By K. Sashi Rao Management Teacher and Trainer DEMAND PLANNING AND FORECASTING Session 1

Course Framework Demand Basics- the economics perspective Demand Management and Planning - the business perspective Demand Forecasting Methods- qualitative and quantitative Selecting and Monitoring Forecasting Methods and Models

Demand Basics - the economics perspective

What is Demand? “Demand” is the amount of a good/product/service that consumers are willing and able to buy at a given price in given time Willingness to buy is the desire to own or use a good/product/service More precisely, ‘demand’ is the relationship between the price charged and the amount bought at that price Not only demand has got to do with quantity/volume, but also with its price and ‘utility ’

What is Demand Utility? “Utility” is the satisfaction derived by a person consuming/using a good/product/service This utility can vary from person to person (e.g. eating fried foods) This utility can also vary ‘over time’ or ‘repeated usage’ for the same person( e.g. how often and how much fried foods the same person consumes)

Factors Influencing Demand Price of the product/service Income/Expenditure of the consumer Nature and features of the product/service Consumer preferences and tastes Demand for alternative products( substitutes) with same utility or satisfaction(e.g. like baked snacks) Demand for goods used at same time(complements) like tomato sauce for fried/baked foods ; or like shoes and socks; sari and blouse

Law of Demand and Demand Curve The Law of Demand holds that, other things being equal, as the price of a product/service rises, its quantity demand will fall, and vice versa In other words, people will generally buy more when prices drop, and vice versa Recent example of onion prices which had increased sharply to Rs 50/kg and above whereby people reduced or stopped buying for some time, and patterns restored when prices came back to more acceptable prices of around Rs 15/20 per kg

Law of Supply and Supply Curve The Law of Supply holds that, other things being equal, as the price of a product rises, its quantity available for supply raises, and vice versa This means higher the price, the higher the quantity available for supply; producers supply more at higher price as it fetches higher revenues and profits

Demand Price Curve

Demand-Supply Price Curve

Demand and Supply Equilibrium(1) “Equilibrium” is the point at which quantity demand equals quantity supplied At equilibrium there is no tendency to change The previous two slides illustrate the Demand (D) and Supply Curves( S1 and S2) and this Equilibrium The two Supply Curves(S1 and S2) are indicative of not only the price-quantity relationship but also other non-price determinants of demand which can cause a shift to the left (S1)or right(S2)

Demand and Supply Equilibrium(2) The equilibrium price (P1 or P2) is the price at which sellers together are willing to sell the same amount as buyers are willing to buy, also known as the market clearing price The equilibrium quantity (Q1 or Q2) is the amount of that product that will be produced and bought without surplus or shortage(excess demand) of that market

Demand Shifters(1) Important to understand that demand is influenced not only by price but also other non-price determinants of demand These could be seen thro a series of demand changes caused by : Changes in disposable income Changes in tastes and preferences Changes in customer expectations Changes in price of related goods( substitutes and complements)

Demand Shifters(2) Demand increases due to: Increase in price of substitutes Decrease in price of complements Increase in income if product is a normal product Decrease in income if product is an inferior product Demand decreases due to: Decrease in price of substitutes Increase in price of complements Decrease in income if product is a normal product Increase in income if product is an inferior product

Demand Shifters(3) Aggregate demand( summation of individual demand) is also dependent on : Change in number of customers Change in distribution of tastes amongst consumers Change in distribution of income amongst customers with different tastes All these go to emphasize that actual demand is determined by much more than by the simple price- quantity relationship

Demand and Supply Curves Factors Demand Curve: Population and demographic distribution and changes over time Product design and offerings changes over time Product life cycle stages and changes over time Changing consumer preferences and expectations Price changes in product itself and related products Supply Curve: Changes in cost of inputs over time Changes in used processes and technology Changes in industry size and characteristics Changes in number and strength of competitition

Elasticity of Demand/Supply Price elasticity of demand- measures the responsiveness of demand to a given change in price; some goods exhibit price elasticity( like necessities) and some don’t (like luxuries); > 1 means elastic goods, < 1 means inelastic goods Price elasticity of supply- measures the responsiveness of supply to a given price change; a price rise means larger rise in supply of ‘elastic’ goods and much smaller rise for ‘inelastic’ goods; typically there would be large stocks for elastic goods and limited for inelastic goods; >1 means elastic goods, < 1 means inelastic goods Income elasticity of demand- measures the demand changes to given changes in income; if positive, people will demand more as income grows; if negative, people will buy less and go for substitutes which give better value for money; if it is positive than the product is good, and if negative the product is inferior For more detailed discussion on demand-supply curves and elasticity, do refer to the CII course booklet on Demand Planning and Forecasting(pages 4 to 16).

Demand Realities Previous demand-supply curves and equilibrium analysis all presumed other things being equal Reality is they are not !! Markets are imperfect! Consumers preferences and tastes are unpredictable and constantly changing! Competition is always there and becoming stronger! Hence demand analysis just not driven by economic theories and postulates Hence, demand planning and forecasting in the real world is much more complex to consider business realities and requirements