The process to satisfy human wants/ needs/desires.
Want: having a strong desire for something
Need: lack of means of subsistence
Desire: an aspiration to acquire something
Demand: effective desire
Demand is that desire which backed by willingness and ability to buy
a particular commodity.
Things necessary for demand:
Price of the commodity
Amount (or quantity) of the commodity consumers are willing to purchase
at the price
TYPES OF DEMAND
DETERMINANTS OF DEMAND
Price of the product
Single most important determinant
Negative effect on demand
Income of the consumer
Normal goods: demand increases with increase in
Inferior goods: demand falls as income rises
Price of related goods
If the price of a commodity increases, demand for its substitute rises.
If the price of a commodity increases, quantity demanded of its complement falls.
DETERMINANTS OF DEMAND
Tastes and preferences
Very significant in case of consumer goods
Expectation of future price changes
Gives rise to tendency of hoarding of durable goods
Size, composition and distribution of population will
Very important in case of competitive markets
Interdependence between demand for a product and its
determinants can be shown in a mathematical functional
Dx = f(Px, Y, Py, T, A, N) …….. [Multivariate fx]
Independent variables: Px, Y, Py, T, A, N
Dependent variable: Dx
Px: Price of x
Y: Income of consumer
Py: Price of other commodity
T: Taste and preference of consumer
N: Macro variable like inflation, population growth, economic
XCEPTIONS TO THE LAW OF DEMAND
Law of demand may not operate due to the following
Giffen Goods: Sir Robert Giffen, Ireland
Snob Appeal: Veblen Goods, Thorstein Veblen
Demonstration Effect: Fashion
Future Expectation of Prices (Panic buying)
Life saving drugs
Goods with no substitute
Amount of income spent
TECHNIQUES OF DEMAND
• Subjective (Qualitative)
methods: rely on human
judgment and opinion.
• Buyers’ Opinion
• Sales Force Composite
• Market Simulation
• Test Marketing
• Experts’ Opinion
• Group Discussion
• Delphi Method
simulation models based
on historical demand or
SUBJECTIVE METHODS OF DEMAND
Consumers’ Opinion Survey
• Buyers are asked about future buying intentions of
products, brand preferences and quantities of
purchase, response to an increase in the price, or an implied
comparison with competitor’s products.
• Census Method: Involves contacting each and every buyer
• Sample Method: Involves only representative sample of buyers
• Simple to administer and comprehend.
• Suitable when no past data available.
• Suitable for short term decisions regarding product and promotion.
• Expensive both in terms of resources and time.
• Buyers may give incorrect responses.
Sales Force Composite
• Salespersons are in direct contact with the customers. Salespersons are asked about
estimated sales targets in their respective sales territories in a given period of time.
• Cost effective as no additional cost is incurred on collection of data.
• Estimated figures are more reliable, as they are based on the notions of
salespersons in direct contact with their customers.
• Results may be conditioned by the bias of optimism (or pessimism) of
• Salespersons may be unaware of the economic environment of the business and
may make wrong estimates.
• This method is ideal for short term and not for long term forecasting
Experts’ Opinion Method
i) Group Discussion: (developed by Osborn in 1953) Decisions may be taken
with the help of brainstorming sessions or by structured discussions.
ii) Delphi Technique: developed by the Rand Corporation at the beginning of
the Cold War, to forecast impact of technology on warfare.
• Decisions are enriched with the experience of competent experts.
• Firm need not spend time, resources in collection of data by survey.
• Very useful when product is absolutely new to all the markets.
• Experts’ may involve some amount of bias.
• With external experts, risk of loss of confidential information to rival firms.
• Firms create “artificial market”, consumers are instructed to shop with some money.
“Laboratory experiment” ascertains consumers’ reactions to changes in
price, packaging, and even location of the product in the shop.
• Grabor-Granger test (1960s)
• Market experiments provide information on consumer behaviour regarding a change
in any of the determinants of demand.
• Experiments are very useful in case of an absolutely new product.
• People behave differently when they are being observed.
QUANTITATIVE METHODS OF DEMAND
Statistical tool to predict future values of a variable on the basis of
time series data.
• Time series data are composed of:
• Secular trend (T): change occurring consistently over a long time and is
relatively smooth in its path.
• Seasonal trend (S): seasonal variations of the data within a year
• Cyclical trend (C): cyclical movement in the demand for a product that may
have a tendency to recur in a few years
• Random events (R): have no trend of occurrence hence they create random
variation in the series.
• Graphical method
• Past values of the variable on vertical axis and time on horizontal axis
and line is plotted.
• Movement of the series is assessed and future values of the variable are
• simple but provides a general indication and fails to predict future value of
Demand for mobiles (in lakhs)
LIMITATIONS OF DEMAND
• Change in Fashion
• Consumers’ Psychology
• Lack of Experienced Experts
• Lack of Past Data
BREAK EVEN ANALYSIS
•Breakeven point is the point where total
cost just equals the total revenue, in other
words it is the no profit no loss point.
BREAK EVEN OUTPUT
• Fixed Cost/Contribution
• 200000 / 40 = 5000 units
BREAK EVEN SALES
• BE Units X Sales price per unit
• 5000 X 100 = 5,00,000
MARGIN OF SAFETY
• Total output – BE output
• 8000 – 5000 = 3000
• MOS X Contribution
• 3000 X 40 = INR. 1,20,000