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Demand analysis
- 1. A product orservice is said to have demand when three conditions are satisfied: 1. Desire to purchase. 2. Willingness to pay 3. Ability to pay Unless all these conditions are fulfilled, the product is not said to have any demand.
- 2. Types of demand Demand can be of three types: Price demand Income demand Cross demand.
- 3. Price demand: price demand refers to the quantity of a product or service demand at a given price. Income demand: Income demand refers to the quantity of a particular product or service demanded at a given level of income of the consumer or the household. Cross demand: cross demand refers to the quantity demanded for a particular product or service given the price of a related good. The related good may be complementary or a substitute.
- 4. NATURE OF DEMAND: Demand always Implies at a give Price. A more number product with 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. Consumer goods vs. producer goods: Consumer refers to such products and services which have capable of satisfying human need. Goods can be grouped under consumer goods and producer goods. Consumer goods are those which are available for ultimate consumption.
- 5. These givedirect and immediate satisfaction. Producer goods are those which are used for further processing or production of good/services to earn income. These goods yield satisfaction indirectly.
- 6. Autonomous demand vs.derived demand Autonomous demand refers to the demand for product and services directly. The demand for the services of a super specialty hospital can be considered as autonomous where as the demand for the hotels around that hospitals is called a derived demand. In case of a derived demand ,the demand for a product arises out of the purchase of a parent product. If there is no demand for house, there may not be demand for steel, cement, bricks, and so on. Demand for houses is autonomous where as demand for these inputs is derived demand.
- 7. Durables vs. perishablegoods Durable goods are those goods which give service relatively for a long period. The life of perishable goods is very less. May be in hours of days. Examples of perishable goods are milk, vegetables, fish and such. Rice, wheat, sugar and such others can be examples of durable goods.
- 8. Firm demand vs.industry demand The firm is a single business unit where as industry refers to the group of firms carrying on similar activity. The quantity of goods demanded by a single firm is called firm demand. The quantity of goods demanded by a single firm is called firm demand and quantity demanded by the industry as a whole is called industry demand Ex: one construction company may use 100 tones of cement during a given month. This is firm demand. The construction industry in a particular state may have used ten million tones. This is industry demand.
- 9. Short rundemand vs. long run demand: Short run demand is the demand with its immediate reaction to price changes, income fluctuations and so on. Long run demand is that demand which will ultimately exist as a result of the changes in pricing, promotion or product improvement, after enough time is allowed to let the market adjust itself to the given solution.
- 10. The shortrun and long run cannot be clearly defined other than in terms of duration of time. The demand for a particular product or service in a given region for a particular day can be viewed as short-run demand. The demand for a longer period for the same region can be viewed as long run demand . existing demand based on the tastes and technology at the current price is short-run demand.
- 11. The demandthat can be created in the long-run in the design as a result of changes in technology in long-run. New demand vs. replacement demand: New demand refers to the demand for the new products and it is the addition to the existing stock. The item is to maintain the asset in good condition. The demand of the car is new demand and the demand for spare parts is replacement demand. Replacement demand may also refer to the demand resulting out of replacing the existing assets with the new ones. New companies announce exchange schemes for TVs, washing machines and so would like to tap the replacement demand.
- 12. Total market andsegment market demand The total demand for sugar in the region is the total demand. The demand for sugar form the sweet making industry from this region is the segment demand. The market segmentation concept is very useful because it enables the study of specific requirements, if any such as taste and preferences and so on.
- 13. Factors determining demand Priceof the demand income level of the consumer Tastes and preferences of the consumer Prices of related goods which may be substitute/complimentary Expectations about the prices in future. Expectations about the incomes in future. Size of population. distribution of consumers over different regions Advertising efforts Any other factor of affecting the demand.
- 14. Demand function Demandfunction is a function which describes a relationship between one variable and its determinants. It describes how much quantity of goods is bought at alternative prices of good and related goods, alternative income level, and alternative values of other variables affecting demand. Thus, the demand function which influence the demand. The above can be built up into demand function.
- 15. Mathematically, thedemand function for a product A can be expressed as follows Ad= f( P,I Pr, EP, EI, SP DC, A, O). Where Ad refers to quantity of demand and it is a function of the following variables:
- 16. The impact ofsome of these determinants on demand can be described as follows Price of the product: Demand for a product is inversely related to its price. In other words, if price rises the demand falls and vice verse. this is the price demand function showing the price effect on demand.
- 17. Income ofthe consumer: As the income of the consumer or the household increases, there is tendency to buy more and more up to a particular limit. The demand for product X is directly related to the income of the consumer. Price of substitute or complimentary: Tastes and preferences
- 18. Law of demand The law of demand states: Other things remaining same, the amount of quantity rises with every fall in the price and vice versa. The law of demand states the relationship between price and demand of a particular product or service. It makes an assumption that all other demand determinants remain the same or do not change.
- 19. Assumptions of thelaw of demand The phrase other things remaining same is the assumption under the law of demand. Here, other things include income level of the consumer, tastes and preferences of the consumer, prices of related goods, exceptions about prices or income in future. Size of population, advertising efforts, and any other factor capable of affecting the demand.
- 20. Exceptions : Wherethere is a shortage necessities feared: Where the product is such that it confer distinction. Giffen paradox Incase of ignorance of price changes.
- 21. Where thereis a shortage necessities feared: if consumer fear that there could be shortage of necessities, then this law does not hold good. They may tend to buy more than what they require immediately even if the price of the product increase. Where the product is such that it confers distinction.: products such as jewels, diamonds and so on. Confer distinction on the part of the user. In such case, the consumer tends to buy even though there is increase in its price. such products are called Veblen goods.
- 22. Giffen paradox: People whose incomes are low purchase more of a commodity such as broken rice bread etc. when it price rises. Conversely 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 giffen paradox and such goods are called inferior or giffen goods.
- 23. Incase ofignorance of price changes.: At times the customer may not keep track of changes in price. In such case, he tend to buy even if there is increase in price. In case of these exceptions, the demand curve slopes upwards.
- 24. Significance of thelaw of demand The law of demand is the primary law in the consumption theory in economics. It indicates the consumer behavior for the given change in the variables in the study. Despite the assumption that other things remaining the same, the results of the law of demand are time tested and have been the basis for further decisions relating to costs, output, investment appraisals and so on.