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Chapter: Engineering Economics and Financial Accounting : Demand and Supply Analysis

Important Questions and Answers: Demand and Supply Analysis

Engineering Economics and Financial Accounting - Demand and Supply Analysis - Important Questions and Answers: Demand and Supply Analysis



1.Define Demand.


Demand indicates the quantities of products (goods service) which the firm is willing and financially able to purchase at various prices, holding other factors constant.


2. Define Determinants of Demand:


An individual’s demand for a commodity depends on his desire and capability to purchase it. Apart from the desire to purchase, there are many other factors which influence the purchase of a product (demand). These are known as demand determinants.


3. What is meant by Tastes and preferences of Consumers:


The change of tastes and preferences of consumers in favor of a commodity will result in a greater demand for the commodity. The opposite also holds good i.e. if the tastes and preferences of consumer change against the commodity, the demand will suffer.


4. What are the two kinds of Consumers expectations?


Consumers have two kind of expectations one pertains to their future income and the second is related to the future prices of the goods and its related goods.


5. Define Advertising


Advertisements provide information about the presence of quality products in the market and induces customer’s to buy more. It also promotes the latest preferences of the general public to masses.


6. Define the Law of Demand:


The relation of price to quantity demanded / sales is known as the law of demand. Law of demand states that the higher the price is the lower the demand is and vice versa, holding other factors as constant.


7. Define the price quantity relation.


This price quantity relation can be expressed as demand being a function of price




8. What Highlights of the law of demand:


1.     The relationship between price and quantity demanded is inverse.

2.     Price is the independent variable and demand the dependent variable.

3.     Law of demand assumes that except for price and demand, other factors remain constant.


9. What is Demand Shift: (Change in demand)


Factors shift the demand for a particular product either on the right side of the demand curve or to the left side of the demand curve based on the changes in price. These factors, other than the price of a good that influence demand are known as demand shifters. The shift in the demand either to the left or right is called the demand shift.


10.What are the Exceptions to law of demand:


1.     In share markets on would have noticed that the rise in price of the shares increases, the sales of the shares while decrease in the price of the shares results in decrease of sale of the shares.


2.     Some goods which act as status symbol and have a snob appeal fall under this category. Here when the price of the product rises then the appeal of the product also rises and thus the demand. Some example are diamonds and antiques.


3.     Finally, ignorance on the part of the consumer may cause the consumer to buy at a higher price, especially when the rise in price is taken to mean an improvement in quality and a reduction in price as deterioration in quality.


11.Define Individual demand :


The quantity of a product demanded by an individual purchaser at a given price is known as individual demand.


12.Define Market demand :


The total quantity demanded by all the purchasers together is known as the market demand.


13.What are the types of Demand function


1.     Consumption function

2.     Product consumption function

3.     Differences in regional incomes

4.     Income expectation and demand


14.What are the Characteristics of demand function ?


1.     The long run relationship between consumption and income is some what stable, and expenditure on consumption is usually about 85 to 90% of the income.


2.     The consumption function is highly unstable in short runs and the relationship between income and consumption cannot be predicted by any mathematical formula.


3.     During the periods of economic prosperity, there is an absolute increase in the expenditure on consumption, but decrease as a percentage of income during periods of depression, the consumption declines absolutely but the expenditure on the consumption increases as a percentage of income.


4.     In the periods of economic recovery, the rate of increase in consumption is higher than the rate of the decline in consumption in times of recession.


15.Define Product consumption function:



This function can be defined as the relationship between the total income of the consumer and sales of particular products. It means that when there is a change in income there is a change in the demand for particular products.


16. Define Income expectations and Demand:


Expectations are related to people’s estimates of the level and durability of the future economic conditions. The demand for many consumer durables (household appliances like TV, Washing machine, etc) is often sensitive to general expectations regarding income level.


17.What are the features of advertising demand relationship ?


1.     Even when there is no advertising effort done, there will be a certain amount of sales possible for a particular product by virtue of its presence in the market.


2.     There is a direct relationship between advertising and sales. Thus when there is an increased spending on advertisements. It will bring in more sales.


3.     Increase in advertisements will lead to more than proportionate increase in sales only to a point. After that any increase in advertisement will have only less than proportionate effect on sales.



18.Define Elasticity of Demand:


Elasticity of demand is defined as ‘the percentage change in quantity demanded caused by one percent change in the demand determinant under consideration, while other determinants are held constant’.


19. Define demand determinant


It is the degree of change in demand to the degree of change in any of the demand determinants.


20.What are the Various Elasticities ?


1. Price elasticity of demand


2.     Income elasticity of demand

3.     Cross elasticity of demand

4.     Promotional elasticity

5.     Exportations elasticity of demand


21.Define Price Elasticity of Demand


Price elasticity of demand can be defined as “the degree of responsiveness of quantity demanded to a change in price”.


22.What are the Types of price elasticity:


1.     Perfectly elastic demand

2.     Absolutely inclastic demand or perfectly inelastic demand

3.     Unit elasticity of demand

4.     Relatively elastic demand

5.     Relatively inelastic demand


23.Define Absolutely inelastic demand or perfectly inelastic demand (ep=):


Absolutely inelastic demand is where a change in price howsoever large, causes no change in the quantity demanded of a product. Here, the shape of the demand curve is vertical.


24.Define Relatively elastic demand (ep>1):


It is where a reduction in price leads to more than proportionate change in demand. Here the shape of the demand curve in flat.


25.What are theFactors determining price elasticity of Demand ?


The elasticity of demand depends on the following factors namely


1.     Nature of the product

2.     Extent of usage

3.     Availability of substitutes

4.     Income level of people

5.     Proportion of the income spent of the product

6.     Urgency of demand and

7.     Durability of a product.



Part B





1.     i. Define law of demand &explain the types of demand.



According to Marshall, The amount demanded increases with a fall in price and diminishes with a rice in price, other remaining constant.




Types of Demand

ü    Individual & Market demand


ü    Firm and Industry product


ü    Autonomous & Derived demand


ü    Demand for durable and non durable demand


ü    Short term and long term demand


ü    Joint demand and composite demand


ü    Direct demand and Indirect demand


ü    Total market and Market segment demand


ü    Negative demand






ii.Why does demand curve sloping Downwards ?

Ø    substitution effect


Ø    income effect


Ø    new consumer creating demand


Ø    price effect


Ø    different uses



2.       Write a note on elasticity of supply & it’s types

It is a measure of degree of responsiveness of supply to the change in price


E(s) = Proportional change in supply / Proportional change in price



Types of Elasticity of supply


1.Completely (Perfectly) Inelastic supply: In this case the quantity supplied does not react to the changes in the price. The increase or decrease in the price does not change the quantity supplied.


2.Completely (Perfectly) Elastic supply: When a minuscule change in price results in infinite change in the quantity supplied then it is a case of completely elastic supply. For instance when there is marginal rise in the price, then the quantity supplied rises infinitely.

Unitary Elastic supply: When the proportionate change in quantity supplied is equal to the proportionate change in the price of the commodity then we call it as unitary or unit elasticity of supply.

4.Relatively Inelastic supply: When the percentage change in quantity supplied is less than the proportionate change in price than it is a case of relatively inelastic supply.



3. .Briefly explain about various factors determining the demand.


ü    Price of the commodity


ü    Taste & Preference


ü    Advertisements & Sales Propaganda

ü    Growth of Population


ü    Tax rate


ü    Pattern of saving Income of the consumer


ü    Price of related goods


ü    Consumer’s Expectations


ü    Weather conditions


ü    Availability of credit


ü    Circulation of money



4.     Describe concept of demand elasticity .


It denotes a measure of the rate at which demand changes in response to the change in prices



1.     Price Elasticity of demand

2.     Income Elasticity of demand

3.     Cross elasticity of demand


4.     Promotional elasticity of demand 1.Price Elasticity of demand


Perfectly Elastic demand ( E=∞)Demand change but price does not change


Perfectly Inelastic demand ( E=0)


If the demand for a commodity does not change in spite of an increase or decrease in its price


Unitary Elastic demand ( E=1)


Change in demand is exactly proportionate to the change in price


2.Income Elasticity of Demand


It is defined as the percentage change in the quantity demanded of a good divided by the percentage change in the income of the consumer,


3.Cross elasticity of demand


A change in demand for one good in response to a change in the price of another good .

 4.Advertising and promotional elasticity of demand


It is a measure of the responsiveness of demand for a commodity to the change in outlay on advertisements and other promotional efforts


5. Discuss in detail about the Measurement of Price Elasticity of Demand


1.  Percentage Method


It measures the percentage change in the quantity of a commodity demanded resulting from a given percentage change in its price

2. Point Method or Geometric Method


It measures the elasticity of demand on different points of a demand curve. It is a variant proportionate method.

3. Arc Method


segment of a demand curve between two points is called Arc.



∆Q= change in quantity demanded

∆P= Change in price of the commodity

P1= Original price


P2=New Price


Q1=Original quantity


Q2=New quantity


4. Total outlay Method


It is measured on the basis of change in total outlay or total expenditure in response to change in the price of the commodity




Unitary Elasticity: Small changes in price unaffected the total outlay


Elastic demand: Small changes in price increases the total outlay


Inelastic demand: Small changes in price decreases the total outlay


5. Revenue Method


It refers to the sale proceeds of a firm



Ep=Stands for elasticity of demand 

A=Stands for average revenue 

M=Stands for Marginal revenue

2.Income Elasticity of Demand

It is defined as the percentage change in the quantity demanded of a good divided by the percentage change in the income of the consumer,



Ey= stands for income elasticity


Q=stands for quantity demanded


Y=stands for income


∆Q= Gives change in quantity demanded 

∆Y = Gives change in income


Types of Income Elasticity of demand


1.High Income elasticity : If Income increases in high and quantity demand also good increases


2. Unitary Income elasticity: Changes in income and quantity demanded are same


3. Low Income elasticity: If Income increases in low and quantity demand also good increases

4. 4.Zero Income elasticity: No change in quantity demanded by the changes in income


5. 5.Negative Income elasticity: Increase in income results in decreases in quantity demanded

3. Cross elasticity of demand


A change in demand for one good in response to a change in the price of another good .



Ec=stands for cross elaticity


∆Qx= changes in quantity demanded


Py=original price of good y


∆Py=small changes in price of y 

Qx=changes in quantity demanded


Applications of cross elasticity in management


a.      In Production

b.     Demand forecasting and pricing

c.      In international trade and balance of payments


4. Advertising and promotional elasticity of demand


It is a measure of the responsiveness of demand for a commodity to the change in outlay on advertisements and


other promotional efforts

Factors determining advertising elasticity of demand

ü    Type of commodity


ü    Market share


ü    Rival’s reactions


ü    State of economy




ü   Effect of advertising in terms of time


6.Tools of Forecasting Techniques


1.     Qualitative model

a. Delphi Technique


A systematic forecasting method that involves structured interaction among a group of experts on a subject.


The Delphi Technique typically includes at least two rounds of experts answering questions and giving justification for their answers, providing the opportunity between rounds for changes and revisions.


b. Nominal group technique


The nominal group technique (NGT) is a group process involving problem identification, solution generation, and decision making.


c. Marketing research method


The process or set of processes that links the consumers, customers, and end users to the marketer through information — information used to identify and define marketing opportunities and problems and improve understanding of marketing as a process.


d. Sales force composite method


A technique used by production managers to project the future demand for a good or service based on the total amount that each salesperson anticipates being able to sell in their region.



2. Quanitative model


I.Time Series Models

a.  Last period Method

Uses last period’s actual value as a forecast


Ft= At – 1


Ft = Forecast demand for period t


At-1= Actual demand in previous period


b. Simple Average Method


Ft =Forecasted demand for period t


At= Actual demand for period t


n= Total no of periods


c. Moving average method

Uses an average of a specified number of the most recent observations, with each observation receiving a different emphasis (weight)



Ft- Forecasted demand for period t 

At- Actual demand for period t


n- Total no of periods


d. Exponential smoothing method


A weighted average procedure with weights declining exponentially as data become older.


Ft = Ft-1 + a(At-1 – Ft-1)




Ft – Forecasted demand for period t


Ft-1 –forecasted demand for previous method a- Smoothening constant


At-1- Actual demand for previous demand


e. Trend Project( Past data/ Predicting the future)


This method is a version of the linear regression technique.


Y = a + bX




X represents the values on the horizontal axis (time)


Y represents the values on the vertical axis (demand).


2. Cause and Effect Model


a.  Correlation and Regression method


Linear regression is a mathematical technique that relates one variable, called an independent variable, to another, the dependent variable,


Y = a + bX


Y- independent variable X- Dependent variable a- the intercept


B- slope of the line


b. Econometric Method


It includes endogenous –determined within the model ( controlled variables) and exogenous variable-determined outside the model(uncontrolled variables)


eg., Money


C. Input and output method


It helps to determine Or forecast the demand of a particular product or services.


d. End use method


It has theoretical and practical method or value. It is influenced by the technological , structural and other changes.


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