Demand Analysis

INTRODUCTION
In
INTRODUCTION
INTRODUCTION
INTRODUCTION
In economics, demand for a
commodity does not simply
refer to a want, a
need, or a desire to obtain a
commodity. In addition to
these requirements, the

1
consumer must be able and
willing to pay the required
amount of money.
When a desire for
something is accompanied
by the ability and
willingness to
pay for that thing, the result
is effective demand, which
manifests itself in a
variety of ways.
INTRODUCTION
2
In economics, demand for a
commodity does not simply
refer to a want, a
need, or a desire to obtain a
commodity. In addition to
these requirements, the
consumer must be able and
willing to pay the required
amount of money.
When a desire for
something is accompanied
by the ability and
willingness to
3
pay for that thing, the result
is effective demand, which
manifests itself in a
variety of ways.
INTRODUCTION
In economics, demand for a
commodity does not simply
refer to a want, a
need, or a desire to obtain a
commodity. In addition to
these requirements, the

4
consumer must be able and
willing to pay the required
amount of money.
When a desire for
something is accompanied
by the ability and
willingness to
pay for that thing, the result
is effective demand, which
manifests itself in a
variety of ways.
The concept of demand is always described from the point of view of the customer
as the other meaning for demand is nothing but want of goods and services by the
customer for a specific price from the producer, which is the basis for existence of
any producer of business. There is a direct relationship between the price and
demand of the goods and services, which means the prices of goods impacts its
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demand. Customer always wants goods and services for a reasonable and low price
from the producer. If the prices of goods and services are low, customers shows
interest to purchase more goods and services, otherwise the customer purchases
less goods and services if the prices are high.

Therefore, analysis of demand or law of demand proves that demand of the goods
and services and price of the goods and services are inversely related to each other.
Demand for the goods and services always fall down if the price of goods and
services are high, dissimilar demand for the goods and services always increases if
the price of goods and services are low .

The success of any business largely depends on sales, and sales depend on market
demand behavior. Market demand analysis is one of the crucial requirements for
the existence of any business enterprise. Analysis of market demand for the
product is necessary for the management in order to take decisions regarding
production, cost allocation, product pricing, advertising, inventory holdings, etc.
How much the firm must endeavor to produce depends mainly upon the demand
for its product. If demand falls short of production, the two must be balanced by
creating a new demand through more and better advertisements. If there is no
demand for the product, its production is unwarranted. If the future demand for the
product is likely to be more, the more the inventories that the firm should hold.

If the demand for the product is large, a higher price can be charged, with other
things remaining the same. Market demand analysis helps the manager to make
decisions regarding:
(a) sales forecasting with a sound basis and greater accuracy

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(b) guidelines for demand manipulation through advertising and sales promotion
programs
(c) production planning and product improvement
(d) pricing policy
(e) determination of sales quotas and performance appraisal of personnel in the
sales department and
(f) size of market for a given product and corresponding market share. For all these
purposes, demand analysis is essential for successful production planning and
business expansion in managerial decision-making.

Meaning of Demand

By demand we mean the various quantities of a given commodity or service which

consumers would buy in one market in a given period of time at various prices, or at
various incomes, or at various prices of related goods. —Bober.

Therefore, the demand for a good is made up of the following three things:
1. the desires to acquire it
2. the willingness to pay for it, and
3. the ability to pay for it. In other words.

Demand = Desire to acquire + Willingness to pay + Ability to pay

In absence of any of these three characteristics, there is no demand. For example, a

teacher may possess both the willingness to pay as well as the ability to pay for a
liquor bottle, yet he does not have demand for it. This is because he does not desire
to have an alcoholic drink. Similarly, a trader might have the desire to have a TV,
he might be rich enough to be able to pay for it, but if he is not willing to pay for

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the TV, he does not have demand for this product. Also, a worker might possess
both the desire for a scooter as well as the willingness to pay for it, but if he does
not possess enough money to pay for it, he does not have demand for the scooter.
In contrast to these three situations, a lawyer, who has the desire for a car, as well
as both the will and ability to pay for it, has demand for the car. Thus, demand in
economics means effective demand, i.e., one which meets all its three
characteristics—desire, willingness and ability to pay. On the other hand, demand
means desire backed by willingness and ability to pay.

Besides, demand also signifies a price and a period of time in which the demand is
to be fulfilled. Demand is the quantity of a specific good that people are willing
and able to buy during a specific period, given the choices available.

To sum up. we can say that the demand for a product is the desire for that product
backed by willingness as well as ability to pay for it. It is always defined with
reference to a particular time, place, price and given values of other variables on
which it depends.

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Steps in market demand analysis

Market identification

one of the first steps in market demand is to identify the target market for the company’s
products or services. Surveys or customer feedbacks can be leveraged to determine the current
customer satisfaction levels. Any comments indicating dissatisfaction can be taken into
consideration for planning improvements that will eventually enhance customer satisfaction.

Business cycle

After identifying the potential markets, the next step is to assess the stage of the business cycle
that each market is undergoing. A business cycle ideally comprises of three stages: emerging,
plateau and declining. Markets that are in the emerging stage show higher consumer demand and
low supply of current products or services. The plateau stage depicts the break-even level of the
market, where the supply of goods meets the current market demand. A declining stage indicates
lagging consumer demand for the company’s goods or services.

Product Niche

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Once the market and their respective business cycles have been reviewed, companies must
develop products or tailor their services to meet a specific niche in the market. Products must be
differentiated from the peers in the market so that they meet the specific needs of consumers, and
thereby create higher demand for the company’s goods or services.

Evaluate competition

A crucial factor of demand analysis is determining the number of competitors in the market and
their current market share. Markets in the emerging stage of the business cycle tend to have
fewer competitors. This translates to a higher profit margin for your company.

Steps in the Demand Analysis

Demand analysis process needs to be done in a structured manner for a particular market and
affects the business strategy and decisions. Some of the steps which are to be followed for the
analyzing the demand are:

1. Market Selection

Demand is linked to a market. Without knowing the market properly, demand cannot be
analyzed. Every business would be operating in a single or multiple markets but it should be
clearly known. The first step is understanding the market and knowing the demand trends for the
particular product or service.

2. Product/Service category analysis

Next step would be to make sure which product or service is being used to analyze the demand.
A company may be having a product portfolio of 20 products. Total demand would not give a
picture at an individual level. It may happen that demand is huge for 5 categories and low for the
rest of 15 but still overall demand is high. For analysis, the product category has to be selected.
e.g. if a company is selling smart devices it needs to select phones or the tablets only for its
purpose.

3. Understanding Business Parameters

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Demand is never constant across a single year or a time. A less demand in a particular month
may not be a sign of an issue with the product line but it may be that due to climate change, the
demand of an item like an air conditioner may go low but it may again rise in summer season.

4. Understanding the competitors and partner trends

For an accurate demand analysis, we also need to see what our partners, vendors and suppliers
are predicting in the market as they are also in the same market and product category. Also
competitors performance and past sales can help us analyze the demand correctly.

Demand Analysis Parameters

The key drivers while determining demand are:

1. Product's own price

Price of the product plays an important role in demand analysis. If the price is high as compared
to competitors or what the customer can pay, the demand would be affected.

It can be low or high depending upon the price point of the product or service.

2. Customer income

They buying power of customer would definitely impact the demand of a product. If the product
or service is offered at a price point more than the affordability of a customer group then the
demand would be low hence customer income needs to be analyzed for demand.

3. Price of competitor goods

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As we discussed in the first 2 points about price and buying power, competitor's price adds to the
equation and can affect the demand of product/service. If competitor is priced lower then the
demand of that particular product would be more and vice versa. It can be different scenario in
case of luxury of niche products.

4. Tastes & requirements of the customer

Consumer behavior has be to taken into account. The product or service has to align with the
customer's preferences else there would be no demand for the product.

5. Expectations

Sometimes the customer has expectations from a new or existing product based on the overall
industry landscape. e.g. if every competitor in the market is offering free warranty service but
one company doesn't then most likely it would not be able to meet the customer expectations.

6. Number of customers in the market

The potential market is an important parameter for demand analysis as the customers drive the
demand. if the customers are too low then even though the first 5 points are in favor still the
demand would never rise as the customer base is too small for a viable business.

Application Of Demand Analysis-

In economics, the demand-supply study elucidates the dynamics between

buyers and sellers (in a free market). Other applications are as follows:

Price Control: When at war, governments use demand-supply analysis to set

a price ceiling for each product. The price ceiling is the maximum price of

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essential goods or services. In order to ensure public wellbeing during
pressure situations, this price is kept lower than the equilibrium price. 

Housing Rent Control: Here, the government ascertains a maximum rental

price that can be charged to tenants for occupying houses for rent. Again, the
set limit is below the equilibrium for housing rent price. This is done to
safeguard lower or middle-income tenants from exploitation.

Taxation: The analysis considers the impact of direct and indirect taxes on

consumers. When indirect taxes are raised, consumers are burdened. It results
in a shift in demand and supply curves.

Subsidy: To encourage a particular commodity, the government

offers subsidies to manufacturers. Such grants decrease the price of that
particular good or service. As a result, there is an increase in both demand
and supply.

Farm Product Pricing: The fair price of farm yield is also based on demand-
supply. In a perfectly competitive market, farmers are price takers, and
market forces (demand and supply) are the price makers. However, the
government sets a minimum price to protect farmers from losses.

Black Market Identification: Black marketers flourish when demand for a

commodity is high but the supply is low. They sell products at a price higher
than the ceiling price. The demand and supply study reveals such practices.

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Minimum Wage Legislation: State governments undertake such analyses
of labor markets to determine minimum wages. A minimum wage cap
protects employees and laborers from exploitation.

Consumer Surplus and Producer Surplus: A demand-supply study

explains the consumer surplus—the gap between the amount consumers are
willing to pay and the actual amount paid for a particular commodity. The
study also sheds light on the producer surplus the amount at which
producers were ready to sell and the actual selling price.

Objectives of Demand Analysis:

According to Dean, demand analysis has four managerial purposes:

1) Forecasting sales,

(2) Manipulating demand,

(3) Appraising salesmen’s performance for setting their sales quotas, and

(4) Watching the trend of the company’s competitive position.

Of these the first two are most important and the last two are ancillary to the
main economic problem of planning for profit.

i. Forecasting Demand:
Forecasting refers to predicting the future level of sales on the basis of
current and past trends. This is perhaps the most important use of demand
studies. True, sales forecast is the foundation for planning all phases of the

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company’s operations. Therefore, purchasing and capital budget
(expenditure) programmes are all based on the sales forecast.

ii. Manipulating Demand:

Sales forecasting is most passive. Very few companies take full advantage of
it as a technique for formulating business plans and policies. However,
“management must recognize the degree to which sales are a result only of
the external economic environment but also of the action of the company
itself.

Sales volumes do differ, “depending upon how much money is spent on

advertising, what price policy is adopted, what product improvements
are made, how accurately salesmen and sales efforts are matched with
potential sales in the various territories, and so forth”.
Often advertising is intended to change consumer tastes in a manner
favourable to the advertiser’s product. The efforts of so-called ‘hidden
persuaders’ are directed to manipulate people’s ‘true’ wants. Thus sales
forecasts should be used for estimating the consequences of other plans for
adjusting prices, promotion and/or products.

Importance of Demand Analysis:

A business 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 plant to be

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set up, and a host of other strategic business decisions largely depend on the
level of demand.

Why should a business firm invest time, effort and money to produce colour
TV sets in a poor country like Chad or Burma, unless there is sufficient de-
mand for it? A firm must be able to describe the factors that cause
households, governments or business firms to desire a particular product like
a typewriter. It is in this context that an understanding of the theory of
demand is really helpful to the practicing manager.

Demand theory is undoubtedly one of the manager’s essential tools in

business planning both short run and long run. The objective of corporate
planning is to identify new areas of investment.

In a dynamic world characterized by changes in tastes and preferences of

buyers, technological change, migration of people from rural to urban areas,
and so on, it is of paramount importance for the business manager to take into
account prospective growth of demand in various market areas before taking
any decision on new plant location (i.e., the place of birth decision of a
business firm).

If demand is expected to be stable, big sized plant may have to be set up.
However, if demand is expected to fluctuate, flexible plants (possibly with
lower average costs at the most likely rate of output) may be desirable.

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A huge amount of capital may be required to carry inventories of finished
goods. If demand is really responsive to advertising, there may be a strong
rationale for heavy outlay on market development and sales promotion.

Demand considerations may directly and indirectly affect day-to-day

financial, production and marketing decisions of the firm. Demand (sales)
forecasts do provide some basis for projecting cash flows and net incomes
periodically. Moreover, expectations regarding the demand for a product do
affect production scheduling and inventory planning.

Laws of Demand Analysis:

Perhaps one of the most fundamental concepts of economic theory is the Law
of Demand. The Law simply describes the inverse relationship between price
per unit (the dependent variable) and quantity demanded of a product (the
independent variable) per unit of time.

It simply states that all other variables remaining unchanged, as the price of a
product (say tea) falls, the quantity demanded (of it) increases. This may,
however, lead to a fall in the quantity demanded of coffee. Thus the Law of
Demand implies substitutability between products: an increase in the quantity
demanded of one commodity is almost always at the expense of another.

We are focusing on some key concepts of demand analysis, even at the cost
of repetition. To a layman demand refers to the desire for a commodity.

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For example, we often make such loose statements that the demand for
Maruti cars in India is universal. However, such statements are of little
significance to an economist whose primary purpose is to give a quantitative
expression to the above statement.

Therefore, to an economist the term ‘demand’ refers to the maximum number

of Maruti cars that may be purchased by all consumers at a particular price at
a particular point of time.

In general, to an economist the term ‘demand’ refers to a specific relationship

of various quantities (of a particular product) per unit of time (say a day, a
week, a month or a year) to such variable as the price of the product under
consideration, income of the buyer(s), prices of substitutes, prices of comple-
ments, expected future conditions, seasonal factors, availability of consumer
credit and various other factors.

It is possible to estimate demand relationships for a particular firm or for the

whole industry. The basic concepts to be developed in this section are equally
applicable to each type of demand, i.e., firm demand and industry demand.

The Law of Demand can be illustrated by a hypothetical table showing

alternative combinations of price and quantity demanded of say, Maruti cars.
The table is known as the demand schedule. It can also be explained
graphically as a line or curve.

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In fact, the demand curve is a graphical representation of the demand
schedule. The modern approach, however, is to explain the law in terms of a
function showing the relation between dependent and independent variables.

Here we propose to explain the law of demand graphically. This is the

general convention. This curve simply describes the relationship between the
price of a commodity (or service) and the quantity demanded of the same per
unit of time.

The convention is to express the demand curve for a product on a two-

dimensional graph as in Figure 10.1 It may be noted that the term demand
refers to the whole demand curve for a commodity while the term ‘quantity
demanded’ indicates a particular point on the demand curve.

The demand curve also represents the average revenue function for the
product. It is because average revenue is the same as the price of a product.
The demand curve usually slopes downward from left to the right. This is
because the quantity de- the price of a commodity falls (other variables re-

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maining unchanged), the quantity demanded of the commodity increases
along the same demand curve from left to right.

Functions of Demand Analysis:

i. The Demand Function:
In economic theory the concept of demand is often expressed in an abstract
way and economists often make use of the term ‘demand function’ to give a
quantitative expression of demand. This function shows the functional
relationship between the quantity demanded of a commodity and all factors
affecting the demand for the same.

ii. The Demand for Durable Goods:

Very few empirical demand studies have so far been made on the durable
goods and such goods have not attracted the attention they deserve.

Yet durable goods seem to have attracted excise duties, import tariffs,
quantitative trade controls, license fees, and other policy measures far out of
proportion to their weight in the national output or expenditure. Housing for
instance, is subject to a property (wealth) tax, and the return on business
capital, to a corporation income-tax as well.

Moreover, the demand for durable goods fluctuates so violently in

comparison with the demand for other sectors’ products, that most modern
theories assign it a key role in causing and/or exacerbating business cycles.

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Conclusion Of Demand Analysis-

Their demand will decrease if they expect lower future prices. Their demand
will decrease if they expect lower future income. Conclusion. Demand and supply
refer to the relationship price has with the quantity consumers demand and the
quantity supplied by producers. people will demand - that is buy - more of a good
or service at lower prices than at higher prices. When this relationship is graphed,
the result is a demand curve. A change in price results in movement along the
demand curve from one point to another and is called a change in the quantity
demanded.

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