DEMAND ANALYSIS

1. What are the sources of demand

2. What are the determinants of demand

3. How do the buyers decide the quantity of the

product to be purchased

4. How do the buyers respond to change in product

prices, their income and prices of related
products

5. How can the market demand for a product be

assessed and forecast
 THROUGH ANALYSIS OF DEMAND BUSINESS
EXECUTIVES CAN KNOW :

1. FACTORS WHICH DETERMINE THE SIZE OF

DEMAND
2. ELASTICITIES OF DEMAND- RESPONSIVENESS
OR SENSITIVITY OF DEMAND TO THE CHANGES
IN ITS DETERMINANTS
3. POSSIBILITY OF SALES PROMOTION THROUGH
MANIPULATION OF PRICES
4. RESPONSIVENESS OF DEMAND TO THE
ADVERTISEMENTS
5. OPTIMUM LEVEL OF SALES, INVENTORIES, AND
ADVERTISEMENTS
BASIS OF DEMAND
Consumer Behaviour
 BASIS OF DEMAND

UTILITY

From the From the

product angle consumer angle

Want satisfying Satisfaction

property of a Pleasure
commodity Happiness
Well-being

ABSOLUTE SUBJECTIVE
 UTILITY

Total Utility Marginal Utility

Sum of utility derived from Utility derived from one

various units of over a period additional unit consumed
of time
OR

Ux = u1 + u2 + u3 + u4 Addition to the total utility

resulting from consumption
of one additional unit

∆TUx
MUx =
∆Qx
 DIMINISHING MARGINAL UTYILIY

Units of commodity Total Utility Marginal Utility

X (Tux) (MUx)
1 30 30
2 50 20
3 60 10
4 65 5
5 60 -5
6 45 -15
MEANING OF DEMAND
 MEANING

DESIRE TO BUY A
COMMODITY

NEED TO POSSESS
A COMMODITY

CONSTITUTES DEMAND
WILLINGNESS TO
PURCHASE THE
COMMODITY

ABILITY TO
PURCHASE THE
COMMODITY
 1. Quantity demanded
of a commodity

2. Price at which it
is demanded
DEMAND FOR
A
COMMODITY 3. Time period over
SHOULD which it is
INDICATE demanded

4. The market area in

which it is
demanded
 INDIVIDUAL DEMAND AND INDUSTRY
DEMAND

INDIVIDUAL DEMAND DEPENDS UPON

1. THE INCOME OF THE INDIVIDUAL

2. THE PRICE OF THE COMMODITY
3. THE PRICE OF THE SUBSTITUTE
4. THE TASTES AND PREFERENCE OF THE
CONSUMER
5. SOCIAL CONVENTIONS
 INDUSTRY DEMAND

INDUSTRY QUANTITIES DEMANDED BY

DEMAND = INDIVIDUAL CONSUMERS AT
DIFFERENT PRICES
 INDUSTRY DEMAND FOR PRODUCT ‘X’

PRICE OF NUMBER OF UNITS DEMANDED BY

‘X’ IN RS. A B C D TOTAL

5 0 0 1 1 2
4 1 1 2 2 6
3 2 3 4 4 13
2 4 4 5 5 18
1 5 6 7 8 26

INDUSTRY DEMAND IS THE AGGREGATE OF

INDIVIDUAL DEMAND SCHEDULES
 10
Y
..
9 .
8 . .
7
.
PRICE

5 .
4 .
| | | | | | | | | |
0 x
1 2 3 4 5 6 7 8 9 10

QUANTITY DEMANDED
 PRICE-DEMAND RELATIONSHIP

DEMAND SCHEDULE

PRICE OF X QUANTITY DEMANDED

(IN RS.) (NO OF UNITS)
10 2
9 4
8 6
7 7
6 8
5 9
4 10
TYPES OF DEMAND
 DERIVED DEMAND
1 AUTONOMOUS DEMAND

DEMAND FOR PRODUCERS GOODS

2 DEMAND FOR CONSUMERS’ GOODS
DEMAND FOR DURABLE GOODS
3
DEMAND FOR NON-DURABLE GOODS

4 NEW AND REPLACEMENT DEMANDS

INDUSTRY DEMAND
5 FIRMS DEMAND
SHORT RUN DEMAND
6
LONG RUN DEMAND
7 TOTAL MARKET AND MARKET SEGMENT DEMAND
 GOODS

Consumers’ Goods Producers’ Goods

DURABLE NON- DURABLE NON-

DURABLE DURABLE
Clothes Building
Houses Soaps Plant Raw-materials
Furniture Salt Machinery Fuel &
TV Milk Office power
Refrigerator TV Gas Furniture Packing
Cars Drinks Material
DETERMINANTS OF DEMAND
 Factors Determining Demand

1. Price of the 2. Other Factors which include

commodity (a) Income of the consumer
(b) Consumer tastes & preferences
(c) Prices of related goods
(d) Expectation of future price changes
(e) Advertising efforts
(f) Quality of the product
(g) Distribution of wealth
(h) Standard of living
(i) Age structure and sex ration population
(j) Level of taxation
(k) Climate or weather condition
(l) Population
 PRICE EFFECT

INCOME SUBSTITUTION
EFFECT
EFFECT
If price falls Kerosene oil, LPG,
Electricity
Real income
increases If price of one falls
If income There is a
increases substitution
Demand
increases
 DETERMINANTS OF MARKET DEMAND

PRICE OF THE PRODUCT

WHEN PRICE INCREASES WNEN PRICE DECREASES

CONSUMERS PURCHASE CONSUMERS PURCHASE
LESS – DEMAND FALLS MORE—DEMAND RISES

OTHER THINGS REMAINING CONSTANT

1. INCOME OF CONSUMERS
2. PRICES OF SUBSTITUES & COMPLEMENTARY
GOODS
3. CONSUMERS’ TASTES AND PREFERENCES
4. NUMBER OF CONSUMERS
 PRICE OF RELATED GOODS

SUBSTITUTES COMPLEMENTS

RISE IN PRICE OF ‘X’ THEIR DEMAND CHANGES

INCREASES DEMAND FOR SIMULTANEOUSLY WHEN
SUBSTITUTE ‘Y’ PRICE CHANGES

TEA AND COFFEE PETROL AND CARS

 CONSUMERS INCOME

QUANTITY DEMANDED OF THIS CATEGORY OF

GOODS INCREASES WITH INCREASE IN
ESSENTIAL
CONSUMER’S INCOME ONLY UP TO A CERTAIN
GOODS LIMIT, EVEN THOUGH TOTAL EXPENDITURE
MAY INCREASE IN ACCORDANCE

A COMMODITY IS DEEMED TO BE INFERIOR IF

INFERIOR
ITS DEMAND DECREASES WITH INCREASE IN
GOODS CONSUMERS INCOME

NORMAL ARE THOSE WHICH ARE DEMANDED IN

GOODS INCREASING QUANTITIES AS CONSUMERS’
INCOME RISES--- RAPIDLY , THEN SLOWS DOWN

PRESTIGE OR
DEMAND FOR SUCH GOODS ARISES BEYOND
LUXURY CERTAIN LEVELS OF CONSUMER’S INCOME
GOODS
CONSUMER’S TASTES AND PREFERENCES

PLAY AN IMPORTANT ROLE IN DETERMINING

THE DEMAND FOR A PRODUCT

WHICH DEPEND UPON

1. CHANGING FASHION
2. SOCIAL CUSTOMS
3. RELIGIOUS VALUES
4. HABBITS
5. LIFE-STYLE
6. AGE
7. SEX
 ADVERTISING

Creates awareness

Arouses curiosity

Initiates action

Creates demand
DEMAND SCHEDULE, DEMAND CURVE AND
DEMAND FUNCTION
 PRICE-DEMAND RELATIONSHIP

DEMAND SCHEDULE

PRICE OF X QUANTITY DEMANDED

(IN RS.) (NO OF UNITS)
10 2
9 4
8 6
7 7
6 8
5 9
4 10
 INDUSTRY DEMAND FOR PRODUCT ‘X’

PRICE OF NUMBER OF UNITS DEMANDED BY

‘X’ IN RS. A B C D TOTAL

5 0 0 1 1 2
4 1 1 2 2 6
3 2 3 4 4 13
2 4 4 5 5 18
1 5 6 7 8 26

INDUSTRY DEMAND IS THE AGGREGATE OF

INDIVIDUAL DEMAND SCHEDULES
 10
Y
..
9 .
8 . .
7
.
PRICE

5 .
4 .
| | | | | | | | | |
0 x
1 2 3 4 5 6 7 8 9 10

QUANTITY DEMANDED
 CHARACTERISTICS OF DEMAND

QUANTITY DEMANDED IS A FUNCTION OF PRICE

PRICE IS AN INDEPENDENT VARIABLE

DEMAND IS A DEPENDENT VARIABLE

DEMAND FUNCTION =

QD = f(P)
 OTHER FACTORS AFFECTING DEMAND
QD = f((P)

OTHER FACTORS AFFECTING DEMAND ARE:

PRICE ------- P
TASTES & PREFERENCES ----------- T
INCOME--------- I
SO THE FORMULA CAN BE RESTATED AS :
QD = f(P,T,I)
DEMAND ANALYSIS---
APPLICATIONS
 DEMAND ANALYSIS

• OVERVIEW
• Demand Relationships
• Demand Elasticities
• Income Elasticities
• Cross Elasticities of Demand

1999 South-Western College Publishing

 MANAGERIAL USES
DEMAND ANALYSIS

Serves Two Major Purposes

FORECASTING MANIPULATING
DEMAND
DEMAND
DEMAND ELASTICITY

Ancillary
Functions

1. Appraisal of performance of a salesman

2. Fixing sales quota 3. Company’s
 DEMAND MANIPULATION … Private Airlines

Potential

WILLINGNESS
Marketing Created
Strategy DESIRE

ABILITY

Effective
Demand Loyalty
Programmes

Growth in On Line
Demand Bookings

Other Frills
 FEASIBILITY STUDIES

Business Payback
Prospect Period
s
Sales/Expansion/ Revenue
Generation
Diversification
Sales volume
Sales volume

Demand Demand

DEMAND
 SALES MANAGEMENT

Fixation of Assigning Salesman’s Deciding on

sales compen- distribution
targets sales sation channel
territories

DEMAND
ANALYSIS
 WAREHOUSE
ANAGEMENT

Location Size of Warehouse

of warehouse economics
warehouse

DEMAND
ANALYSIS
 INVENTORY
MANAGEMENT

DEMAND

ANALYSIS

SUPPLY &
DEMAND

CONSUMPTION
PATTERN
LOCATION
INVENTORIES

SIZE OF
INVENTORIES
 PROMOTION STRATEGY

PRICE Value for money…. High prices

EFFECT ON
DEMAND Discounts, Add-ons, Better service

INCOME Positioning products as high end

EFFECT ON products…. Maruti esteem as the
DEMAND Big car

Company’s focus on explaining the

advantages of the product more
SUBSTITUTION persuasively than the competitors
EFFECT ON
DEMAND Advertising creates an image of the
Brand… which will sell
 INDIVIDUAL DEMAND AND INDUSTRY
DEMAND
INDIVIDUAL DEMAND DEPENDS UPON

1. THE INCOME OF THE INDIVIDUAL

2. THE PRICE OF THE COMMODITY
3. THE PRICE OF THE SUBSTITUTE
4. THE TASTES AND PREFERENCE OF
THE CONSUMER
5. SOCIAL CONVENTIONS