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Managerial Economics
Esmhel B. Briones, MBA
Demand and its Determinants
Demand and its Determinants
• Demand reflects the size and the pattern of market.
Business activity is always market-determined. The
manufacturers inducement to invest in a given line of
production is limited by the size of market.
• The demand for output and input; the demand for the firm
and the industry; the demand by the consumer and
stockiest; and similar other demand concepts become
therefore, relevant for managerial decision analysis. Even if
the firm pursues objectives alternative to profit-
maximization, demand concepts still remain relevant.
Significance of Demand Analysis
Significance of Demand Analysis
• Demand is one of the crucial requirements for the
functioning of any business enterprise its survival and
growth.
• Demand analysis is of profound significance to management.
Information on the size and type of demand helps
management in planning its requirements of men, materials,
machines, money and what have you.
Examples
• If the demand for a product is subject to temporary business
recession, the firm may plan to pile up the stock of unsold
products.
• If the demand for a product shows a trend towards a substantial
and sustained increase in the long run, the firm may plan to install
additional plant and equipment to meet the demand on a
permanent basis.
• If the demand for a firm’s product is falling, while its rival’s sale is
increasing, the firm needs to plan its sales tactics; the firm may
need to undertake some sales promotion activity like
advertisement.
Examples
• If
the firm’s supply of the product is unable to
meet its existing demand, the firm may be
required to revise its production plan and
schedule; or the firm may have to review its
purchase plan for inputs and the suppliers’
response to input requirements by the firm. In
the same way, larger the demand for a firm’s
product, the higher is the price the firm can
change.
• The common theme underlying these examples
is that the whole range of planning by the firm:
production planning, inventory planning, cost
budgeting, purchase plan, market research,
pricing decision, advertisement budget, and
profit plan etc. call for an analysis of demand.
• Demand analysis is one area of economics that has been
used most extensively by business. The decision which
management makes with respect to any functional area,
always hinges on an analysis of demand.
• Demand analysis seeks to identify and measure the forces
that determine sales; it reflects the market conditions for
the firm’s product. Once the demand analysis is done, the
alternative ways of creating, controlling or managing
demand can be inferred.
Concept of Demand
Concept of Demand
Demand for product implies:
• Desires to acquire it,
• Willingness to pay for it, and
• Ability to pay for it.