Content
Demand
Objectives of Demand Analysis:
According to Dean, demand analysis has four managerial
purposes:
(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.
Of these the first two are most important and the last two
are ancillary to the main economic problem of planning for profit.
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.
ii. Manipulating Demand:
Sales forecasting is most passive. 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.
ADVERTISEMENTS:
Sales volumes do differ, “depending upon how much
money is spent on advertising, what price policy is adopted, what product
improvements are made, how accurately salesmen and sales efforts are matched
with potential sales in the various territories, and so forth”.
Often advertising is intended to change consumer tastes in a
manner favourable to the advertiser’s product. The efforts of so-called ‘hidden
persuaders’ are directed to manipulate people’s ‘true’ wants. Thus sales
forecasts should be used for estimating the consequences of other plans for
adjusting prices, promotion and/or products.
Importance of Demand Analysis:
A business manager must have a background knowledge of
demand because all other business decisions are largely based on it. For
example, the amount of money to be spent on advertising and sales promotion,
the number of sales-persons to be hired (or employed), the optimum size of the
plant to be set up, and a host of other strategic business decisions largely
depend on the level of demand.
Why should a business firm invest time, effort and money to
produce colour TV sets in a poor country like Chad or Burma, unless there is
sufficient demand for it? A firm must be able to describe the factors that
cause households, governments or business firms to desire a particular product
like a typewriter. It is in this context that an understanding of the theory
of demand is really helpful to the practicing manager.
Demand theory is undoubtedly one of the manager’s essential
tools in business planning both short run and long run. The objective of
corporate planning is to identify new areas of investment.
In a dynamic world characterised by changes in tastes and
preferences of buyers, technological change, migration of people from rural to
urban areas, and so on, it is of paramount importance for the business manager
to take into account prospective growth of demand in various market areas
before taking any decision on new plant location (i.e., the place of birth
decision of a business firm).
If demand is expected to be stable, big sized plant may
have to be set up. However, if demand is expected to fluctuate, flexible
plants (possibly with lower average costs at the most likely rate of output)
may be desirable.
A huge amount of capital may be required to carry
inventories of finished goods. If demand is really responsive to advertising,
there may be a strong rationale for heavy outlay on market development and
sales promotion.
What you’ll learn to do: explain the determinants of
demand
Imagine that the price of Ben & Jerry’s ice cream
decreases by 25 percent during the next summer. What do you think will
happen to the amount of Ben & Jerry’s ice cream that people will want to
buy? Clearly, the demand for ice cream will increase. By the same token, if the
price of the ice cream were to rise by 25 percent, then the demand for the ice
cream would fall. In this section, you will examine the law of demand and
see why this simple concept is essential to understanding economics.
The specific things you’ll learn in this section include the
following:
- Explain
the law of demand
- Explain
a demand curve
- Create
a demand curve using a data set
- Describe
the differences between changes in demand and changes in the quantity
demanded
- Explain
the impact of factors that change demand
Learning Activities
The learning activities for this section include the
following:
- Reading:
What Is Demand?
- Video:
Change in Demand vs. Quantity Demanded
- Reading:
Factors Affecting Demand
- Worked
Example: Shift in Demand
- Reading:
Summary of Factors That Change Demand
- Simulation:
Demand for Food Trucks