Demand Analysis and Market

survey

By
Dr. B.S. Choudhary
IIT(ISM) Dhanbad
Demand
Curves
Introduction
 Demand is the primary motive force behind all other economic activities-be it
production, be it consumption, be it employment or be it exploration. Without
demand no investment will be made, and consequently no wealth will be
generated or distributed.
 Demand is the quantity of consumers who are willing and able to buy products at
various prices during a given period of time. Demand for any commodity implies
the consumers' desire to acquire the good, the willingness and ability to pay for it.
 The demand for a item that the consumer chooses, depends on the price of it, the
prices of other goods, the consumer’s income and her tastes and preferences.
 Analysis of the problems related to demand have to be based on the total
knowledge of the events and trends in a number of areas of economic activity like
resources, infrastructure, production, processing, export, import consumption,
substitute, etc. this also brings us to the topic of market survey which is closely
related to demand analysis. A practical useful demand analysis is based on
observations and information gathered from a well-planned survey of the markets.
Meaning and law of demands

 It should be noted that demand may not have anything to do with actual
consumptions at all, it may be for export, or it may be for stock.
 Demand is , therefore, expressed as annual demand, monthly demand,
etc. and with reference to some particular price quotation.
 The law of demand describes an inverse relationship between price and
quantity demanded of a good. If the price of the good increases, then the
demand falls, because the consumer is usually reluctant to spend more
and more money on purchase. If the price of the good decreases, the
demand for the good increases because with price being less, the
consumer prefers to buy the goods.
 Law of Demand, along with Law of Supply is used to explain how market
economies allocate resources and determine the prices of goods and
services in everyday transactions.
 This relationship depends on several assumptions:-
 The individual buyer should remain uncharged
 The prevailing social fashion should remain consistent
 The goods demand are not for seasonal consumption
 The buyers income should remain constant
 The prices of other goods in which the consumers may be interested
should not change
 There should not be any emergency like war, famine etc.
 There should be enough quantity available in the market
 No individual buyer is in position to influence the price
 No new substitute is envisaged to be introduced into the market
But in practice, none of these assumptions ever holds good, and the
actual quantity purchased at a given price may not be the same as
would have been purchased at the same price in an ideal situation.
 However, by and large, a change in price of commodity affects the
demand. The extend to which demand respond to price changes, has
been termed as ‘ elasticity of demand’ the demand of necessities is
usually inelastic , while that of luxuries is elastic.
 There are many scenario of mineral markets:
 Raw material for other industries.
 Finished products can be of necessities or luxuries
 Mineral have multiple uses
 Susceptible to substitute
 minerals are sensitive to technological innovations
 Government policy
Methodology of Demand Analysis

 The goal of the most theories, in a broad sense, to predict or

The art of reliable forecasting of future mineral demand. The
following techniques are mainly used:
 Analysis of Time Series Data
 Analysis based on end use
 Analysis based on Macro-economic variables
 Analysis based on Econometric Model
 Contingency Forecasts
 Intensity of use method
Analysis of time series data

 This method has been widely used in India by different

organizations, like the planning commission, IBM etc for
forecasting future demand of different minerals.
 The basic principle lies in consideration of past production
or consumption data, exports and imports etc.
 In this methodology, it is assumed that the
production/consumption of a mineral changes
automatically as time passes, and all other influence are
taken care of by time alone. To find the trends various
methods are tried such as: arithmetic averaging of growth
rate, moving average method and trend line analysis.
 Arithmetic averaging of growth rate,: data for the past say
10 years are considered and the percentage changes in
each successive year are calculated. Then, by taking
simple arithmetic average of these percentages, the
overall annual growth rate in demand is worked out., it is
an oversimplification of problem MAt+1 = [Dt + Dt-1 + ... +Dt-n+1] / n
 Moving average method: based on the percentage
increase from block to block, the past overall growth rate
can be calculated for future projection. Weighted MA(3) = w .D + w .D + w .D
1 t 2 t-1 3 t-2
For estimating the past trend of consumption, moving
average was calculated by forming overlapping blocks,
each of 3 years and then overall average annual growth
rate can be workout.
 Trend line analysis: regression technique applied to time
series data. Different equations are obtained , linear,
quadratic and exponential between years vis
consumption/production.
Reliability is questionable due to political, social and
technological factors
Analysis based on end use
 In this methodology, the future demand is not projected directly out of the
past demand data. Instead, the production of the end product, in the
manufacture of which the mineral is consumed, is considered. Given the
future target of production of the end products and the consumption norm of
the input mineral, the future demand of the latter can be assessed.
 The future targets of production of various important mineral based end
product like steel, cement, thermal power etc. are worked out by the
concerned industries themselves in consultation with the government and the
planning commission.
 Those targets are based on a host of economic criteria like availability of
capital, growth of population, government policies, trends of various R&D
activities, infrastructure constraints, and so on.
 The consumption norms of different minerals are estimated on the basis of the
past data for production of end products and those for consumption of
mineral raw materials. The general trend in the consumption pattern, or the
average of the norms during the past 5 or 10 years may be taken.
 Demerits : limitation in estimation of actual mineral consumption, only few
principle end use industries are considered, future technological innovations
on the consumption norm cannot be taken,
Analysis based on Macro-economic variables

 Macro-economic parameters are the independent or

explanatory variables, and the mineral demand is the
depended variable.
 The relation between a single macro-economic
variable and of a mineral is expressed in the form of an
equation:
Yt=a+bxt+et
Yt=end use consumption of mineral commodity at time t
a, b are parameters and t may have value 1, 2, 3--
Xt=macro economic variables at time ,t
et is disturbance term
USBM has identified 38 macro
economic variables
 Gross national product
 Population
 Gross private domestic
investment
 New construction activity
 Total industrial production
 Textile mill production
 Paper and paper products
 Chemical and its products
 Basic chemical
 Synthetic materials
 Paints
 Petroleum products
 Rubbers and plastic products
 Stone, glass and clay
 Iron and steel
 Basic steel and mill products
 Fabricated metals products
 Construction and allied
equipment
 Electric machinery
 House hold equipments
 Communication equipment
 Transport equipments
 Motor vehicles and parts
 Automobiles
 Aircrafts and parts
 Ships and boats
 Food and food products
 Ordnance
Analysis based on Econometric Model
 Econometric forecasting models are systems of relationships between
variables such as GNP, inflation, exchange rates etc. Their equations
are then estimated from available data, mainly aggregate time series
 In this analysis the mineral consumption are directly prepared
 In this model, uses multiple regression equation involving as many
economic variables as possible so that the disturbance term tends to
be extremely insignificant.
Zt=a+a1ut+a2vt+a3wt+a4xt+a5yt+et
a1,a2----unknown parameters, ut, wt,----economic variables
 This methodology aims at taking into account all the economic factors
which concurrently influence the demand for a mineral.
 But this methodology has its own complexities: All the economic
variables must be quantifiable, It requires innumerable trials to estimate
the best fit of unknown parameters in a multiple regression equation
involving large number of variables.
The econometric methods are comprised of two basic methods, these
are:
 Regression Method: The regression analysis is the most common method
used to forecast the demand for a product. This method combines the
economic theory with statistical tools of estimation. The economic
theory is applied to specify the demand determinants and the nature
of the relationship between product’s demand and its determinants.
Thus, through an economic theory, a general form of a demand
function is determined. While the statistical techniques are applied to
estimate the values of parameters in the projected equation.
 for a single variable demand function, the simple regression equation is
used while for multiple variable functions, a multi-variable equation is
used for estimating the demand for a product.
 Simultaneous Equations Model: Under simultaneous equation model,
demand forecasting involves the estimation of several simultaneous
equations. These equations are often the behavioral equations, market-
clearing equations, and mathematical identities.
Contingency Forecasts
 This is known as judgemental method of analysis
 The contingency forecast become useful for providing room for
some unexpected developments, which are totally unrelated
to the past trends, and which may cause the future demand to
deviate from an otherwise expected trend. Such a
contingency may be due to sudden technological
breakthroughs, substitution, change in government policies
swings in consumers tastes and fashions etc.
 In this methodology the future demands is projected on the
basis of the previous models , are taken as starting point and
then experts opinion, born out of their instinctive judgement, is
pooled to make an assessment of the extent, to which the
future demands are likely to deviate from that starting point.
Intensity of use method
 The ratio of consumption to a measure of national income such as
Gross National income or Gross domestic products is defined as
Intensity of use (I,U)
 The intensity of use hypothesis states that there is an inverted U-
shaped relationship between the amount of a material used per unit
of output, or its intensity of use, and the level of economic
development, as reflected in gross domestic product (GDP) per
capita
 The existence of such a relationship was first suggested by Wilfred
Malenbaum in the context of steel demand. “At the early stages of
economic growth when per capita income levels are low, material
requirements are also low, for such economies are based largely on
unmechanized agriculture. As industrialization occurs,
manufacturing, construction, and other material-intensive activities
expand. As development continues, however, the need for houses,
factories, roads, automobiles, and machinery gradually is satisfied,
and consumer demand increasingly shifts toward services.
 Limitation of this is that the impact of likely technological changes, materials
substitution and consumer preferences on the future consumptions not given due
importance.
 Market Survey
 Survey method is one of the most common and direct methods of
forecasting demand in the short term. This method encompasses
the future purchase plans of consumers and their intentions. In this
method, an organization conducts surveys with consumers to
determine the demand for their existing products and services and
anticipate the future demand accordingly.
 i. Experts’ Opinion Poll:
 Refers to a method in which experts are requested to provide their opinion about
the product. Generally, in an organization, sales representatives act as experts who
can assess the demand for the product in different areas, regions, or cities.
 Sales representatives are in close touch with consumers; therefore, they are well
aware of the consumers’ future purchase plans, their reactions to market change,
and their perceptions for other competing products. They provide an approximate
estimate of the demand for the organization’s products. This method is quite simple
and less expensive.
 However, it has its own limitations, which are discussed as follows:
 a. Provides estimates that are dependent on the market skills of experts and their
experience. These skills differ from individual to individual. In this way, making exact
demand forecasts becomes difficult.
 b. Involves subjective judgment of the assessor, which may lead to over or under-
estimation.
 c. Depends on data provided by sales representatives who may have inadequate
information about the market.
 d. Ignores factors, such as change in Gross National Product, availability of credit,
and future prospects of the industry, which may prove helpful in demand
forecasting.
 ii. Delphi Method:
 Refers to a group decision-making technique of forecasting demand. In this
method, questions are individually asked from a group of experts to obtain
their opinions on demand for products in future. These questions are
repeatedly asked until a consensus is obtained.
 In addition, in this method, each expert is provided information regarding
the estimates made by other experts in the group, so that he/she can revise
his/her estimates with respect to others’ estimates. In this way, the forecasts
are cross checked among experts to reach more accurate decision
making.
 Ever expert is allowed to react or provide suggestions on others’ estimates.
However, the names of experts are kept anonymous while exchanging
estimates among experts to facilitate fair judgment and reduce halo effect.
 The main advantage of this method is that it is time and cost effective as a
number of experts are approached in a short time without spending on
other resources. However, this method may lead to subjective decision
making.
 iii. Market Experiment Method:
 Involves collecting necessary information regarding the current and
future demand for a product. This method carries out the studies and
experiments on consumer behavior under actual market conditions. In
this method, some areas of markets are selected with similar features,
such as population, income levels, cultural background, and tastes of
consumers.
 The market experiments are carried out with the help of changing prices
and expenditure, so that the resultant changes in the demand are
recorded. These results help in forecasting future demand.

 There are various limitations of this method, which are as follows:

 a. Refers to an expensive method; therefore, it may not be affordable by
small-scale organizations
 b. Affects the results of experiments due to various social-economic
conditions, such as strikes, political instability, natural calamities
Market survey
 It is “ gathering, recording and analysing of all facts about problems
relating to the transfer and sale of goods and services from producer to
consumer’
 It is also described as finding out not only the consumers want, but also
what they will want in the foreseeable future.
 If analyses reveal possibility of sufficient demand at present and in future ,
then other related aspects like sources of supply, quality, production
planning, modalities of distribution and sale, fiscal constraints etc are
studied.
 No demand no survey
 Relevant data like political , social and cultural environments. Consumers
tastes and preferences, trends in R&D and substitution, prices of other
related commodities-are collected in systematic market surveys.
 The modalities of data collection is broadly through desk research such as
study report, literature etc and field survey which consists in discussion with
consumers and producers understanding their problems, pooling of
experts opinion etc.
Thanks