Course Code and Name: 144E1C &Business Economics

UNIT II-DEMAND AND SUPPLY

Assignment and Test 2.1

SET-A

Part A (2 mark Questions)

What is demand?

1 Demand is the quantity of a product or service that consumers are willing and able to
purchase at a given price level, during a specific period of time.

What is Law of Demand?

The Law of Demand states that, ceteris paribus (all other things being equal), the
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quantity of a good or service demanded increases as its price decreases, and decreases as
its price increases.
What is individual demand?
3 The quantity of a good or service a single consumer is willing and able to purchase at a
given price level.
What is derived demand?
4 Demand for a good or service that is derived from the demand for another good or
service (e.g., demand for tires is derived from demand for cars).
What is Consumer equilibrium?
5 A state where a consumer's satisfaction is maximized, given their income and prices of
goods and services.

Part B (5 mark Questions)

1 What are the determinants of demand?
The determinants of demand are factors that influence the quantity of a good or service
that consumers are willing and able to purchase at a given price level. These factors
include:

1. Price of the good or service: The higher the price, the lower the demand.
2. Income: Changes in consumer income affect demand (normal goods demand
increases with income).
3. Prices of related goods: Substitutes (e.g., coffee and tea) and complements (e.g.,
bread and butter).
4. Consumer preferences: Changes in tastes, fashion, and preferences.
5. Population and demographics: Changes in population size, age, and demographics.
6. Expectations: Consumer expectations about future prices, income, and availability.
7. Advertising and marketing: Influences consumer awareness and preferences.
8. Seasonality: Demand varies by season (e.g., winter clothing).
9. Government policies and taxation: Taxes, subsidies, and regulations can impact
demand.
10. Economic conditions: Economic growth, recession, and interest rates influence
demand.

These factors can cause a shift in the demand curve, changing the quantity demanded
at a given price. Understanding these determinants helps businesses and policymakers
make informed decisions.
What are the different types of demand?
There are several types of demand, including:

1. Individual Demand: The demand for a good or service by a single consumer.

2. Market Demand: The total demand for a good or service by all consumers in a
market.

3. Joint Demand: The demand for two or more goods or services that are used together
(e.g., bread and butter).

4. Composite Demand: The demand for a good or service that has multiple uses (e.g.,
milk for drinking and cooking).

5. Derived Demand: The demand for a good or service that is derived from the demand
for another good or service (e.g., demand for tires is derived from demand for cars).

6. Direct Demand: The demand for a good or service for immediate consumption or
use.
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7. Indirect Demand: The demand for a good or service for future consumption or use.

8. Price Demand: The quantity of a good or service demanded at a specific price.

9. Income Demand: The demand for a good or service that changes with a change in
income.

10. Cross Demand: The demand for one good or service in relation to the price of
another good or service.

11. Short-Run Demand: The demand for a good or service in the short term (e.g., daily
or weekly).

12. Long-Run Demand: The demand for a good or service in the long term (e.g.,
monthly or yearly).

These types of demand help businesses and economists understand consumer behavior
and make informed decisions.
Part C (10 mark Questions)
What are the determinants of elasticity of demand?

The determinants of elasticity of demand are factors that influence how responsive the
quantity demanded of a good or service is to changes in its price or other influential
factors. The main determinants are:

1. Availability of Substitutes: More substitutes → Higher elasticity

2. Proportion of Income Spent: Higher proportion → Higher elasticity
3. Necessity vs. Luxury: Luxuries → Higher elasticity, Necessities → Lower elasticity
4. Time Period: Longer time period → Higher elasticity
5. Consumer Awareness: Higher awareness → Higher elasticity
6. Price Level: Higher price → Higher elasticity
7. Income Level: Higher income → Higher elasticity
8. Consumer Taste and Preferences: Changes in taste → Higher elasticity
9. Advertising and Marketing: Effective advertising → Lower elasticity
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10. Number of Buyers and Sellers: More buyers and sellers → Higher elasticity

Additionally, other factors like:

- Brand loyalty
- Quality of the product
- Availability of credit
- Government policies and regulations
- Demographic factors (age, gender, etc.)

can also influence elasticity of demand.

These determinants help understand why elasticity of demand varies across different
goods and services, and how businesses and policymakers can adjust their strategies
accordingly.

SET-B

Part A (2 mark Questions)

What is demand curve?
1 A graphical representation showing the relationship between price and quantity
demanded of a good or service.
Define cross and price demand
2 The demand for one good or service in relation to the price of another good or service
(e.g., demand for butter decreases when margarine prices fall).
What is income Demand?
3 The demand for a good or service that changes with a change in income (normal goods
demand increases with income, while inferior goods demand decreases).
4 What is inferior and giffen goods
Inferior Goods: Goods or services whose demand decreases when income increases (e.g.,
bus rides).

Giffen Goods: Goods or services whose demand increases when price increases (rare,
e.g., luxury items).
What is Market demand?
5 The total demand for a good or service by all consumers in a market at a given price
level.

Part B (5 mark Questions)

Explain the different types of elasticity of demand.
Elasticity of demand measures how responsive the quantity demanded of a good or
service is to changes in its price or other influential factors. There are several types of
elasticity of demand:

1. Price Elasticity of Demand: Measures the responsiveness of quantity demanded to

changes in price.

1 2. Income Elasticity of Demand: Measures the responsiveness of quantity demanded to

changes in consumer income.

3. Cross-Price Elasticity of Demand: Measures the responsiveness of quantity

demanded of one good to changes in the price of another good.

4. Advertising Elasticity of Demand: Measures the responsiveness of quantity

demanded to changes in advertising expenditure.
2 Discuss the law of demand and Exception of law of demand
The Law of Demand states that, ceteris paribus (all other things being equal), the
quantity demanded of a good or service decreases as its price increases, and vice versa.
This means that:

1. As price increases, quantity demanded decreases.

2. As price decreases, quantity demanded increases.

This is because higher prices make the good or service less attractive to consumers,
who may choose to buy less or seek alternatives. Conversely, lower prices make the
good or service more attractive, leading to increased demand.

Dx= f [Px]
Thedemandfunctionexplainsthefunctionalrelationshipbetweendemandforacommodityanddeterminantsof
the demands.This can be explained by the following equation:
Dn=f[Pn,Ps,Pc,Y,T ]
Where, Dn = Demand for commodity ‘n’
f = functional relationship
Pn = Price of commodity ‘n’
Ps=Priceofthesubstitute
Pc = Price of the complement
Y= Income of the consumer T= Taste and preference of the consumer

Key assumptions:

1. Ceteris paribus (all other factors remain constant)

2. Rational consumers (make decisions based on self-interest)
3. Substitution effect (consumers can substitute one good for another)

The Law of Demand is often depicted graphically as a downward-sloping demand

curve, where:

- Price (P) is on the vertical axis (y-axis)

- Quantity Demanded (Q) is on the horizontal axis (x-axis)

The Law of Demand has important implications for businesses, policymakers, and
consumers, as it helps predict how changes in price will affect the quantity demanded
of a good or service

Exception of law of Demand

The law of demand states that, ceteris paribus (all other things being equal), the
quantity demanded of a good or service decreases as its price increases. However,
there are some exceptions to this law, including:

1. Giffen goods: These are goods where demand increases as price increases, often due
to social status or prestige.
2. Veblen goods: These are goods where demand increases as price increases, due to
the perceived value or luxury associated with them.
3. Essential goods: Demand for essential goods like medicine, food, or water may not
decrease significantly with price increases, as they are necessary for survival.
4. Addictive goods: Demand for addictive goods like cigarettes or drugs may not
decrease significantly with price increases, due to the addictive nature of the product.
5. Goods with limited substitutes: If there are no close substitutes for a good, demand
may not decrease significantly with price increases.
6. Income effect: If a price increase leads to a significant decrease in income, demand
may not decrease as expected.
7. Expectations: If consumers expect prices to rise further, they may buy more now,
even at a higher price.

These exceptions highlight that the law of demand is not always absolute and can be
influenced by various factors..

Part C (10 mark Questions)

1 Explain the measurement of elasticity of demand.

The Percentage Method

It is also known as ratio method, when we measure the ratio as:

2. Total Outlay Method

Marshall suggested that the simplest way to decide whether demand is
elastic or inelastic is to examine the change in total outlay of the
consumer or total revenue of the firm.
Total Revenue = ( Price x Quantity Sold)
TR = (P x Q)
Where there is inverse relation between Price and Total Outlay, demand
is elastic. Direct relation means inelastic. Elasticity is unity when Total
Outlay is constant.

3. Point or Geometrical Elasticity

When the demand curve is a straight line, it is said to be linear.
Graphically, the point elasticity of a linear demand curve is shown by the
ratio of the segments of the line to the right and to the left of the
particular point.
Where ‘ep’ stands for point elasticity, ‘L’ stands for the lower segment
and ‘U’ for the upper segment

Assignment and Test 2.2

SET-A

Part A (2 mark Questions)

Write Short notes on cross elasticity of demand.
1 Cross Elasticity of Demand: Measures the responsiveness of demand for one good to
changes in the price of another good.
Define elasticity
2 Elasticity: Measures the degree of responsiveness of one variable to changes in another
variable.
What is demand forecasting?
3 Demand Forecasting: Predicting future demand for a good or service based on historical
data and market trends.
Define law of supply
4 Law of Supply: States that as the price of a good increases, the quantity supplied also
increases, ceteris paribus.
Define the price elasticity of demand and income elasticity of demand.
Price Elasticity of Demand: Measures the responsiveness of quantity demanded to
changes in price.
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Income Elasticity of Demand: Measures the responsiveness of quantity demanded to
changes in consumer income.

Part B (5 mark Questions)

How to forecast demand for new products?

Forecasting demand for new products involves a combination of qualitative and

quantitative methods. Here are some steps to help you forecast demand:

1. Market Research: Gather data on target audience, preferences, and needs.

2. Competitor Analysis: Analyze sales data and market share of similar products.

3. Historical Data: Use historical sales data of similar products or company's previous
1 product launches.

4. Trend Analysis: Identify market trends, seasonality, and economic indicators.

5. Surveys and Focus Groups: Gather feedback from potential customers.

6. Test Marketing: Launch a small-scale pilot to gauge demand.

7. Regression Analysis: Use statistical models to analyze relationships between variables.

8. Time Series Analysis: Examine historical data to identify patterns and trends.
2 What are the features of a good demand forecasting method?
A good demand forecasting method should have the following features:

1. Accuracy: Provide reliable and accurate predictions.

2. Reliability: Consistently produce trustworthy forecasts.

3. Sensitivity: Account for changes in market conditions and variables.

4. Flexibility: Adapt to new data and changing circumstances.

5. Simplicity: Be easy to understand and implement.

6. Transparency: Provide clear explanations for forecasts.

7. Timeliness: Generate forecasts in a timely manner.

8. Cost-effectiveness: Balance forecasting costs with benefits.

9. Data quality: Handle diverse data sources and formats.

Part C (10 mark Questions)

1 What are the different methods/techniques of demand forecasting?
Here's a explanation of the different demand forecasting clear methods:

Qualitative Methods

- Use expert opinions, customer surveys, and market research to forecast demand.
- No mathematical models are used.
- Examples: Expert Opinion, Market Research, Customer Surveys.

Quantitative Methods

- Use mathematical models to forecast demand.

- Examples: Time Series Analysis (e.g., Moving Average, Exponential Smoothing),
Regression Analysis, Econometric Models.

Time Series Methods

- Analyze historical data to identify patterns and trends.

- Examples: Naive Approach, Moving Average, Exponential Smoothing, Seasonal
Decomposition.

Causal Methods

- Identify relationships between variables to forecast demand.

- Examples: Regression Analysis, Econometric Models.

Machine Learning Methods

- Use algorithms to analyze data and forecast demand.
- Examples: Artificial Neural Networks, Decision Trees, Random Forest, Support Vector
Machines.

Hybrid Methods

- Combine multiple methods to improve forecasting accuracy.

Judgmental Forecasting Methods

- Use managerial judgment and sales force input to forecast demand.

Simulation Methods

- Use simulations to model real-world scenarios and forecast demand.

These categories help organize the different demand forecasting methods, making it
easier to choose the best approach for your specific need

Assignment and Test 2.2

SET-B

Part A (2 mark Questions)

1 Define elasticity of demand
Elasticity of Demand: Measures the responsiveness of quantity demanded to changes in
price or other influential factors.Elasticity of Demand: Measures the responsiveness of
quantity demanded to changes in price or other influential factors.
Define supply
2 Supply: Refers to the amount of a good or service producers are willing and able to
produce and sell at a given price level.
What is consumer Behavior?
3 Consumer Behavior: Studies how individuals make decisions about what goods and
services to buy, and how much to pay for them.
What is aggregate demand and aggregate supply?
Aggregate Demand and Aggregate Supply: Aggregate demand refers to the total demand
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for all goods and services in an economy, while aggregate supply refers to the total
supply of all goods and services.
What are capital goods and consumer goods?
Capital Goods:

- Used for production, manufacturing, or generating income

- Durable and long-lasting
- Examples:
- Machinery and equipment
- Buildings and factories
- Vehicles and tools
5 - Technology and software
Consumer Goods:

- Used for personal consumption and satisfaction

- May be durable or non-durable
- Examples:
- Food and beverages
- Clothing and accessories
- Electronics and appliances
- Furniture and home decor

Part B (5 mark Questions)

1 What are the determinants of law of supply?
The determinants of the Law of Supply are factors that influence the quantity of a good
or service that suppliers are willing and able to produce and sell at a given price level.
These determinants include:

1. Production Costs: Changes in production costs, such as labor, materials, and

technology.

2. Price of the Good: The price of the good or service itself.

3. Prices of Related Goods: Prices of complementary or substitute goods.

4. Technology: Improvements in technology can increase efficiency and reduce costs.

5. Expectations: Suppliers' expectations about future price changes or market conditions.

6. Number of Suppliers: An increase in the number of suppliers can increase market

supply.

7. Resource Availability: Availability of necessary resources, such as labor, materials,

and equipment.

8. Government Policies and Regulations: Taxes, subsidies, and regulations can impact
supply.

9. Weather and Natural Disasters: Weather conditions and natural disasters can impact
supply, especially for agricultural products.

10. Institutional Factors: Social, cultural, and institutional factors can influence supply
decisions.

These determinants can cause a shift in the supply curve, changing the quantity supplied
at a given price level. Understanding these factors helps businesses and policymakers
analyze and predict changes in supply.
2 Describe the different elasticity of demand?
There are five types of elasticity of demand:

1. Perfectly Elastic Demand: Elasticity = ∞ (infinity)

- A small price change leads to an infinite change in quantity demanded.
- Demand curve is horizontal.

2. Perfectly Inelastic Demand: Elasticity = 0 (zero)

- A price change has no effect on quantity demanded.
- Demand curve is vertical.

3. Unitary Elastic Demand: Elasticity = 1

- A price change leads to a proportionate change in quantity demanded.
- Demand curve is a rectangular hyperbola.

4. Elastic Demand: Elasticity > 1

- A small price change leads to a relatively large change in quantity demanded.
- Demand curve is relatively flat.

5. Inelastic Demand: Elasticity < 1

- A price change leads to a relatively small change in quantity demanded.
- Demand curve is relatively steep.

Additionally, there are two other types:

1. Relatively Elastic Demand: Elasticity > 0.5 (but not infinite)
- A price change leads to a relatively large change in quantity demanded.

2. Relatively Inelastic Demand: Elasticity < 0.5 (but not zero)

- A price change leads to a relatively small change in quantity demanded.

Understanding these types of elasticity helps businesses and policymakers predict how
changes in price will affect quantity demanded.

Part C (10 mark Questions)

1 Explain the types of elasticity of demand and price elasticity of demand
1. Price Elasticity of Demand (PED)

- Measures response to price changes

- Elastic (PED > 1), Inelastic (PED < 1), Unit Elastic (PED = 1)

2. Income Elasticity of Demand (YED)

- Measures response to income changes

- Positive (Normal goods), Negative (Inferior goods), Zero (Necessities)

3. Cross Elasticity of Demand (XED)

- Measures response to price changes of related products

- Positive (Substitutes), Negative (Complements), Zero (Unrelated products)

Values of price elasticity of demand:

There are five values of price elasticity of demand
1. Perfectly elastic demand(Ep=∞)
2. Perfectly Inelastic demand(Ep=0)
3. Relatively elastic demand(EP> 1)
4. Relatively Inelastic demand (EP<1)
5. Unitary elastic demand(EP=1)
The price elasticity of demand measures how responsive the quantity demanded of a product is
to changes in its price. Here are some key values and interpretations:

Elastic (Ed > 1)

- A small price change leads to a large quantity change.

- Demand is sensitive to price.
- Examples: luxury goods, air travel, and hotels.
Inelastic (Ed < 1)

- A large price change leads to a small quantity change.

- Demand is insensitive to price.
- Examples: necessities like salt, cigarettes, and prescription drugs.

Unit Elastic (Ed = 1)

- A price change leads to a proportionate quantity change.

- Demand is equally responsive to price.
- Examples: few products exhibit unit elasticity, but it's a theoretical benchmark.

Perfectly Elastic (Ed = ∞)

- A small price increase leads to a complete loss of demand.

- Demand is extremely sensitive to price.
- Examples: perfectly competitive markets, where substitutes are readily available.
Perfectly Inelastic (Ed = 0)

- A price change has no effect on quantity demanded.

- Demand is completely insensitive to price.
- Examples: none in reality, but it's a theoretical extreme.

Keep in mind that these values are not fixed and can vary depending on the market, time
period, and other factors.