UNIT -1|DEMAND ANALYSIS &FORECASTING
INTRODUCTION
Demand Analysis has profound significance to management for day today functioning ana
expansion of the business. Analysis of the determination of prices of goods and services in the
market is an indispcnsable part of the subjcct matter of cconomic theory. When an economy 1s
guided by market nechanism, prices are determined by interaction between demand and supply
forces, that is, they are the result of an interaction between decisions taken by buyers and sellers.
Demand analysis involves understanding the customer demand for a product or service in a
particular market. Companies use demand analysis techniques to determine if they can sucessfully
enter a market and generate expected profits to advance their business operations. It alsogives a
better understanding of the high-demand markets for the company'sofferings, giving them afair
idea on which markets to invest in
Demand analysis is one of the most important considerations for a variety of business decisions
including sales forecasting, pricing products/services, marketing and advertisement spending,
manufacturing decisions, and expansion planning. Demand analysis covers both future and
retrospective analysis so that they can analyze the demand better and understand the
product/service's past success and failure too. Denand analysis helps in identifying key business
areas where demand is highest and areas which needs attention as very low demand indicates
different problems like either the customers are not aware of the product/service and more focus
must be in advertisement and promotion or the customer needs are not met by current
product/service and improvements are needed or competitors have sprung up with better offerings
etc.
Abusiness manager must have a background knowledge of demand because all other business
decisions are largely based on it. For example, the amount of money to be spent on advertising and
sales promotion, the number of sales-persons to be hired (or employed), the optimum size of the
12 Deaton, A. (1986). Demand analysis. Handbook of econometrics, 3, 1767-1839
plant to be set up, and a host of other strategic business decisions largely depend onthe level of
demand.
The market system works in an orderlv nanner because it is governed by certain fundamental laws
of market knownas Lawof Demand and Supply. The demandand supply forces determine the
price of goods and services in the market. The laws of demand and supply plays very important
role in economic anlysis. Thomas Carlyle, the famous 19th century historian remarked "It is easy
to make parrot lcarned in cconomics: teach aparrot to say demand andsupply" The most important
function of microeconomics is to explain the laws of demand and supply, market mechanism and
working of the price system. Here we will discuss the concept of demand.
CONCEPT OF DEMAND
People demand goods and services in an economy to satisfy their wants. All goods and services
have wants satisfying capacity which is known as UTILITY" in economics. Utility is highly
subjective concept; it is different from person to person. Utility (level of satisfaction) is measured
by means of introspection. By demand for goods and services economists essentially mean is
willingness as well as ability of the consumer in procuring and consuming the goods and services.
Thus, demand for a commodity or service is dependent upon (a) its utility to satisfy want or desire
(b)capability of the prospective consumer to pay for the good or service. In nutshell therefore we
can state that:
When desire is backed up by willingness and ability to pay for a good or service then it
becomes demand for the good or service
The demand for a commodity is its quantity which consumers are able and willing to buy at various
prices during a given period of time. So, for a commodity to have demand, the consumer must
possess willingness to buy it, the ability or means to buy it, and it must be related to per unit of
time i.e. per day, per week, per month or per year.
commodity or
various quantities of a given
demand wve mean the at varioUS prices
or at
According to Prof. Bober. By natket in a piven period of time
one
consumers w0uld buvin
Service which
goods.
various prices ofrelated
various incones or at
paying for goods
consunner's readiness to satisfy desire by
bul
Conccptually, demand is nothing willingness tO pay makes a
real or effective
avccompanicd by ability and
or sences. Adesire present globalised
most important decision making variables in
the
demand. Demand is one of of an econOrmy consumers
and producer:
ceonomy. Under such typc
liberalised and privatizcd market. Therefore
full freedom to both that is buyers and sellers in the
have wide choice. There is depending upon the
and patternof the market. The future of a producer is
Demand retlccts thc size such but want
demand. Even the firm does not want to make profit as
wellanalvsed consumer's without
services' or 'social responsibilities'. That is also not possible
to devote for 'customer
things are directly built into the
choice etc. AIl these
evaluating the consumer's tastes, preferences,
economic conceptof demand.
survival and the growth of any business enterprise depends upon the proper analysis of
The decisions of the
Thus the short term and long term
demand for its product in the market.
demand
depending upon the trends in demand for the product. Any rise or fall in
management are
change in
product has to be to find out reasons and revised production plans, technology or
for the
advertisement, packging, quality etc.
Types of Demand
consumers for a
classified based on various factors, such as the number of
Demand is generally interdependence of different
products, utility of products, and
given product, the nature of different situations.
product can be different under
demands. The demand for a particular for their
organisations to be aware of the type of demand that arise
Therefore, it is essential for types
decisions require the knowledge of various
Managerial
products under different situations.
of demand: -
different quantities ofa commodity or service that consumers
1. Price demand: It is ademand for
time period assuming other factors, such as prices of the
intend to purchase at a given price and
related goods, level of income of consumers,and consumer preferences, remain unchanged. Price
demand is inversely proportional to the price of a commodity or service. As the price of a
commodity or service rises, its demand falls and viceversa. Therefore. price dermand indicates the
functional relationship between the price of acommodity or service and the quantity demanded. It
can be mathematically expressed as follows:
D = f(PA) where,
D = Demand for commodity A
f= Function
PA Price of commodity A
2. Income demand: It is a demand for different quantities of a commodity or service that
consumers intend to purchase at different levels of income assuming other factorsremain the same.
Generally, the demand for a commodity or service increases with increase in the level of income
of individuals except for inferior goods. Therefore, demand and income are directly proportional
to normal goods whereas the demand and income are inversely proportional to inferior goods. The
relationship between demand and income can be mathenmatically expressed as follows:
D =f(YA), where,
D = Demand for commodity A
f= Function
YA = Income of consumer A
3. Cross demand: It refers to the demand for different quantities of a commodity or service whose
demand depends not only on its own price but also the price of other related commodities or
other. Thus, wnen
Services. Forexample, tea and coffee are considered to he the substitutes of each
tea increases.
the price of coffee increnses, people switch to tean, (Consequently, the demand for
Thus, it can be said that tea and coflee have cross demand. Mathematically, this can be expressed
as follows:
D = f(P), where,
DA = Denmand for commodity A
f= Function
Pg = Price of commodity B
4. Individual demand and Market demand: This is the classification of demand based on the
number of consumers the market. Individual demand refers to the quantity of a commodity or
service demanded by an individual consumer at a given price at a given time period. For example,
month is the individual or
the quantity of sugar that an individual or household purchases in a
householddemand. The individual demand of a product is influenced by the price of a product,
income of customers, and their tastes and preferences.
of all the consumers of
On the other hand, market demand is the aggregate of individual demands
factors are constant. For example,
a product over a period of time at a specific price while other
These four consumers consume 30
there are four consumers of sugar (having a certain price).
in a month. Thus,
kilograms, 40 kilograms, 50kilograms, and 60 kilograms of sugar respectively
month.
the market demand for sugar is 180 kilograms in a
or more commodities or services that are
5. Joint demand: It is the quantity demanded for two
petrol, bread and butter, pen
used jointly and are, thus demanded together. For example, car and
and are demanded together. The demand for
and refill, etc. are commodities that are used jointly
rise in the demand for cars results in a
such commodities changes proportionately. For example,
demand, rise in the price
pronortionate rise in the demand for petrol. However, in the case of joint
of one commodity results in the fall of demand for the other commodity. In the above
example, an
inerease in the price of cars will cause afall in the demand of not only of cars but also of petrol.
6. Composite demand: lt is the demand for commodities or services that have multiple uses. For
Cxample, the demand for stccl is a result of its use for various purposcs like making utensils, car
bodies, pipes, cans, etc. Inthe case of acommodity or service having composite demand, a change
in price results ina large change in the demand. This is because the demand for the commodity or
service would change across its various usages. In the above example, if the price of steel increases,
the price of other products made of steel also increases. In such a case, people may
restrict their
consumption of products nade of stecl.
7. Direct and derived demand: Direct demand is the demand for
commodities or services meant
for final consumption. This demand arises out of the natural desire of an individual to
consume a
particular product. For example, the demand for food, shelter, clothes, and vehicles is direct
demand as it arises out of the biological, physical, and other personal needs of consumers.
On the other hand, derived demand refers to the demand for a product that arises due to the demand
for other products. For example, the demand for cotton to produce cotton fabrics is derived
demand. Derived demand is applicable for manufacturers' goods, such as raw materials,
intermediate goods, or machines and equipment. Apart from this, the factors of production (land,
labour, capital, and enterprise) also have a derived demand. For example, the demand for labour
in the construction of buildings is a derived demand.
8. Demand for Consumers' Goods and Producers' Goods: Consumers' goods are those final
goods which directly satisfy the wants of consumers. Such goods are bread, milk, pen, clothes,
furniture, etc. Producers' goods are those goods which help in the production of other goods that
satisfy the wants of the consumers directly or indirectly, such as machines, plants, agricultural and
industrial raw material, etc. The demand for consumers' goods is known as direct or
autonomous
demand. The demand for producers' goods is derived demand because they are demanded not for
final consumption but for the production of other goods.
demand for producers' goods:
Joel Deangives the following reasons of the substitutes.
expert, price-wise and sensitive to
hence more
1) Buyers are professionals, and
their
purely cconomic: products are bought, not for themselves alone. but for
(2) Their motivesare
profit prospects.
generally more
Demand, being derived from consumption demand, fluctuates differently and
(3)
violently.
uses to which
goods and producers' goods is based on the
The distinction between consumers'
There are many goods such as electricity, coal, etc. which are used both as
these goods are put.
distinction is useful for the appropriate demand
consumers' goods and producers' goods. Still, this
analysis.
goods have been
Demand for Perishable and Durable Goods: Consumers' and producer's
9. goods
further into perishable and durable goods. In economics, perishable goods are the
classified
single act of consumption while durable goods are the goods which can be
which are used up in a
goods are
time and again for a considerable period of time. In other words, perishable
used
of durable goods are consumed.
Thus, perishable
consumed automatically while only services
foodstuffs, raw materials, etc.
goods include all types of services,
durable goods consist of buildings, machines, furniture's, etc. This distinction
On the other hand,
because in the demand analysis durable goods create more complex problems
has great importance
than nondurable goods.
goods are often sold to meet the current demand which is based on existing
Non-durable
On the other hand, the sale of durable goods increases the stock of available goods
conditions.
services are consumed over a period of time. The demand for perishable goods is more
whose
elastic in the short-run and their demand
elastic while the demand for non-durable goods is less
tends to be more elastic in the long run.
According to J. Dean, the demand for durable goods is more unstable in relation to the business
conditions. Postponement, replacement, storage and expansions are inter-related problems which
are included in the determination of demand for durable goods.
10. Derived and Autonomous Demand: When the demand for aparticular product is dependent
demand
upon the demand for some other goods, it is called derived demand. In many cases, derived
for
of aproduct is due to its bcing a component part of the parent product. For example, demand
further
cement is dependent upon the demand for houscs. The inputs or commodities demanded for
production have derived demand.
The demand for raw materials, machines., etc. do not fulfil any direct consumption need of the
buyer but they are needed for the production of goods having direct demand. Therefore, they fall
demand for
in the category of derived demand. If demand for final product increases, the derived
the latter also
related product also increases. If demand for the former falls, the demand for
decreases.
demand for other
On the other hand, when demand for a particular product is independent of the
products, such a demand is called autonomous demand. The demand for consumer goods is
needed for direct
autonomous. It is the one where a commodity is demanded because it is
consumption. For example, T.V., furniture, etc.
To distinguish between derived demand and autonomous demand is not an
easy job. There is a
For example.
thin line of demarcation between the two. In fact, mostly demand is derived demand.
service. Thus,
even the demand for a car by a household is derived from the demand for transport
the distinction between the two is rather arbitrary and a matter of degree. Derived demand is
demand, the impact
generally less price elastic that the autonomous demand. In the case of derived
of price on demand gets diluted by other components in production whose prices are sticky.
FACTORSDETERMINING DEMANDDETERMINANTS OF DEMAND
The determinants of demand are the factors that influence the decision of consumers to purchase
a commodity or service. It is essential for organisations to understand the relationship between the
demand and its each determinant to analyse and estimate the individual and market demand for a
commodity or service. The quantity demanded for a commodity or service is influenced by various
factors,such as price, consumcts' income and preferences, andgrowth of population.For exarmple,
thedemand for apparel changes with changes in fashion and tastes and preferences of consumers.
This can be cxpressed as follows:
D = f(PA. Po.......I, T) where,
DA = Demand for commodityA
f= Function
Po = Price of other related products
I=Income of consumers
T= Tastes and preferences of consumers
1) Price of the Commodity: It is the most important factor affecting demand for the given
demanded.
commodity. Generally, there exists an inverse relationship between price and quantity
in the satisfaction level of
It means, as price increases, quantity demanded falls due to decrease
demanded
consumers. For example, if price of given commodity (say, tea) increases, its quantity
(D) is a function
willfall as satisfaction derived from tea willfall due to rise in its price. Demand
between price and demand,
of price (P) and can be expressed as:D=f(P). The inverse relationship
known as law of demand.
important factor which determines the demand
2)Tastes and Preferences of the consumers: An
for it. A good for which consumers tastes
for a good is the tastes and preferences of the consumers
large and its demand curve will therefore lie at a
and preferences are greater, its demand would be
often change and as a result there
higher level. People's tastes and preferences for various goods
change in demand for them. The changes in demand for various goods occur due to the chan gas
is
1n fashion and also due to the pressure of advertisements by the manufacturers and sellers of
aifferent products. On the contrary, when certain goods go out of fashion or people's tastes and
preferences no longer remain favourable to them, the demand for them decreases.
3) Income of the Consumers: The demand for goods also depends upon the income of the
consumers. The greater the income of the people, the greater will be their demand for goods. In
drawing the demand schcdule or the demand curve for agood we take income of the people as
given and constant. When as aresult of thc risc in the income of the people, the dermand increases,
the whole of the demand curve shifts upward and vice versa. The greater income means the greater
purchasing power. Thercfore, when incomes of the people incrcase, they can afford to buy more.
It is because of this reason that increase in income has a positive effect on the demand for a good.
When the income of the people falls, they would demand less of a good and as aresult the demand
curve willshift downward. For instance, as a result of economic growth in India the income of the
people has greatly increased owing to the large investment expenditure on the development
schemes by the Government and the private sector. As a result of this increase in income, the
demand for food grains and other consumer goods has greatly increased. Likewise, when because
of drought in a ycar the agriculture production greatly falls, the incomes of the farmer's decline.
As aresult of the decline in income of the farmers, they will demand less of the cotton cloth and
other manufactured products.
4) Changes in prices of the related goods. The demand for a good is also affected by the prices
of other goods, especially those which are related to it as substitutes or complements. When we
draw the demand schedule or the demand curve for a good we take the prices of the related goods
as remaining constant. Therefore, when the prices of the related goods, substitutes or complements,
change, the whole demand curve would change its position; it will shift upward or downward as
the case may be. When the price of a substitute for a good fall, the demand for that good will
decline and when the price of the substitute rises, the demand for that good will increase. For
example, when price of tea and incomes of the people remain the same but the price of coffee falls,
the consumers would demand less of tea than before. Tea and coffee are very close substitutes.
Therefore, when coffee becomes cheaper, the consumers substitute coffee for tea and as a result
the demand for tea declines. The goods which are complementary with each other, the fall in the
