Dr.

Monica Sharma

Definition of Demand:
The term demand refers to a desire for a
commodity backed by :
Desire to buy
Willingness to pay
Ability to pay
According to Vera Anstey:
"The demand for a particular good is
the amount that will be purchased at
a given price at a given time".

 Price of the goods

Income of the buyer
Prices of Related Goods
Prices of Related Goods
Seasons prevailing at the time of purchase
Fashion

 Advertisement and Sales promotion

Population of the Country
Distribution of income and wealth
Propensity to save
Availability of consumer credit
State of business

DEMAND SCHEDULE:

Demand
Schedule
shows the different
quantities of goods
that a consumer is
willing to buy at
various prices.
Prices and quantities
normally move in
opposite directions

Price of
Goods X

Quantity
Demanded

10

100

20

50

30

25

15

75

DEMAND CURVE:
It

is

representation

graphical
of

demand schedule, which

shows the relationship
between the price of the
commodity and changes
in the quantity of goods.

Demand function is a mathematical function showing

relationship between the quantity demanded of a
commodity and the factors influencing demand.
Dx = f (Px, Py, T, Y, A, Pp, Ep, U)
In the above equation,
Dx= Quantity demanded of a commodity
Px = Price of the commodity
Py = Price of related goods
T = Tastes and preferences of consumer
Y = Income level
A = Advertising and promotional activities
Pp = Population (Size of the market)
Ep = Consumers expectations about future prices
U = Specific factors affecting demand for a commodity such as
seasonal changes, taxation policy, availability of credit facilities, etc.

Meaning:
The law of demand establishes a functional relationship
between price and quantity demanded of a commodity.
The law of demand states that the demand for a
commodity increases when its price decreases and it
falls when its price rises, other things remaining
constant.

Assumptions of the Theory:

1)Consumers income remains same.
2)Prices of substitute goods do not change
3)The preferences of consumer remain to be same.
4)It considers that the fashion does not show any changes.
5) No change in the population.
6) No new substitutes for the commodity.
7) No expectation of change in the price of commodity in
future.
8) Avoids any type of change fiscal policies of the
government of a nation.

Example:

Demand Schedule
Price

Quantity
Demand
ed

100

200

300

400

500

Demand Curve

Why the demand curve slopes downward

OR
Factors determining Law of demand

Law of Diminishing Marginal Utility

Substitution Effect
Income Effect
Change in number of consumers / New Consumers
Several Uses of a commodity

Exceptions to the law of demand

OR
Cases when the Law of Demand doesn't
hold good

Conspicuous goods /Luxurious goods

Giffen goods
Future expectations about prices
Fear of shortages
Ignorance
Necessity Goods
Emergency Situations

Importance of Law of Demand

It helps in Price Determination of Goods.
It help the taxation authorities in setting the tax
rates for the

commodities.

It is useful in determining the prices of agricultural

products.
It helps the companies in its planning process.

Movement along the Demand

Shift in Demand Curve

1.It is caused by change in 1.It is caused by change

price of a commodity
factors other than price :

in

a) change in households income

b)
change
in
price
complementary goods.

of

c) change in weather conditions

d) change in size of households
family
2.It refers to change
quantity demanded due
rise/fall in price.

e) change in consumers taste.

in 2. It refers to change in demand
to at the same price.

Movement along the Demand

Shift in Demand Curve

3.It
refers
to
upward
(contraction in demand ) or
downward
(Expansion
in
demand) movement along the
same demand curve
4.Graphic representation

3. It refers to rightward (Increase

in
demand)
or
leftward
(decrease in demand ) shift of
same demand curve.
4.Graphic representation

Extension in Demand

Increase in Demand

1.It is caused by fall in price 1.It is caused by :

of a commodity
a)increase in households income
b) fall in price of complementary
goods.
c) favourable weather conditions
d) increase in size of households
family
e)
favourable
change
in
consumers taste.
2. It refers to downward 2. It refers to rightward shift of
movement along the
same same demand curve.
demand curve
3.It refers to rise in demand 3. It refers to rise in demand at

Extension in Demand
4.Expansion in demand with
the help of Demand Schedule.
Original demand schedule

Increase in Demand
4.Increase in demand with the
help of Demand Schedule.
Original demand schedule

Px

Qx

Px

Qx

10

100

10

100

Revised demand schedule

Revised demand schedule

Px

Qx

Px

Qx

150

10

150

Extension in Demand

Increase in Demand

5.Graphic representation

5.Graphic representation

Contraction in Demand

Decrease in Demand

1.It is caused by increase in 1.It is caused by :

price of a commodity
a) fall in households income
b) fall
goods.

in

price

of

c)
unfavourable
conditions

substitute
weather

d) lesser number of members in

households family
e)
unfavourable
change
in
consumers taste.
2.
It
refers
to
upward 2. It refers to leftward shift of
movement along the same same demand curve.
demand curve.

Contraction in Demand
4.Contraction in demand with
the help of Demand Schedule.
Original demand schedule

Decrease in Demand
4.Decrease in demand with the
help of Demand Schedule.
Original demand schedule

Px

Qx

Px

Qx

10

100

10

100

Revised demand schedule

Revised demand schedule

Px

Qx

Px

Qx

15

50

10

50

Contraction in Demand
5.Graphic representation

Decrease in Demand
5.Graphic representation

Meaning:
The concept of price-elasticity of demand was first of all
introduced in economics by Prof. Alfred Marshall.
In simple words, price elasticity of demand is the ratio of
percentage

change

in

quantity

percentage change in price.

Symbolically,
Ed= Q * P
P Q
Here, Q is the change in quantity
P is the change in price
Q is original quantity
P is the is original price

demanded

to

the

Basically, the price elasticity of demand ranges from zero to infinity.

It can be equal to zero, less than one, greater than one and equal to
unity. Following are the types of Price Elasticity of Demand:
1) Perfectly Elastic Demand:
It is said to happen when a little change in
price leads to an infinite change in quantity demanded. A small
rise in price on the part of the seller reduces the demand to zero. Here
value of Ep=

2. Perfectly inelastic Demand:

Perfectly inelastic demand is opposite to

perfectly elastic demand. Under the perfectly inelastic demand,
irrespective of any rise or fall in price of a commodity, the
quantity demanded remains the same. Here the value of Ed=0
Example: Life Saving Drugs

3.Unitary Elastic Demand:

The demand is said to be unitary elastic when a
given proportionate change in the price level brings about an
equal proportionate change in quantity demanded, The
numerical value of unitary elastic demand is exactly one i.e., Ed =
1.
Example: CLOTH

4. Relatively Elastic Demand:

Relatively elastic demand refers to a situation in
which a small change in price leads to a big change in
quantity demanded. In such a case elasticity of demand is said
to be more than one i.e., Ed >1.
Example: Petrol

5. Relatively Inelastic Demand:

Under the relatively inelastic demand a given
percentage change in price produces a relatively less percentage
change in quantity demanded. In such a case elasticity of
demand is said to be less than one i.e. Ed <1.
Example: Sugar

1) Nature of the commodity

2) Substitutes
3) Number of Uses
4) Postponement of the use
5) Joint demand
6) Price Level
7) Income Level
8) Habits
9) Nature of Expenditure

Majorly there are three methods that are being used to calculate Price
Elasticity of demand.

1. Percentage method or Proportionate Method.

2. Total Expenditure Method.
3. Point Elasticity of Demand/ Graphic Method
1.

Percentage method or Proportionate Method:

This method was propounded by Dr. Flux, hence it is known as
Flux method.
According to this method, "price elasticity of demand is the
ratio of percentage change in the quantity demanded to
the percentage change in price of the commodity.
It is also known as the Ratio Method, and
Arithmetic
Method.

1.

Percentage method or Proportionate Method:

FORMULA:

Symbolically,

Ed= Q * P
P
Q
Here, Q is the change in quantity
P is the change in price
Q is original quantity
P is the is original price

2. Total Expenditure Method or Total outlay method:

Prof. Marshall has evolved the total expenditure method to
measure the price elasticity of demand. According to this
method, elasticity of demand can be measured by
considering the change in price and the subsequent change
in the total quantity of goods purchased and the total
amount of money spend on it.
Total Outlay = Price x Quantity Demanded
Possibilities Under Total Outlay Method
(i) Greater than unity: If with a fall in price (demand
increases) the total expenditure increases or with a rise in
price (demand falls) the total expenditure falls, in that case
the elasticity of demand is greater than one i.e. (Ed >1.)

2. Total Expenditure Method or Total outlay method:

(ii) Equal to unity: If with a rise or fall in the price (demand
falls or rises respectively), the total expenditure remains the
same, the demand will be unitary elastic i.e. (Ed = 1).
(iii) Less than unity: With a fall in price (Demand rises), the
total expenditure also falls, and with a rise in price (Demand
falls) the total expenditure also rises, the demand is said to
be less elastic or elasticity of demand is less than one i.e.
(Ed <1).

2. Total Expenditure Method or Total outlay method:

Graphical Presentation of situation under Total Outlay Method

3. Point method /Geometric Method

This method is used when elasticity of demand is measured
corresponding to a specific point on a given demand curve.
It is also called Point Method of measuring elasticity of
demand.

3. Point method /Geometric Method:

In this figure, MN is a straight line demand curve. P is a midpoint on the demand curve which divides the demand curve
in two equal segments, viz. lower segment (PN) and
upper segment (PM).So, to calculate different price
elasticity of demand formula will be:
.

Ed = Lower section of the Demand curve

Upper section of Demand curve

3. Point method /Geometric Method:

1) Importance for Finance Minister

2) Importance for the Monopolist
3) Fixation of Wages
4) International Trade
5) Importance for the Producer
6) Rate of Foreign Exchange
7) Shifting of Tax Burden
8) Price discrimination
9) Joint Product Cost Problem
10) Importance for Transportation Industry
11) Law of Increasing Return and Demand

Meaning:
Income elasticity of demand means the ratio of percentage change in the
quantity demanded to the percentage change in income.

Ey = Proportionate Change in Quantity Demanded

Proportionate Change in Income

Ey= Q * Y
Y

Here, Q is the change in quantity

Y is the change in Income
Q is original quantity
Y is the is original Income

1) Positive Income Elasticity of Demand:

Income elasticity of demand is said to occur when with the increase
in the income of the consumer, his demand for goods and services
also increases and vice-versa. Income elasticity of demand is
positive in case of normal goods.
This can be further classified into three types:
a) Unit income elasticity: Demand changes in same proportion to change in
income. i.e, Ey = 1. Example Comforts goods like Washing Machine.

1) Positive Income Elasticity of Demand:

b) Income Elasticity Greater than Unity (luxuries): An increase in income
brings about a more than proportionate increase in quantity demanded. i.e, Ey
>1. Example of High income elasticity: jewellery, ornaments, precious stones,
luxuries items.

1) Positive Income Elasticity of Demand:

c) Income elasticity less than unity (necessaries): An increase in income leads
to proportionately less change in quantity demanded then that elasticity is
known as less than unit elasticity. i.e., Ey = <1 Example of Low income
elasticity: sugar.

2) Negative Income Elasticity of Demand:

Negative income elasticity of demand is said to occur when increase in
the income of the consumers is accompanied by fall in demand of goods and
services and vice-versa. It is the case of inferior goods. DD is the negative
income elasticity of demand Curve. Here, Ey<0.
Example: Inferior Goods

3) Zero Income Elasticity of Demand:

Zero income elasticity of demand is said to exist when increase or
decrease in income has no impact on the demand of goods and services. Here,
Ey=0.
Example: Inferior Goods

Production Planning and Management

Forecasting of Demand
In classifying goods as normal and inferior
In Expansion and Contraction of the firm
Studying Markets situations

Meaning:
Income elasticity of demand means the ratio of percentage change in the
quantity demanded to the percentage change in income.

Ey= Qx * Py
Py

Qx

Here, Q is the change in quantity

Y is theange in Income
Q is original quantity
Y is the is original Income

1) Positive Cross Elasticity of Demand:

When goods are substitute of each other than
cross elasticity of demanded is positive. In other words, when an
increase in the price of Y leads to an increase in the demand of X.

2) Negative Cross Elasticity of Demand:

In case of complementary goods, cross
elasticity of demand is negative. A proportionate increase in price of one
commodity leads to a proportionate fall in the demand, of another
commodity because both are demanded jointly.

3) Zero Cross Elasticity of Demand:

Cross elasticity of demand is zero
when two goods are unrelated to each other. For instance, increase in price
of car does not affect the demand of cloth.

Changing the price

substitutes and
complementary goods.

of

the

products

having

Demand Forecasting

Helps in measuring interdependence of price of

commodity.
Multiproduct firms use these concept to measure

Meaning:
Advertising elasticity refers to the responsiveness demand or sales to
change in advertising or other promotional expenses.
Percentage change in demand or sales
Ea =
Percentage change in Advertisement expenditure
Q or Sales

Symbolically Ea =
A

Q or Sales

Where, Original sales = 10,000 units, Original advertisement expenditure = 800

New sales = 50,000 units, New advertisement expenditure = 2000

Solution: Ea = 40,000 * 800

1200

10000

Ea = 2.67

Determinants of Advertisement Elasticity

1. Type of commodity
2. Market share
3. Rivals reaction
4. State of economy

1. Helps in determining the level of prices

2. Helps in formulating appropriate sales promotional
strategy
3. Helps in manipulating the sales

Meaning:
It is defined as the ratio of the relative change in expected future
prices to the relative change in current price.
Symbolically:

Relative (or percentage) change in expected future price

Relative (or percentage) change in current price
E p C p E p C p
E pe

Ep
Cp
C p E p
E pe

Where E pe refers expected price and C p to current price,

and E p and C p to changes in them

Elasticity of
Price
Expectations
Relatively
Elastic
Relatively
Inelastic

Value
of
Coefficie
nt

Purchasers Expectations

Epe> 1

Purchases expect that future

price will increase by a larger
percentage than current price.

Epe<1

Purchaser expect that future

price will increase by smaller
percentage than current price

Unitary Elastic Epe=1

Future price will increase by

same percentage as current
price

Perfectly
Inelastic

Epe=0

An increase in current price will

have no effect on future price

Perfectly
Elastic

Epe=

Increase in current price will be

followed by decrease in future

Meaning:
Demand forecasting is the scientific and analytical estimation of
demand for a product (service) for a particular period of time. It is the
process ofdetermining how much ofwhatproducts is needed when
and where. It is an operations research technique of planning and
decision making.

Factors determines demand forecasting

1. Time factorTime factor
2. Level of forecasting.vel of forecasting
3. General or Specific forecasting or Specific forecasting
4. Problems & methods of forecasting
5. Classification of goods of goods
6. Knowledge of different market conditions
7. Other factors like Psychological Factors, Social factors etc.

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 i.e. Management of inventories
4)To ensure best utilization of machines.

A. Short Term Objectives

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 short term 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.

B. Long term Objectives

8)Planning of new project
9)Expansion and modernisation of existing unit
10)Diversification
11)Technology upgradation
12)Assessing long-term financial needs.
13)Arranging suitable man power.
14)Evolving suitable strategy for changing pattern of
consumption , industrialisation, urbanisation education.

Forecast Horizon
Long-range( 3 to 5
yrs or more)

Applications
Business

planning,

Characteristics
product Broad, general, often only

planning, capital planning, facility qualitative

planning, location planning

Medium /

Aggregate planning, capital and Numerical, not necessary

Intermediate range cash budgets, production planning, at the item level

(3 months to 3

inventory planning

years)
Short-range ( 1
week to 3 months)

Short-run

adjustment

of Item level for purchasing

production and personnel levels, and inventory control

purchasing,

job

scheduling,

capacity changes by over time,

layoffs etc.

There are several methods to predict the future demand. All methods
can be broadly classified into two:

(A)Survey methods
(B)Statistical methods
I) Survey methods:
The following techniques are used to conduct the survey of consumers
and experts:
i.Complete Enumeration Method :
Under this, the forecaster undertakes a complete survey of all
consumers whose demand he intends to forecast. Once this
information is collected, the sales forecasts are obtained by simply
adding the probable demands of all consumers.

Dp = d1 + d2 + d3 + . Dn

where d1, d2, d3 etc. denote demand by the individual households 1,

2, 3 etc

I) Survey methods:
ii.

Sample Survey Method :

Under this method, only a few potential consumers and users selected
from the relevant market through a sampling method are
surveyed. Method of survey may be direct interview or mailed
questionnaire to the sample consumers. On the basis of the
information obtained, the probable demand may be estimated.
Compared to the former survey, this method is simpler, less costly,
and less time-consuming but the choice of sample is very critical

I) Survey methods:
iii. Market Studies and Experiments :
An alternative method of collecting necessary information regarding
demand is to carry out market studies and experiments in
consumers behaviour under actual, though controlled, market
conditions.
Under this method, firms first select some areas of the representative
markets - three or four cities having similar features, viz.,
population,

income

levels,

cultural

and

social

background,

occupational distribution, choices and preferences of consumers.

Then, marketors carry out market experiments by changing prices,
advertisement expenditure, and other controllable variables in the
demand function under the assumption that other things remain
the same

I) Survey methods:
iv. Collective Opinion Method/Sales force Opinion Method /
Sales Force Polling method:
Under this Method, Sales persons are asked about estimated sales
targets in their respective sales territories in a given period of
time.

Merits

Demerits

Cost effective

Biasness
on
salespersons.

the

side

of

Estimated figures are more

reliable, as they arebased on
the notions of salespersons in
direct
contact
with
their
customers.

Salespersons may be unaware of

theeconomic environment of the
business
and
may
make
wrongestimates.

Less time consuming.

This method is ideal for shortterm

I) Survey methods:
v.

Experts Opinion Method

Group Discussion: It was developed by Osborn in 1953.Here the

decisions maybe taken with the help of brainstorming sessions or
by structured discussions.

Delphi Technique: It was developed by the Rand Corporation

atthe beginning of theCold War in 1950 by Olaf Helmer, Dalkey
and Gordon to forecastimpact of technology onwarfare.

In this method, repeated opinion of experts without their face to face

interaction are recorded and consolidated opinion of experts is
sent for revised views till conclusions are not drawn out from the
opinion.

I) Survey methods:
v.

Experts Opinion Method

Merits

Demerits

Decisions are enriched with the Experts may involve some amount
experience of competent experts of bias.
Firm need not spend time,
With external experts, risk of loss of
resources incollection of data by confidential information to rival
survey.
firms.
Very useful when product is
absolutely new toall the
markets

I) Survey methods:
(vi) End Use Method or Input-Output Method:
This method is quite useful for industries which are mainly producing
producers goods.
In this method, the sale of the product under consideration is projected
on the basis of demand survey of the industries using this product
as an intermediate product, that is, the demand for the final
product is the end user demand of the intermediate product used
in the production of this final product.

II Statistical Methods:
These are based on the assumption that future patterns tend to be
extensions of past ones and that one can make useful predictions
by studying the past behaviour

i) Time series analysis or trend method:

Time

series forecasting uses historical figures to predict future results..

Statistical tool to predict future values of a variable on the basis of
time series data. Time series data are composed of:

Secular trend (T): change occurring consistently over a long

time and is relatively smooth in itspath.

Seasonal trend (S): seasonal variations of the data within a year

Cyclical trend (C): cyclical movement in the demand for a product that may
have a tendency to recur in a few years

Random events (R): have no trend of occurrence hence they create

II Statistical Methods:

Methods of Trend Projection:

a) Graphical method:
This method gives the basic tendency of a series to
grow, decline and remain steady over a period of time. This
method is useful in forecasting Indias population, demand for
textiles, cement, etc. the period of time in trend analysis is always
a long period.
Year

Sales

1995

40

1996

50

1997

44

1998

60

1999

54

2000

62

II Statistical Methods:

Methods of Trend Projection

b) Moving average method:
A moving average forecast uses a
number of most recent historical actual data value to generate a
forecast. The moving average (simple) for number of period is
calculated as:
Ft =
At-1+ A t-2 + -----------+ At-n

N
Ft = Forecast for the coming period
N = No. of periods to be averaged.
At-1 = Actual occurrence in the past period
At-2, A t-3 and At-n = Actual occurrence two periods ago, three periods
ago etc.

II Statistical Methods:
b) Moving average method:
Example: Auto sales at Carmens Chevrolet are shown below. Develop
a 3-week moving average.
Wee Auto Sales
k
1

Wee
Auto
k
Sales
1
8

Three-Week Moving
Average

10

10

11

11

(8 + 9 + 10) / 3 = 9

10

10

(10 + 9 + 11) / 3 = 10

13

13

(9 + 11 + 10) / 3 = 10

(11 + 10 + 13) / 3 =
11 .33

II Statistical Methods:

Methods of Trend Projection

c) Weighted moving Average:
The simple moving average gives equal weight to each component of
the moving average database, a weighted moving average allows
any weights to be placed on each element, providing that the sum
of all weight equals one.
The formula for a weighted moving average is

Ft = W, At-1, + W2 At-2 + ----------- Wn At-n/ Total Weight assigned

Where
W1 = Weight to be given to the actual occurrence for the
period t-1
W2 = Weight to be given to the actual occurrence for the period t-1

II Statistical Methods:
c) Weighted moving Average:

Weighted moving average =

(weight for period n)(demand in period n)

weights

Example:
Carmens decides to forecast auto sales by weighting the three weeks
as follows:
Wee Auto Three-Week Moving Average
Weigh Period
k
Sale
ts
s
Applie
1
8
d
3
Last week
2
10
2
Two weeks
3
9
ago
1
Three weeks
4
11
[(3*9) + (2*10) + (1*8)] / 6 =
ago
9.17
6
Total
5
10
[(3*11) + (2*9) + (1*10)] / 6 =
10.17
6
13
[(3*10) + (2*11) + (1*9)] / 6 =
10 .17
7
[(3*13) + (2*10) + (1*11)] / 6
= 11.67

II Statistical Methods:

Methods of Trend Projection

d) Exponential Smoothing:
In exponential smoothing method, only three pieces of data are
needed to forecast the future, the most recent forecast, the actual
demand that occurred for that forecast period and a smoothing
constant.
Formula:
Where

Ft = Ft-1 + (At-1 - Ft-1)

Ft = The exponentially smoothed forecast for period t.
= The exponentially smoothed forecast made for prior

Ft-1
period.
At-1 = Actual demand in the prior period.
= The desired response rate or smoothing constant.

II Statistical Methods:

Methods of Trend Projection

d) Exponential Smoothing:
Illustration: Assume that the long run demand for a product under
study is relating stable and a smoothing constant is considered
0.05. Assume that last month forecast (Ft-1) was 1,050 units. If
1,000 actually were demanded, rather than 1,050, the forecast for
this month would be
Ft = Ft-1+ (At-1 Ft-1)
= 1,050 + 0.05 (1,000-1,050)
= 1,050 + 0.05 (-50)
= 1,047.5 units

II Statistical Methods:

Methods of Trend Projection

d) Least square method:
This is one of the best method to determine trend. In most cases, we
try to fit a straight line to the given data. The line is known as Line
of best fit as we try to minimise the sum of the squares of
deviation between the observed and the fitted values of the data.
The basic assumption here is that the relationship between the
various factors remains unchanged in future period also.
In order to solve the equation Y = a + bx (i)
we have to make use of the following normal equations:
y = na + b X
(ii)
xy =a x+b x2
(iii)
Where a is the intercept and b shows the impact of the independent
variable. We have two variablesthe independent variable x and
the dependent variable y.

II Statistical Methods:

Methods of Trend Projection

d) Least square method:
This is one of the best method to determine trend. In most cases, we
try to fit a straight line to the given data. The line is known as Line
of best fit as we try to minimise the sum of the squares of
deviation between the observed and the fitted values of the data.
The basic assumption here is that the relationship between the
various factors remains unchanged in future period also.
In order to solve the equation Y = a + bx (i)
we have to make use of the following normal equations:
y = na + b X
xy =a x+b x2

(ii)
(iii)

II Statistical Methods:
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) BarometricTechniques:
Barometric Technique alerts businesses to changes in the overall
economic conditions. It helps in predicting future trends on the
basis of index ofrelevant economic indicators especially when the
past data do not show a clear tendency of movement in a
particulardirection.

II Statistical Methods:
iii) Barometric Techniques:
The indicators is of following types:
Leading indicators: economic series that typically go up or down
ahead of other series e.g. birth rate of children is the leading series
for demand of seats in schools.
Coincident indicators : move up or downsimultaneously with the
level of economic activitiese.g. national income series is
coincident with series of employment in economy.
Lagging series: which moves with economic series aftera timelag
e.g. industrial wages is lagging series of price index for industrial
workers.

II Statistical Methods:
iv) Simultaneous Equations Method
It is based on the fact that inany economic decision every variable
influences every other variable in an economic environment. It has
following characteristics:

Incorporates mutual dependence amongvariables.

It is a simultaneous and twoway relationships,

A typical simultaneous equation model may comprise of:

Endogenous variables: included in the model as dependent

variables

Exogenous variables: given from outside the model

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. jute bags for polythene 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 desirable to use a

combination of two or more methods in order to get better results.

 Change in Fashion
Consumers Psychology
Uneconomical
Lack of Experienced Experts
Lack of Past Data

Thank You.