1. Demand Analysis
• Success of business depends on sales, sales
depends on market demand.
• Various business activities like manpower
utilization, production planning, investment
decisions, cost budgeting, pricing decisions and
profit planning depends on demand analysis.
• Ex.,Failure of Kellogg’s and Mc Donalds in
Indian Market during 1990 attributed to improper
estimation of demand for their products
2. Market demand serves the following purposes,
1.it is an important technique for sales forecasting
2. It provides guidelines for manipulation of demand
through advertising and sales promotion programmes.
3.It shows direction to product planning and product
4.Useful in determining sales quotas and performance
5. It is anchor for the pricing policy
6.It indicates size of the market for given product and market
share of concerned firm
7.It reflects competitive position of a firm in market trend.
3. Meaning of Demand
• “A buyers’ desire for a product backed by sufficient purchasing
• Demand for product refers to the amount of it which will be
bought per unit of time at particular price
From managerial point of view, concept of demand may be looked
upon as follows,
1.Demand is the desire or want backed by money
2.Demand is always related to price and time
3.Demand may be exe-ante or ex-post(intended demand or what is
Individual demand and Market demand
• Individual demand refers to demand for a product at particular
time and price from individual point of view.
4. Factors influencing individual demand
1. Price - More quantity bought at low price or vice versa.
2. Income – Buyers’ income determines purchasing power
3. Tastes, habits and preferences –
Ex., Demand for products like ice cream, chocolates and beverages
depends on tastes
Demand for products like tea, cigarattes, betel, tobacco is a matter of
People with different tastes and habits have different preferences for
different goods- Vegetarian Versus non-vegetarian
4. Relative prices of other goods- Substitute and complimentary products
Substitute goods- When a want can be satisfied by alternative/similar
Ex., peas and beans, groundnut oil and sunflower oil, tea and
coffee, jowar and bajra
Complimentray goods –in order to satisfy given want, two or more
goods are needed in combination.These are
referred as complimentary goods.
Ex., car and petrol, pen and ink, tea and sugar, shoes and socks.
5. Consumers’ expectation- about future changes in prices affect its
6. Advertising effect- Preferences of consumer can be altered by
advertisement and promotion.
5. Market Demand- market demand for a product refers to the total
demand of all the buyers, taken together. This is more important from
the point of business.
Factors influencing Market demand,
• Price of the product
• Distribution of income and wealth in the community
• Community’s common and scale of preferences
• General standard of living and spending habits the people
• Number of buyers in the market and the growth of population
• Age structure and sex ratio of the population
• Future expectations
• Level of taxation and tax structure
• Inventions and innovation
• Changing Fashions
• Climate or weather conditions
• Social Customs
• Advertisement and sales promotions
6. Demand Function
At any point in time the quantity of a given product that will
be purchased by the consumers depends on a number of
key variables/ determinants.
Dx = f (Px, Ps, Pc,Yd, T, A, N, u)
Where, Px= Price
N=Number of buyer
7. Demand schedule
A tabular statement of price and quantity relationship is called demand
1. Individual demand schedule-Tabular list showing quantities of a
product demanded by an individual at each alternative conceivable
price in a given period of time.
Price of Mangoes (Rs) Demand per week
8. 2.Market Demand schedule-Tabular statement
narrating the quantities of a commodity in
aggregate by all the buyers in the market at
different prices over a given period of time.
Unit of commodity demand per day by
A B C
4 1 1 3 5
3 2 3 5 10
9. A linear Demand Function
D = a - bP
Where D = Quantity demanded
a = constant signifying initial demand
b = represents functional relationship between the price (P) and
b having negative ( -ve) sign denotes demand for a commodity is
decreasing function of lts price
Price(Px) Denand function ( Dx=
1 20-2*1 18
2 20-2*2 16
3 20-2*3 14
4 20-2*4 12
5 20-2*5 10
11. Demand Curve
• Demand curve is graphical representation of a demand schedule.
• Demand Curve depicts the picture of the data contained in the demand
• It relates the amount the consumer is willing to buy at each alternative
conceivable price for the commodity over a given period of time
Derivation of market demand curve
The market demand curve is derived from summation of individual demand
curves for a given product.
Characteristics of a particular demand curve
1. Demand curve has negative relationship which reflects
inverse relationship between price and quantity demanded.
2. A particular point on demand curve depicts specifically a
single price- quantity relation.
3. Demand curve may be linear or non-linear
4. concave to the origin
13. THE LAW OF DEMAND
• It describes the general tendency of consumers’ behaviour in demanding a
commodity in relation to the changes in its price.
• It expresses nature of relationship between two variables of the demand relation
viz., price and quantity demanded.
• It simply states demand inversely varies to changes in price.
Statement of Law of Demand
The higher the price of a commodity, the smaller is the quantity demanded,
lower the price, larger the quantity demand.
14. Assumptions of law of demand
• The law of demand is conditional. It is based on certain conditions as given.
It is therefore, always stated with the ‘ other things being equal/constant’ .
• It relates to changes in price variable only, assuming other determinants of
the demand to be constant
• No change in consumers’ income
• No change in consumers’ preferences
• No change in the fashion
• No change in the price of related goods
• No expectation of future price changes or shortages
• No change in size, age composition and gender ratio of the population
• No change in the range of goods available to the buyers
• No change in the distribution of income and wealth of the community
• No change in the government policy
• No change in weather conditions
15. Change in quantity demanded
• The Phrase ‘changes in quantity demanded’ relates to the law of
• It refers to the changes in the quantities purchased by the consumer
on account of the changes of price.
• For ‘ increase or decrease’ in demand, refers to the changes in
demand caused by the changes in various other determinants of
demand, price remaining unchanged.
Extension or contraction of demand
• When with fall in price more of a commodity is bought, there is
extension Of Demand. Similarly, when a lesser quantity is demanded
with a rise in price, there Is Contraction of demand.
• In short, demand extends when the price falls and contracts when the
• The terms ‘extension’ and ‘contraction’ of demand should, however be
distinguished from ‘increase’ or ‘ decrease in demand.
• Variation in demand is the connotation of the law of demand. It
expresses functional relationship between demand and price.
17. Increase or Decrease in Demand
• An increase in demand signifies either more will be demanded
at a given price (ice-cream, Sweaters, umbrella/seasonal goods)
• same will be demanded at higher price (sugar, salt,
• An increase in demand really means that more is now
demanded than before at each and every price.
• Similarly, decrease in demand signifies either that less will be
demanded at a given price or the same quantity will be
demanded at the lower price. Decrease in demand really means
that less is now demanded than before at each and every rise in
• Shifting the demand curve shows increase or decrease I
19. Increase or Decrease in Demand
Same will be
20. Reason for change (Increase or decrease) in demand
1.Change in income
2.Changes in tastes, habits, and preferences
3.Changes in fashions and customs
4.Change in the distribution of wealth
5.Change in substitutes
6.Change in demand of position complimentary goods
7.Change in population
8.Advertisement and publicity persuation
9.Change in value of money
10.Change in the level of taxation
11.Expectation of future changes of prices
21. TYPES OF DEMAND
1.Demand for Consumers’ goods and Producers’ goods-
Consumers’ goods- Goods and services demanded by consumers for
the direct satisfaction of their wants i.e., consumption purpose are
referred as consumer goods
Ex., Food, cloth, house, services of lawyer, doctor, teacher
Producers’ Goods – Goods which are demanded by producers in the
process of production are referred to as producer goods or capital
eg.,tools and equipments, machinary, raw material etc
• Demand for consumer goods is direct and autonomous. Demand producer
good is derived. It is based on the demand for output
• Demand for consumer good depend on its marginal utility. Demand for
producers’ goods depend on its marginal productivity or the marginal
• Since marginal utility curves are negatively sloping, the demand curves for
consumers’ goods are negatively sloping
22. Dean( 1976) assigned reasons for explaining the distinctive demand behaviour
for producer goods in the economy,
• The buyer of producer good are professionals
• Producers buyers are more sensitive to factor price differences and substitutes
• The motives of the producers buyers are purely economicThey buy capital goods on
account of profit prospects
• Their demand is derived
2. Demand for Perishable goods and Durable goods
• Perishable goods have no durability and perish soon ( fish, vegetables, milk etc).
Durable goods last long ( house, furniture, clothes).
• Use of perishable goods give short service while durable goods can be used for
• Perishable goods have more elastic demand. Durable goods less elastic demand
• The demand for perishable goods is always immediate. Demand for durable goods
• The existing Conditions of style, convenience and the income of the buyers usually
govern the demand for non-durable goods.
• The demand for durable goods depends on current trends, state of optimism, the
rate of obsolescence, lifetime of the product, improvement in the product design,
apart from prices and incomes.
• Demand for durable goods is more volatile in relation to business to business
23. 3.Autonomous demand And Derived Demand
Spontaneous demand for goods, which is based on an urge to satisfy some wants
Directly is called autonomous demand. Demand for consumer goods is autonomous.
It is final demand. It is a direct.
When demand for a product depends on the demand for some other commodity, it is
called as derived demand. ‘When demand for a product is tied to the to the purchase
Of some parent product, its is called derived.
4. Industry Demand and Firm / company demand
Industry demand referrs to total demand for the commodity produced by the
Industry. Eg., total demand for cars in India.
Firm or Company demand refers to the market demand for the firms’ product.
5.Short run demand and Long run demand.
Short run demand refers to existing demand with its immediate reaction to price
Changes, income fluctuation etc., where as long run demand is that which
Ultimately exist as a result ofchanges in pricing, promotion product improvement
After enough time is allowed to let the market adjust itself to the new situation.
24. The short run elasticity of industry demand is less than the long run elasticity owing to
many reasons, as,
• Cultural lags in information and experience
• Capital investment required of buyers to shift consumption patterns
• Time adjustment involved e.g., it takes time to change consumption habits, time
needed to arrange for the finance.
6.Joint demand or Composite Demand
Joint / Complimentary demand
When two goods are demanded in conjunction with one another at the same
time to satisfy a single want, they are said to be joint or complimentary
In such cases change, a change in demand for one commodity lead to the change in
demand other commodity
Eg., car and petrol, ink and pen, jowar and bajra
Composite demand- A commodity is said to be in composite demand
when it is several different uses. A change in demand for the commodity by one user will
affect its supplies to others and will bring about change in its price and hence alter
Eg.,Steel and related industry, Cement and related industry, Sugar and related industry.
25. 7.Price demand, Income demand and cross demand.
Price demand-refers to the various quantities of a product purchased
by the consumer at alternative prices. In price demand, the demand
function is based on the single price. Thus,
D = f(p)
Income Demand- Refers to the various quantities of product
demanded by a consumer at alternative levels of his changing income.
In income demand, the demand function is based on the income
D = f(M)
Cross Demand – refers to the various quantities of a commodity (say
x) purchased by a consumer in relation to the change in price of a
related commodity (say y- which may be substitute or complimentary
Dx = f (Py)
26. Exceptions in Law of Demand
• It is almost universal phenomenon that when the price falls, the
demand extends and it contract when the price rises.
• Sometimes it is observed, very rarely that, with a fall in price,
demand also falls and with rise in price demand also rises. This is
a situation which apparently is contrary to the law of demand.
• The demand curve in such situation will be typically unusual. It is
Upward sloping curve.
• Certain inferior goods called giffn goods.
• When price falls, quite often less quantity will be purchased than
before because of the negative income effect and peoples’
increasing preference for a superior commodity with rise in their
• Eg., Staple food stuffs like Cheap potatoes, cheap bread,
vegetable ghee, as against superior commodities like good
potatoes, cake, basmati rice and pure ghee.
27. ARTICLES OF SNOB APPEAL.
Sometimes, certain commodities are demanded just because they
happen to be expensive or prestige goods, and have a ‘snob
appeal’.They satisfy the aristocratic desire to preserve exclusiveness
for unique goods.These are generally ostentatious articles, purchased
by fewer rich people or using them as status symbol.
It is observed that when prices of such articles like diamonds, rises,
their demand also rises.
Eg., Rolls-Royce cars, Antiques.
Speculation about changes in the prices of a commodity in future, have
impact on increase in demand for that product. They may not act
according to law of demand.
When people are convinced that price of a particular commodity will
rise still further, they wil not contract their demand with the given price
rise.They may purchase more for the purpose of hoarding.
Eg., Stoch exchange- rise in share prise-more purchase-expect more returns
28. 4.CONSUMERS’ PSYCHOLOGICAL BIAS OR ILLUSION
When consumer wrongly biased against the quality of a commodity with
the price change, he may contract this demand with the fall of price.
Some sophisticated consumers do not buy when there is stock
clearance sale at reduced prices, thinking that the goods may be of bad
30. NETWORK EXTERNALITIES IN MARKET DEMAND
Theoretically it is assumed that individual demands for the product are
independent, therefore we desire market demand function/curve by simply
summing individuals buyers’ demands.In reality, these may be interdependent
i.e., an individual demand may be depending on the demands of the other
people in the case of some goods.This situation is described as network
Externalities, which may be positive or negative in effect.
There are two network Externalities
1. Bandwagon effect
2. Snob effect/ Velben effect
31. BANDWAAGON EFFECT
Demonstartion effect of consumption by the others lead to the bandwagon
effects of change in demand for a product in the market.
In todays’ life, demand for certain goods determined not by their utility but
mostly on account of bandwagon or demonstration effect. Thus, demand in
such cases is influenced by consumption of trend setters in the community.
“That means demand of an individual is conditioned by the consumption of
others” hence price becomes minor consideration here.
In short, the bandwagon effect on market demand for a product is the result of
the buyers’ desire to be in style or fashion-that is, to have it because others
This effect usually associated with stylishness, craze or fads of the people as
greater and greater number of people want to use a product due to
demonstration effect influencing on their desire through advertising media.
33. The snob effect: Velben effect;
Refers to desire of a person (usually rich one) to own exclusive or unique
product- called snob good or velben good.
It serves status symbol.When only few people could own a snob good, its
demand tends to be high among the affluent group.
Eg., Designer clothes, rolls royce cars, ray ban goggles, an antique, fancy
restaurants are prestige goods and because of their snob value, the seller
has to restrict the supply of such snob appeal goods.
In marketing and advertising strategies of such exclusive type of goods,
demand has to be made effective by creating snob effect.
When price of luxury or prestige goods rise, their snob appeal is inhanced, so
their demand shifts upward.With the fall in the prices of such goods their
snob appeal diminishes, causing downward shift in their demand from the
35. Z- shaped demand curve implies that at very high price, the maket demand is
limited but less elastic.
When price is reduced, demand expands as per law of demand.But beyond a
limit, further fall in price leads to contraction in demand.And, when branded
goods loose their exclusive appeal, these goods have to compete with
unbranded goods in the market.Such unbranded goods are then disposed
off in shopping centres and super markets at very high discounts to attract
The market externalities play a significant role in influencing the market demand for
Certain products such as computers, CD Players, fax machines, hand phones etc
A positive network externalities causes an upward shift in the market demand curve.
The producers may experience a rapid growth in demand for such products, because
of the bandwagon effect a positive network externalities for quite a long time till the
Saturation point is reached