ELASTICITY OF DEMAND

DEMAND FORECASTING

ELASTICITY . . .
is a measure of how much buyers and sellers respond to changes in market conditions

allows us to analyze supply and demand with greater precision.

PRICE ELASTICITY OF DEMAND

Price

elasticity of demand is the percentage change in quantity demanded given a percent change in the price. is a measure of how much the quantity demanded of a good responds to a change in the price of that good.

It

COMPUTING THE PRICE ELASTICITY OF DEMAND

The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.
Price Elasticity = Of Demand
Percentage Change in Qd Percentage Change in Price

COMPUTING THE PRICE ELASTICITY OF DEMAND

Price elasticity of demand Percentage change in quatity demanded Percentage change in price

Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:

(10 8 ) 100 20 percent 10 2 ( 2.20 2.00 ) 100 10 percent 2.00

RANGES OF ELASTICITY

Inelastic Demand
Percentage change in price is greater than percentage change in quantity demand. Price elasticity of demand is less than one.

Elastic Demand
Percentage change in quantity demand is greater than percentage change in price. Price elasticity of demand is greater than one.

DETERMINANTS OF PRICE ELASTICITY OF DEMAND

Necessities versus Luxuries Availability of Close Substitutes Definition of the Market Time Horizon

DEFINITION

Is a process by which an individual or a firm predicts future demand for product or products Accurate forecasting-enables these firms to produce required quantities at the right time and arrange well in advance for the various factors of production Better planning and allocation of national resources.

HOW?

THE FORECAST

Step 6 Monitor the forecast Step 5 Prepare the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique Step 2 Establish a time horizon Step 1 Determine purpose of forecast

PURPOSES OF FORECASTING

Purposes of short-term forecasting

Purposes of long term forecasting

SHORT-TERM FORECASTING

Production scheduling Reducing cost of purchasing raw materials Determining appropriate price policy

Setting sales targets and establishing controls and incentives

Evolving a suitable advertising and promotion programme

Forecasting short-term financial

LONG-TERM FORECASTING

Planning of a new unit or expansion of an existing unit

Planning of long-term financial requirements Planning of man-power requirements

CRITERIA FOR A GOOD FORECASTING

Accuracy

Plausibility
Simplicity Economy Availability Durability

METHODS Survey method Direct interview method Collective opinion Delphi method Trend projection method Economic indicators Controlled expriments Regression method

DELPHI METHOD

In this method an attempt is made to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until some sort of unanimity is arrived among all experts. These meetings help to narrow down different views of experts.

SURVEY METHODS

conducted by sales agencies

a direct method of addressing people

helps in gaining first hand information

INTERVIEW METHOD

interviewing the consumers directly to get information about their purchase plans at a number of possible prices over a particular period of time. information collected through questionnaire The data will have to be classified and tabulated for systematic presentation and analysis.

EXPERTS OPINION

business firm prefers to depend on survey of experts

Experts are those who have the feel about the product
opinion poll is conducted among experts Sometimes this method is also called the hunch method

COLLECTIVE OPINIONS METHOD

OPINIONS FROM MARKETING & SALES SPECIALISTS ARE COMPILED. 2 TYPES OF TARGETS ESTIMATED AMBITIOUS TARGETS. CONSERVATIVE TARGETS. COMBINES EXPERTISE OF HIGHER LEVEL MANAGEMENT & SALES EXECUTIVES.

REGRESSION METHOD

involves a study of the dependence of one variable on the other variables. In demand forecasting demand is estimated with the help of a regression equation where in demand is the dependent variable and price, advertising expenditure, consumers income, etc is the independent variable.

BENEFITS OF EFFECTIVE DEMAND FORECASTING

HIGHER REVENUES SALES MAXIMIZATION REDUCED INVESTMENTS FOR SAFETY STOCKS

IMPROVED PRODUCTION PLANNING

EARLY RECOGNITION OF MARKET TRENDS BETTER MARKET POSITIONING

IMPROVED CUSTOMER SERVICE LEVELS