Monday, January 2, 2017

Demand: Meaning and Concept

"Demand is the mother of production"
Increasing demand for a product offers a high business prospects in future and decreasing demand for a product reduces the business prospects.
For example
Increasing demand for computers, cars, smart phones in India has enlarged the business prospects for both domestic and foreign companies. On the other hand, declining demand for traditional color TV sets and feature phones is forcing the companies to switch over to modern substitutes or go out of business.
It is therefore, essential for business mangers to have clear understanding of the following aspects of demand for their products;

  1. What are the sources of demand?
  2. What are the determinants of demand?
  3. How do the buyers decide the quantity of a product to be purchased?
  4. How do the buyers respond to change in product prices, their income and prices of the related foods?
  5. How can the total or market demand for a product be assessed and forecast?
Conceptually, the term 'demand' implies a 'desire' for a commodity backed by the ability and willingness to pay for it. Unless a person has adequate purchasing power or resources and the preparedness to spend his resources, his desire for a commodity would not be considered as his demand. But if a man has sufficient money and is willing to pay, his desire to buy a car is an effective demand. Therefore

"The desires without adequate purchasing power and willingness to pay don't affect market, nor do they generate production activity."

A want with three attributes becomes an effective demand....
  • desire to pay
  • willingness to pay and 
  • ability to pay
 Only an effective demand figures in economic analysis and business decisions

Demand for a commodity refers; Price, Period of time, and Place
The term 'demand' for a commodity (i.e. quantity demanded) always has a reference to 
  • Price
  • Period of time
  • Place
Any statement regarding the demand for a commodity without reference to its price, time of purchase and place is meaning less and is of no practical use. 
For instance, to say 'the demand for laptop is 50,000' carries no meaning for business decision, nor does it have any use in any kind of economic analysis

A meaningful statement regarding the demand for a commodity should, therefore, contain the following information:
  1. The quantity demanded
  2. The price at which the commodity demanded
  3. The time period over which a commodity is demanded, and
  4. The market area in which a commodity is demanded
For example :
The annual demand for laptop in Delhi  at  an average price of Rs.25000 per laptop is 50,000 is a meaningful statement.