DEMAND ANALYSIS

CONCEPT OF DEMAND

Demand is an economic concept that relates to a consumer's desire

to purchase goods and services and willingness to pay a specific
price for them. An increase in the price of a good or service tends to
decrease the quantity demanded.
Demand is defined as the ability of a consumer to buy goods and
services in the market. In economics, this term is associated with
various elements and aspects of the business. These include product
prices, customer preference, product supply, competition, production,
and sales.

Demand Determinants
Primarily, there are five determinants.

#1 – Price
When a consumer makes a purchase, the product’s price is usually
the first thing that affects the customer’s willingness to buy. An
increase in prices reduces customers’ wants and needs for a
product.
#2 – Preference
Product sale is highly affected by consumer preference. If the
product does not interest the consumer, they will not pay for it,
irrespective of features or quality.

#3 – Income
For the willingness to pay, a consumer must earn or have an
income. Therefore, an expensive product will not appeal to a
customer with a low income. Simply put, low income reduces
customers’ willingness to buy a certain category of products.

#4 – Substitutes
If similar and equally useful products are available, consumers will
compare products and opt for the cheaper alternative. This
phenomenon is fundamental to customer behavior.

#5 – Expectations
Consumers have certain expectations with each product—it solves a
problem or offers satisfaction. Consumers would not buy the
product again if said expectations were not met the first time. It will
drastically affect customers’ willingness to buy that particular
product in the long run. Therefore, customer retention is crucial.

Importance of Demand
Demand is considered the basis of the entire process of economic development, hence
demand plays an important role in the economic, social and political fields.
The importance of demand may be studied under the following heads:
1. Importance in Consumption
2. Advantageous to Producers
3. Importance in Exchange
4. Importance in Distribution
5. Importance in Public Finance
6. Importance of Law of Demand and Elasticity of Demand
Importance in Consumption
Demand implies the schedule of quantities to be purchased over a specific period of
time at various prices. A consumer determines the number of various
commodities consumed on the basis of his demand.

Advantageous to Producers
Producers maximize the profit by determining the nature, variety, quantity and cost of
production on the basis of demand for various commodities and by controlling the
supply at the appropriate time. A monopolist also keeps in mind the nature of demand
while maximization of his profit.
Importance in Exchange
Quantity demanded is the purchase of a commodity in a certain quantity at a certain
price, therefore it is exchanged. This means that the production, purchase and sale of a
particular commodity of a particular quality and quantity take place in demand and it
is the process of exchange.
The means of exchange viz. money, banking, insurance, transportation,
communication etc. are also affected by demand. Continuous growth in demand
proves helpful in the progress of exchange as well as the economic development of the
country. The basis for the determination of market price, normal price, long-term
price, monopolistic price or price discrimination is demand.
Importance in Distribution
Aggregate social production is determined on the basis of social demand. Production
scale is increased with an increase in demand. Resources from various sources are
procured to fulfil this increased demand. The share in the national product of a factor
of production depends upon its demand.
The interest rates remain high in a capitalistic economic system due to the high
demand for capital in the production process and on the other hand in a labour-
intensive economic system, it is quite natural that wage rates of labour are high due to
the high demand for labour.

Importance in Public Finance

Maximization of social welfare is the prime objective of the process of public finance.
Sources of public revenue (inflows) and items of public expenditure (outflows) are
determined to achieve this objective. The government collects revenue through direct
and indirect taxes. The effect of tax on demand is kept in mind while levying taxes.
Income tax is not levied on the general public because higher rates of direct taxes tend
to reduce the income and the demand for commodities in society. Similarly, indirect
taxes like excise duty, sales tax, octroi, import-export duty etc. are determined by
keeping in view their impact on the overall demand.

Types of Demand
These are types of demand explained briefly below:

1. Price Demand
2. Income Demand
3. Cross Demand

Price Demand
Price demand implies the different quantities of the commodity demanded by the
consumers at various prices for a particular period of time. In the study of price
demand it is assumed that other things remain unchanged i.e. the income, habits,
tastes, fashion, etc., do not change. In fact, what we have studied in the earlier
pages is related to price demand only. Price demand is shown in the diagram.
Income Demand
It shows the relation between the quantity demanded of a commodity and the income
of the consumer. Income demand implies the quantity of a commodity purchased by
the consumer at various levels of income, other things remaining the same. Another
thing remaining same implies that the price of the commodity taste, fashion, etc. do
not change.

Cross Demand
The study of demand of a commodity X with changes in the price of related
commodity Y (Assuming other things remain the same) is known as cross demand.
Related goods are of two types—substitutes and complementary goods.

Price Elasticity of Demand Meaning,

TyWhat Is Price Elasticity of Demand?
Price elasticity of demand is a measurement of the change in the consumption of a product in
relation to a change in its price. Expressed mathematically, it is:
Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage
Change in Price
Economists use price elasticity to understand how supply and demand for a product change
when its price changes.1 Like demand, supply also has an elasticity, known as price elasticity
of supply. Price elasticity of supply refers to the relationship between change in supply and
change in price. It’s calculated by dividing the percentage change in quantity supplied by the
percentage change in price. Together, the two elasticities combine to determine what goods
are produced at what prices.

KEY TAKEAWAYS

 Price elasticity of demand is a measurement of the change in consumption of a

product in relation to a change in its price.
 A good is perfectly elastic if the price elasticity is infinite (if demand changes
substantially even with minimal price change).
 If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic.
 If a good’s price elasticity is 0 (no amount of price change produces a change in
demand), it is perfectly inelastic.
 If price elasticity is exactly 1 (price change leads to an equal percentage change in
demand), it is known as unitary elasticity.
 The availability of a substitute for a product affects its elasticity. If there are no good
substitutes and the product is necessary, demand won’t change when the price goes
up, making it inelastic.

What Is Elasticity?
Understanding Price Elasticity of Demand
Economists have found that the prices of some goods are very inelastic.2 That is, a reduction
in price does not increase demand much, and an increase in price does not hurt demand,
either. For example, gasoline has little price elasticity of demand. Drivers will continue to
buy as much as they have to, as will airlines, the trucking industry, and nearly every other
buyer.

Other goods are much more elastic, so price changes for these goods cause substantial
changes in their demand or their supply.2

Not surprisingly, this concept is of great interest to marketing professionals.1 It could even
be said that their purpose is to create inelastic demand for the products that they market. They
achieve that by identifying a meaningful difference in their products from any others that are
available.

If the quantity demanded of a product changes greatly in response to changes in its price, it is
elastic. That is, the demand point for the product is stretched far from its prior point. If the
quantity purchased shows a small change after a change in its price, it is inelastic. The
quantity didn’t stretch much from its prior point.
Factors That Affect Price Elasticity of Demand
Availability of Substitutes

The more easily a shopper can substitute one product for another, the more the price will fall.
For example, in a world in which people like coffee and tea equally if the price of coffee goes
up, people will have no problem switching to tea, and the demand for coffee will fall. This is
because coffee and tea are considered good substitutes for each other.

Urgency

The more discretionary a purchase is, the more its quantity of demand will fall in response to
price increases. That is, the product demand has greater elasticity.3

Say you are considering buying a new washing machine, but the current one still works; it’s
just old and outdated. If the price of a new washing machine goes up, you’re likely to forgo
that immediate purchase and wait until prices go down or the current machine breaks down.

The less discretionary a product is, the less its quantity demanded will fall. Inelastic examples
include luxury items that people buy for their brand names. Addictive products are quite
inelastic, as are required add-on products, such as inkjet printer cartridges.

One thing all these products have in common is that they lack good substitutes. If you really
want an Apple iPad, then a Kindle Fire won’t do. Addicts are not dissuaded by higher prices,
and only HP ink will work in HP printers (unless you disable HP cartridge protection).

Duration of Price Change

The length of time that the price change lasts also matters.3 Demand response to price
fluctuations is different for a one-day sale than for a price change that lasts for a season or a
year.

Clarity of time sensitivity is vital to understanding the price elasticity of demand and for
comparing it with different products. Consumers may accept a seasonal price
fluctuation rather than change their habits.

Types of Price Elasticity of Demand

Price elasticity of demand can be categorized according to the number calculated by dividing
the percentage change in quantity demanded by the percentage change in price. These
categories include the following:

Types of Price Elasticity of Demand

If the percentage change in quantity It is Which means:
demanded divided by the percentage known as:
change in price equals:
Infinity Perfectly Changes in price result in
elastic demand declining to zero
Types of Price Elasticity of Demand
Greater than 1 Elastic Changes in price yield a
significant change in demand
1 Unitary Changes in price yield
equivalent (percentage)
changes in demand
Less than 1 Inelastic Changes in price yield an
insignificant change in
demand
0 Perfectly Changes in price yield no
inelastic change in demand
Data: Khan Academy

Example of Price Elasticity of Demand

As a rule of thumb, if the quantity of a product demanded or purchased changes more than
the price changes, then the product is considered to be elastic (for example, the price goes up
by 5%, but the demand falls by 10%).

If the change in quantity purchased is the same as the price change (say, 10% ÷ 10% = 1),
then the product is said to have unit (or unitary) price elasticity.

Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10%
change in price), then the product is deemed inelastic.

To calculate the elasticity of demand, consider this example: Suppose that the price of apples
falls by 6% from $1.99 a bushel to $1.87 a bushel. In response, grocery shoppers increase
their apple purchases by 20%. The elasticity of apples is thus: 0.20 ÷ 0.06 = 3.33. The
demand for apples is quite elastic.

What is price elasticity of demand?

Price elasticity of demand is the ratio of the percentage change in quantity demanded of a
product to the percentage change in price. Economists employ it to understand how supply
and demand change when a product’s price changes.

What makes a product elastic?

If a price change for a product causes a substantial change in either its supply or its demand,
it is considered elastic. Generally, it means that there are acceptable substitutes for the
product. Examples would be cookies, luxury automobiles, and coffee.

What makes a product inelastic?

If a price change for a product doesn’t lead to much, if any, change in its supply or demand, it
is considered inelastic. Generally, it means that the product is considered to be a necessity or
a luxury item for addictive constituents. Examples would be gasoline, milk, and iPhones.
Types of Elasticity of Demand
Based on the variable that affects the demand, the elasticity of
demand is of the following types. One point to note is that unless
otherwise mentioned, whenever the elasticity of demand is
mentioned, it implies price elasticity.

Price Elasticity

The price elasticity of demand is the response of the quantity

demanded to change in the price of a commodity. It is assumed that
the consumer’s income, tastes, and prices of all other goods are
steady. It is measured as a percentage change in the quantity
demanded divided by the percentage change in price. Therefore,

$$\text{Price Elasticity} = E_p = \frac{\text{Percentage change in

quantity demanded}}{\text{Percentage change in price}}$$

Or,

Ep=Change in Quantity×100Original QuantityChange in Price×100Original Price

=Change in QuantityOriginal Quantity×Original PriceChange in
Price
Income Elasticity

The income elasticity of demand is the degree of responsiveness of

the quantity demanded to a change in the consumer’s income.
Symbolically,

EI=Percentage change in quantity demandedPercentage change in

income
Cross Elasticity
The cross elasticity of demand of a commodity X for another
commodity Y, is the change in demand of commodity X due to a
change in the price of commodity Y. Symbolically,

Ec=ΔqxΔpy×pyqx
Where,

Ec
is the cross elasticity,
Δqx
is the original demand of commodity X,
Δqx
is the change in demand of X,
Δpy

Demand Forecasting
What is Demand Forecasting?
Demand forecasting is an amalgamation of two words; the first one is known as
demand, and another one is forecasting. The meaning of demand is the outside
requirements of a manufactured product or a useful service. In general aspects,
forecasting usually means making an approximation in the present for an event
that would be occurring in the future.
All the companies use these predictions to format their approach to marketing
and sales. It contributes hugely towards increasing their profit margins. Here,
we are stepping forward to elaborate on demand forecasting, its features and
its usefulness. Moreover, we will also see its applications.
Definition of Demand Forecasting
Demand forecasting is a technique that is used for the estimation of what can
be the demand for the upcoming product or services in the future. It is based
upon the real-time analysis of demand which was there in the past for that
particular product or service in the market present today. Demand forecasting
must be done by a scientific approach and facts, events which are related to the
forecasting must be considered.
Hence, in simple words, if someone asks what demand forecasting is, we can
answer that after fetching information about different aspects of the market and
demand which is dependent on the past, an attempt might be made to analyze
the future demand.
This whole concept of analyzing and approximations are collectively called
demand forecasting. In order to understand it more clearly, we can consider the
following equation so that we can understand the concept of demand
forecasting more easily.
For example, if we sold 100,150, 200 units of product Z in January, February,
and March respectively, now we can approximately say that there will be a
demand for 150 units of product Z in April. However, there is also a clause that
the condition of the market should remain the same.

Methods of Demand Forecasting

There are two main methods of demand forecasting: 1) Based on Economy and
2) Based on the period.
1. Based on Economy
There is a total of three methods of demand forecasting based on the economy:
 Macro-level Forecasting: It generally deals with the economic
environment which is related to the economy as calculated by the Index
of Industrial Production(IIP), national income and general level of
employment, etc.
 Industry-level Forecasting: Industry-level forecasting usually deals with
the demand issued for the industry’s products as a whole. We can
consider the example where there is a demand for cement in India,
Demand for clothes in India, etc.
 Firm-level Forecasting: It is a major type of demand forecasting. Firm-
level forecasting means that we need to forecast the demand for a
specific firm’s product. We can consider the following examples as
Demand for Birla cement, Demand for Raymond clothes, etc.
2. Based on the Time
Forecasting based on time may be either short-term forecasting or long-term
forecasting.
 Short-term Forecasting: It generally covers a short period which
depends upon the nature of the industry. It is done generally for six
months or can be less than one year. Short-term forecasting is apt for
making tactical decisions.
 Long-term Forecasting: Long-term forecasts are generally for a longer
period. It can be from two to five years or more. It gives data for major
strategic decisions of the company. We can consider the example of the
expansion of plant capacity or on opening a new unit of business, etc.

Steps Used in Demand Forecasting

The process of demand forecasting can be divided into five simple steps:
 Setting an Objective: The first step involves clearly deciding on the
purpose of the analysis. That is, the manufacturers define their goals that
are achievable through the analysis and compatible with their needs.
 Determining the Time Period: In this step, the manufacturer decides
whether the analysis will be carried out for a short or long duration of time.
Many forecasts run for a long duration as they offer more and consistent
data.
 Selecting a Demand Forecasting Method: In the next step, the
manufacturer decides along with the analysts which method will give the
best results.
 Collection of Data: In the penultimate step, the data is collected
according to the preconceived attributes for the analysis.
 Evaluation of Data: In the last step, the collected data is evaluated to
obtain conclusions for the forecast.
REVENUE CONCEPT
Revenue is the money generated from normal business operations,
calculated as the average sales price times the number of units
sold. It is the top line (or gross income) figure from which costs are
subtracted to determine net income. Revenue is also known as
sales on the income statement.
Types of Revenue
A company's revenue may be subdivided according to the divisions that
generate it. For example, Toyota Motor Corporation may classify revenue
across each type of vehicle. Alternatively, it can choose to group revenue
by car type (i.e. compact vs. truck).

A company may also distinguish revenue between tangible and intangible

product lines. For example, Apple products include iPad, Apple Watch,
and Apple TV. Alternatively, Apple may be interested in separately
analyzing its Apple Music, Apple TV+, or iCloud services.

Revenue can be divided into operating revenue—sales from a company's

core business—and non-operating revenue which is derived from
secondary sources. As these non-operating revenue sources are often
unpredictable or nonrecurring, they can be referred to as one-time events
or gains. For example, proceeds from the sale of an asset, a windfall from
investments, or money awarded through litigation are non-operating
revenue.
Formula and Calculation of Revenue
The formula and calculation of revenue will vary across companies,
industries, and sectors. A service company will have a different formula
than a retailer, while a company that does not accept returns may have
different calculations than companies with return periods. Broadly
speaking, the formula to calculate net revenue is:

Net Revenue = (Quantity Sold * Unit Price) - Discounts - Allowances -

Returns

The main component of revenue is the quantity sold multiplied by the

price. For a service company, this is the number of service hours multiplied
by the billable service rate. For a retailer, this is the number of goods sold
multiplied by the sales price.

The obvious constraint with this formula is a company that has a

diversified product line. For example, Apple can sell a MacBook, iPhone,
and iPad, each for a different price. Therefore, the net revenue formula
should be calculated foreach product or service, then added together to
get a company's total revenue.

There are several components that reduce revenue reported on a

company's financial statements in accordance to accounting guidelines.
Discounts on the price offered, allowances awarded to customers, or
product returns are subtracted from the total amount collected. Note that
some components (i.e. discounts) should only be subtracted if the unit
price used in the earlier part of the formula is at market (not discount)
price.