DEMAND ANALYSIS

INTRODUCTION
It is necessary to estimate the demand for the goods or services
before they are produced and provided. The producers, for this purpose, heavily
depend upon the data relating to the pattern of consumption of these goods and
services. The demand analysis provides them the basis to take decisions relating to
volume of production (How many products required to produce), capital to be
invested (How much amount to be invested) and so on.
DEMAND
Demand for a commodity refers to the quantity of the commodity
which an individual consumer is willing to purchase at a particular time at a
particular price.
A product or service is said to have demand when three conditions are
satisfied.
(a)

Desire to acquire

- Desire of the consumer to buy the Product

(b)

Willingness to pay - His willingness to buy the product and

(c)

Ability to pay

Ability to pay the specified price for it.

Objectives/Importance of Demand Analysis:

Demand Analysis: importance to the business enterprises. They are the source of
many useful insights for business decision making. The success of failure of
business firms depend primarily on its ability to generate resources by satisfying
the demand of consumers. The firms unable to attract consumers are soon forced
out from the market.
The importance of demand analysis in business decisions can be explained under
following headings:

Demand analysis helps in analyzing the various types of demand which enables the
manager to arrive at reasonable estimates of demand for product of his company.
Managers not only assess the current demand but he has to take into account the
future demand also.
Demand analysis/forecasting make it easy for the entrepreneur to know about the
kinds of goods necessary in the market or society. With this the entrepreneur can
easily find out the type of goods to be produced for the maximization of the profit
beforehand. For this, the income of consumers, tastes, desire, fashions etc. should
be looked upon very carefully. With the help of these things the entrepreneur can
easily forecast the necessities.
1. Sales forecasting: The demand is a basis the sales of the production of a
firm. Hence, sales forecasting can be made on the basis of demand. For
example, if demand is high, sales will be high and if demand is low, sales will
be low. The firms can make different arrangements to increase or reduce
production or push up sales on the basis of sales forecast.
2. Pricing decisions: The analysis of demand is the basis of pricing decisions of a
firm. If the demand for the product is high, the firm can charge high price,
other things remaining the same. On the contrary .If the demand is low, the
firm cannot high price. The demand analysis also helps the firm in profit
budgeting.
3. Marketing decisions: The analysis of demand helps a firm to formulate
marketing decisions. The demand analysis analyses and measures the forces
that determine demand. The demand can be influenced by manipulating the
factors on which consumers base their demand on attractive packaging.
4. Production decisions: How much a firm can produce depends on its capacity.
But how much it should produce depends on demand. Production is not
necessary if their no demand. But continuous production schedule is
necessary if the demand for the production is relatively stable. If the demand
is less than the quantity of production, new demand should be created by
means of promotional activities such a advertising.
5. Financial decisions: The demand condition in the marker for firm's product's
affects the financial decisions as well. If the demand for firm's product is
strong and growing, the needs for additional finance will be greater. Hence,
the financial manager should make necessary financial arrangement to
finance the growing need of the capital.

Nature and types of Demand:

Demand for the product is determined by its nature. Demand for such
commodities which use indispensable for the consumer is not affected significantly
by changes in their market conditions. In other words, a product with more
number of uses is naturally more in demand than one with a single use, the nature
of demand is better understood when we see these variations given below:
(1)

Individual Demand v/s Market Demand:

Individual Demand:

The individual demand is the demand of one individual or firm. It represents the
quantity of a good that a single consumer would buy at a specific price point at a
specific point in time. While the term is somewhat vague, individual demand can be
represented by the point of view of one person, a single family, or a single
household.
Market Demand:

Market demand provides the total quantity demanded by all consumers. In other
words, it represents the aggregate of all individual demands. There are two basic
types of market demand: primary and selective. Primary demand is the total
demand for all of the brands that represent a given product or service, such as all
phones or all high-end watches. Selective demand is the demand for one particular
brand of product or service, such as the iPhone or a Michele watch. Market demand
is an important economic marker because it reflects the competitiveness of a
marketplace, a consumers willingness to buy certain products and the ability of a
company to leverage itself in a competitive landscape. If market demand is low, it
signals to a company that they should terminate a product or service, or restructure
it so that it is more appealing to consumers.

2.

Autonomous Demand v/s Derived Demand:

Autonomous Demand:

Autonomous demand refers to the demand for products and services

directly and independently.
For Ex :

Demand for two wheelers is autonomous demand.

Derived Demand:
In case of derived demand, the demand for a product arises due to
purchase of another product.
For Ex:

(1)

Demand for petrol because two wheelers

(2)

If there is a demand for house, then there is

a demand for cement, iron and bricks.

3.

Firm Demand v/s Industry Demand :

Firm Demand :
The firm is a single business unit (single company). The term Firm
Demand denotes demand for a particular product of a particular firm (company).
For Ex:

The demand of LG TVs is referred as Firm Demand or

Company Demand.
Industry Demand:
Industry refers to the group of companies producing same type of
product. Industry Demand refers to the total demand for the product of a
particular industry.
For Ex:

Demand for TVs produced by all companies is

Referred as Industry Demand.

4.

New Demand v/s Replacement :

New Demand refers to the demand for the new products and it is

addition to the existing stock.

Replacement Demand:

Replacement demand may also refer to the demand resulting out of

replacing the existing asset with the new ones.
For Ex: Purchasing a new TV and replacing with old is Referred as
replacement demand.
5.

Total market and segment market demand :

Total Market Demand :

Total market demand means the total demand for a product in a given
total market.
For Ex: State of Maharashtra
Segment Market Demand:
Segment market demand refers to the demand of product in particular
market segment of a total market.
For Ex:

If a product selling in Maharashtra total demand

means

that

total

demand

to

the

that

product

in

Maharashtra.
Market segment demand means the demand in a particular area.
For Ex :

Demand in Pune segment of total Maharashtra Market.

Factors determining the Demand (or)

Demand Determined
The demand for a particular product depends on several factors. The following
factors determine the demand for a given product.
(a)

Price of the product (P)

(b)

Income of the consumer (I)

(c)

Taste and performance of the consumer (T)

(d)

Price of related goods (Substitute or complementary) (Pr)

(e)

Expectations about the prices in future (Ep)

(f)

Expectations about the income in future (Ei)

(g)
(h)
(1)

Advertising effort (Ac)

Any other factors capable of affecting the demand (O)

Price of the product (P) :

The most important factor which influence the demand is price. A

decrease in the price of a normal good leads to rise in demand of a

product. Similarly, an increase in the price will reduce the demand for a
commodity. The relation between price and demand is inverse relationship.
(2)

Income of the consumer (I)

When the income of the consumer is increased, the consumer

purchase more quality of goods. When the income of consumer is decreased, the
consumer purchase less quality of goods. The income of the consumer and demand
of a product moves in the same direction.
(3)

Tastes and preference of the consumer (T) :

We know it quit well that the change in tastes and preferences of a

consumer in favor of a commodity results in increasing demand for a commodity,

while if this change is against the commodity it results in smaller demand for the
commodity.
(4)

Price of the related goods (Pr) (Substitute and complementary

Goods):
When a change in the price of one commodity influences the demand

for other commodity. The related commodities are two types :

(a)

Substitutes

(b)

Complements

(a)

Substitute Goods :
When the price of one commodity increase, then the demand for

another product will increase.

For Ex:

In case of Tea and Coffee, when coffee price increased

then the demand for tea will increase. Likewise (i.e., both increase together or
decrease together)
(b)

Complementary goods :
When the price of one commodity, will increase, then the demand for

another product will decrease.

For Ex:

Bread and butter

Pen and ink
Petrol and automobiles

(5)

Expectations about future price of the product (Ep) :

If the consumer expects future price of the product will increase, then

the consumer purchase more quantity of goods at present. Similarly, if the price of
the product in the future will decrease, then the demand at present will decrease.
(6)

Expectations about future income of the consumer (Ef)

In case, the consumer expects a higher income in future, he spends

more at present to purchase more quantity of goods. Similarly, the consumer

expects a lower income in future, he spends less at present to purchase less
quantity of goods.
(7)

Advertisement (AE):
If we can spent more amount on advertisement to influence the

consumer, the demand will increase, if advertisement expenditure is less, then the
demand will decrease.
And any other factors capable of affecting the demand.
Demand Function:

A mathematical expression of the relationship between quantity

demanded of the commodity and its determinants. Demand function is a function
which describes the relationship between demand and its determinants.
a) Qdx=f(Px)
It describes how much quantity of goods is bought at alternative
prices of goods and related goods, alternative income levels, alternative various
demand determinants mathematically, the demand function for a product can be
expressed as follows:
B.

Qd = f (P, I, T, PR, EP, EI, SP, DC, A, O)

Where
Qd

Quantity of demand

Price of the product

Income of the consumer

Tastes and preference

PR

Price of related goods

EP

Expected price of the product in future

EI

Expected income of the consumer in future

SP

Size of the population

DC

Distribution of consumers over various regions

Advertisement expenditure

Any another factor which influence the demand

LAW OF DEMAND
The law of demand states : When the price of a product will increase, then the
demand for the product will decrease. Similarly, when the price of the product
decreased, the demand will increase when remaining things are constant.
diagram
When

remaining

things

are

constant. Remaining

things

means

remaining determinants. The relation b/w demand and price is inverse relationship.
Law of Demand table
Price of product

Demand of product
2

10

Exceptions to the law of Demand:

There are certain exceptions to the law of demand in other words, the
law of demand is not applicable in the following cases.
(1)

Giffen Goods:
People whose incomes are low purchase more of a commodity such

broken

rice,

bread,

potato

(which

is

their

staple

food)

when

its

prices

rises. Inversely when its price falls, instead of buying more, they buy less of this
commodity and use the savings for the purchase of better goods such as
meat. This phenomenon is called Giffens paradox and such goods are giffen goods.
(2)

Prestigious/Veblen Goods:
Products such as jewels, diamonds and so on confer distinction on the

part of the user. In such case, the consumers tend to buy more goods when price
increased, and less purchase when price decreased. Such goods are called Veblen
Goods.
(3)

Where there is a shortage of necessities:

If the consumers fear that these could be shortage of necessities, then

this law of demand does not applicable. They may tend to buy more than what
they require immediately, even if the price of the product increases.

(4)

In case of ignorance of price changes:

When the customer is not familiar with the changes in the price, he

tends to buy even if there is increase in price.

Reasons of inverse relation between Price and Demand/Why demand curve

slopes downwards?
A demand curve is the graphical representation of the demand schedule for a
commodity. It is the graphic statement of an individual buyer's reaction on amount
demanded at a given price in the given point of time. A demand curve has got a
negative slope. It slopes downwards from left to right. A demand curve shows the
maximum quantities per unit of time that consumers will buy at various prices. In
the words of Richard Lipsey "The curve which shows the relation between the price
of a commodity and the amount of that commodity the consumer wishes to
purchase is called Demand Curve.

(1) Law of diminishing marginal utility:

A consumer always equalises marginal utility with price. The law states that a
consumer derives less and less satisfaction (utility) from the every additional
increase in the stock of a commodity. When price of a commodity falls the
consumer's price utility equilibrium is disturbed i.e. price becomes smaller than
utility.
The consumer in order to restore the new equilibrium between price and utility buys
more of it so that the marginal utility falls with the rise in the amount demanded.
So long the price of a commodity falls, the consumer will go on buying more
amount of it so as to reduce the marginal utility and make it equal with new price.
Thus the shape and slope of a demand curve is derived from the slope of marginal
utility curve.
(2) Income effect:
Another cause behind the operation of law of demand is income effect. As the price
of a commodity falls, the consumer has to buy the same amount of the commodity
at less amount of money. After buying his required quantity he is left with some
amount of money.
This constitutes his rise in his real income. This rise in real income is known as
income effect. This increase in real income induces the consumer to buy more of
that commodity. Thus income effect is one of the reasons why a consumer buys
more at falling prices.
(3) Substitution effect:
When the price of a commodity falls, it becomes relatively cheaper than other
commodities. The consumer substitutes the commodity whose price has fallen for
other commodities which becomes relatively dearer.
For example with the fall in price of tea, coffees. Price being constant, tea will be
substituted for coffee. Therefore the demand for tea will go up.

(4) New consumers:

When the price of a commodity falls many other consumers who were deprived of
that commodity at the previous price become able to buy it now as the price comes
within their reach. For example the units of colour TV. increases with a remarkable
fall in price of it. The opposite will happen with a rise in prices.
(5) Multiple use of commodity:
There are some commodities which have multiple uses. Their uses depend upon
their respective, prices. When their prices rise they are used only for certain
selected purposes. That is why their demand goes down.
For example electricity can be put to different uses like heating, lighting, cooling,
cooking etc. If its price falls people use it for other uses other than that. A rise in
price of electricity will force the consumer to minimize its use. Thus with a fall and
rise in price of electricity its demand rises and falls accordingly.