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The demand for the product plays a major role to achieve the objective of a firm (Maximize the revenues and profits) • To know the likely demand for the goods or services, the manager has to analyze the factor that influences the demand.
Demand • The quantity of the commodity which an individual consumer or a household is willing to purchase per unit of time at a particular price.
Importance of Demand Analysis • Incorrect estimations will either result in money left on the table if it’s underestimated or losses if it’s overestimated.
Importance of Demand Analysis • To determine company’s production schedule. • Helps management in planning for its requirements of raw materials, the size of the plant to be installed, man power and financial resources etc.
Importance of Demand Analysis • To forecast sales of a product and formulate appropriate marketing strategies
Important factors of Demand • Desire to Buy • Willingness to buy • Ability to buy
Characteristics of Demand Demand has the following four characteristics 1. Price Demand is always related to price. 2. Time Demand always means the amount to be purchased at a particular time like per unit of time, per day, per week, per month or per year.
Characteristics of Demand 3. Quantity Demand is always specific quantity, expressed numerically, which a consumer is willing to purchase. 4. Market Demand is always related to the market. Market here simply refers to the contact between buyers and sellers.
Meaning of Demand Analysis • Demand analysis is the Study of sales generated by a good or service to determine the reasons for its success or failure, and how its sales performance can be improved on the basis of factors affecting the demand.
Meaning of Demand Analysis • It seeks to identify and analyze the factors that influences the demand. • Demand analysis is a study of the reasons underlying the demand for a product with the intent of forecasting and anticipating sales.
Determinants of Demand / Factors Affecting Demand • The demand for a product largely depends on its price. • But price is not the only factor that influences demand. • The demand for a product also depends on various factors. • Hence the quantity of a product that consumer is willing and able to buy at any given price changes, if any of the following factors change.
Price of the Product • The price of the product is the most important factor determining the demand. • The price-quantity relationship is inverse; when price increases, quantity contracts and vice-versa.
Income of the Consumer • Consumption is influenced by the income of a consumer. • With every increase in the income of a consumer, his consumption pattern changes as the purchasing power of the consumer increases.
Price of the Substitute Product • A substitute product is one that provides the same level of satisfaction as the product already being consumed by the consumer. • If the price of the product which the consumer already being consuming increases, consumer will switch to the substitute product. • For example, Bio-fertilizer is the good substitute for Chemical fertilizers.
Price of the Complementary Products. • Complementary Products are products that are consumed together. • For example, car and petrol or shoe and polish etc. in this case, if the price of one product goes up the demand for the other product decreases.
Tastes and Preferences of the Consumer • It also affects the demand for a product. To and extent, prevailing fashion, advertising and an overall increase in standard of living influence consumer tastes.
Changes in Policy • The demand of a particular product also depends upon government policies. • For example, if the government increases taxes on products, prices increase and hence the demand decreases in the short run. • Change in government policies may also have an negative impact on the demand for particular product.
Savings • Savings and demand are inversely related. • If the marginal propensity to save becomes high, the amount available for consumption will be less. • The demand will decrease.
Advertisement • In highly competitive markets a powerful competitive advertising campaign through T.V, News papers etc, will increase demand.
Demonstration Effect • Demonstration effects are effects on the behavior of individuals caused by observation of the actions of others and their consequences.
Expectation Regarding Future Price Changes • If a consumer expects a fall in the price of a product in the near future, he may reduce his present consumption of that product. • However, the extent to which he can reduce his present consumption depends on the nature of the product. • If the product is essential or perishable one, the consumer cannot postpone his purchase.
Change in Population • An increase in population tends to increase the demand. • Moreover the composition of population also affects demand.
Types of Demand • Price Demand Price demand refers to the various quantities of goods that a consumer would purchase at given time at a given prices. *It expresses the relationships between prices and quantities of the goods purchased.
The price demand is further divided into two • Individual Demand The individual’s demand for products and services in a given period of time or the total demand for the product of an individual firm at various prices. • Market Demand Market demand is the sum of the demands of all individuals in a given period of time.
Income Demand • Income demand refers to the various quantities of goods which would be purchased by the consumers at various levels of income. • Thus income demand expresses the relation between income and amount of goods demanded.
Cross Demand • Cross demand means the quantities of goods which will be purchased with the reference to the changes in the price of other inter-related goods, which are either substitutes or complimentary goods.
Direct Demand • The demand for consumer’s goods, which will satisfy human wants directly and immediately, is known as direct demand. For example; the demand for food.
Indirect Demand / Derived Demand • Indirect demand refers to the demand for producer’s goods which satisfy human wants indirectly. • For example, the demand for factors of production.
Joint Demand • The demand for one thing leading to the demand for another is called as joint demand. • The demand for pen is joint one for it involves the demand for ink and paper.
Composite Demand • Demand is said to be composite when a commodity is demanded for two or many purposes. • The demand for Coal, Rubber is composite as they can be used for several uses.
Alternative Demand • The demand when it can be satisfied with alternative ways. • The demand for light, for example, can be satisfied either from electric light or kerosene or gas etc.
Meaning of the Law of Demand • The law of demand explains the inverse relationships between the quantity demanded and the price. • This law states that “ceteris paribus” when the price of product is high quantity is low, and vice versa. • other factors remaining the same, the demand for a product is inversely related to the price.
Marshall states the law as follows, “The amount demanded increases with a fall in price and diminishes with a rise in price”. • Thus the relationship between the price and the demanded is not direct and proportional but inverse.
