MANAGERIAL ECONOMICS
UNIT – II
DEMAND
MEANING
Demand refers to the willingness or effective desire of individuals to buy a product supported
by their purchasing power.
In economics, Demand is generally classified based on various factors, such as the number of
consumers for a given product, the nature of products, the utility of products, and the
interdependence of different demands.
TYPES
1. Individual and Market Demand
It is one of the types of demand. Individual demand refers to such demand of an individual for
the quantity of a commodity that he is eager to buy at a particular price during a specific time
period, given his money income, his taste, and prices of other commodities (particularly,
substitutes and complements). On the contrary, market demand is the sum of all individual
demands for a commodity over a specific period of time, and at a given price, with other factors
remaining the same.
2. Demand for Firm’s Products and Industry’s Products
The demand for the quantity which a firm produces at a given price over a time period is the
demand for a firm’s product. Whether the cumulative demand for the product of all the firms
in the industry is known as the market demand for the ‘industry’s product’.
3. Autonomous and Derived Demand
The demand for a commodity that is not related to the demand for other commodities is known
as autonomous or direct demand. For example, the demand for goods such as food, shelter,
clothes, vehicles, etc., is autonomous because it arises due to biological, physical, and other
personal needs of consumers. The demand for a commodity that is related to the demand of
other commodities is known as derived demand. For example, the demand for petrol, diesel,
and other lubricants is related to the demand of vehicles. These types of demand if highly
impactable on the market demand.
4. Demand for Durable and Non-Durable Goods
Goods can be classified into two categories such as durable and non-durable goods. These are
the types of demand. On the basis of these two categories, the demand can be classified into
two categories such as demand for durable and non-durable goods. Durable goods are those
which can be used for indefinitely long periods of time or continuously over a period. Durable
goods may be consumer as well as producer goods. Durable consumer goods include clothes,
shoes, owner’s-occupied residential houses, furniture, utensils, refrigerators, scooters, cars, etc.
The durable producer goods include mainly the items under ‘fixed assets, such as buildings,
plants, machinery, etc. On the other hand, non-durable goods are those which can be used only
once. For example, food items.
5. Short-Term and Long-Term Demand
Short-term and long-term both are impactful types of Demand. Short-term demand refers to
the demand for products that are used for a very short time period or for a current period. For
example, demand for umbrellas, raincoats, sweaters, etc. is short-term in nature. Long-term
demand refers to the demand for products over a longer period of time, for example, demand
for durable goods, demand for producer goods, etc. is long-term in nature.
6. Joint Demand and Composite Demand
When demand for two or more two goods is mutually demanded at the same time to satisfy a
single demand then it is called joint demand. It is one of the types of demand. Demand for
bikes and petrol, coffee and sugar, pen and ink, etc., are examples of joint demand. When a
commodity is demanded two or more distinct uses then it is said to be composite demand. For
example, steel is demanded the purpose of making car bodies, making utensils, etc.
7. Direct and Indirect Demand
Direct demand refers to such demand which is directly used by the end consumer. The demand
for such goods is also called consumer’s goods demand because these are used for final
consumption. Demand for all consumers goods such as sweets, oil, readymade clothes,
motorcycles, and houses is direct demand. Indirect demand is such demand for those goods
which are not used by end consumers. These goods are used for producing other goods. Due to
this, indirect demand is also referred to as producer’s goods demand.
8. Total Market and Market Segment Demand
The total market demand is referred to as the summative demand for the product from all the
segments whereas market segment demand would refer to the demand the product in that
specific market segment. For analysis of demand, both total markets, as well as market
segment types of demand, is necessary. The market may be segmented on the basis of age,
gender, geographical area, etc. For example, demand for Arun ice cream in India is the total
market demand, and demand for Arun ice cream in Rajasthan or demand for Arun ice cream
by women is a market segment demand.
DEMAND FORECASTING
DEFINITION:
“Demand estimation (forecasting) may be defined as a process of finding values for demand in
future time periods.” Evan J. Douglas.
“Demand forecasting is an estimate of sales during a specified future period based on
proposed marketing plan and a set of particular uncontrollable and competitive forces.”
Cundiff and still.
MEANING:
Demand forecasting refers to the process of estimating the future demand for a product or
service. It involves analysing historical data, market trends, and other relevant factors to predict
the quantity of a product or service that consumers will buy in a given period.
METHODS OF DEMAND FORECASTING
There are two main methods of demand forecasting: 1) Based on Economy and 2) Based on
the period.
1. Based on Economy
There is a total of three methods of demand forecasting based on the economy:
Macro-level Forecasting: It generally deals with the economic environment which is
related to the economy as calculated by the Index of Industrial Production(IIP), national
income and general level of employment, etc.
Industry-level Forecasting: Industry-level forecasting usually deals with the demand
issued for the industry’s products as a whole. We can consider the example where there
is a demand for cement in India, Demand for clothes in India, etc.
Firm-level Forecasting: It is a major type of demand forecasting. Firm-level
forecasting means that we need to forecast the demand for a specific firm’s product.
We can consider the following examples as Demand for Birla cement, Demand for
Raymond clothes, etc.
2. Based on the Time
Forecasting based on time may be either short-term forecasting or long-term forecasting.
Short-term Forecasting: It generally covers a short period which depends upon the
nature of the industry. It is done generally for six months or can be less than one year.
Short-term forecasting is apt for making tactical decisions.
Long-term Forecasting: Long-term forecasts are generally for a longer period. It can
be from two to five years or more. It gives data for major strategic decisions of the
company. We can consider the example of the expansion of plant capacity or on
opening a new unit of business, etc.
3. Nature of products
Products can be categorised into consumer goods or capital goods on the basis of their nature.
Demand forecasting differs for these two types of products, which is discussed as follows:
Consumer goods: The goods that are meant for final consumption by end users are
called consumer goods. These goods have a direct demand. Generally, demand
forecasting for these goods is done while introducing a new product or replacing the
existing product with an improved one.
Capital goods: These goods are required to produce consumer goods; for example, raw
material. Thus, these goods have a derived demand. The demand forecasting of capital
goods depends on the demand for consumer goods. For example, prediction of higher
demand for consumer goods would result in the anticipation of higher demand for
capital goods too.
IMPORTANCE OF DEMAND FORECASTING
Demand forecasting is vital to the management of every business. It enables an organisation
to mitigate business risks and make effective business decisions. Moreover, demand
forecasting provides insight into the organisation’s capital investment and expansion decisions.
Producing the desired output
Demand forecasting enables an organisation to produce the pre-determined output. It also helps
the organisation to arrange for the various factors of production (land, labour, capital, and
enterprise) beforehand so that the desired quantity can be produced without any hindrance.
Assessing the probable demand
Demand forecasting enables an organisation to assess the possible demand for its products and
services in a given period and plan production accordingly. In this way, demand forecasting
avoids dependence on merely making assumptions for demand.
Forecasting sales figures
Sales forecasting refers to the estimation of sales figures of an organisation for a given period.
Demand forecasting helps in predicting the sales figures by considering historical sales data
and current trends in the market.
Better control
In order to have better control on business activities, it is important to have a proper
understanding of cost budgets, profit analysis, which can be achieved through demand
forecasting.
Controlling inventory
As discussed earlier, demand forecasting helps in estimating the future demand for an
organisation’s products or services. This, in turn, helps the organisation to accurately assess its
requirement for raw material, semi-finished goods, spare parts, etc.
Assessing manpower requirement
Demand forecasting helps inaccurate estimation of the manpower required to produce the
desired output, thereby avoiding the situations of under-employment or over-employment.
Ensuring stability
Demand forecasting helps an organisation to stabilise their operations by initiating the
development of suitable business policies to meet cyclical and seasonal fluctuations of an
economy.
Planning import and export policies
At the macro level, demand forecasting serves as an effective tool for the government in
determining the import and export policies for the nation. It helps in assessing whether import
is required to meet the possible deficit in domestic supply.
Factors Influencing Demand Forecasting
There are a number of factors that affect the process of demand forecasting. Figure lists down
various factors influencing demand forecasting:
Prevailing Economic Conditions
Demand forecasting can be affected by the changing price levels, national and per capita
income, consumption pattern of consumers, saving and investment practices, employment
level, etc. of an economy.
Thus, it is important that existing economic conditions should be assessed in order to align
demand forecasting with current economic trends.
Existing conditions of the industry
The assessment of demand for an organisation’s products and services is also affected by the
overall conditions of the industry in which the organisation operates.
For example, concentration of an industry increases the level of competition, which directly
affects the demand for products and services of different organisations in the industry. In such
a case, demand forecasted by organisations may falter.
Existing Condition of an Organization
Apart from industry conditions, the internal state of an organisation also affects demand
forecasting. Within the organisation, demand forecasting is affected by various factors, such as
plant capacity, product quality, product price, advertising and distribution policies, financial
policies, etc.
Prevailing Market Conditions
in market conditions, such as change in the prices of goods; change in consumers’ expectations,
tastes and preferences; change in the prices of related goods; and change in the income level of
consumers also influence the demand for an organisation’s products and services.
Sociological factors, such as size and density of population, age group, size of family, family
life cycle, education level, family income, social awareness, etc. largely impact demand
forecasts of an organisation. For example, markets having a large population of youngsters
would have a higher demand for lifestyle products, electronic gadgets, etc.
Psychological Conditions
Psychological factors, such as changes in consumer attitude, habits, fashion, lifestyle,
perception, cultural and religious beliefs, etc. affect demand forecast of an organisation to a
large extent.
Competitive Conditions
A market consists of several organisations offering similar products. This gives rise to
competition in the market, which affects demand forecasted by organisations.
For example, reduction in trade barriers increases the number of new entrants in a market,
which affects the demand for products and services of existing organisations.
Import – Export policies
The demand for export-import goods gets directly affected by changes in factors, such as
import and export control, terms and conditions of import and export, import/export policies,
import/export conditions, etc.
STEPS IN DEMAND FORECASTING
To achieve the desired results, it is important that demand forecasting is done systematically.
Specifying the objective
The purpose of demand forecasting needs to be specified before starting the process. The
objective can be specified on the following basis:
Short-term or long-term demand for a product
Industry demand or demand specific to an organisation
Whole market demand or demand specific to a market segment
Determining the time perspective
Depending on the objective, the demand can be forecasted for a short period (2-3 years) or long
period (beyond 10 years). If an organisation performs long-term demand forecasting, it needs
to take into consideration constant changes in the market as well the economy.
Selecting the method for forecasting
There are various methods of demand forecasting, which have been discussed later in the
chapter. However, not all methods are suitable for all types of demand forecasting. Depending
on the objective, time period, and availability of data, the organisation needs to select the most
suitable forecasting method. The selection of demand forecasting method also depends on the
experience and expertise of the demand forecaster.
Collecting and analysing data
After selecting the demand forecasting method, the data needs to be collected. Data can be
gathered either from primary sources or secondary sources or both. As data is collected in the
raw form, it needs to be analysed in order to derive meaningful information out of it.
Interpreting outcomes
After the data is analysed, it is used to estimate demand for the predetermined years. Generally,
the results obtained are in the form of equations, which need to be presented in a
comprehensible format.
LIMITATIONS OF DEMAND FORECASTING
Limitations of Demand Forecasting are:
Lack of historical sales data
Past sales figures may not always be available with an organisation. For example, in case of a
new commodity, there is unavailability of historical sales data. In such cases, new data is
required to be collected for demand forecasting, which can be cumbersome and challenging for
an organisation.
Unrealistic assumptions
Demand forecasting is based on various assumptions, which may not always be consistent with
the present market conditions. In such a case, relying on these assumptions may produce
incorrect forecasts for the future.
Cost incurred
Demand forecasting incurs different costs for an organisation, such as implementation cost,
labour cost, and administrative cost. These costs may be very high depending on the complexity
of the forecasting method selected and the resources utilised. Owing to limited means, it
becomes difficult for new startups and small-scale organisations to perform demand
forecasting.
Change in fashion
Consumers’ tastes and preferences continue to change with a change in fashion. This limits the
use of demand forecasting as it is generally based on historical trend analysis.
Lack of expertise
Demand forecasting requires effective skills, knowledge and experience of personnel making
forecasts. In the absence of trained experts, demand forecasting becomes a challenge for an
organisation. This is because if the responsibility of demand forecasting is assigned to
untrained personnel, it could bring huge losses to the organisation.
Psychological factors
Consumers usually prefer a particular type of product over others. However, factors, such as
fear of war and changes in economic policy, could affect consumers’ psychology. In such cases,
the outcomes of forecasting may no longer remain relevant for the time period.
