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MG2452-Engineering economics and financial accounting

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 S.P.Ponsudha AP/IT CAPE

MG2452-Engineering economics and financial accounting


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,

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MG2452-Engineering economics and financial accounting


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

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MG2452-Engineering economics and financial accounting


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 nondurable 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. o 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. o 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. o 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 S.P.Ponsudha AP/IT CAPE

MG2452-Engineering economics and financial accounting


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 -3id year 4th year 10,000 12,000 14,200 1000 1200 1420 1000 1000 1000 12,000 _ 14,200 16,620 2000 2200 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.

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MG2452-Engineering economics and financial accounting


Short-term and Long-term Demand Short-term demand refers to the demand for goods that are demanded 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 longperiod. 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-

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MG2452-Engineering economics and financial accounting


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 long-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.

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