In the example above, there has been an increase in demand which has caused an increase in equilibrium quantity. This results in the increase demand for a product. An organization, while analysing the effect of one particular determinant on demand, needs to assume other determinants to be constant. Since supply and demand can be curves as well as simple lines the slope, and hence the elasticity, can be different at different points on the line. For example, the demand for apparel changes with change in fashion and tastes and preferences of consumers. Some people buy new models of goods because they have genuine need for them or have excess purchasing power. Different age people like 1 Children 2 Adult people 3 Old people Composition of population Slide 18: Demonstration effect plays an important role in affecting the demand for a product.
Age distribution of the population determines what kind of commodities will be demanded. In a perfect economy, any market should be able to move to the equilibrium position instantly without travelling along the curve. Time and Elasticity: The element of time also influences the elasticity of demand for a commodity. But if your income doubles, you won't always buy twice as much of a particular good or service. Deciding the production capacity: Implies that with the help of demand forecasting, an organization can determine the size of the plant required for production. Competition Level: Influence the process of demand forecasting. Deciding whether to forecast the market share of the organization 2.
Demand forecasting is a systematic process that involves anticipating the demand for the product and services of an organization in future under a set of uncontrollable and competitive forces. If the price of such a commodity goes up, the people will shift to its close substitutes and as a result the demand for that commodity will greatly decline. In such a case, it is difficult to forecast demand for existing products in future. There are a number of factors that affect demand forecasting. How would the demand for a good change if income increased or decreased? The elasticity of demand of any commodity is determined by a number of factors which are explained below: Nature of commodity The elasticity demand for any commodity depends upon the nature of the commodity, i.
Essential or Basic Consumer Goods: Refer to goods that are consumed by all the people in the society. But this does not apply in the case of necessities. If there is a rapid change in technology, the existing technology or products may become obsolete. The Number of Uses of a Commodity 4. If the number of consumers increases in the market, the consumption capacity of consumers would also increase. Business conditions The level of demand for different commodities also depends upon the business conditions in the country.
Consumers will have higher paying capacity and greater willingness to pay higher for quality. During a particular period of time. Therefore, given the time, they can substitute the material whose price has risen. For example, purchase of cars and other durables increases before budget is announced if consumers fear that prices may rise after budget. Since the changes are in percentages, changing the unit of measurement or the currency will not affect the elasticity.
Clothing, household furniture and automobiles are some of the important examples of this category of goods. Low-cost and increased the number of people who could afford a house. Income of the consumer The elasticity of demand also depends on income of the consumer. Habits People who are habituated to the consumption of a particular commodity like coffee, tea, cigarette of a particular brand, the demand for it will be inelastic. For instance, if the price of fuel oil rises, it may be difficult to substitute fuel oil by other types of fuels such as coal or cooking gas. The demand curve can move inward or outward.
Two assumptions are necessary for the validity of the standard model. But the quantity demanded didn't grow. If the quantity demanded or supplied changes a lot when the price changes a little, it is said to be elastic. Proportion of income spent Goods on which a consumer spends a very small proportion of his income, e. Or, when people expect pay revisions, they wait for major purchases till pay is revised.
Price of Goods: Acts as a major factor that influences the demand forecasting process. Effect of Advertisements Refers to one of the important factors of determining the demand for a product. Generally, organizations opt for both the forecasts together because over-generalization restricts accurate estimation of demand and too specific information provides an inadequate basis for planning and execution. Other things being equal, demand for those goods increases for which consumers develop taste and preferences. For example, demand for constructing a house can be postponed. A change in any of these factors leads to change in the tastes and preferences of consumers.
In other words, complementary goods are consumed together. The Availability of Substitutes: Of all the factors determining price elasticity of demand the availability of the number and kinds of substitutes for a commodity is the most important factor. Inferior Goods Explanation Definition: An inferior good is a good that has the property that when a person's income rises the demand for the inferior good falls. This is why the slopes downwards. If it is positive, this increase in demand would be represented on a graph by a positive shift in the demand curve.