Demand is one of
the crucial requirements for the existence of any business firm. Firms are
interested in their profit and sales, both of which depend partially upon the
demand for the product. The decisions, which management makes with respect to
production, advertising, cost allocation, pricing, inventory holdings, etc.
call for an analysis of demand. While how much a firm can produce depends upon
its capacity and demand for its products. If there is no demand for a product,
its production is unworthy. If demand falls short of production, one way to
balance the two is to create new demand through more and better advertisements.
The more the future demand for a product, the more inventories the firm would
hold. The larger the demand for a firm's product, the higher is the price it
can charge.
Demand
analysis seeks to identify and measure the forces that determine sales. Once
this is done the alternative ways of manipulating or managing demand can easily
be inferred. Although, demand for a finri's product reflects what the consumers
buy, this can be influenced through manipulating the factors on which consumers
base their demands. Demand analysis attempts to estiinate the demand for a product in future, which further helps
to plan production based on the estimated demand.
MEANING OF DEMAND
Demand for a good implies the
desire of an individual to acquire the product. It also includes willingness
and ability of ail individual to pay for the product. For example, a miser's
desire for and his ability to pay for a car is not demand, for he does not have
the necessary will to pay for the car. Similarly, a poor person's desire for·
and his willingness to pay for a car is not demand because he lacks the
necessary purchasing power. One can also imagine an individual, who possesses
both the will and the purchasing power to pay for a good. But this purchasing
power is not the demand for that good, this is because he does not have the
desire to buy that product. Therefore, demand is successful when there are all the
three factors: desire, willingness and ability. It should also be noted that
demand for any goods or services has no meaning unless it is stated with
reference to time, price, competing product, consumer's incomes, tastes and
preferences. This is because demand varies with fluctuations in these factors.
For example, the demand for an Ambassador car in India is 40,000 is meaningless
unless it is stated that this was the demand ·in 1976 when an Ambassador car's
price was around thirty thousand rupees. The price of the competing cars’
prices were around the same, a Bajaj scooter's price was around five thousand
rupees and petrol price was around three and a half rupees per litre. In 1977,
the demand for Ambassador cars could be different if any of the above factors
happened to be different. Furthermore, it should be noted that a product is
defined with reference to its particular quality. If its quality changes it can
be deemed as another product. Thus, the demand for any product is the desire, wi1lihigness
and ability to buy the product with reference to a partkular time and given
values of variables on which it depends.
TYPES OF
DEMAND
The demand
for various kinds of goods is generally classified on the basis of kinds of
consumers, suppliers of goods, nature of goods, duration of consumption goods,
interdependence of demand, period of demand and nature of use of goods
(intermediate or final), The major classifications of demand are as follows:
· Individual
and market demand
· Demand for
firm's prodtictand industry's products
· Autonomous
and derived demand
· Demand for
durable and non-durable goods
· Short-term
and long-term demand
Individual
and Market Demand
The
quantity of a product, which an individual is willing to buy at a particular
price during a specific time period, given his money income, his taste, and
prices of other commodities (particularly substitutes and complements), is
called 'individual's demand for a product'. The total quantity, which all comsumers
are willing to buy at a given price per time unit, given their money income,
taste, and prices of other commodities is known as 'market demand for the
good'. In other words, the market demand for a good is the sum of the
individual demands of all the c6-nsumers of a product, over a time period at
given prices.
Demand for Firm's Product and
Industry's Products
The
quantity of a firm's yield, that can be disposed of at a given price over a
period refers to the demand for firm's product. The aggregate demand for the
product of all firms of an industry is known as the market-demand or demand for
industry's product. This distinction between the two kinds of demand is not of
much use in a highly competitive market since it merely signifies the
distinction between a sum and its parts. However, where market structure is
oligopolistic, a distinction between the demand for firm's product and
industry's product is useful from managerial point of view. The product of each
firm is so differentiated from the products of the rival firms that consumers
treat each product different from the other. This gives firms an opportunity to
plan the price of a product, advertise it in order to capture a larger market
share thereby to enhance profits. For instance, market of cars, radios, TV
sets, refrigerators, scooters, toilet soaps and toothpaste, all belong to this
category of markets.
In case of monopoly and perfect competition, the
distinction between demand for a firm's product and industry's product is not
of much use from managerial point of view. In case of monopoly, industry is
one-firmindustiy andthe demand for firm's product is the same as that of the
industry. In case of perfect competition, products of all firms .of the
industry are homogeneous and price for each firm is determined by industry.
Firms have little opportunity to plan the prices permissible under local
conditions and advertisement by a firm becomes effective for the whole
industry. Therefore, conceptual distinction between demand for film's product
and industry's product is not much use in business decisions making.
Autonomous
and Derived Demand
An
Autonomous demand for a product is one that arises independently of the demand
for any other good whereas a derived demand is one, which is derived from
demand of some other good. To look more closely at the distinction between the
two kinds of demand, consider the demand for commodities, which arise directly
from the biological or physical needs of the human beings, such as demand for
food, clothes and shelter. The demand for these goods is autonomous demand.
Autotnomous demand also arises as a' result of demonstration effect, rise in
income, and increase in population and advertisement of new produCts. On the
other hand, the demand for a good that arises because of the demand for some
other good is called derived demand. For instance, demand for land, fertiliser
and agricultural tools and implements are derived demand, since the demand of
goods, depends on the demand of food. Similarly, demand for steel, bricks,
cement etc., is a derived demand because it is derived from the demand for
houses and other kind of buildings. [n general, the demand for, producer goods
or industrial inputs is a derived one. Besides, demand for complementary goods
(which complement the use of other goods) or for supplementary goods (which
supplement or provide additional utility from the use of other goods) is a
derived demand. For instance petrol is a complementary goods for automobiles
and a chair is a complement to a table. Consider some examples of supplement
goods. Butter is supplement to bread, mattress is supplement to cot and sugar
is supplement to tea. Therefore, demand for petrol, chair, and sugar would be
considered as derived demand. The conceptual distinction between autonomous
demand and derived demand would be useful according to the point of view of a
bllsinessman to the extent the former can serve as an indicator of the latter.
Demand for
Durable and Non-durable Goods
Demand is
often classified under demand for durable and non-durable goods. Durable goods
are those goods whose total utility is not exhausted in single or short-run
use. Such goods can be used continuously over a period of time. Durable goods
may be consumer goods as well as producer goods. Durable consumer goods include
clothes, shoes, house furniture, refrigerators, scooters, and cars. The durable
producer goods include mainly the items under fixed assets, such as building,
plant and machinery, office furniture and fixture. The durable goods, both
consumer and producer goods, may be further classified as semi-durable goods
such as, clothes and furniture and durable goods such as residential and
factory buildings and cars. On the other harid, non-durable goods are those
goods, which can be used only once such as food items and their total utility
is exhausted in a single use. This category of goods can also be grouped under
non-durable consumer and producer goods. All food items such as drinks, soap,
cooking fuel, gas, kerosene, coal and cosmetics fall in the former category
whereas, goods such as raw materials', fuel and power, finishing materials and
packing items come in the latter category.
The demand for non-durable goods depends largely on their
current prices, consumers' income and fashion whereas the expected price,
income and change in technology influence the demand for the durable good. The demand
for durable goods changes over a relatively longer period. There is another
point of distinction between demands for durable and non-durable goods. Durable
goods create demand for replacement or substitution of the goods whereas
non-durable goods do not. Also the demand for non-durable goods increases or
decreases with a fixed or constant rate whereas the demand for durable goods
increases or decreases exponentially,
i.e., it may depend· upon some factors such as obsolescence of machinery, etg.
For example, let us suppose that the annual demand for cigarettes in a city is
10 million packets and it increases at the rate of half-a-million packets per
annum on account of increase in population when other factors remain constant.
Thus, the total demand for cigarettes in the next year will be 10.5 million
packets and 11 million packets in the next to next year and so on. This is a
linear increase in the demand for a non-durable good like cigarette. Now
consider the demand for a durable good, e.g., automobiles. Let us suppose: (i1
the existing number of automobiles in a city, in a year is 10,000, (ii) the
annual replacement demand equals 10 per cent of the total demand, and (iii) the
annual autonomous increase ·in demand is 1000 automobiles. As such, the total
annual clemand for automobiles in four subsequent years is calculated and
presented in Table 2.1.
Table 2.1:
Annual Demand for Automobiles
|
Beginning
|
Total no. of
|
Replacement
|
Annual
|
Total
|
Annual
|
|
of the year
|
automobiles
|
demand
|
autonomous
|
demand
|
increase;
|
|
|
(Stock)
|
|
demand
|
|
in
|
|
,
|
|
|
|
|
demand
|
|
1st year
|
10,000
|
-
|
-
|
10,000 _
|
-
|
|
2nd year
|
10,000
|
1000
|
1000
|
12,000
|
2000
|
|
-3id year
|
12,000
|
1200
|
1000
|
14,200
|
2200
|
|
4th year
|
14,200
|
1420
|
1000
|
16,620
|
2420
|
Stock +
Replacement + Autonomous demand = TotalDemand
It may be seen from the Table 2.1 that the total demand
for automobiles is increasing at an increasing rate due to acceleration in the
replacement demand. Another factor, which might accelerate the demand for
automobiles and such durable goods, is the rate of obsolescence of this
category of goods.
Short-term
and Long-term Demand
Short-term
demand refers to the demand for goods that are demanoed over a short period. In
this category fall mostly the fashion consumer goods, goods of seasonal use and
inferior substitutes during the scarcity period of superior goods. For
instance, the demand for fashion wears is short-term demand though the demand
for the generic goods such as trousers, shoes and ties continues to remain a
longterm demand. Similarly, demand for umbrella, raincoats, gumboots, cold
drinks and ice creams is of seasonal nature; 'The demand for such goods lasts
till the season lasts. Some goods of this category are demanded for a very
short period, i.e., 1-2 week, for example, new greeting cards, candles and
crackers on occasion of diwali.
Although some goods are used only seasonally but are
durable in pature, e.g., electric fans, woollen garments, etc. The demand for
such goods is of also durable in nature but it is subject to seasonal fluctuations.
Sometimes, demand for certain gools suddenly increases because of scarcity of
their superior substitutes. For examp1e, when supply of cooking gas suddenly
decreases, demand for kerosene, cooking coal and charcoal increases. In such
cases, additional demand is of shGrtterm nature. The long-term demand, on the
hand, refers to the demand, which exists over a long-period. The change in
long-term demand is visible only after a long period. Most generic goods have
long-term demand. For example, demand for consumer and producer goods, durable
and non-durable goods, is long-term demand, though their different varieties or
brands may have only short-term demand. Short-term demand depends, by and
large, on the price of commodities, price of their substitutes, current
disposable income of the consumer, their ability to adjust their consumption
pattern and their susceptibility to advertisement of a new product. The
long-term demand depends on the long-term income trends, availability of better
substitutes, sales promotion, and consumer credit facility. The short-term and
lcmg-term concepts of demand are useful in designing new products for
established producers, choice of products for the new entrepreneurs, in pricing
policy and in determining advertisement expenditure.
