Demand Analysis
Definition: Demand analysis involves research to estimate or determine the customer demand for a product or service in a particular market. This analysis is crucial for making informed business decisions related to sales forecasting, pricing, marketing, manufacturing, and expansion planning.
Key Considerations:
- Future and Retrospective Analysis: Demand analysis involves both predicting future demand and analyzing past demand trends to understand the product’s or service’s historical performance.
- Market Entry Decision: For new companies, demand analysis helps determine if there is substantial demand for their product/service. It considers the number of competitors, their size, and the overall industry growth to assess the potential for market entry and business sustainability.
Applications of Demand Analysis:
- Sales Forecasting: Predicting future sales to guide production and inventory decisions.
- Pricing Strategy: Setting optimal prices based on demand elasticity.
- Marketing and Advertising: Allocating budget to maximize demand stimulation.
- Production Planning: Aligning manufacturing processes with expected demand levels.
- Expansion Planning: Deciding on new market entries or scaling operations.
Demand Schedule
Definition: A demand schedule is a table that shows the quantity of a commodity that consumers are willing to purchase at various prices. It illustrates the Law of Demand, which states that the quantity demanded of a commodity increases as its price falls and decreases as its price rises, ceteris paribus (all other things being equal).
Types of Demand Schedules:
- Individual Demand Schedule: Depicts the demand of a single consumer at different price levels.
- Market Demand Schedule: Summarizes the demand of all consumers in the market at various price levels.
Individual Demand Schedule Example:
| Price per unit of commodity X (Px) | Quantity demanded of commodity X (Dx) |
| 100 | 80 |
| 250 | 60 |
| 300 | 40 |
| 450 | 30 |
| 500 | 10 |
Explanation: When the price of the commodity is ₹100, the individual demands 80 units. As the price increases to ₹500, the demand decreases to 10 units, demonstrating the inverse relationship between price and quantity demanded.
Individual Demand Curve: The individual demand curve is a graphical representation of the individual demand schedule. The X-axis represents the quantity demanded, and the Y-axis represents the price of the commodity. It typically slopes downward from left to right, reflecting the inverse relationship between price and demand.
Market Demand Schedule Example:
| Price per unit of commodity X (Px) | Quantity demanded by consumer A (QA) | Quantity demanded by consumer B (QB) | Market Demand (QA + QB) |
| 100 | 80 | 70 | 150 |
| 250 | 60 | 50 | 110 |
| 300 | 40 | 30 | 70 |
| 450 | 30 | 20 | 50 |
| 500 | 10 | 30 | 40 |
Explanation: At a price of ₹100, consumer A demands 80 units and consumer B demands 70 units, resulting in a market demand of 150 units. As the price increases to ₹500, market demand decreases to 40 units.
Market Demand Curve: The market demand curve is a graphical representation of the market demand schedule. The X-axis represents the total quantity demanded by the market, and the Y-axis represents the price of the commodity. Similar to the individual demand curve, it slopes downward, indicating the inverse relationship between price and quantity demanded.
Importance of Demand Analysis and Demand Schedules
Strategic Business Decisions:
- Advertising and Promotion: Determines the budget allocation for advertising campaigns to maximize demand.
- Production Planning: Ensures production aligns with anticipated demand to avoid overproduction or stockouts.
- Pricing Strategies: Helps set competitive prices that maximize revenue without deterring customers.
- Market Entry and Expansion: Informs decisions about entering new markets or expanding in existing ones based on demand potential.
Operational Efficiency:
- Inventory Management: Guides optimal inventory levels to meet demand without excess stock.
- Sales Forecasting: Provides a basis for setting sales targets and planning sales strategies.
- Financial Planning: Aids in projecting cash flows and budgeting based on expected demand.
By understanding and utilizing demand analysis and demand schedules, businesses can make informed decisions that enhance their competitiveness and profitability in the market.