2. CONTENT
• Demand analysis for policy making
• Alternative approaches to demand analysis
• Policy implications
• Role of quantitative policy analysis
3. REFERENCES
• Anna matas (1988). Demand and Revenue Implications of an
Integrated Public Transport Policy: The Case of Madrid. Economic
Modelling, 5:277-282.
• Bernard F. Whalen(1976). Strategic Mix of Odd, Even Prices Can
Lead to Retail Profits, Marketing News, p. 24.
• Mary E. Renwick and Sandra(1988). Demand Side Management
Policies for Residential Water Use: Who Bears the Conservation
Burden?. Land Economics, Vol. 74, No. 3 pp. 343-359
• Peter Coy(2000).The Power of Smart Marketing, Business Week, April
10, pp. 160-162.
4. • Robert A. Robicheaux (1975). How Important is Pricing in
Competitive Strategy?. Proceedings of the Southern Marketing
Association 1975, pp. 55-57.
• Thomas Nagle(1983). Pricing as Creative Marketing. Business
Horizons, July-August pp.14-19.
5. Demand
Demand is the amount of goods that consumers or buyers are willing
and capable to buy for a specific price in a specific time period while
everything else remains the same. Demand is an economic principle that
describes the willingness and desire of consumers to purchase specific
goods or services at a specific Ceteris Paribus
7. Objectives of Demand Analysis:
(1) Forecasting sales,
(2) Manipulating demand,
(3) Appraising salesmen’s performance for setting their sales
quotas, and
(4) Watching the trend of the company’s competitive position.
8. i. Forecasting Demand:
Forecasting refers to predicting the future level of sales on the
basis of current and past trends. This is perhaps the most
important use of demand studies. True, sales forecast is the
foundation for planning all phases of the company’s
operations. Therefore, purchasing and capital budget
(expenditure) programmes are all based on the sales forecast.
9. ii. Manipulating Demand:
Sales forecasting is most important very few companies take
full advantage of it as a technique for formulating business
plans and policies. However, management must recognize the
degree to which sales are a result only of the external
economic environment but also of the action of the company
itself.
10. (3) Appraising salesmen’s performance for setting their sales
quotas, and
(4) Watching the trend of the company’s competitive position.
11. Importance of Demand Analysis:
• A business manager must have a background knowledge of demand.
• Describe the factors that cause households, governments or business
firms to desire a particular product.
• The objective of corporate planning is to identify new areas of
investment.
• Demand considerations may directly and indirectly affect day-to-day
financial, production and marketing decisions of the firm.
• Therefore, for all these reasons, business managers can make good use
of the various concepts and techniques of demand theory.
12. Functions of Demand Analysis:
i. The Demand Function:
Demand function to give a quantitative expression of demand. This
function shows the functional relationship between the quantity demanded of
a commodity and all factors affecting the demand for the same.
It is usually stated as:
Qd = f (P1, Y, P2, P3, … Pn, A, C, etc)
Here Qd denotes the quantity, p1 its own price, Y is the income of the buyer,
P2……… Pn are the prices of all other goods which are either substitutes or
complements, and so on. A is the level of advertising and C denote all other
factors affecting demand
13. A demand equation is a convenient way of giving a quantitative
expression of demand. An example of a demand equation is
Q0 = α – β1P + β2A + e
in which Q is quantity demanded of a commodity and is obviously the
dependent variable, P (price) and A (the level of advertising) are
independent variables, α, β1 and β2 are the parameters to be estimated.
For example, β1 is the change in sales for every rupee change in price.
Finally e is the error term, which summarizes the effects of all random
variables (chance factors) on demand.
14. A demand function of this type has the following form:
Q0 = αPβ ,Aβ2. e
in which the variables and parameters have their usual meaning. The
assumption underlying the second equation is that the marginal effects
of each variable are not constant but rather are dependent upon the
numerical value of that variable and of all other influences represented
in the demand equation.
15. In terms of logarithms the transformed equation may be expressed as:
16. Various factors cause changes in demand and thus shift of the demand
curve to a new position.
For example, changes in demand for consumer goods are caused by
the following factors:
1. Changes in wages and compensation (bonus, overtime, etc.) of
workers and salaried people, changes in rental income and/or interest in-
come, if any;
2. Population growth and consequent changes in the size of the
population and its age composition;
17. 3. Changes in government laws, regulations, policies (fiscal and
monetary) and procedures concerning consumption of certain harmful
or illegal products (like liquors, or LSD)
4. Changes in the kinds and types of products having appeal to
consumers. (In fact, the appeal to new goods has always been a
powerful factor of economic growth).
18. ii. The Demand for Durable Goods:
Durable goods seem to have attracted excise duties, import tariffs,
quantitative trade controls, license fees, and other policy measures far
out of proportion to their weight in the national output or expenditure.
Housing for instance, is subject to a property (wealth) tax, and the return
on business capital, to a corporation income-tax as well.
The demand for durable goods fluctuates so violently in comparison
with the demand for other sectors’ products, that most modern theories
assign it a key role in causing and/or exacerbating business cycles.
19. Demand Determinants of Durable Goods:
• Joel Dean points out, “Sales of non-durables are made largely to meet
current demand which depends on current conditions. Sales of
durables, on the other hand, add an increment to a stock of existing
goods that dole out their services slowly over several years. It is thus a
common practice to segregate current demand for durables in terms of
replacement of old products and expansion of the total stock”.
20. iii. Durable Goods in Income Statement:
Current consumption entry in the consumers’ income statement should
include his expenditures for non-durables, his expenditures for services
purchased from outside sources, and the cost of the current-period ser-
vices provided to him by his own durable goods. His current-
consumption entry should not, however, include his current-period
expenditure on new durable goods.
21. iv. Stock Demand Vs. Flow Demand:
Durable goods studies face another problem because of the existence of
stock demand and flow demand. At any point in time there is demand
for the ownership of houses. There is also the demand for newly
constructed dwellings. These two demands are obviously interrelated.
Demand must always be considered in relation to supply because both
are important in determining the market price of a product (or factor).
22. v. The Utility Function:
The environmental (external) factors affecting the level of demand are
general economic conditions, consumer tastes and the nature of com-
petition. These are, at best, subject to only indirect influence by a
particular business of the variables at the disposal of management in its
attempts to influence sales, price is perhaps the most important factor.
Other elements in the overall marketing strategy of a business include:
expenditure for advertising and other methods of promotion; choice of
channels of distribution; and size and method of compensation of the
sales force.
23. vi. Normal Goods and Inferior Goods:
A normal goods is one the demand for which increases with an increase
in disposable personal income.
Over the course of a business (trade) cycle, the demand for a commodity
produced by a company may rise at increasing rates or fall very little. It
is the task of the business (company) economist to relate changes in
income to changes in demand for all major products manufactured by
the company.
24. Alternative approaches to determining price
Price determination decisions can be based on a number of factors,
including cost, demand, competition, value, or some combination of
factors. However, while many marketers are aware that they should
consider these factors, pricing remains somewhat of an art. For purposes
of discussion, we categorize the alternative approaches to determining
price as follows:
a) Cost-oriented pricing;
b) Break-Even Analysis
c) Demand-oriented pricing; and
d) Value-based approaches.
25. Cost-Oriented Pricing: Cost-Plus and Mark-
Ups
The cost-plus method, sometimes called gross margin pricing, is
perhaps most widely used by marketers to set price. When middlemen
use the term mark-up, they are referring to the difference between the
average cost and price of all merchandise in stock, for a particular
department, or for an individual item.
26. Break-Even Analysis
The break- even price is the price that will produce enough revenue to
cover all costs at a given level of production. Total cost can be divided
into fixed and variable (total cost = fixed cost + variable cost).
• Break-even analysis is it assumes that variable costs are constant.
However, wages will increase with overtime and shipping discounts
will be obtained.
• Break-even assumes that all costs can be neatly categorized as fixed or
variable. Where advertising expenses are entered, break-even analysis
will have a significant impact on the resulting break-even price and
volume.
27. Target Rates of Return
It would be necessary, therefore, to determine whether the desired price
is in fact attractive to potential customers in the marketplace. If break-
even pricing is to be used, it should be supplemented by additional
information concerning customer perceptions of the relevant range of
prices for the product. The source of this information would most
commonly be survey research, as well as a thorough review of pricing
practices by competitors in the industry. In spite of their shortcomings,
break-even pricing and target return pricing are very common business
practices.
28. Demand-Oriented Pricing
Demand-oriented pricing focuses on the nature of the demand curve for
the product or service being priced. The nature of the demand curve is
influenced largely by the structure of the industry in which a firm
competes. That is, if a firm operates in an industry that is extremely
competitive, price may be used to some strategic advantage in acquiring
and maintain market share. On the other hand, if the firm operates in an
environment with a few dominant players, the range in which price can
vary may be minimal.
29. Value-Based Pricing
If we consider the three approaches to setting price, cost-based is
focused entirely on the perspective of the company with very little
concern for the customer; demand-based is focused on the customer, but
only as a predictor of sales; and value-based pricing focuses entirely on
the customer as a determinant of the total price/value package.
30. Other Pricing Methods:
i. Value Pricing:
ii. Target Return Pricing:
iii. Going Rate Pricing:
iv. Transfer Pricing:
31. i. Value Pricing:
Implies a method in which an organization tries to win loyal customers
by charging low prices for their high- quality products. The organization
aims to become a low cost producer without sacrificing the quality. It
can deliver high- quality products at low prices by improving its
research and development process. Value pricing is also called value-
optimized pricing.
32. ii. Target Return Pricing:
Helps in achieving the required rate of return on investment done for a
product. In other words, the price of a product is fixed on the basis of
expected profit.
33. iii. Going Rate Pricing:
Implies a method in which an organization sets the price of a product
according to the prevailing price trends in the market. Thus, the pricing
strategy adopted by the organization can be same or similar to other
organizations. However, in this type of pricing, the prices set by the
market leaders are followed by all the organizations in the industry.
34. iv. Transfer Pricing:
Involves selling of goods and services within the departments of the
organization. It is done to manage the profit and loss ratios of different
departments within the organization. One department of an organization
can sell its products to other departments at low prices. Sometimes,
transfer pricing is used to show higher profits in the organization by
showing fake sales of products within departments.
35. Case Study Regarding Policy Implications
One of the most popular options for promoting public transport use is
the provision of an integrated and high‐quality public transport system.
This was the strategy adopted by the regional government in Madrid,
Spain, in 1986, and since then public transport patronage has increased
by more than 50%. This paper has two objectives.
• The first is to identify the factors underlying the significant increase in
the demand for public transport in Madrid. To do this, an aggregate
demand function is estimated for bus and underground trips, which
allows one to obtain the demand elasticities with respect to the main
attributes of public transport services and also to calculate the
long‐term impact of changes in those explanatory variables on
patronage
36. • The second objective is to evaluate the impact on revenue derived
from the introduction of the travel card scheme, and to discuss the
consequences on revenue of changes in the relative fare levels of
different types of ticket without substantially affecting patronage. This
latter issue is addressed by estimating a matrix of own and cross‐price
elasticities for different ticket types.
(Anna matas (1988). Demand and Revenue Implications of an
Integrated Public Transport Policy: The Case of Madrid. Economic
Modelling, 5:277-282. )
37. Demand Side Management Policies for
Residential Water Use: Who Bears the
Conservation Burden?
To assess the potential for urban demand side management (DSM) policies as
a water resource management tool, we analyze the extent to which price and
alternative policy instruments (such as use and quantity restrictions and
subsidies for water efficient technologies) re- duce residential demand and
their distributional implications by type of household. Using detailed
household-level panel data for two California communities, the results
suggest that the ultimate effects of DSM policies in terms of the reduction in
aggregate demand and distribution of water savings among household classes
depend both on the policy instrument selected and the composition of
aggregate demand.
Mary E. Renwick and Sandra(1988). Demand Side Management Policies for
Residential Water Use: Who Bears the Conservation Burden?. Land
Economics, Vol. 74, No. 3 pp. 343-359
38. Role of Quantitative Policy Analysis
In policy analysis, there is a gap between the realm of pure theory and
the real world that policy makers face (Dervis, de Melo, and Robinson,
1982).
• Assisting the policy debate requires more than the qualitative insights
given by pure theory; it requires quantification of the various
mechanisms analyzed by theory.
• As it is easy to miss many of the complex indirect effects of a policy,
empirical modeling can help reveal these effects.
• In addition, quantitative analysis allows running sensitivity tests to
clarify the role of key behavioral assumptions and important parameter
values.
39. Quantitative modeling thus allows tracing back disagreements and
differences on policy choices to specific behavioral assumptions and
causal relations, empirical values given to parameters, and choices of
normative objectives. With multiple objectives, including efficiency and
nonefficiency objectives as listed above, that cannot be aggregated in
any uniquely acceptable welfare function, quantitative policy analysis
enables quantification of trade-offs and better-informed policy debates
leading to the choice of which policies to implement.
40. • The first step consists in constructing a model, y f (x, z) ,
where x are uncontrollable exogenous variables, z are policy
instruments, and y are endogenous variables, some of which
enter into the definition of criteria for policy evaluation ( Fox,
Sengupta, and Thorbecke, 1966). Solving the model for the
observed levels of x and the policy package that was actually
implemented yields the solution , which is usually called the
base run of the model. This solution is either one value for
each endogenous variable if the model is static or a sequence
of values if intertemporal.
41. • Second, the base run yields predicted values for some endogenous
variables which are not directly observable.
• Third, simulation on the base run can be used to decompose the effects
on y of specific noncontrollable factors xi , such as an external price
shock, or of specific policy instruments zi, such as fiscal policy,
which, jointly with the other x i and the other z i , determine the
values predicted by the base run (the notation z i means all z
excluding zi ).
• Fourth, the base run is used as the benchmark against which to
measure the impact of counterfactual policy scenarios
