Demand Analysis… Law of Demand… Classification of Demand › Economics Basics
Basic Principles of Economics, Market Structures and Cost Analysis
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Demand Analysis
The success of any business largely depends on sales, and sales depend on market demand behaviour. Market demand analysis is one of the crucial requirements for the existence of any business enterprise. Analysis of market demand for the product is necessary for the management in order to take decisions regarding production, cost allocation, product pricing, advertising, inventory holdings, etc. How much the firm must endeavour to produce depends mainly upon the demand for its product. If demand falls short of production, the two must be balanced by creating a new demand through more and better advertisements. If there is no demand for the product, its production is unwarranted. If the future demand for the product is likely to be more, the more the inventories that the firm should hold. If the demand for the product is large, a higher price can be charged, with other things remaining the same.Market demand analysis helps the manager to make decisions regarding: (a) sales forecasting with a sound basis and greater accuracy: (b) guidelines for demand manipulation through advertising and sales promotion programmes; (c) production planning and product improvement: (d) pricing policy; (e) determination of sales quotas and performance appraisal of personnel in the sales department; and (f) size of market for a given product and corresponding market share.
For all these purposes, demand analysis is essential for successful production planning and business expansion in managerial decision-making.
Meaning of Demand
By demand we mean the various quantities of a given commodity or service which consumers would buy in one market in a given period of time at various prices, or at various incomes, or at various prices of related goods. —BoberTherefore, the demand for a good is made up of the following three things:
1. the desires to acquire it
2. the willingness to pay for it, and
3. the ability to pay for it. In other words.
Demand = Desire to acquire + Willingness to pay + Ability to pay
In absence of any of these three characteristics, there is no demand. For example, a teacher may possess both the willingness to pay as well as the ability to pay for a liquor bottle, yet he does not have demand for it. This is because he does not desire to have an alcoholic drink. Similarly, a trader might have the desire to have a TV, he might be rich enough to be able to pay for it, but if he is not willing to pay for the TV, he does not have demand for this product. Also, a worker might possess both the desire for a scooter as well as the willingness to pay for it, but if he does not possess enough money to pay for it, he does not have demand for the scooter. In contrast to these three situations, a lawyer, who has the desire for a car, as well as both the will and ability to pay for it, has demand for the car. Thus, demand in economics means effective demand, i.e., one which meets all its three characteristics—desire, willingness and ability to pay. On the other hand, demand means desire backed by willingness and ability to pay.
Besides, demand also signifies a price and a period of time in which the demand is to be fulfilled. Demand is the quantity of a specific good that people are willing and able to buy during a specific period, given the choices available.
To sum up. we can say that the demand for a product is the desire for that product backed by willingness as well as ability to pay for it. It is always defined with reference to a particular time, place, price and given values of other variables on which it depends.
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Law of Demand
Among the many causal factors affecting demand, price is the most significant and the price- quantity relationship called as the Law of Demand is stated as follows: "The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers, or in other words, the amount demanded increases with a fall in price and diminishes with a rise in price" (Alfred Marshall). In simple words other things being equal, quantity demanded will be more at a lower price than at higher price. The law assumes that income, taste, fashion, prices of related goods, etc. remain the same in a given period. The law indicates the inverse relation between the price of a commodity and its quantity demanded in the market. However, it should be remembered that the law is only an indicative and not a quantitative statement. This means that it is not necessary that such variation in demand be proportionate to the change in price.Definitions
Some major definitions of the Law of Demand are as follows:"Law of Demand states that people will buy more at lower prices and buy less at higher prices, if other things remaining the same."- Prof. Samuelson.
The Law of Demand states that amount demanded increases with a fall in price and diminishes when price increases." - Prof. Marshall
"According to the law of demand, the quantity demanded varies inversely with price." –Ferguson
Marshall:-“The greater the amount to be sold the smaller must be the price”
Benham:-“Usually a larger quantity of commodity will demanded at lower price that a higher price”
Characteristics of law of demand
• Inverse relationship between price and demand.• Price is independent variable
• Demand is dependent variable on price of goods.
Demand Curve and Schedule
Prices of oranges Quantity demanded for oranges10 2
S S
6 S
S 10
Table represents the increase in the price of the oranges lead to decrease the demand for oranges.
If the price of the orange is 5/-, people are willing to by 10 oranges. When prices are increased to 8/- where people are willing to buy only 5 oranges. This table shows that the increase in price of goods causes decreases the quantity demanded for the goods.
DEMAND CURVE (graphical presentation of law of demand)
Assumptions
Every law will have limitation or exceptions.This law operates when the commodity’s price changes and all other prices and conditions do not change. The main assumptions are• Habits, tastes and fashions remain constant
• Money, income of the consumer does not change.
• Prices of other goods remain constant
• The commodity in question has no substitute
• The commodity is a normal good and has no prestige or status value.
• People do not expect changes in the prices.
Exceptions to law of demand
Generally, the amount demanded of good increases with a decrease in price of the good and vice versa. In some cases, however, this may not be true. Such situations are explained below.1. Giffen goods: these are those inferior goods on which the consumer spends a large part of his income and the demand for which falls with a fall in their price. The demand curve for these has a positive slope. The consumers of such goods are mostly the poor. a rise in their price drains their resources and the poor have to shift their consumption from the more expensive goods to the giffen goods, while a fall in the price would spare the household some money for more expensive goods. which still remain cheaper. These goods have no closely related substitutes; hence income effect is higher than substitution effect.
2. Commodities which are used as status symbols: Some expensive commodities like diamonds, air conditioned cars, etc., are used as status symbols to display one’s wealth. The more expensive these commodities become, the higher their value as a status symbol and hence, the greater the demand for them. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price. Also known as a Veblen good. (In economics, Veblen goods are a group of commodities for which people's preference for buying them increases as their price increases, as greater price confers greater status, instead of decreasing according to the law of demand.)
3. Expectations regarding future prices: If the price of a commodity is rising and is expected to rise in future the demand for the commodity will increase.
4. Emergency: At times of war, famine etc. consumers have an abnormal behaviour. If they expect shortage in goods they would buy and hoard goods even at higher prices. In depression they will buy less at even low prices.
5. Quality-price relationship: some people assume that expensive goods are of a higher quality then the low priced goods. In this case more goods are demanded at higher prices.
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Classification of Demand
1. Individual demand:-
A commodity or good demanded by a single person is called individual demand.Individual Demand Schedule
Price Individual Quantity Demanded
1 4
2 3
3 2
4 1
Application: when the price is very high, a low-income buyer may not buy anything, though a high-income buyer may buy something. In such a case, we may distinguish between the demand of an individual buyer and that of the market which is the aggregate of individuals.
2. Market Demand
A demand for a particular product by all customers and added, is called market demand. (Total all individual demand is called as the market demand)Table is the market demand schedule. This schedule, from the angle of simplification, is based on the assumption that there are two buyers, A and B for X commodity. By adding up their individual demand, the market demand schedule has been estimated:
Market demand Schedule
Price of Commodity X (Rs.) Demand of person A Demand of person B Market Demand
Person (A+B+……= market demand)
1 4 5 4 + 5= 9
2 3 4 3 + 4 = 7
3 2 3 2 + 3 = 5
4 1 2 1 + 2 = 3
Factors affecting market demand
Market or aggregate demand is the summation of individual demand curves. In addition to the factors which can affect individual demand there are three factors that can affect market demand (cause the market demand curve to shift):a change in the number of consumers,
a change in the distribution of tastes among consumers,
a change in the distribution of income among consumers with different tastes
3. Derived demand
The increase in demand for one particular good causes increase in the demand for other good is called derived demand. Complementary goods are those goods which are jointly used to satisfy a want. In other words, complementary goods are those which are incomplete without each other.These are things that go together, often used simultaneously. For example, pen and ink, Tennis rackets and tennis balls, cameras and film, etc.
For example, demand for coal leads to derived demand for mining, as coal must be mined for coal to be consumed.
examples:
• Increasing demand for use computers in various fields will cause increase in demand for the operating systems like Microsoft windows products.
• Increase in the demand for automobiles like bikes, cars and large & heavy vehicle will cause increase in the demand for the fuel like petrol and diesel.
• Increase in the demand for the cellular phone will cause increase in the demand for the memory cards for the multimedia purpose.
• Increase in the demand for the education will cause increase in the demand for the text books for the various subjects.
4. Cross Demand:
When the demand of one commodity is related with the price of other commodity is called cross demand. The commodity may be substitute or complementary. Substitute goods are those goods which can be used in case of each other. For example, tea and coffee, Coca-cola and Pepsi. In such case demand and price are positively related. This means if the price of one increased then the demand for other also increases and vise versa.
Cross elasticity demand:
There is a mutual relationship between change in price and quantity demanded of two related goods. Change in the price of one goods can cause change in the demand for the related good. For example, change in the price of tea ordinarily causes change in demand for coffee. Likewise, change in the price of cars causes change in demand for petrol. Mutual relationship between quantity demanded of a good due to change in the price of another goods can be measured by cross elasticity of demand.
Change in the Price of a particular good effect the demand for the other good. For example, 10% increase in the price of fuel, that causes 20% decrease in the demand for new cars which are not giving mileage,This measures the % change in QD for a good after the change in price of another.
According to Liebhafsky,' The cross elasticity of demand is a measure of the responsiveness of purchases of X to change in the price of Y "
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Demand function
A mathematical expression of relationship between quality demanded of the commodity and its determinants is known as the demand function. Explained below.
2) Px = Price of Product
3) Ax = Advertising for Product
4) Dx = Design/style/quality-Cost of product
5) Ox = Outlets, Distribution
6) Ic = Incomes of consumers/customers/clientele
7) Yc = Consumer Expenditures on related goods
8) Tc = Tastes
9) Ec = Expectations of consumers regarding future prices
10) Py = Prices of related goods
11) Ay = Advertising/Promotion of related goods
12) Dy = Design/Styles of related goods
13) Oy = Outlets of related goods
14) G = Government Policy
15) N = Number of People in the Economy
16) W = Weather Conditions
REASONS FOR CHANGE (INCREASE OR DECREASE) IN DEMAND
1. Changes in income
2. Changes in tastes, habits and preference.
3. Changes in fashions and customs.
4. Changes in the distribution of wealth.
5. Changes in population.
6. Advertisement and publicity.
7. Change in the value of money (if money value increases that leads to raise in demand for goods).
DETERMINANTS OF DEMAND
The demand for a commodity by a buyer is generally not a fixed quantity. It is affected by many factors. The factors that influence the demand are called the determinants of demands. The determinants of demand are also known as demand shifters. The following factors affect an individual's demand for a commodity:1. Prices of related commodities
When a change in price of the other commodity leaves the amount demanded of the commodity under consideration unchanged, we say that the two commodities are unrelated, otherwise these are related. The related commodities are of two types’ substitutes and complements. When the price of one commodity and the quantity demanded of the other commodity move in the same direction (i.e., both increase together and decrease together).
2. Income of the individual
The amount demanded of a commodity also depends upon the income of an individual. With an increase in income, increased amount of most of the commodities in his consumption bundle, though the extent of the increase may differ between commodities.
3. Tastes and preferences
It is quite well that the change in tastes and preferences of consumers in favor of a commodity results in smaller demand for the commodity. Modern business firms, which sell product with different brand names, rely a great deal on influencing tastes and preferences of households in favor of their products (with the help of advertisements, etc.) in order to bring about increase in demand of their products.
4. 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 and vice-versa.
5. Wealth
The amount demanded of a 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 majority is poor, the demand for luxuries is generally less.
6. Expectations regarding the future
If consumers expect changes in price of a 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.
7. 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.
8. 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.
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Price Elasticity of Demand
Elasticity = responsiveness of consumer due to the price change of any commodityDefinitions
• According to Alfred Marshall: "Elasticity of demand may be defined as the percentage change in quantity demanded to the percentage change in price."• According to A.K. Cairncross : "The elasticity of demand for a commodity is the rate at which quantity bought changes as the price changes."
• According to J.M. Keynes : "The elasticity of demand is a measure of the relative change in quantity to a relative change in price."
• According to Kenneth Boulding : "Elasticity of demand measures the responsiveness of demand to changes in price."
The law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not tell us how much more.
The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand
If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). The opposite also applies; a product is inelastic if a large change in price is accompanied by a small amount of change in demand.
Business know that they face demand curves, but rarely do they know what these curves look like. Yet sometimes a business needs to have a good idea of what part of a demand curve looks like if it is to make good decisions. If Rick's Pizza raises its prices by ten percent, what will happen to its revenues? The answer depends on how consumers will respond. Will they cut back purchases a little or a lot? This question of how responsive consumers are to price changes involves the economic concept of elasticity.
DEGREES OF PRICE ELASTICITY
Different commodities have different price elasticities. Some commodities have more elastic demand while others have relative elastic demand. 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.According to Dr. Marshall : "The elasticity or responsiveness of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price."
However, some particular values of elasticity of demand have been explained as under ;
Types of Price Elasticity of Demand:-
1. Perfectly elastic demand.2. Perfectly inelastic demand.
3. Relatively elastic demand.
4. Relatively inelastic demand.
5. Unitary inelastic demand.
MEASUREMENT OF PRICE ELASTICITY OF DEMAND
There are five methods to measure the price elasticity of demand.1. Total Expenditure Method.
2. Proportionate Method.
3. Point Elasticity of Demand.
4. Arc Elasticity of Demand.
5. Revenue Method.
Total Expenditure Method
Dr. 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.Proportionate Method
This method is also associated with the name of Dr. Marshall. According to this method, "price elasticity of demand is the ratio of percentage change in the amount demanded to the percentage change in price of the commodity." It is also known as the Percentage Method, Flux Method, Ratio Method, and Arithmetic Method.Ed = Proportionate change in Quantity Demanded
proportionate change in price
Arc Elasticity of Demand
• According to Prof. Baumol: "Arc elasticity is a measure of the average responsiveness to price change exhibited by a demand curve over some finite stretch of the curve".• According to Leftwitch : "When elasticity is computed between two separate points on a demand curve, the concept is called Are elasticity."
Revenue Method
Mrs.; Joan Robinson has given this method. She says that elasticity of demand can be measured with the help of average revenue and marginal revenue. Therefore, a sale proceeds that a firm obtains by selling its products is called its revenue. However, when total revenue is divided by the number of units sold, we get average revenue. On the contrary, when addition is made to the total revenue by the sale of one more unit of thecommodity is called marginal revenue.
Formula:
Ed = A
A-M
where Ed represents elasticity of demand, A = average revenue and M = marginal revenue.
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Perfectly Elastic Demand
When the percentage change in quantity demanded is infinite even if the percentage change in price is zero, the demand is said to be perfectly elastic. Endless demand at given price.
Eg:- we can take example as bikes market. In today’s Indian bike market The demand for bikes is increasing day by day without any effect of price change.
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Perfectly Inelastic Demand
When the percentage change in quantity demanded is zero no matter how price is changed, the demand is said to be perfectly inelasticObserve the graph, price of the goods changing or raises from P1 to P2 and P3 but there is no change in demand at Q.
Or
An example of perfectly inelastic demand would be a lifesaving drug that people will pay any price to obtain. Even if the price of the drug were to increase dramatically, the quantity demanded would remain the same.
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Relatively Elastic Demand
When the percentage change in quantity demanded is greater than the percentage change in price, the demand is said to be elastic.Or
In other words, relatively small changes in price cause relatively large changes in quantity.
Observe the graph, price of the goods increased from P1 to P2 and eventually the demand for the goods decreases from Q1 to Q2. But the proportionate change in price is less than the proportionate change in demand
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Relatively Inelastic Demand
More change in the price of the goods but less change in demand for the goods.Observe the graph, price of the goods increased from P1 to P2 and eventually the demand for the goods decreases from Q1 to Q2. The proportionate change in price is more than the proportionate change in demand.
Facts
WASHINGTON: US motorists drove 1.2 per cent fewer miles in 2011, the lowest level measured since 2003, while concerns about the high cost of gasoline are rising, the government announced Tuesday.According to Federal Highway Administration figures, last year US drivers drove 57.5 billion km less than they did in 2010.
Since 2008, the distance covered by US drivers, which is calculated by taking into account traffic volume on the highways, has fallen due to the economic crisis and the high price of gasoline.
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Unitary Elastic Demand
The proportion of change in demand is equal to proportion of change in price.
Example: The price of digital cameras increases by 10%, the quantity of digital cameras demanded decreases by 10%. The price elasticity of demand is (unitary elastic demand).
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Problem on price elasticity of demand
The most common elasticity measurement is that of price elasticity of demand. It measures how much consumers respond in their buying decisions to a change in price. The basic formula used to determine price elasticity is
Problems:
If price increases by 10% and consumers respond by decreasing purchases by 20%, the equation computes the elasticity coefficient as -2. The result is negative because an increase in price (a positive number) leads to a decrease in purchases (a negative number). Because the law of demand says it will always be negative, many economists ignore the negative sign, as we will in the following discussion.
If the price of certain goods falls from 20/- to 10/-, that causes increase in the demand from43 units to 75 units. Calculate the price elasticity of demand.
Solution:
I f the values are given separately and not in the percentages, we should apply the following formula model 1
∆Q =change in the demand.(difference in demand) =43- 75= 32
• ∆P=change in the price.(difference in the price) =20-10 = 10
• P=initial price. (first price/ old price) =20
• Q=initial demand. (first demand/ old demand)= 43
We should compare the above value with the price which is 1%. And its general always.
Hence 1% of the price change causes the 1.48% change in demand
Easy way to remember:
Elastic means that a change in price leads to a bigger Change in quantity demanded. Think of a rubber band, or elastic, that stretches to a bigger size than its original size. Inelastic means that a change in price leads to a smaller Change in quantity demanded. Unlike a rubber band, it does not stretch bigger.
Unit Elastic means that a change in price leads to a one-for-One change in quantity demanded. For example, a doubling of the price leads to a halving of the quantity demanded. Remember by unit, meaning single or one.
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Demand Forecasting
The activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.— according to Cundiff and Still, "Demand Forecasting is an estimate of Demand during a specified period. Which estimate is tied to a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces."
— In the words of Prof. Philip Kotler. The company (sales) forecast is the expected level of company sales based on a chosen marketing plan and assumed marketing environment"
— According to Evan J. Douglas, "Demand forecasting may be defined as the process of finding values for demand in future time periods."
Demand Forecasting
The cost should be controlled by producing correct level of goods in the firm and also according to the demand for those goods in the market. For the estimation of demand, demand forecasting is to be done by the firm.• Forecasting = estimation of future situations.
• Forecasting reduces or minimizes the uncertainty.
• By forecasting effective decisions can be taken for tomorrow.
• Demand forecasting is based on the determinants of the demand.
• Demand for goods increases and gives sales.
• Sales are the primary source of the income for a firm.
STEPS INVOLVED IN DEMAND FORECASTING
1. Identification of business objectives:In the first stage we should know what is the aim of forecasting? What we get or know from the forecasting? Estimation of factors like quantity and composition of demand for goods, price to be quoted, sales planning and inventory control etc., are done in the first stage.
2. Determining the nature of goods under consideration:
Different category of goods has their own distinctive demand. Example capital goods, consumer durables and non-durables goods in which category our goods fall we should estimate.
3. Selecting a proper method of forecasting:
There are different methods for demand forecasting. Which is best suited method that we should select for doing demand forecasting?
4. Interpretation of results:
The forecasting which is done by the managerial economist should be interpreted in detailed manner. That means it should be easy to understand by the top management.
Demand Forecasting Techniques
To invest money and others factors in business; we require a reasonable accurate forecast of demand. Starting with qualitative methods like survey of collective opinions, buyers' intention, Delphi approach and its variant, a number of quantitative methods are used for computing demand forecasts as detailed below:Opinion polling method
a) Collective opinion Survey:Sales personnel are closest to the customers and have an intimate feel of the market. Thus they are most suited to assess consumer’s reaction to company's products. Here each salesperson makes an estimate of the expected sales in their area, territory, state and/or region, These estimates are collated, reviewed and revised. Taking in to account product design, features and price is decided and made. Thus, "collective opinion survey forms the basis of market Analysis and demand forecasting.
Although this method is simple, direct, first hand and most acceptable, it suffers from following weaknesses
1. demand estimates by individual salespersons to obtain total demand of the country may be risky as each person has knowledge about a small portion of market only
2. Salesperson may not prepare the demand estimation with the seriousness and care
3. limited experience in their employment, salesperson may not have the required knowledge and experience
b) Survey of Customers Intention
Another method of demand forecasting is to carry out a survey of what consumers prefer and intend to buy. If the product is sold to a few large industrial buyers, survey would involve interviewing them.
If it is a consumer durable product, a sample survey is carried out about what they are planning or intending to buy. It is not east to query all consumers through direct contact or through printed questionnaire by mail. These surveys serve useful purpose in establishing relationships between
a) demand and price
b) demand and income of consumers
c) demand and expenditure on advertisement etc.
This method is preferred when bulk of the sales made to institutions and industrial buyers and only a few of them have to be contacted. Disadvantages are. Survey method is not useful for households - interviewing them is not only difficult but also expensive. They are not able to give precise idea about their intentions particularly when alternative products are available in the market.
c) Delphi Method
The Delphi technique was developed at RAND Corporation in the 1950s. Delphi method is a group (members) process and aims at achieving a `single opinion of the members on the subject. Herein experts in the field of marketing research and demand forecasting are engaged in
• analyzing economic conditions
• carrying out sample surveys of market
• conducting opinion polls
Based on the above, demand forecast is worked out in following steps:
1. Administrator sends out a set of questions in writing to all the experts on the panel, who are requested to write back a brief predication.
2. Written predictions of experts are collected and combined, edited and summarized together by the administrator.
3. Based on the summary, administrator designs a new set of questions and gives them to the same experts who answer back again in writing.
4. Administrator repeats the process of collecting, combining, editing and summarizing the responses.
5. Steps 3 and 4 are repeated by the administrator to experts with diverse backgrounds until they come to one single opinion.
If there is divergence of opinions and hence conclusions, administrator has to sort it out through mutual discussions. Administrator has to have the necessary experience and background as he plays a key role in designing structured 'questionnaires and synthesizing the data.
d) Nominal Group Technique
This technique was originally developed by Delbecq and VandeVen. This is a further modification of Delphi method of forecasting. A panel of 3-4 groups of up to 10 experts are formed and allowed to interact, discuss 'and rank all the suggestions in descending (highest to lowest) order as per the following procedure:
Experts sit around a table in full view of one another and are asked to speak to each other. An administrator hand over copies of questionnaire needing a forecast and each expert is expected to write down a list of ideas about the questions. After everyone has written down their ideas, administrator asks each expert to share one idea, out of own list. The idea shared is written on the `flip chart' which everyone can see. Experts give ideas in rotation until all of them are written on the `flip chart'. No discussion takes place in this phase and usually 15 to 25 ideas emerge from this format.
In the next phase, experts discuss ideas presented by them. Administrator ensures that all ideas have been adequately discussed. During discussions similar ideas are combined. This reduces the number of ideas. After completing group discussions, experts are asked to give in writing ranks to ideas according to their perception of priority
Statistical methods
Trend projection methodThis technique assumes that whatever past years demand pattern will be continued in the future also. Basing on the historical data that means previous year’s data is used to predict the demand for the future. In this trend projection method, previous year’s data is presented on the graph and future demand is estimated.
Past data is used to establish a functional relationship between two variables. For Example, demand for consumer goods has a relationship with income of Individuals and family; demand for tractors is linked to the agriculture income and demand for cement, bricks etc. are dependent upon value of construction contracts at any time. Forecasters collect data and build relationship through co-relation and regression analysis of variables.
Deficit monsoon hits tractor sales as farm operations see a decline
Our annual sale is pegged around 40,000 units. But, we are unlikely to touch sales in excess of 20,000 units, says official of automotive major Mahindra & MahindraDeficit rain during monsoon this year has brought down paddy acreage during the kharif season. But the shortfall in rains has hit one segment of the industry very hard.
The sale of tractors, used extensively in the agriculture operations, has shown a steep dip during the current year. Automotive major Mahindra & Mahindra has witnessed a significant de-growth in the overall tractor sales in the State that, in turn, had its echo on the company’s overall performance in the segment.
Mahindra & Mahindra president automotive and farm equipment sectors Pawan Goenka said the company enjoys over 50 per cent market share in the tractor sales in Andhra Pradesh where the total annual sale is pegged around 40,000 units. “But, we are unlikely to touch sales in excess of 20,000 units as was witnessed in the previous fiscal,” he told The Hindu .
The acreage is down by about 3 lakh hectares, compared to 26 lakh hectares normal, in the State and farmers have switched over to other crops like cotton, pulses and maize on account of shortfall in the kharif plantation during the early phase of monsoon. The State, according to figures released by the Centre, faced the worst water crunch, with a 52 per cent deficiency in the reservoir levels.
Tractors, according to Mahindra and Mahindra, are extensively used in the canal irrigation where they serve as multi-utility vehicles. Thanks to the steep drop in release of water to canal irrigated areas, the usage had come down significantly.
Mahindra and Mahindra, accordingly, forecast the tractor growth rate during the year to half to around 6 per cent from the earlier projected 12 per cent. “Tractor growth rate is expected to be around 6 per cent during the year with first quarter showing some de-growth and second quarter expected to be even,” he said. The company, however, sounded optimistic in claiming that sales are expected to pick up by November when the Rabi operations start. “The second half is expected to ensure growth of around 6 per cent,” Mr. Goenka said. The company has registered sale of 13,000 units in the period between April and August, but was unlikely to touch the last year’s figure in excess of 20,000 units.
Agriculture Department secretary V. Nagi Reddy admitted that the monsoon had not been upto the expected levels and this was sure to bring down the crop production. Though the State had witnessed normal rainfall, the deficit in water availability could be attributed to the shortage in the catchment areas in Karnataka and Maharashtra that reduced inflows into reservoirs. According to him, there was over 10 per cent drop in the total cultivated area because of the deficit rains. “Fall in production is, however, unlikely to be proportionate with the dip in the total acreage as the shortfall is likely to be made up by higher production of other crops,” Mr. Nagi Reddy said.
Source: the Hindu
Econometric Models
Econometric models are more complex and comprehensive as this model uses mathematical and statistical tools to forecast demand. This model takes various factors which affect the demand. For example, demand for passenger transport is not only dependent upon the population of the city, geographical area, industrial units, their location etc.It is not easy to locate one single economic indicator for determining the demand forecast of a product. Invariably, a multi-factor situation applies Econometric Models, although complex, are being increasingly used for market analysis and demand forecasts.
Simple Average Method
Among the quantitative techniques for demand analysis, simple Average Method is the first one that comes to one's mind. Herein, we take simple average of all past periods - simple monthly average of all consumption figures collected every month for the last twelve months or simple quarterly average of consumption figures collected for several quarters in the immediate past. Thus,Sum of Demands of all periods =
