What is 'Demand'? Explain the objectives of demand analysis.

What is ‘Demand’? Explain the objectives of demand analysis. Also discuss the important determinants of demand.

Ans.

Basically, ‘demand‘ means ‘a desire for a commodity backed by an ability and willingness to pay for it’. Unless a customer has enough purchasing power or resources and the willingness to spend his resources, just his desire for the product cannot be considered as his demand.

However, in Economics, ‘demand’ means the ‘quantity of a given article which would be taken at a given price, over a period of time at a place’. For example: saying ‘annual demand for TV sets in Delhi at an average price of Rs. 15,000/- a piece is 50,000.’ is a meaningful statement.

From the above statement we can see that a meaningful statement regarding demand for a commodity should contain the following information:

We can see that a meaningful

1. The quantity demanded of a commodity

2. The price at which the commodity is demanded

3. The time period over which a commodity is demanded

4. The market area in which the commodity is demanded

Objectives of Demand Analysis

1. Demand Forecasting: Forecasting of demand is calculating demand for a product or service at some future date.

2. Production Planning: Demand analysis helps in production planning in the sense that it gives an idea about how much to produce. In the absence of demand analysis, a there may be overproduction or underproduction. In both the cases the firm will face losses.

3. Sales Forecasting: Sales forecasting is based on the demand analysis. Promotional efforts of the firm are based on sales forecasting.

4. Control of business: For controlling the business in a better way, it is essential to have a proper budgeting of costs and profits that will be based on demand analysis.

5. Inventory Control: A satisfactory control of raw materials, semi finished and finished goods, spare parts etc. can be done on the basis of demand analysis.

6. Growth and Long-term Investment Programs: Demand analysis is necessary to determine the growth rate of the firm and its long-term investment planning.

7. Economic Planning and Policy Making: Demand analysis helps the policy makers to make proper planning and better distribution of the scarce resources. The government can determine its export and import policies on the basis of demand forecasting.

The knowledge of the factors of market demand for a product and the nature of relationship between demand and factors affecting demand can be very helpful in analyzing and estimating demand for a product. Following are the various factors that determine market demand for a product:

(i) Price of the product: The price of a product is one of the most important factor of demand in the long-term and perhaps the only factor in the short-term. As per law of demand, we know that the price of a product and its demand is inversely related. It implies that a rise in the price of a product results in fall in demand for it.

(ii) Price of the related goods: The demand for product is also affected by the changes in the price of related goods. Related goods may be substitutes or complementary goods.

Substitutes – Two products are substitutes for each other if they satisfy the same want and a change in the price in one product affects the demand for the other product in the same direction. E.g., If Tea and Coffee are substitutes; a rise in price of tea will result in rise in demand for coffee.

Complementary Goods – Two products are complementary products when the use of the two goods goes together so that their demand changes (increases or decreases) simultaneously. E.g., Milk and sugar to tea are complementary products; butter and jam to bread; In economics, two goods Le termed as complementary to one another if an increase in the price of one causes a decrease in the demand for the other.

(iii) Income of the consumer: The ability to buy a product depends upon the income of the consumer. When the income of the consumer increases, they buy more as their purchasing power increases, as a result demand increases and when their income falls, they buy less as their purchasing power decreases, as a result demand decreases. Usually, people with higher current disposable incomes spend a larger amount on consumer goods than those with a lower income.

(iv) Consumer’s tastes and preferences: Consumer’s taste and preferences play an important in determining the demand for a product. Taste and preferences generally depend on life-style, habit, social customs, religious values attached to a product, general level of living in the society and age and sex of the consumer’s. Changes in these factors changes consumer’s tastes and preferences. As a result, consumer’s reduce or stop consuming one product and add new ones to their consumption pattern. For example, consumers are ready to pay more for ‘modern goods’ even if their utility is same as the old fashioned product e.g., flat TV in place of usual TV, new suits in place of old fashioned suits.

(v) Advertisement expenditure: Advertisement costs are incurred with the objective of promoting sales of the product. Advertisement helps in increasing demand for the product in at least four ways: (a) by informing potential customers about the availability of the product, (b) by showing its superiority over rival’s product; (c) by influencing consumer’s choice over the rivals product and (d) by setting new fashion and changing tastes. E.g.. demand for detergents and cosmetics are mainly caused by advertisement.

(vi) Consumer’s expectation: Consumer’s expectations regarding future prices, income and supply of goods play an important role in determining the demand for goods and services in the short run. If a consumer expects a rise in prices he may buy large quantities which will increase the demand for a product. Similarly, if he expects fall in prices in the future, he will buy less at present and hence the demand will fall. Same way, expectation of rising income in the future may increase his current consumption. E.g., announcement of dearness allowance, bonus and revision of pay scale encourages a consumer to increase current purchases.

(vii) Growth of population: The total demand for a product which most people uses depends on the size of the population. With the increase in population, there will be a larger demand for a product.

(viii) Tax Rate: High tax rate would generally mean a low demand for goods. At certain times the government restricts the consumption of certain products by imposing high tax rate on it.

(ix) Weather conditions: Seasonal factors also affect demand. The demand for certain items purely depends on climatic and weather conditions. For example, growing demand for cold drinks in the summer and for woolen clothes in the winter.

(x) Availability of Credit: The purchasing power of a consumer is influenced the availability of credit. If there is availability of cheap credit, consumer’s tend to spend more on consumer durables thereby increasing demand for certain products.

(xi) Demonstration effect: When new commodities or new models of existing ones appear in the market, rich people buy them first. For example, if a new model of a car is launched in the market, rich people will would mostly be the first buyers. Some people buy them because they have a genuine demand for them. Few buy them to show their status and affluency. However, when the market is flooded by these products, many people buy them not because they have a genuine need of it but because their neighbours have bought these products. The purchases made by those who buy it later arise due to such feelings as jealousy, competition and equality among friends and relatives and desire to raise their social status.

A purchase made because of these factors is known as ‘Demonstration Effect’ or the ‘Bandwagon Effect’.

(xii) Distribution of National Income: The level of national income is the basic determinant of the market demand for a product. Higher the national income, higher is the demand for all normal goods and product.