Demand for goods and services constitute one side of the product market; supply of goods and services forms the other. It is needless to say that if there is no demand for a good, there is no need to produce that good. Also, if the demand for a good exceeds its supply, there may be a need to expand its production. Further, production generally takes time, and so for one to know the likely demand for a relevant product at future date to plan its production properly. Thus, a clear understanding of the relevant demand is imperative for any producer worth his name.
Demand analysis seeks to identify and analyze the factors influence the demand. As we shall see later, a firm is not a passive taker of the demand for its product. It has the capacity to create demand as well. Thus, a study of demand is necessary for a decision maker, for it has bearings on its production schedule, and influence on its profit, among other critical variables, is also subject to manipulation by the decision maker and it is crucial for attaining the firmâ€™s objectives. Before we pursue this matter further, it is necessary to explain certain concepts.
Demand in economies means effective demand that is one which meets with all its three crucial characteristics; desire to have a good, willingness to pay for that good, and ability to pay for that good. In the absence of any of these three characteristics, there is no demand. For example, a teetotaler professor may possess both the willingness to pay as well as the ability to pay for a bottle of liquor, yet he does not have a demand for it. This is because he does not desire to have an alcoholic drink. Similarly, a businessman might have the desire to have a television, he might be rich enough to be able to be pay for it, but if he is not willing to pay for the television, he does not have a demand for this product. Also, a blue collar worker might possess both the desire for a scooter as well as the willingness to pay for it, but if he does not possess enough money to pay for it, he does not have a demand for the scooter. In contrast, to these three situations, a doctor, who has the desire for a car, as well as both will have the ability to pay for it, has the demand for a car. Incidentally sometimes there is a shortage of a commodity, meaning that there is no one from whom the product can be purchased. For example, a doctorâ€™s demand might be for a new Toyota car there might not be a seller or the government may not permit him to import it, then what? Well, there is a demand for Toyota car but it can not be met. In other words, it is an insatiable demand.
Demand for a good depends on several factors and varies as any one or more of these factors change. However, it is pertinent to recall here the two important determinants of demand own price and time. Demand is usually defined as a schedule which shows various quantities of a product which one of a product which one or more consumers are willing and able to purchase at each specific price in a set of possible process during a specific period of time.
Types of Demand:
There are a large number of goods and services available in every economy. Their classification is important in order to carry out a meaningful demand analysis from managerial decisions. Also an understanding of demand at various levels of aggregation is inevitable for policy decisions. The significant classification can be as follows:
1. Demand for customersâ€™ goods and producersâ€™ goods
2. Demand for perishable and durable goods
3. Autonomous (direct) and derived (indirect) demand.
4. Individual buyerâ€™s demand and all buyers (aggregate / market) demand.
5. Firm and industry demand
6. Demand by market segments and by total market.
Consumersâ€™ Goods and Producers Goods:
Goods and services used for final consumption are called consumer goods. These include those consumed by human beings (e.g. food items, clothes, Kitchen utensils, residential houses, medicines, and services of teachers, doctors, lawyers, washer-men and shoe makers), animals (e.g. dog food and fish food), birds (e.g. grains )etc. In contrast producersâ€™ goods refer to the ones used for production of other goods. Thus, producersâ€™ goods consist of plant and machines, factory buildings services of business employees, raw material etc.
Perishable and Durable Goods:
In economics, the meaning of these terms is different. Here perishable goods refer to those goods which can be consumed only once. In other words, these goods are themselves consumed while in the case of durable goods, their services alone are consumed. Thus, perishable goods include all services (e.g. services of teachers and doctors), food items, raw materials, coal, and electricity, while durable goods include plant and machinery, buildings, furniture, automobiles, refrigerators and fans.
The distinction is significant, for durable products pose more complicated problems for demand analysis than do non durables. Sales of non-durables are made largely to meet current demand which depends on current conditions. In contrast, sales of durable goods go partly to satisfy new demand and partly to replace old items.
Autonomous and Derived Demand:
The goods whose demand is not tied with demand for some other goods are said to have autonomous demand, while the rest have derived demand. Thus, the demands for all producersâ€™ goods are derived demands, for they are needed in order to obtain consumers or producers goods. So is the demand from money which is needed not for its own sake but for its purchasing power, which can buy goods and services.
Thus, the distinction between autonomous and derived demand is more of a degree than of a kind. Sometimes a distinction is also drawn between direct and indirect demand, and that distinction is close to the difference between autonomous and derived demand respectively. Goods that are demanded for their own sake have direct demand while goods that are needed in order to obtain some other goods possess indirect demand. In this sense, all consumer goods have direct demands while producersâ€™ goods, including money, have indirect demand.