Demand Analysis

Dr. Amit Singh Khokhar

Assistant Professor
The Market Economy
A market is (a place) where individuals, households, and businesses are engaged in buying and
selling products and services through various modes.

The working of a market is governed by two forces, which are demand and supply.

These two forces play a crucial role in determining the price of a product or service and size of the
market.
The Situation
Shilpa Shah, GM Marketing, Healthy Foods Corporation, went through the marketing research
group’s (MRG) report that predicted ready-to-eat noodles to be the new line of food products. She
knew from her own experience how her two school-going children and their friends loved a bowl of
hot noodles, but she wondered if Ashok Kumar, her CEO, would be convinced. As she handed him
the report, she mentioned in passing “Do you recall how we had launched the biscuits division five
years back? We hardly expected it to be such a great success in spite of the stiff competition from
our arch-rivals, Britannia and Parle.” Ashok glanced at the figures and asked “So noodles are going
to be the bigger growth engine for the future, even better than the brown bread we launched last
year?” the instant noodles production in the Indian market is around 40,000 tonnes and is valued at
₹ 400 crores. The report said that, with just a couple of brands existing in India, noodles as a
popular snack food is yet to develop fully here. So far, in the two-minute noodles segment, there is
only Maggi that has a dominant share, followed by Top Ramen. Ashok commented, “It is obvious
that Healthy Foods must get into the noodles business, especially as there are few players in this
market segment.”
“I know you have a good intuition for what’s new in the market. But before we go headlong into this
new venture, we would have to analyze the factors that drive the demand for ready-to-eat noodles.
What snack foods do average middle-class Indians have at home, instead of noodles?” “Mixture, alu
bhujia, chaat, and its variations,” replied Shilpa. Then, the GM reminded her boss about the CII
report on the food business and their findings. Ashok continued, “I think it will be better if you help
me understand what drives the noodles market and why will people be ready to accept noodles in
place of traditional snacks. Let us then look at what are the key determinants of the demand for
ready-to-eat noodles? Shilpa, can you provide me with a report on the elements that are driving the
demand for noodles. How responsive will people be to changes in the price of competing products
such as alu bhujia, mixture, and chaat? The answer to these questions will help us better
understand how to price and position our brand in the marketplace.”
Demand
Demand is a relationship between various possible prices of a product and the quantities purchased
by consumers at each price. In this relationship, price is an independent variable and the quantity
demanded is the dependent variable. In simple terms, demand can be defined as the quantity of a
product that a buyer desires to purchase at a specific price and time.

Alternatively: Demand may be defined as quantities of a good or service that people are ready to
buy at various prices within some given time period, with other factors besides price held constant.
Demand refers to the willingness or effective desire of individuals to buy a product supported by
their purchasing power. Here, effective desire is the quantity of a commodity or service that is
purchased at a given time period at a given price from the market.

The three terms demand, want, and desire are often used interchangeably. However, in economics,
each of these terms has a different meaning.

Suppose an individual is willing to purchase a personal computer for his/her work, it becomes
his/her desire. If the individual has the purchasing power to buy the computer but is not willing to
sacrifice his/her money, it becomes a want. However, if the individual is willing to use the money to
purchase the computer, it becomes a demand.

Willingness to purchase + ability to purchase + willingness to pay

The quantity demanded is the amount that a customer is willing to purchase. However, the quantity
demanded is not always equal to the actual purchase. This is because the commodity or service may
not be available in the required quantity. (what about the supply?)
Individual vs Market Demand

Price per QD1 QD2 QD3 QDM

unit
10 1 2 3 6
8 3 5 7 15
6 5 8 11 24
4 7 11 15 33
2 9 14 19 42
The demand for a product in the market is governed by the law of demand, which states that the relationship
between these two variables can be established if other factors affecting the quantity demanded of a product
remain constant (ceteris paribus).

As per the law of demand, the demand for a product falls with an increase in its prices and vice versa, while
other factors are constant.

Demand Function

DX = f(PX)

DX = Demand for commodity x

PX = Price of commodity x

f = Function
Law of Demand

The law of demand states that the quantity purchased varies inversely with price. In other words, the
higher the price, the lower the quantity demanded.

Determinants of Demand

• Price

• Non-price determinants
– Prices of related goods
– Tastes and preferences
– Income
– Future expectations
– Number of buyers
Price
Changes in price result in changes in the quantity demanded (movement along the demand curve)
Non-price determinants
Changes in non-price determinants result in changes in demand (shifts in the demand curve)
Contraction and Expansion of Demand
Exceptions to the Law of Demand
• Giffen Goods

• Articles of Distinction/Veblen Goods

• Conspicuous Necessities

• Consumers’ Ignorance

• Situations of Crisis/Panic Buying

• Future Rise Expectations

The GM remarked, “My staff have gone through all the available information about the potential
market for ready-to-eat noodles. Right now the supply of noodles is provided by Nestle and a
Japanese subsidiary of Top Ramen. I think the explosive demand for noodles can be explained by
using the traditional economic factors that drive the demand for any product. Activity-filled lifestyle,
long-distance commuting, an increasing number of working adults, and higher income with two
earning members have created a shift toward ready-to-eat snacks. Let me summarize these factors:

1. The impact of income on demand: The ready-to-eat noodles appeal to consumers with incomes.
One way that we got an insight into this aspect of demand for noodles is by looking at the
phenomenal growth of the retail food chain like Spencer’s Daily. Spencer’s Daily caters to exactly the
same type of consumer that would buy ready-to-eat noodles. One of the key reasons for the success
of their outlet is an increase in the proportion of Indian households earning ₹ 100,000 or more from
18 per cent 10 years ago to 22 per cent in 2004. This increase in the income segment that desires
and can afford this product has clearly helped boost the overall market demand for ready-to-eat
noodles.
2. The impact of tastes and preferences on demand: Our preliminary marketing studies indicate that
the people who buy this product actually consider it a ‘necessary’ part of their life. In other words,
it is not simply a product, but part of a family lifestyle.

3. Prices of related products: We do not know for certain, but we believe that noodles are
considered a closer substitute for mixtures and chaats than either dosa or idly. We know that a 250
gm packet of Haldiram’s bhujia is ₹ 22, whereas a packet of noodles is ₹ 10.

“Okay, Shilpa, I really like this idea. But I’m not fully convinced, and I also think we should see how
our new initiatives in the brown bread business turn out before we try something else. Have your
staff send me more details and I would be particularly interested if you were able to provide me
with a quantitative analysis of the impact of those factors you mentioned on the demand for
noodles. But to be honest, you have really got me thinking seriously about this product. In fact, I
wonder how much we would have to pay for Chinese snacks? But maybe that’s jumping too far
ahead. Let’s see the analysis first.”