Demand Analysis Concept and importance of Demand
Demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given period of time. The relationship between price and quantity demanded is also known as the demand curve. Preferences which underlie demand, are influenced by cost, benefit, odds and other variables.
Theoretically, demand can be defined as a quantity of a product an individual is willing to purchase at a specific point of time.
Some of the management experts have defined demand in the following ways:
According to Prof. Benham, “The demand for anything, at a given price is the amount of it which will be bought per unit of time at the price.”
In the words of Prof Hanson, “By demand is meant, demand at a price, for it is impossible to conceive of demand not related to price.”
As per Prof Hibdon, “Demand means the various quantities of goods that would be purchased per time period at different prices in a given market.”
According to Prof Mayers, “The demand for goods is schedule of the amounts that buyers would be willing to purchase at all possible prices at any one instant of time.”
From the aforementioned definitions, it can be concluded that demand implies a desire supported by an ability and willingness of an individual to pay for a particular product. If an individual does not have sufficient resources or purchasing power to buy a particular product, then his/her desire alone would not be regarded as demand.
For instance, if an individual desires to purchase a resort and does not have adequate amount of money to purchase the resort, his/her desire is not considered as demand for the resort Apart from It, if an affluent individual desires to purchase a resort, but does not have willingness to spend money for purchasing the resort then his/her desire is also not considered as demand.
Therefore, we can say that effective demand is the desire backed by the purchasing power and willingness of an individual to pay for a particular product. An effective demand has three characteristics namely, desire, willingness, and ability of an individual to pay for a product.
The demand for a product is always defined in reference to three key factors, price, point of time, and market place. These three factors contribute a major part in understanding the concept of demand. The omission of any of these factors would make the concept of demand meaningless and vague.
For example, the statement, “the demand for an ABC product is 200” neither conveys any meaning, nor does have any use for economic analysis or business decision making. On the other hand, the statement, “the demand for milk is 100 liters per day at a price of Rs. 15 per liter in City A.” provides a clear understanding of demand.
The importance of demand analysis in business decisions can be explained under following headings:
- Sales Forecasting
The demand is a basis the sales of the production of a firm. Hence, sales forecasting can be made on the basis of demand. For example, if demand is high, sales will be high and if demand is low, sales will be low. The firms can make different arrangements to increase or reduce production or push up sales on the basis of sales forecast.
- Pricing Decisions
The analysis of demand is the basis of pricing decisions of a firm. If the demand for the product is high, the firm can charge high price, other things remaining the same. On the contrary .If the demand is low, the firm cannot high price. The demand analysis also helps the firm in profit budgeting.
- Marketing Decisions
The analysis of demand helps a firm to formulate marketing decisions. The demand analysis analyses and measure the forces that determine demand. The demand can be influenced by manipulating the factors on which consumers base their demand on attractive packaging.
- Production decisions
How much a firm can produce depends on its capacity. But how much it should produce depends on demand. Production is not necessary if their no demand. But continuous production schedule is necessary if the demand for the production is relatively stable. If the demand is less than the quantity of production, new demand should be created by means of promotional activities such a advertising.
- Financial decisions
The demand condition in the marker for firm’s product’s affects the financial decisions as well. If the demand for firm’s product is strong and growing, the needs for additional finance will be greater. Hence, the financial manager should make necessary financial arrangement to finance the growing need of the capital.