Definition,Demand Analysis & Factors Affecting the Demand
Demand for a product implies:
- A desire to acquire it;
- willingness to pay for it
- ability to pay for it.
Definition of Demand:
“By demand , we mean the quantity of a commodity that will be purchased at a particular price and not merely the desire of a thing“._Hansen.
“Demand means the various quantities of goods that would be purchased per time period at different prices in a given market“._Hiddon.
From the above definition, it is clear that a complete statement of demand requires three things-(i).The price,(ii).the quantity bought at the given price,(iii).the period of time.
According Joel dean, business firms are interested in demand analysis because it serves two major purpose:(i).Forecasting sales and (ii).Manipulating demand. The following are the objectives of demand analysis.
Objectives of Demand Analysis:
- To study and analyse the factors affecting demand.
- To measure elasticity of demand
- To prepare demand forecasts
- Manipulating demand by sales efforts
- Appraisal of salesmen’s performance and fixing their quotas
- Tracking the trend of the firm’s competitive position in the market.
Factors Affecting the Demand:
1. Price of the Commodity:
It is the most important factor affecting demand for the given commodity. Generally, there exists an inverse relationship between price and quantity demanded. It means, as price increases, quantity demanded falls due to decrease in the satisfaction level of consumers.
2. Price of Related Goods:
Demand for the given commodity is also affected by change in prices of the related goods. Related goods are of two types:
(i) Substitute Goods:
Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want, like tea and coffee. An increase in the price of substitute leads to an increase in the demand for given commodity and vice-versa. For example, if price of a substitute good (say, coffee) increases, then demand for given commodity (say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given commodity is directly affected by change in price of substitute goods.
Ex:- 1. Tea and Coffee 2. Coke and Pepsi 3. Pen and Pencil 4. CD and DVD 5. Ink pen and Ball Pen 6. Rice and Wheat
(ii) Complementary Goods:
Complementary goods are those goods which are used together to satisfy a particular want, like tea and sugar. An increase in the price of complementary good leads to a decrease in the demand for given commodity and vice-versa. For example, if price of a complementary good (say, sugar) increases, then demand for given commodity (say, tea) will fall as it will be relatively costlier to use both the goods together. So, demand for a given commodity is inversely affected by change in price of complementary goods.
EX:- 1. Tea and Sugar 2. Pen and Ink 3. Car and Petrol 4. Bread and Butter 5. Pen and Refill 6. Brick and Cement.
3. Income of the Consumer:
Demand for a commodity is also affected by income of the consumer. However, the effect of change in income on demand depends on the nature of the commodity under consideration.
i. If the given commodity is a normal good, then an increase in income leads to rise in its demand, while a decrease in income reduces the demand.
ii. If the given commodity is an inferior good, then an increase in income reduces the demand, while a decrease in income leads to rise in demand.
4. Tastes and Preferences:
Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in fashion, customs, habits, etc. If a commodity is in fashion or is preferred by the consumers, then demand for such a commodity rises. On the other hand, demand for a commodity falls, if the consumers have no taste for that commodity.
5. Expectation of Change in the Price in Future:
If the price of a certain commodity is expected to increase in near future, then people will buy more of that commodity than what they normally buy. There exists a direct relationship between expectation of change in the prices in future and change in demand in the current period. For example, if the price of petrol is expected to rise in future, its present demand will increase.