Demand reflects the size and the pattern of market. Business activity is always marketdetermined.

The manufacturers inducement to invest in a given line of production is limited by the size of market The demand for output and input; the demand for the firm and the industry; the demand by the consumer and stockist; For example, suppose the firm is aiming at customer service not profit. How can it ensure quantity and quality of service, without analyzing what the customer really wants? Or suppose, the firm is destined to discharge social responsibility of business. Can this be done without evaluating social preferences? Tastes, preferences and choices are all concepts directly built into the economic concepts of demand.

Demand and its determinants

SIGNIFICANCE OF DEMAND ANALYSIS

Demand is one of the crucial requirements for the functioning of any business enterprise its survival and growth.
Information on the size and type of demand helps management in planning its requirements of men, materials, machines, money and what have you.

example

if the demand for a product is subject to temporary business recession, the firm may plan to pile up the stock of unsold products. If the demand for a product shows a trend towards a substantial and sustained increase in the long run, the firm may plan to install additional plant and equipment to meet the demand on a permanent basis. If the demand for a firms product is falling, while its rivals sale is increasing, the firm needs to plan its sales tactics; the firm may need to undertake some sales promotion activity like advertisement. If the firms supply of the product is unable to meet its existing demand, the firm may be required to revise its production plan and schedule; or the firm may have to review its purchase plan for inputs and the suppliers response to input requirements by the firm.

The common theme underlying these examples is that the whole range of planning by the firmproduction planning, inventory planning, cost budgeting, purchase plan, market research, pricing decision, advertisement budget, profit planning etc. call for an analysis of demand. The decision which management makes with respect to any functional area, always hinges on an analysis of demand.

Demand analysis seeks to identify and measure the forces that determine sales; it reflects the market conditions for the firms product. Once the demand analysis is done, the alternative ways of creating, controlling or managing demand can be inferred.

Activity 1 Briefly answer the following questions : a) Why is a person interested in knowing the demand for the shares he has purchased? b) Why should the Food Corporation of India be concerned about the demand for foodgrains to be released for public distribution system?

CONCEPT OF DEMAND

Demand for product implies:

a) desires to acquire it, b) willingness to pay for it, and c) Ability to pay for it.

All three must be checked to identify and establish demand.

example

A poor mans desires to stay in a five-star hotel room and his willingness to pay rent for that room is not demand, because he lacks the necessary purchasing power; so it is merely his wishful thinking. Similarly, a misers desire for and his ability to pay for a car is not demand, because he does not have the necessary willingness to pay for a car.

It should also be noted that the demand for a product-a commodity or a servicehas no meaning unless it is stated with specific reference to the time, its price, price of its related goods, consumers income and tastes etc. This is because demand, as is used in Economics, varies with fluctuations in these factors.

To say that demand for an Atlas cycle in India is 60,000 is not meaningful unless it is stated in terms of the year, say 1994 when an Atlas cycles price was around Rs. 800, competing cycles prices were different or same.

To Sum up

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.

Activity 2

a) Construct some specific examples showing that despite having a desire, a person may not have i) willingness to pay : ii) ability to pay : b) What do you mean by : i) A households demand for a T.V. set: ii) A firms demand for labour : iii) Our Governments demand for defence equipment:

Demand Function and Demand Curve

Demand function is a comprehensive formulation which specifies the factors that influence the demand for the product. What can be those factors which affect the demand?

For example

Dx = D (Px, Py, Pz, B, W, A, E, T, U) Here Dx, stands for demand for item x (say, a car) Px, its own price (of the car) Py, the price of its substitutes (other brands/models) Pz, the price of its complements (like petrol) B, the income (budget) of the purchaser (user/consumer) W, the wealth of the purchaser A, the advertisement for the product (car) E, the price expectation of the user T, taste or preferences of user U, all other factors.

Impact of these determinants

Briefly we can state the impact of these determinants, as we observe in normal circumstances: i) Demand for X is inversely related to its own price. As price rises, the demand tends to fall and vice versa. ii) The demand for X is also influenced by its related priceof goods related to X. For example, if Y is a substitute of X, then as the price of Y goes up, the demand for X also tends to increase, and vice versa. In the same way, if Z goes up and, therefore, the demand for X tends to go up.

Psychology of consumer

iii) The demand for X is also sensitive to price expectation of the consumer; but here, much would depend on the psychology of the consumer; This is speculative demand. When the price of a share is expected to go up, some people may buy more of it in their attempt to make future gains; others may buy less of it, rather may dispose it off, to make some immediate gain. Thus the price expectation effect on demand is not certain.

iv) The income (budget position) of the consumer

It is another important influence on demand. As income (real purchasing capacity) goes up, people buy more of normal goods and less of inferior goods. Thus income effect on demand may be positive as well as negative. The demand of a person (or a household) may be influenced not only by the level of his own absolute income, but also by relative incomehis income relative to his neighbours income and his purchase pattern. Thus a household may demand a new set of furniture, because his neighbour has recently renovated his old set of furniture. This is called demonstration effect.

v) Past income or accumulated savings

It determine the nominal stock of wealth of a person. To this, you may also add ones current stock of assets and other forms of physical capital; it will have an influence on his demand.

vi) Advertisement

It also affects demand. It is observed that the sales revenue of a firm increases in response to advertisement up to a point. This is promotional effect on demand (sales).

vii) Tastes, preferences, and habits of individuals

Sometimes, even social pressure customs, traditions and conventions exercise a strong influence on demand. These socio-psychological determinants of demand often defy any theoretical construction; these are non-economic and non-market factorshighly indeterminate.

Demand Function

You may now note that there are various determinants of demand, which may be explicitly taken care of in the form of a demand function. In other words, a generalized demand function is a multivariate function whereas the demand curve is a single variable demand function. Dx = D(Px)

TYPES OF DEMAND

i) Direct and Derived Demands

Direct demand refers to demand for goods meant for final consumption; it is the demand for consumers goods like food items, readymade garments and houses. By contrast, derived demand refers to demand for goods which are needed for further production; it is the demand for producers goods like industrial raw materials, machine tools and equipments. Thus the demand for an input or what is called a factor of production is a derived demand; its demand depends on the demand for output where the input enters. For example, the demand for gas in a fertilizer plant depends on the amount of fertilizer to be produced and substitutability between gas and coal as the basis for fertilizer production.

ii) Domestic and Industrial Demands

The example of the refrigerator can be restated to distinguish between the demand for domestic consumption and the demand for industrial use. Coal has both domestic and industrial demand, and the distinction is important from the standpoint of pricing and distribution of coal.

iii) Autonomous and Induced Demand

When the demand for a product is tied to the purchase of some parent product, its demand is called induced or derived. For example, the demand for cement is induced by (derived from) the demand for housing. As stated above, the demand for all producers goods is derived or induced. In addition, even in the realm of consumers goods, we may think of induced demand. Consider the complementary items like tea and sugar, bread and butter etc. The demand for butter (sugar) may be induced by the purchase of bread (tea). Autonomous demand, on the other hand, is not derived or induced. All direct demand may be loosely called autonomous.

iv) Perishable and Durable Goods Demands

we can classify goods into several categories: single-use consumer goods, single-use producer goods, durable-use consumer goods and durableuse producers goods. Non-durable items are meant for meeting immediate (current) demand, but durable items are designed to meet current as well as future demand as they are used over a period of time. Because of continuous use, such assets like furniture or washing machine, suffer depreciation and thus call for replacement. Thus durable goods demand has two varieties replacement of old products and expansion of total stock. Such demands fluctuate with business conditions, speculation and price expectations.

v) New and Replacement Demands

If the purchase or acquisition of an item is meant as an addition to stock, it is a new demand. If the purchase of an item is meant for maintaining the old stock of capital/asset, it is replacement demand. Such replacement expenditure is to overcome depreciation in the existing stock. The demand for spare parts of a machine is replacement demand, but the demand for the latest model of a particular machine (say, the latest generation computer) is a new demand.

vi) Final and Intermediate Demands

This distinction is again based on the type of goods- final or intermediate. The demand for semi-finished products, industrial raw materials and similar intermediate goods are all derived demands, i.e., induced by the demand for final goods. In the context of input-output models, such distinction is often employed.

vii) Individual and Market Demands

A market is visited by different consumers, consumer differences depending on factors like income, age, etc. They all react differently to the prevailing market price of a commodity. For example, when the price is very high, a low-income buyer may not buy anything, though a high income buyer may buy something. In such a case, we may distinguish between the demand of an individual buyer and that of the market ,which is the aggregate of individuals. You may note that both individual and market demand schedules (and hence curves, when plotted) obey the law of demand. But the purchasing capacity varies between individuals. For example, A is a high income consumer, B is a middle-income consumer and C is in the low-income group. This information is useful for personalized service or target-group-planning as a part of sales strategy formulation.

viii) Total Market and Segmented Market Demands

Different individual buyers together may represent a given market segment; and several market segments together may represent the total market. For example, the Hindustan Machine Tools may compute the demand for its watches in the home and foreign markets separately; and then aggregate them together to estimate the total market demand for its HMT watches. This distinction takes care of different patterns of buying behavior and consumers preferences in different segments of the market. Such market segments may be defined in terms of criteria like location, age, income, nationality, and so on

x) Company and Industry Demands

An industry is the aggregate of firms (companies). Thus the Companys demand is similar to an individual demand, whereas the industrys demand is similar to aggregated total demand. For example, you may think of the demand for cement produced by the Cement Corporation of India (i.e., a companys demand), or the demand for cement produced by all cement manufacturing units including the CCI (i.e., an industrys demand). The determinants of a companys demand may not always be the same as those of an industrys. The inter-firm differences with regard to technology, product quality, financial position, market (demand) share, market leadership and competitiveness--- all these are possible explanatory factors. In fact, a clear understanding of the relation between company and industry demands necessitates an understanding of different market structures.