand for different
commodities.
Government Policy:
Government policy affects the demands for commodities through taxation. Taxing a commodity increases its
price and the demand goes down. Similarly, financial help from the government increases the demand for a
commodity while lowering its price.
Expectations regarding the future:
consumers expect changes in price of commodity in future, they will change the demand at present even
when the present price remains the same. Similarly, if consumers expect their incomes to rise in the near
future they may increase the demand for a commodity just now.
Climate and weather:
The climate of an area and the weather prevailing there has a decisive effect on 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.
State of business:
The level of demand for different commodities also depends upon the business conditions in the country. If
the country is passing through boom conditions, there will be a marked increase in demand. On the other
hand, the level of demand goes down during depression.

Reasons for Law of Demand

Definition: The Law of Demand explains the downward slope of the demand curve, which posits that as
the price falls the quantity demanded increases and as the price rise, the quantity demanded decreases, other
things remaining unchanged.
There are several factors that explain why the demand curve slopes downward or why the law of demand
showing an inverse relation between the price and quantity is valid?
Reasons for Law of Demand
1. Substitution Effect: The Substitution effect is seen when the quantity demanded for one commodity
changes due to the change in the price of other closely related commodity. Such as, if the price of the
commodity decreases while the price of the other is assumed to remain the same, then the latter becomes
dearer and the demand for the cheaper commodity increases.
For example, suppose the price of tea decreases while the price of coffee remains unchanged, then the tea
will be substituted for coffee and thus the demand for tea increases. This effect of increase in the demand for
tea is called as the substitution effect.
2. Income Effect: The income effect explains the change in demand due to the change in the real income of
the consumer as a result of the change in the price of the given commodity. Such as, with the fall in the price
of a commodity, the real income (purchasing power) of the consumer increases since the consumer can now
purchase more units of the commodity with the same amount of money income. Thus, the increase in
demand due to the increase in the real income is called as the income effect.
For example, Suppose a boy purchases 5 ice-creams for Rs 50, and if the price of ice-cream falls to Rs 8,
now he can purchase 6 ice-creams with the same amount of money income or may decide to buy the same
quantity and save the rest of the money, as he is required to spend less.
3. Utility-Maximizing Behavior: The consumer theory posits that the consumer buys goods and services to
maximize his total utility (satisfaction). We know, that the marginal utility decreases with each additional
unit of the commodity and thus, this is one of the reasons for the downward slope of the demand curve,
which shows that the demand for the normal goods increases with the fall in the prices.
A person exchanges his money income for the purchase of the commodity so as to maximize his satisfaction.
He continues to buy the commodity as long as the marginal utility of money (MUm) is less than the marginal
utility of the commodity (MUx).
4. Large Number of Consumers: The effect on demand due to the change in the number of consumers as a
result of a change in the price also causes the demand curve to slope downwards. Such as, if the price of the
commodity falls, then many new consumers who were earlier not able to afford the commodity due to its
high price, starts purchasing it. And as a result, the demand for the commodity increases.On the other hand,
if the price rises, then few rich people can buy it, and many consumers will withdraw themselves from the
market. And as a result, the demand for the commodity decreases.
5. Varied Uses of the Product: This is one of the important reasons for the law of demand, which explains
that the product has several uses and can be utilized for different purposes. When the price of the commodity
rises, then the consumer restricts its usage for the most important purpose. On the other hand, if the
commodity becomes cheap then it can be utilized for all kinds of purposes, whether important or not.
For example, if the price of coal increases, then it will be more used in the industries where it is an essential
raw material, whereas its demand for less important use such as in household (bonfire) gets reduced.
Thus, these are the important factors that explain the slope of the demand curve and advocates that the law
of demand is valid.
 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. Elasticity of demand shows the extent
of change in quantity demanded to a change in price.
In the words of “Marshall”, “The elasticity of demand in a market is great or small according as the amount
demanded increases much or little for a given fall in the price and diminishes much or little for a given rise
in Price” 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

Definition: The Elasticity of Demand measures the percentage change in quantity demanded for a
percentage change in the price. Simply, the relative change in demand for a commodity as a result of a
relative change in its price is called as the elasticity of demand.
Types of Elasticity of Demand

1. Price Elasticity of Demand: The price elasticity of demand, commonly known as the elasticity of demand
refers to the responsiveness and sensitiveness of demand for a product to the changes in its price. In other
words, the price elasticity of demand is equal to

Numerically,
 Where,
ΔQ = Q1 –Q0, ΔP = P1 – P0, Q1= New quantity, Q2= Original quantity, P1 = New price, P0 = Original
priceThe following are the main Types of Price Elasticity of Demand:
 Perfectly Elastic Demand
 Perfectly Inelastic Demand
 Relatively Elastic Demand
 Relatively Inelastic Demand
 Unitary Elastic Demand
Income Elasticity of Demand: The income is the other factor that influences the demand for a product.
Hence, the degree of responsiveness of a change in demand for a product due to the change in the income is
known as income elasticity of demand. The formula to compute the income elasticity of demand is:

For most of the goods, the income

elasticity of demand is greater than one indicating that with the change in income the demand will also
change and that too in the same direction, i.e. more income means more demand and vice-versa.
Cross Elasticity of Demand: The cross elasticity of demand refers to the change in quantity demanded for
one commodity as a result of the change in the price of another commodity. This type of elasticity usually
arises in the case of the interrelated goods such as substitutes and complementary goods. The cross elasticity
of demand for goods X and Y can be expressed as:

The two commodities are said to be

complementary, if the price of one commodity falls, then the demand for other increases, on the contrary, if
the price of one commodity rises the demand for another commodity decreases. For example, petrol and car
are complementary goods.
While the two commodities are said to be substitutes for each other if the price of one commodity falls, the
demand for another commodity also decreases, on the other hand, if the price of one commodity rises the
demand for the other commodity also increases. For example, tea and coffee are substitute goods.
Advertising Elasticity of Demand: The responsiveness of the change in demand to the change in
advertising or rather promotional expenses, is known as advertising elasticity of demand. In other words, the
change in the demand as a result of the change in advertisement and other promotional expenses is called as
the advertising elasticity of demand. It can be expressed as:

Numerically,

Where,
Q1 = Original Demand
Q2= New Demand
 A1= Original Advertisement Outlay
A2 = New Advertisement Outlay
These are some of the important types of elasticity of demand that helps in understanding the criteria of
demand for the goods and services and the factors that influence the demand.

Types of Price Elasticity of Demand

Definition: The Price Elasticity of Demand is commonly known as the elasticity of demand, which refers
to the degree of responsiveness of demand to the change in the price of the commodity.
The following are the main types of price elasticity of demand:

1. Perfectly Elastic Demand (Ep = ∞): The demand is said to be perfectly elastic when a slight change in the
price of a commodity causes a major change in its quantity demanded. Such as, even a small rise in the price
of a commodity can result into fall in demand even to zero. Whereas a little fall in the price can result in the
increase in demand to infinity.
In perfectly elastic demand the demand curve is a straight horizontal line which shows, the flatter the
demand curve the higher is the elasticity of demand

.
2. Perfectly Inelastic Demand (Ep =0): When there is no change in the demand for a product due to the
change in the price, then the demand is said to be perfectly inelastic. Here, the demand curve is a straight
vertical line which shows that the demand remains unchanged irrespective of change in the price., i.e.
quantity OQ remains unchanged at different prices, P1, P2, and P3.

3. Relatively Elastic Demand (1 to ∞): The demand is relatively elastic when the proportionate change in the
demand for a commodity is greater than the proportionate change in its price. Here, the demand curve
 is gradually sloping which shows that a proportionate change in quantity from OQ0 to OQ1 is greater than

the proportionate change in the price from OP1 to Op2.

4. Relatively Inelastic Demand (0-1): When the proportionate change in the demand for a product is less than
the proportionate change in the price, the demand is said to be relatively inelastic demand. It is also called as
the elasticity less than unity, i.e. 1. Here the demand curve is rapidly sloping, which shows that the change
in the quantity from OQ0 to OQ1 is relatively smaller than the change in the price from OP1 to Op2.

5. Unitary Elastic Demand (Ep =1): The demand is unitary elastic when the proportionate change in the price
of a product results in the same change in the quantity demanded. Here the shape of the demand curve is
a rectangular hyperbola, which shows that area under the curve is equal to one.

Thus, these are some of the types of the price elasticity of demand that helps the firms to price their product
in accordance with the demand patterns of an individual which changes with the change in the price of the
commodity.

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

Income elasticity of demand can be classified in to five types.

A. Zero income elasticity:
Quantity demanded remains the same, even though money income increases. Symbolically, it can be
expressed as Ey=0. It can be depicted in the following way:

As income increases from OY to OY1, quantity demanded never changes.

B. Negative Income elasticity:
 When income increases, quantity demanded falls. In this case, income elasticity of demand is negative. i.e.,
Ey < 0.

When income increases from OY to OY1, demand falls from OQ to OQ1.

C. Unity income elasticity:
When an increase in income brings about a proportionate increase in quantity demanded, and then income
elasticity of demand is equal to one. Ey = 1

When income increases from OY to OY1, Quantity demanded also increases from OQ to OQ1.
D. Income elasticity greater than unity:
In this case, an increase in come brings about a more than proportionate increase in quantity demanded.
Symbolically it can be written as Ey > 1.

It shows high-income elasticity of demand. When income increases from OY to OY1, Quantity demanded
increases from OQ to OQ1.

E. Income elasticity leas than unity:

When income increases quantity demanded also increases but less than proportionately. In this case E < 1.
An increase in income from OY to OY, brings what an increase in quantity demanded from OQ to OQ1, But
the increase in quantity demanded is smaller than the increase in income. Hence, income elasticity of
demand is less than one

Determinants of Elasticity of Demand

Definition: The Elasticity of Demand is a measure of sensitiveness of demand to the change in the price of
the commodity.
Determinants of Elasticity of Demand
Apart from the price, there are several other factors that influence the elasticity of demand. These are:
1. Consumer Income: The income of the consumer also affects the elasticity of demand. For high-income
groups, the demand is said to be less elastic as the rise or fall in the price will not have much effect on the
demand for a product. Whereas, in case of the low-income groups, the demand is said to be elastic and rise
and fall in the price have a significant effect on the quantity demanded. Such as when the price falls the
demand increases and vice-versa.
2. Amount of Money Spent: The elasticity of demand for a product is determined by the proportion of income
spent by the individual on that product. In case of certain goods, such as matchbox, salt a consumer spends a
very small amount of his income, let’s say Rs 2, then even if their prices rise the demand for these products
will not be affected to a great extent. Thus, the demand for such products is said to be inelastic.
Whereas foods and clothing are the items where an individual spends a major proportion of his income and
therefore, if there is any change in the price of these items, the demand will get affected.
3. Nature of Commodity: The elasticity of demand also depends on the nature of the commodity. The product
can be categorized as luxury, convenience, necessary goods. The demand for the necessities of life, such as
food and clothing is inelastic as their demand cannot be postponed. The demand for the Comfort Goods is
neither elastic nor inelastic. As with the rise and fall in their prices, the demand decreases or increases
moderately.
Whereas the demand for the luxury goods is said to be highly elastic because even with a slight change in its
price the demand changes significantly. But, however, the demand for the prestige goods is said to be
inelastic, because people are ready to buy these commodities at any price, such as antiques, gems, stones,
etc.
4. Several Uses of Commodity: The elasticity of demand also depends on the number of uses of the
commodity. Such as, if the commodity is used for a single purpose, then the change in the price will affect
the demand for commodity only in that use, and thus the demand for that commodity is said to be inelastic.
Whereas, if the product has several uses, such as raw material coal, iron, steel, etc., then the change in their
price will affect the demand for these commodities in its many uses. Thus, the demand for such products is
said to be elastic.
5. Whether the Demand can be Postponed or not: If the demand for a particular product cannot be
postponed then, the demand is said to be inelastic. Such as, Wheat is required in daily life and hence its
demand cannot be postponed. On the other hand, the items whose demand can be postponed is said to have
elastic demand. Such as the demand for the furniture can be postponed until the time its prices fall.
6. Existence of Substitutes: The substitutes are the goods which can be used in place of one another. The
goods which have close substitutes are said to have elastic demand. Such as, tea and coffee are close
substitutes and if the price of tea increases, then people will switch to the coffee and demand for the tea will
decrease significantly. Whereas, if there are no close substitutes for a product, then its demand is said to be
inelastic. Such as salt and sugar do not have their close substitutes and hence lower is their price elasticity.
7. Joint Demand: The elasticity of demand also depends on the complementary goods, the goods which are
used jointly. Such as car and petrol, pen and ink, etc. Here the elasticity of demand of secondary
 (supporting) commodity depends on the elasticity of demand of the major commodity. Such as, if the
demand for pen is inelastic, then the demand for the ink will also be less elastic.
8. Range of Prices: The price range in which the commodities lie also affects the elasticity of demand. Such as
the higher range products are usually bought by the rich people, and they do not care much about the change
in the price and hence the demand for such higher range commodities is said to be inelastic.
Also, the lower range commodities have inelastic demand because these are already low priced and can be
bought by any sections of the society. But the commodities in middle range prices are said to have an elastic
demand because with the fall in the prices the middle class and the lower middle class are induced to buy
that commodity and therefore the demand increases. But however, if the prices are increased the
consumption reduces and as a result demand falls.
Thus, these are some of the important determinants of elasticity of demand that every firm should
understand properly before deciding on the price of their offerings.

Factors influencing the elasticity of demand Elasticity of demand depends on many factors.

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.
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.
Variety of uses:
If a commodity can be used for several purposes, than it will have elastic demand. i.e. electricity. On the
other hand, demanded is inelastic for commodities, which can be put to only one use.
Postponement of demand:
If the consumption of a commodity can be postponed, than it will have elastic demand. On the contrary, if
the demand for a commodity cannot be postpones, than demand is in elastic. The demand for rice or
medicine cannot be postponed, while the demand for Cycle or umbrella can be postponed.
Amount of money spent:
Elasticity of demand depends on the amount of money spent on the commodity. If the consumer spends a
smaller for example a consumer spends a little amount on salt and matchboxes. Even when price of salt or
matchbox goes up, demanded will not fall. Therefore, demand is in case of clothing a consumer spends a
large proportion of his income and an increase in price will reduce his demand for clothing. So the demand
is elastic.
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.
Range of Prices:
Range of prices exerts an important influence on elasticity of demand. At a very high price, demand is
inelastic because a slight fall in price will not induce the people buy more. Similarly at a low price also
demand is inelastic. This is because at a low price all those who want to buy the commodity would have
bought it and a further fall in price will not increase the demand. Therefore, elasticity is low at very him and
very low prices.
 Importance of Elasticity of Demand:
The concept of elasticity of demand is of much practical importance.
Price fixation:
Each seller under monopoly and imperfect competition has to take into account elasticity of demand while
fixing the price for his product. If the demand for the product is inelastic, he can fix a higher price.
Production:
Producers generally decide their production level on the basis of demand for the product. Hence elasticity of
demand helps the producers to take correct decision regarding the level of cut put to be produced.
Distribution:
Elasticity of demand also helps in the determination of rewards for factors of production. For example, if the
demand for labour is inelastic, trade unions will be successful in raising wages. It is applicable to other
factors of production.
International Trade:
Elasticity of demand helps in finding out the terms of trade between two countries. Terms of trade refers to
the rate at which domestic commodity is exchanged for foreign commodities. Terms of trade depends upon
the elasticity of demand of the two countries for each other goods.
Public Finance:
Elasticity of demand helps the government in formulating tax policies. For example, for imposing tax on a
commodity, the Finance Minister has to take into account the elasticity of demand.
Nationalization:
The concept of elasticity of demand enables the government to decide about nationalization of industries.

Demand Forecasting
Today business enterprises are working under the conditions of uncertainties. Uncertainties can be
minimized through planning and forecasting. The success of a business firm depends upon its ability to
forecast future events.

Definition: Demand Forecasting

refers to the process of predicting the future demand for the firm’s product. In other words, demand
forecasting is comprised of a series of steps that involves the anticipation of demand for a product in future
under both controllable and non-controllable factors.
The business world is characterized by risk and uncertainty, and most of the business decisions are taken
under this scenario. An organization come across several risks, both internal or external to the business
operations such as technology, attrition, unrest, employee grievances, recession, inflation, modifications in
the government laws, etc.
Predicting the future demand for a product helps the organization in making decisions in one of the
following areas:
 Planning and scheduling the production and acquiring the inputs accordingly.
 Making the provisions for finances.
 Formulating a pricing strategy.
 Planning advertisement and implementing it.
Demand forecasting holds significance in the businesses where large-scale production is involved. Since
the large-scale production requires a long gestation period, a good deal of forward planning should be done.
Also, the potential future demand should be estimated to avoid the conditions of overproduction and
underproduction. Most often, the firms face a question of what would be the future demand for their product
as they have to acquire the input (labor and raw material) accordingly.
 The objective of demand forecasting is attained only when the forecasting is done systematically and
scientifically. Thus, the following steps in demand forecasting are followed to facilitate a systematic
estimation of future demand for product:
1. Specifying the Objective
2. Determining the Time Perspective
3. Choice of method for Demand Forecasting
4. Collection of Data and Data Adjustment
5. Estimation and Interpretation of Results
Thus, demand forecasting is a systematic process that assumes greater significance in large-scale producing
firms. Demand forecasting may not be a serious issue for the small scale firms which supply a small portion
of total demand or produces the product that caters to the short demand or seasonal demand. Such firms can
plan their production on the basis of the business skills and their past experiences.
Objectives of Demand Forecasting
A. Short Term Objectives
1. To help in preparing suitable sales and production policies.
2. To help in ensuring a regular supply of raw materials.
3. To reduce the cost of purchase and avoid unnecessary purchase.
4. To ensure best utilization of machines.
5. To make arrangements for skilled and unskilled workers so that suitable labour force may be maintained.
6. To help in the determination of a suitable price policy.
7. To determine financial requirements.
8. To determine separate sales targets for all the sales territories.
9. To eliminate the problem of under or over production.
B. Long term Objectives
1. To plan long term production.
2. To plan plant capacity.
3. To estimate the requirements of workers for long period and make arrangements.
4. To determine an appropriate dividend policy.
5. To help the proper capital budgeting.
6. To plan long term financial requirements.
7. To forecast the future problems of material supplies and energy crisis.

Factors Affecting Demand Forecasting

For making a good forecast, it is essential to consider the various factors governing demand forecasting.
These factors are summarized as follows.
 Prevailing business conditions: While preparing demand forecast it becomes necessary to
study the general economic conditions very carefully. These include the
 price level changes, change in national income, percapita income, consumption pattern, savings and
investment habits, employment etc.
 Conditions within the industry: Every business enterprise is only a unit of a particular industry.
Sales of that business enterprise are only a part of the total sales of that industry. Therefore, while
preparing demand forecasts for a particular business enterprise, it becomes necessary to study the
changes in the demand of the whole industry, number of units within the industry, design and quality
of product, price policy, competition within the industry etc.
 Conditions within the firm: Internal factors of the firm also affect the demand forecast. These
factors include plant capacity of the firm, quality of the product, price of the product, advertising and
distribution policies, production policies, financial policies etc.
 Factors affecting export trade: If a firm is engaged in export trade also it should consider the
factors affecting the export trade. These factors include import and export control, terms and
 conditions of export, exim policy, export conditions, export finance etc.
 Market behaviour : While preparing demand forecast, it is required to consider the market behavior
which brings about changes in demand.
 Sociological conditions: Sociological factors have their own impact on demand forecast of the
company. These conditions relate to size of population, density, change in age groups, size of family,
family life cycle, level of education, family income, social awareness etc.
 Psychological conditions: While estimating the demand for the product, it becomes necessary to
take into consideration such factors as changes in consumer tastes, habits, fashions, likes and
dislikes, attitudes, perception, life styles, cultural and religious bents etc.
 Competitive conditions: The competitive conditions within the industry may change. Competitors
may enter into market or go out of market. A demand forecast prepared without considering the
activities of competitors may not be correct.

Process of Demand Forecasting/ Steps in Demand Forecasting

Demand forecasting involves the following steps:
1. Determine the purpose for which forecasts are used.
2. Subdivide the demand forecasting programme into small I parts on the basis of product or sales
territories or markets.
3. Determine the factors affecting the sale of each product and their relative importance.
4. Select the forecasting methods.
5. Study the activities of competitors.
6. Prepare preliminary sales estimates after, collecting necessary data.
7. Analyse advertisement policies, sales promotion plans, personal sales arrangements etc. and ascertain how
far these programmes have been successful in promoting the sales.
8. Evaluate the demand forecasts monthly, quarterly, half yearly or yearly and necessary adjustments
should be done.
9. Prepare the final demand forecast on the basis of preliminary forecasts and the results of evaluation.

Steps in Demand Forecasting

Definition: 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.
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:
1. 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.
2. 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.
3. 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.
4. Collection of Data and Data Adjustment: Once the method is decided upon, the next step is to collect the
required data 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.
5. 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.

Methods of Demand Forecasting

Definition: Demand Forecasting is a systematic and scientific estimation of future demand for a product.
Simply, estimating the sales proceeds or demand for a product in the future is called as demand forecasting.
There are several methods of demand forecasting applied in terms of; the purpose of forecasting, data
required, data availability and the time frame within which the demand is to be forecasted. Each method
varies from one another and hence the forecaster must select that method which best suits the requirement.
The methods of forecasting can be classified into two broad categories:

1. Survey Methods: Under the survey method, the consumers are contacted directly and are asked about their
intentions for a product and their future purchase plans. This method is often used when the forecasting of a
demand is to be done for a short period of time. The survey method includes:
 Consumer Survey Method
 Opinion Poll Methods
2. Statistical Methods: The statistical methods are often used when the forecasting of demand is to be done
for a longer period. The statistical methods utilize the time-series (historical) and cross-sectional data to
estimate the long-term demand for a product. The statistical methods are used more often and are considered
superior than the other techniques of demand forecasting due to the following reasons:
 There is a minimum element of subjectivity in the statistical methods.
 The estimation method is scientific and depends on the relationship between the dependent and independent
variables.
 The estimates are more reliable
 Also, the cost involved in the estimation of demand is the minimum.
The statistical methods include:
 Trend Projection Methods
 Barometric Methods
 Econometric Methods
These are the different kinds of methods available for demand forecasting. A forecaster must select the
method which best satisfies the purpose of demand forecasting.
M E T H O D S OF DEMAND FORECASTING (FOR ESTABLISHED PRODUCTS)
There are several methods to predict the future demand. All methods can be broadly classified
into two. (A) Survey methods, (B) Statistical methods
(A) Survey methods
Under this method surveys are conducted to collect information about the future purchase plans of potential
consumers. Survey methods help in obtaining information about the desires, likes and dislikes of consumers
through collecting the opinion of experts or by interviewing the consumers. Survey methods are used for
short term forecasting. Important survey methods are (a) consumers interview method, (b) collective
opinion or sales force opinion methodic) experts opinion method, (d) consumers clinic and (f) end use
method.
(a) Consumers' interview method (Consumers survey): Under this method, consumers are
interviewed directly and asked the quantity they would like to buy. After collecting the data, the total
demand for the product is calculated. This is done by adding up all individual demands. Under the
consumer interview method, either all consumers or selected few are interviewed. When all the consumers
are interviewed, the method is known as complete enumeration method. When only a selected group of
consumers are interviewed, it is known as sample survey method
Advantages
1. It is a simple method because it is not based on past record.
2. It suitable for industrial products.
3. The results are likely to be more accurate.
4. This method can be used for forecasting the demand of a new product.
Disadvantages
1. It is expensive and time consuming.
2. Consumers may not give their secrets or buying plans.
3. This method is not suitable for long term forecasting.
4. It is not suitable when the number of consumer is large.
(b) Collective opinion method: Under this method the salesmen estimate the expected sales in their
respective territories on the basis of previous experience. Then demand is estimated after combining the
individual forecasts (sales estimates) of the salesmen.
This method is also known as sales force opinion method.
Advantages
This method is simple.
1. It is based on the first hand knowledge of Salesmen.
2. This method is particularly useful for estimating demand of new products.
3. It utilises the specialised knowledge of salesmen who are in close touch with the prevailing market
conditions.
Disadvantages
1. The forecasts may not be reliable if the salespeople are not trained.
2. It is not suitable for long period estimation.
3. It is not flexible.
4. Salesmen may give lower estimates that make possible easy achievement of sales quotas fixed for each
salesman.
(c) Experts' opinion method: This method was originally developed at Rand Corporation in 1950 by
Olaf Helmer, Dalkey and Gordon. Under this method, demand is estimated on the basis of opinions of
experts and distributors other than salesmen and ordinary consumers. This method is also known as Delphi
 method. Delphi is the ancient Greek temple where people come and prey for information about their future.
Advantages
1. Forecast can be made quickly and economically
2. This is a reliable method because estimates are made on the basis of knowledge and experience of sales
experts.
3. The firm need not spare its time on preparing estimates of demand.
4. This method is suitable for new products.
Disadvantages
1. This method is expensive.
2. This method sometimes lacks reliability
(d) Consumer clinics: In this method some selected buyers are given certain amounts of money and
asked to buy the products. Then the prices are changed and the consumers are asked to make fresh purchases
with the given money. In this way the consumers" responses to price changes are observed. Thus the
behaviour of the consumers is studied. On this basis demand is estimated. This method is an improvement
over consumer’s interview method.
Merits
1. It provides an opportunity to study the behaviour of consumers directly.
2. It provides reliable and realistic picture about future demand.
3. It gives useful information to aid in the decision making process.
Demerits
1. It is a time consuming method.
2. Selecting the participants is very difficult.
3. It is expensive.
4. Consumers may take it as a game. They may not reveal their preferences.
(e) End use method: This method is based on the fact that a product generally has different uses. In the
end use method, first a list of end users (final consumers, individual industries, exporters etc.) is prepared.
Then the future demand for the product is found either directly from the end users or indirectly by estimating
their future growth. Then the demand of all end users of the product is added to get the total demand for the
product.

Statistical Methods
Statistical methods use the past data as a guide for knowing the level of future demand.
Statistical methods are generally used for long run forecasting. These methods are used for established
products. Statistical methods include: (i) Trend projection method, (ii) Regression and Correlation,
(iii) Extrapolation method, (iv) Simultaneous equation method, and (v) Barometric method.
(i) Trend projection method: Future sales are based on the past sales, because future is the grand-child
of the past and child of the present. Under the trend projection method demand is estimated on the basis of
analysis of past data. This method makes use of time series (data over a period of time). We try to ascertain
the trend in the time series. The trend in the time series can be estimated by using any one of the following
four methods:
(a) Least-square method, (b) Free- hand method, (c) Moving average method and (d) semi-average
method.
(ii) Regression and Correlation: These methods combine economic theory and statistical technique of
estimation. Under these methods the relationship between the sales (dependent variable) and other variables
(independent variables such as price of related goods, income, advertisement etc.) is ascertained. Such
relationship established on the basis of past data may be used to analyse the future trend. The regression and
correlation analysis is also called the econometric model building.
(iii) Extrapolation: Under this statistical method, the future demand can be extrapolated by applying
Binomial expansion method. This method is used on the assumption that the rate of charge in demand in the
past has been uniform.
(iv) Simultaneous equation method.-This involves the development of a complete econometric model
which can explain the behaviour of all the variables which the company can control. This method is not very
popular.
(v) Barometric technique: This is an improvement over the trend projection method. According to this
technique the events of the present can be used to predict the directions of change m the future. Here certain
economic and statistical indicators from the selected time series are used to predict variables. Personal
income, non-agricultural placements, gross national income, prices of industrial materials, wholesale
commodity prices, industrial production, bank deposits etc. are some of the most commonly used indicators.
Advantages of Statistical Methods
 The method of estimation is scientific
 Estimation is based on the theoretical relationship between sales (dependent variable) and price,
advertising, income etc. (independent variables)
 These are less expensive.
 Results are relatively more reliable.
Disadvantages of Statistical Methods
 These methods involve complicated calculations.
 These do not rely much on personal skill and experience.
 These methods require considerable technical skill and experience in order to be
effective.
Methods of Demand Forecasting for New Products
Demand forecasting of new product is more difficult than forecasting for existing product. The
reason is that the product is not available. Hence, no historical data are available. In these conditions the
forecasting is to be done by taking into consideration the inclination and wishes of the customers to
purchase. For this a research is to be conducted. But there is one problem that it is difficult for a
customer to say anything without seeing and using the product before. Thus it is very difficult to
forecast the demand for new products. Any way Prof. Joel Dean has suggested the following methods for
forecasting demand of new products:
1. Evolutionary approach: This method is based on the assumption that the new product is the
improvement and evolution of the old product. The demand is forecasted on the basis of the demand of the
old product. For example, the demand for black and white TV should be taken in to consideration while
forecasting the demand for colour TV sets because the latter is an improvement of the former.
2. Substitute approach: Here the new product is treated as a substitute of an existing product, e.g.
polythene bags for cloth bags. Thus the demand for a new product is analysed as a substitute for some
existing goods or service.
3. Growth curve approach: Under this method the growth rate of demand of a new product is estimated
on the basis of the growth rate of demand of an existing product. Suppose Pears soap is in use and a new
cosmetic is to be introduced in the market. In this case the average sale of Pears soap will give an idea as to
how the new cosmetic will be accepted by the consumers.
4. Opinion poll approach: Under this method the demand for a new product is estimated on the basis
of information collected from the direct interviews (survey) with consumers.
5. Sales Experience approach: Under this method, the new product is offered for sale in a sample
market, i.e. by direct mail or through multiple shop or departmental shop. From this the total demand is
estimated for the whole market.
6. Vicarious approach: This method consists of surveying consumers' reactions through the specialised
dealers who are in touch with consumers. The dealers are able to know as to how the customers will accept
the new product. On the basis of their reports demand can be estimated.The above methods are not mutually
exclusive. It is de desirable to use a combination of two or more methods in order to get better results.