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.
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 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) Consumer goods v/s producer goods:
Consumer
Goods:
Consumer goods refers to such
products and services which are satisfying consumer need. Consumer goods are those which are available
for ultimate consumption. Consumer goods
are needed for direct consumption and gives direct and immediate satisfaction.
For Ex : Bread,
Apple, Rice and so on
Producer
Goods:
Producer goods are those which
are used for producing other goods.
Producer goods are those which are used for further processing or
production of goods services to cash income.
These goods gives satisfaction indirectly.
For
Ex: Machines, Steel, Tools, etc.
There
could be cases where a given product may be both producer and also consumer
goods.
For Ex:
A farmer having ten bags of
paddy may use five bags for his personal consumption and other five bags as
seeds for the next crop. In such a case,
paddy is both producer good and consumer good.
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. Durable Goods v/s Perishable Goods:
Durable Goods:
Durable Goods are those which
give service relatively for a long period.
For Ex : T.V., Washing Machine, etc.
Perishable
Goods:
Perishable Goods are those
which give service relatively for a short period.
For Ex: Milk, vegetables, fish, rice, etc.
4. 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.
5. 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.
6. 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:
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 Andhra Pradesh
total demand
means that
total demand to the that product in A.P.
Market segment demand means
the demand in a particular area.
For Ex : Demand in Nellore segment of total A.P. 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)
Size of the population (Sp)
(h)
Distribution of consumers over different
regions (Dei)
(i)
Advertising effort (Ac)
(j)
Any other factors capable of affecting the
demand (O)
(1) 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.
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.
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:
Qd = f (P, I, T, PR, EP, EI,
SP, DC, A, O)
Where
Qd = Quantity of demand
P = Price of the
product
I = Income of the
consumer
T = 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
A = Advertisement
expenditure
O = 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.
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
|
4
|
8
|
6
|
6
|
8
|
4
|
10
|
2
|
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) 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.
