Tag: Market Segmentation

Elasticity of demand refers to the responsiveness or sensitivity of the quantity demanded of a good or service to changes in one of its determining factors, primarily its price, income of the consumer, or prices of related goods. In simpler terms, it measures how much the demand for a product changes when its price or other influencing factor changes.

The most common and widely used form is Price Elasticity of Demand (PED), which shows the extent to which the quantity demanded changes in response to a change in the price of the product. If a small change in price leads to a large change in quantity demanded, demand is said to be elastic. If a change in price results in little or no change in demand, it is inelastic.

Besides PED, there are other forms:

• Income Elasticity of Demand (YED): Measures demand responsiveness to changes in consumer income.
• Cross Elasticity of Demand (XED): Measures demand changes due to the price change of related goods (substitutes or complements).

Elasticity helps businesses make strategic decisions in pricing, marketing, taxation impact, and forecasting revenue. For instance, if a product is price elastic, lowering the price may increase total revenue. Conversely, if demand is inelastic, a firm can raise prices without a major drop in sales volume.

Understanding elasticity is crucial for firms, policymakers, and economists to predict consumer behavior and optimize resource allocation in response to changing economic variables.

Types of Elasticity:

Distinction may be made between Price Elasticity, Income Elasticity and Cross Elasticity. Price Elasticity is the responsiveness of demand to change in price; income elasticity means a change in demand in response to a change in the consumer’s income; and cross elasticity means a change in the demand for a commodity owing to change in the price of another commodity.

(a) Infinite or Perfect Elasticity of Demand

Let as first take one extreme case of elasticity of demand, viz., when it is infinite or perfect. Elasticity of demand is infinity when even a negligible fall in the price of the commodity leads to an infinite extension in the demand for it. In Fig. 1 the horizontal straight line DD’ shows infinite elasticity of demand. Even when the price remains the same, the demand goes on changing.

(b) Perfectly Inelastic Demand

The other extreme limit is when demand is perfectly inelastic. It means that howsoever great the rise or fall in the price of the commodity in question, its demand remains absolutely unchanged. In Fig. 2, the vertical line DD’ shows a perfectly inelastic demand. In other words, in this case elasticity of demand is zero. No amount of change in price induces a change in demand.

In the real world, there is no commodity the demand for which may be absolutely inelastic, i.e., changes in its price will fail to bring about any change at all in the demand for it. Some extension/contraction is bound to occur that is why economists say that elasticity of demand is a matter of degree only. In the same manner, there are few commodities in whose case the demand is perfectly elastic. Thus, in real life, the elasticity of demand of most goods and services lies between the two limits given above, viz., infinity and zero. Some have highly elastic demand while others have less elastic demand.

(c) Very Elastic Demand

Demand is said to be very elastic when even a small change in the price of a commodity leads to a considerable extension/con­traction of the amount demanded of it. In Fig. 3, DD’ curve illustrates such a demand. As a result of change of T in the price, the quantity demanded extends/contracts by MM’, which clearly is comparatively a large change in demand.

(d) Less Elastic Demand

When even a substantial change in price brings only a small extension/contraction in demand, it is said to be less elastic. In Fig. 4, DD’ shows less elastic demand. A fall of NN’ in price extends demand by MM’ only, which is very small.

Significance of Elasticity of Demand:

• Determination of Output Level

For making production profitable, it is essential that the quantity of goods and services should be produced corresponding to the demand for that product. Since the changes in demand are due to the change in price, the knowledge of elasticity of demand is necessary for determining the output level.

• Determination of Price

The elasticity of demand for a product is the basis of its price determination. The ratio in which the demand for a product will fall with the rise in its price and vice versa can be known with the knowledge of elasticity of demand.

If the demand for a product is inelastic, the producer can charge high price for it, whereas for an elastic demand product he will charge low price. Thus, the knowledge of elasticity of demand is essential for management in order to earn maximum profit.

• Price Discrimination by Monopolist

Under monopoly discrimination the problem of pricing the same commodity in two different markets also depends on the elasticity of demand in each market. In the market with elastic demand for his commodity, the discriminating monopolist fixes a low price and in the market with less elastic demand, he charges a high price.

• Price Determination of Factors of Production

The concept of elasticity for demand is of great importance for determining prices of various factors of production. Factors of production are paid according to their elasticity of demand. In other words, if the demand of a factor is inelastic, its price will be high and if it is elastic, its price will be low.

• Demand Forecasting

The elasticity of demand is the basis of demand forecasting. The knowledge of income elasticity is essential for demand forecasting of producible goods in future. Long- term production planning and management depend more on the income elasticity because management can know the effect of changing income levels on the demand for his product.

• Dumping

A firm enters foreign markets for dumping his product on the basis of elasticity of demand to face foreign competition.

• Determination of Prices of Joint Products

The concept of the elasticity of demand is of much use in the pricing of joint products, like wool and mutton, wheat and straw, cotton and cotton seeds, etc. In such cases, separate cost of production of each product is not known.

Therefore, the price of each is fixed on the basis of its elasticity of demand. That is why products like wool, wheat and cotton having an inelastic demand are priced very high as compared to their byproducts like mutton, straw and cotton seeds which have an elastic demand.

• Determination of Government Policies

The knowledge of elasticity of demand is also helpful for the government in determining its policies. Before imposing statutory price control on a product, the government must consider the elasticity of demand for that product.

The government decision to declare public utilities those industries whose products have inelastic demand and are in danger of being controlled by monopolist interests depends upon the elasticity of demand for their products.

• Helpful in Adopting the Policy of Protection

The government considers the elasticity of demand of the products of those industries which apply for the grant of a subsidy or protection. Subsidy or protection is given to only those industries whose products have an elastic demand. As a consequence, they are unable to face foreign competition unless their prices are lowered through sub­sidy or by raising the prices of imported goods by imposing heavy duties on them.

• Determination of Gains from International Trade

The gains from international trade depend, among others, on the elasticity of demand. A country will gain from international trade if it exports goods with less elasticity of demand and import those goods for which its demand is elastic.

In the first case, it will be in a position to charge a high price for its products and in the latter case it will be paying less for the goods obtained from the other country. Thus, it gains both ways and shall be able to increase the volume of its exports and imports.

Price Elasticity of Demand (PED):

Price Elasticity of Demand measures how much the quantity demanded of a product changes in response to a change in its price. It is calculated using the formula:

PED=% change in quantity demanded% change in price\text{PED} = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}PED=% change in price% change in quantity demanded​

If PED > 1, demand is elastic (responsive to price changes). If PED < 1, demand is inelastic (not responsive). If PED = 1, demand is unitary elastic. For example, if the price of a luxury car drops and sales rise significantly, the demand is elastic. However, for necessities like salt or milk, even a big price rise may not reduce demand much, indicating inelastic demand.

Understanding PED helps businesses set pricing strategies. If demand is inelastic, firms can raise prices to increase total revenue. If it’s elastic, they may lower prices to attract more buyers and increase sales volume. Government agencies also consider PED when imposing taxes.

Income Elasticity of Demand (YED):

Income Elasticity of Demand measures how sensitive the quantity demanded of a good is to a change in consumers’ income. The formula is:

YED=% change in quantity demanded% change in income\text{YED} = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in income}}YED=% change in income% change in quantity demanded​

If YED > 1, the product is a luxury good, and demand increases more than proportionally with income. If 0 < YED < 1, it’s a normal good, and demand rises with income but at a slower rate. If YED < 0, it is an inferior good, and demand falls as income rises.

For example, as income increases, people may shift from public transport (inferior good) to personal vehicles (normal or luxury goods). Firms use YED to predict sales trends during economic growth or recession. High-income elasticity indicates sales will rise rapidly in prosperous times, while a low or negative elasticity means demand could fall during downturns.

Cross Elasticity of Demand (XED):

Cross Elasticity of Demand measures how the quantity demanded of one good responds to a price change of another related good. It is used to understand the relationship between substitute and complementary goods. The formula is:

XED=% change in quantity demanded of Good A% change in price of Good B\text{XED} = \frac{\%\text{ change in quantity demanded of Good A}}{\%\text{ change in price of Good B}}XED=% change in price of Good B% change in quantity demanded of Good A​

If XED > 0, the goods are substitutes (e.g., tea and coffee); a price rise in one increases demand for the other. If XED < 0, the goods are complements (e.g., printers and ink cartridges); a price rise in one reduces demand for the other. If XED = 0, the goods are unrelated.

Businesses analyze XED to predict how a competitor’s price change can impact their own sales. For example, a soft drink company may monitor price changes of rival products to anticipate changes in their own demand. It’s also valuable in pricing bundled products or forming strategic alliances with producers of complementary goods.

Demand forecasting is the process of estimating the future demand for a product or service over a specific period. It is a critical component of business planning that helps organizations make informed decisions regarding production, inventory management, pricing, marketing, and resource allocation. Accurate demand forecasting enables businesses to anticipate customer needs, avoid overproduction or underproduction, and optimize operational efficiency.

The goal of demand forecasting is to reduce uncertainty and support strategic planning by predicting how much of a product consumers will be willing and able to purchase in the future. Forecasts are based on a combination of historical sales data, market trends, seasonal patterns, consumer behaviour, and external economic indicators. Businesses may use qualitative methods (like expert opinion and market research) or quantitative methods (like time series analysis, regression models, and machine learning algorithms) depending on the context and available data.

There are different types of demand forecasting, such as short-term forecasting (used for inventory and scheduling), medium-term forecasting (for sales and budget planning), and long-term forecasting (for capacity and expansion decisions). Each serves a specific business purpose.

Effective demand forecasting provides several benefits. It helps reduce costs, improves customer satisfaction through better availability of products, and enhances financial planning by aligning supply with anticipated demand. It also minimizes the risks of stockouts or surplus inventory.

In today’s competitive and dynamic market environment, demand forecasting is essential for gaining a competitive edge, ensuring customer satisfaction, and achieving overall business success. It supports data-driven decision-making and enables organizations to respond proactively to market changes.

Need of Demand Forecasting:

Demand plays a crucial role in the management of every business. It helps an organization to reduce risks involved in business activities and make important business decisions. Apart from this, demand forecasting provides an insight into the organization’s capital investment and expansion decisions.

• Business Planning and Strategy

Demand forecasting is essential for long-term business planning and the formulation of strategies. It helps managers estimate future demand and align their production, investment, and marketing efforts accordingly. Forecasting provides insights into market trends, consumer behavior, and potential changes in demand patterns. This enables firms to develop strategies that minimize risks and capitalize on growth opportunities. Accurate forecasts guide business decisions regarding expansion, diversification, and resource allocation, thereby supporting sustainable growth and competitive advantage in dynamic business environments.

• Production Planning and Scheduling

Forecasting demand enables businesses to plan production activities efficiently. It helps determine the quantity of raw materials, machinery, and labor required to meet expected demand. Proper production planning ensures timely delivery of goods, minimizes lead times, and avoids production bottlenecks. It also helps in reducing production costs by optimizing resource utilization. With accurate demand projections, companies can avoid overproduction, which leads to excess inventory, or underproduction, which causes stockouts and customer dissatisfaction. Thus, forecasting is crucial for streamlined operations.

• Financial Planning and Budgeting

Demand forecasting plays a critical role in financial planning. It helps businesses estimate future revenues and costs, which is vital for preparing budgets, managing cash flows, and assessing profitability. Accurate forecasts allow firms to anticipate financial needs, allocate funds appropriately, and plan for future investments. It also aids in obtaining credit and financial support, as lenders often require evidence of projected demand and income. In essence, demand forecasting supports better fiscal discipline and long-term financial health of an organization.

• Inventory Management

Proper demand forecasting ensures effective inventory management. By predicting the demand accurately, businesses can maintain optimum stock levels — not too high to incur carrying costs, and not too low to miss sales opportunities. It prevents situations of excess inventory that can lead to wastage, especially for perishable goods, and also avoids stockouts that frustrate customers. Forecasting aligns inventory control with market demand, thus ensuring product availability while keeping storage costs and capital investment in inventory at manageable levels.

• Human Resource Planning

Accurate demand forecasts help determine labor requirements for upcoming production and sales activities. Businesses can estimate the number and types of employees needed during peak and off-peak seasons. For example, retailers hire more staff during festive seasons based on expected demand. This ensures optimal workforce allocation, better scheduling, and reduced employee downtime. Demand forecasting thus supports human resource planning by aligning labor supply with demand, ensuring that operations are smooth, cost-effective, and responsive to customer needs.

• Marketing and Promotional Strategy

Forecasting demand is crucial for developing effective marketing campaigns and promotional activities. By knowing when and where demand is likely to rise, companies can focus their marketing efforts strategically. It enables them to allocate budgets, select appropriate channels, and time promotions to boost sales. For example, a forecasted surge in demand during holidays helps firms plan discounts or advertising campaigns in advance. In this way, demand forecasting improves marketing ROI and strengthens customer engagement and brand positioning.

• Pricing Decisions

Demand forecasting provides critical input for pricing decisions. Understanding demand elasticity helps firms decide whether to raise or lower prices to maximize revenue. If forecasts show high future demand, businesses may maintain or increase prices. In contrast, if demand is expected to fall, they may consider promotional pricing or discounts. Accurate forecasting allows for dynamic pricing strategies that align with market conditions and consumer expectations, helping businesses stay competitive while optimizing profit margins.

• Risk Management and Crisis Preparation

One of the most important needs of demand forecasting is to manage business risks. Forecasts allow firms to anticipate shifts in demand due to economic changes, competitor actions, or consumer preferences. This preparation helps companies develop contingency plans, adjust operations, and adapt their offerings accordingly. For instance, during uncertain periods like pandemics or economic slowdowns, forecasting enables proactive decision-making. It enhances organizational resilience by reducing uncertainty and enabling firms to react swiftly to market disruptions.

Objectives of short term demand forecasting:

• Inventory Management

Short-term demand forecasting helps businesses maintain optimal inventory levels. By predicting near-future demand, firms avoid understocking or overstocking, which reduces storage costs and prevents stockouts. It ensures that inventory is aligned with expected sales, thereby improving customer satisfaction and operational efficiency. Effective inventory planning also minimizes losses due to obsolescence or spoilage, especially for perishable or seasonal products.

• Production Planning

Short-term forecasts are crucial for daily or weekly production scheduling. They allow businesses to adjust their production volume based on immediate market demand. This prevents overproduction, reduces idle time, and ensures efficient use of resources. Production planning based on accurate short-term forecasts also helps maintain quality control and timely delivery, which are essential for meeting customer expectations and reducing operational costs.

• Labor Force Scheduling

Forecasting short-term demand allows businesses to align their workforce requirements with production and service needs. Companies can schedule shifts, plan overtime, or hire temporary workers during peak periods. It ensures optimal manpower utilization and prevents labor shortages or surpluses. This leads to cost-effective operations and maintains employee satisfaction by avoiding overburdening during high-demand periods or underemployment during low-demand phases.

• Pricing Adjustments

Short-term demand forecasting helps in making timely pricing decisions. If a surge in demand is anticipated, businesses may increase prices to maximize profits. Conversely, during a slowdown, they might offer discounts or promotions to stimulate demand. This flexibility in pricing ensures competitiveness, helps clear inventory, and supports revenue targets. Effective pricing adjustments based on demand help maintain a stable market position.

• Marketing Campaigns

Forecasting demand over the short term helps businesses time their marketing and promotional activities for maximum impact. If demand is expected to rise, promotional efforts can be intensified to boost brand visibility. During slow periods, targeted campaigns can help stimulate customer interest. Proper timing of promotions improves return on marketing investment and ensures better alignment between marketing strategy and consumer behavior.

• Financial Planning

Short-term forecasting supports accurate cash flow and budget planning. By estimating near-future sales and expenses, firms can manage working capital, schedule purchases, and plan for short-term financing needs. It reduces the likelihood of liquidity issues and ensures smooth operations. Financial planning based on short-term forecasts allows for timely payment of obligations, better credit management, and informed decision-making regarding short-term investments.

• Customer Service Management

Short-term demand forecasting ensures products and services are available when customers need them. This helps improve order fulfillment rates, reduce waiting times, and enhance customer satisfaction. Meeting customer demand promptly builds trust and loyalty. It also enables businesses to handle sudden demand spikes efficiently, ensuring they remain responsive and competitive in fast-moving markets.

• Managing Seasonal and Promotional Demand

Short-term forecasts are essential for anticipating seasonal variations and promotional event impacts. For example, demand often spikes during festivals or clearance sales. Accurate forecasting allows companies to prepare in advance, stocking up on popular products and aligning logistics accordingly. This minimizes disruption, boosts sales, and ensures timely service delivery during high-demand periods.

Objectives of long term demand forecasting:

• Strategic Business Planning

Long-term demand forecasting provides the foundation for strategic decision-making. It helps businesses plan future goals, set long-term objectives, and align operations with projected market trends. Accurate forecasts enable companies to anticipate industry changes, customer needs, and competitive pressures, helping them maintain a sustainable competitive advantage. It supports decisions related to diversification, globalization, and product innovation over extended time horizons.

• Capital Investment Decisions

Businesses rely on long-term demand forecasting to plan for capital investments such as new plants, machinery, technology upgrades, or infrastructure development. These decisions require large financial commitments and long gestation periods. Forecasting helps determine whether anticipated demand justifies such investments. It ensures that resources are not wasted on underutilized assets and enables the organization to plan investments that support future capacity needs.

• Capacity Planning

To meet future demand effectively, firms need to plan their production and operational capacity well in advance. Long-term forecasting helps determine when and how much to expand capacity. It guides decisions about scaling production lines, adding shifts, or establishing new facilities. This ensures businesses are prepared to meet future demand increases without facing operational bottlenecks or sacrificing customer service quality.

• Research and Development (R&D) Planning

Long-term forecasts inform decisions regarding research and development. Businesses can identify future market needs and begin working on new products or improving existing ones. This planning ensures that companies are not reactive but proactive, launching innovative solutions at the right time. R&D planning based on demand projections helps businesses remain technologically advanced and responsive to evolving consumer preferences.

• Human Resource Development

Long-term forecasting supports workforce planning and development strategies. It helps organizations estimate future staffing needs, plan recruitment drives, invest in employee training, and develop succession plans. This ensures that the business has the right talent and skills available when needed. Preparing a future-ready workforce reduces the risk of talent shortages and helps organizations stay competitive and productive in the long run.

• Financial Forecasting and Capital Allocation

Forecasting long-term demand assists in financial forecasting and efficient capital allocation. It helps determine future revenue streams, investment priorities, and funding requirements. Businesses can prepare long-term budgets, secure financing in advance, and allocate capital to areas with the highest expected returns. Long-term financial stability is strengthened when capital planning aligns with realistic demand estimates.

• Risk Management and Contingency Planning

Long-term demand forecasting allows businesses to identify potential risks, such as market downturns, raw material shortages, or technological disruptions. Companies can then create contingency plans to mitigate these risks in advance. This proactive approach enhances organizational resilience, supports crisis readiness, and enables smoother operations even in uncertain or volatile environments.

• Expansion and Diversification Strategy

Businesses aiming to grow through market expansion or diversification use long-term demand forecasting to identify viable opportunities. Forecasts indicate potential markets, emerging customer segments, and product demand trends. These insights support decisions on entering new geographic areas, launching new product lines, or acquiring complementary businesses. Long-term planning ensures resources are directed toward sustainable growth areas.

Methods of Demand Forecasting:

There is no easy or simple formula to forecast the demand. Proper judgment along with the scientific formula is needed to correctly predict the future demand for a product or service. Some methods of demand forecasting are discussed below:

1. Survey of Buyer’s Choice

When the demand needs to be forecasted in the short run, say a year, then the most feasible method is to ask the customers directly that what are they intending to buy in the forthcoming time period. Thus, under this method, the potential customers are directly interviewed. This survey can be done in any of the following ways:

• Complete Enumeration Method: Under this method, nearly all the potential buyers are asked about their future purchase plans.
• Sample Survey Method: Under this method, a sample of potential buyers is chosen scientifically and only those chosen are interviewed.
• End-use Method: It is especially used for forecasting the demand of the inputs. Under this method, the final users i.e. the consuming industries and other sectors are identified. The desirable norms of consumption of the product are fixed, the targeted output levels are estimated and these norms are applied to forecast the future demand of the inputs.

Hence, it can be said that under this method the burden of demand forecasting is on the buyer. However, the judgments of the buyers are not completely reliable and so the seller should take decisions in the light of his judgment also.

The customer may misjudge their demands and may also change their decisions in the future which in turn may mislead the survey. This method is suitable when goods are supplied in bulk to industries but not in the case of household customers.

2. Collective Opinion Method

Under this method, the salesperson of a firm predicts the estimated future sales in their region. The individual estimates are aggregated to calculate the total estimated future sales. These estimates are reviewed in the light of factors like future changes in the selling price, product designs, changes in competition, advertisement campaigns, the purchasing power of the consumers, employment opportunities, population, etc.

The principle underlying this method is that as the salesmen are closest to the consumers they are more likely to understand the changes in their needs and demands. They can also easily find out the reasons behind the change in their tastes.

Therefore, a firm having good sales personnel can utilize their experience to predict the demands. Hence, this method is also known as Salesforce opinion or Grassroots approach method. However, this method depends on the personal opinions of the sales personnel and is not purely scientific.

3. Barometric Method

This method is based on the past demands of the product and tries to project the past into the future. The economic indicators are used to predict the future trends of the business. Based on the future trends, the demand for the product is forecasted. An index of economic indicators is formed. There are three types of economic indicators, viz. leading indicators, lagging indicators, and coincidental indicators.

The leading indicators are those that move up or down ahead of some other series. The lagging indicators are those that follow a change after some time lag. The coincidental indicators are those that move up and down simultaneously with the level of economic activities.

4. Market Experiment Method

Another one of the methods of demand forecasting is the market experiment method. Under this method, the demand is forecasted by conducting market studies and experiments on consumer behavior under actual but controlled, market conditions.

Certain determinants of demand that can be varied are changed and the experiments are done keeping other factors constant. However, this method is very expensive and time-consuming.

5. Expert Opinion Method

Usually, the market experts have explicit knowledge about the factors affecting the demand. Their opinion can help in demand forecasting. The Delphi technique, developed by Olaf Helmer is one such method.

Under this method, experts are given a series of carefully designed questionnaires and are asked to forecast the demand. They are also required to give the suitable reasons. The opinions are shared with the experts to arrive at a conclusion. This is a fast and cheap technique.

6. Statistical Methods

The statistical method is one of the important methods of demand forecasting. Statistical methods are scientific, reliable and free from biases. The major statistical methods used for demand forecasting are:

• Trend Projection Method: This method is useful where the organization has sufficient amount of accumulated past data of the sales. This date is arranged chronologically to obtain a time series. Thus, the time series depicts the past trend and on the basis of it, the future market trend can be predicted. It is assumed that the past trend will continue in future. Thus, on the basis of the predicted future trend, the demand for a product or service is forecasted.
• Regression Analysis: This method establishes a relationship between the dependent variable and the independent variables. In our case, the quantity demanded is the dependent variable and income, the price of goods, price of related goods, the price of substitute goods, etc. are independent variables. The regression equation is derived assuming the relationship to be linear. Regression Equation: Y = a + bX. Where Y is the forecasted demand for a product or service.

Benefits of Forecasting:

• Future oriented

It enables managers to visualize and discount future to the present. It, thus, improves the quality of planning. Planning is done for future under certain known conditions and forecasting helps in knowing these conditions. It provides knowledge of planning premises with which managers can analyse their strengths and weaknesses and take action to meet the requirements of the future market.

For example, if the TV manufacturers feel that LCD or Plasma televisions will replace the traditional televisions, they should take action to either change their product mix or start manufacturing LCD/Plasma screens. Forecasting, thus, helps in utilizing resources in the best and most profitable business areas.

In the fast changing technological world, businesses may find it difficult to survive if they do not forecast customers’ needs and competitors’ moves.

• Identification of critical areas

Forecasting helps in identifying areas that need managerial attention. It saves the company from incurring losses because of bad planning or ill defined objectives. By identifying critical areas of management and forecasting the requirement of different resources like money, men, material etc., managers can formulate better objectives and policies for the organisation. Forecasting, thus, increases organisational and managerial efficiency in terms of framing and implementing organisational plans and policies.

• Reduces risk

Though forecasting cannot eliminate risk, it reduces it substantially by estimating the direction in which environmental factors are moving. It helps the organisation survive in the uncertain environment by providing clues about what is going to happen in future.

If managers know in advance about changes in consumer preferences, they will bring required modifications in their product design in order to meet the changed expectations of the consumers. Thus, forecasting cannot stop the future changes from happening but it can prepare the organisations to face them when they occur or avoid them, if they can.

• Coordination

Forecasting involves participation of organisational members of all departments at all levels. It helps in coordinating departmental plans of the organisation at all levels. People in all departments at all levels are actively involved in coordinating business operations with likely future changes predicted as a result of forecasting. Thus, forecasting helps in movement of all the plans in the same direction.

• Effective management

By identifying the critical areas of functioning, managers can formulate sound objectives and policies for their organisations. This increases organisational efficiency, effectiveness in achieving the plans, better management and effective goal attainment.

• Development of executives

Forecasting develops the mental, conceptual and analytical abilities of executives to do things in planned, systematic and scientific manner. This helps to develop management executives.

The demand of a product is influenced by a number of factors. An organization should properly understand the relationship between the demand and its each determinant to analyze and estimate the individual and market demand of a product.

The demand for a product is influenced by various factors, such as price, consumer’s income, and growth of population.

For example, the demand for apparel changes with change in fashion and tastes and preferences of consumers. The extent to which these factors influence demand depends on the nature of a product.

An organization, while analyzing the effect of one particular determinant on demand, needs to assume other determinants to be constant. This is due to the fact that if all the determinants are allowed to differ simultaneously, then it would be difficult to estimate the extent of change in demand.

Determinants of demand are the various factors that influence a consumer’s desire and ability to purchase a product or service at a given price and time. While price is a significant factor, demand is not solely dependent on it. In real-world markets, demand is shaped by a range of non-price elements that affect consumer behavior and purchasing decisions. These determinants help explain why the demand for a good might increase or decrease, even if its price remains unchanged.

Key determinants include consumer preferences, income levels, prices of related goods (substitutes and complements), expectations about future prices and income, and the number of buyers in the market. For instance, if consumer incomes rise, demand for normal goods typically increases. Similarly, a change in the price of a complementary good (like petrol for cars) can affect the demand for a related product.

Other important factors influencing demand include advertising, weather conditions, government policies, and demographic changes. For example, a successful marketing campaign can boost consumer interest in a product, while a shift in population demographics may lead to rising demand in specific sectors like housing or healthcare.

Understanding the determinants of demand is essential for businesses, marketers, and policymakers to anticipate market trends, adjust strategies, and make informed decisions about pricing, production, and resource allocation. These determinants form the foundation for demand forecasting and economic analysis.

Determinants of demand:

1. Consumer Preferences

Consumer preferences are among the most critical non-price determinants of demand. These preferences are shaped by various factors such as lifestyle, tastes, social trends, advertising, peer influence, cultural values, product image, and consumer perception of quality.

For instance, if consumers begin preferring plant-based diets due to health or environmental concerns, the demand for meat substitutes and organic vegetables will rise. Advertising plays a major role in shaping consumer tastes and establishing brand loyalty, which directly affects demand. A well-positioned marketing campaign can shift consumer preferences and increase demand for a product even without altering its price.

Moreover, factors like occupation, personality, age, and social status also influence individual preferences. A young professional may prefer a smartphone with advanced features, while an elderly person may prioritize ease of use.

2. Prices of Related Products

The demand for a product is also influenced by the prices of related goods, which are broadly categorized into:

• Substitute Goods: Substitutes are products that can be used in place of each other. If the price of one increases, the demand for its substitute usually increases as well. Example: If the price of coffee rises significantly, consumers may switch to tea, increasing the demand for tea.
• Complementary Goods: These are products that are used together, and the demand for one is linked to the price of the other. If the price of a complement rises, the demand for the associated product tends to fall. Example: A rise in the price of petrol may reduce the demand for cars, especially if the cars are not fuel-efficient.

Understanding how goods are related helps businesses determine pricing strategies. For example, reducing the price of razors may increase the demand for razor blades due to their complementary relationship.

3. Consumer Income

Income level is a fundamental determinant of demand. The ability to purchase goods and services increases with income, assuming other factors remain unchanged. The effect of income on demand depends on the type of good:

• Normal Goods: For these goods, demand rises with an increase in income. For example, as income increases, consumers may purchase more branded clothing or dine out more often.
• Inferior Goods: For these goods, demand decreases when income rises, as consumers switch to superior alternatives. For instance, people may stop buying budget instant noodles and shift to healthier or gourmet options when their income improves.

Thus, a firm must understand whether its product is a normal or inferior good to forecast demand appropriately based on economic conditions.

4. Consumer Expectations

Expectations regarding future income, prices, and product availability can affect current demand. Consumers tend to make anticipatory decisions:

• If they expect prices to rise in the future, they may purchase more now, thereby increasing current demand.
• If they expect a fall in income due to a recession or job loss, they may reduce present consumption and postpone non-essential purchases.

Example: Before the launch of a new iPhone model, people may delay purchasing the current model, anticipating new features or price drops, which affects the demand for the existing version.

Businesses use insights into consumer expectations to time their promotions, discount cycles, and inventory stocking.

5. Number of Buyers in the Market

The size and composition of the population directly impact the total market demand. An increase in the number of consumers raises the quantity demanded, even if individual demand remains constant.

Example: A growing urban population increases demand for housing, transportation, and utility services. Similarly, a rise in the number of school-aged children boosts demand for school supplies and uniforms.

Businesses consider demographic trends—such as aging populations, rising birth rates, or increased urban migration—to develop products that meet the evolving needs of a growing or changing customer base

6. Weather and Seasonal Factors

Weather conditions and seasonal variations often have a direct influence on the demand for specific products. Certain goods experience high demand only during specific times of the year.

Examples:

• Winter increases demand for heaters, woolen clothing, and hot beverages.
• Summer leads to a rise in the consumption of ice cream, air conditioners, and cold beverages.

Weather also affects agricultural demand and production. A drought may reduce the demand for lawn care services, while heavy rains can spike umbrella and raincoat sales. Businesses use seasonal demand patterns to manage inventory, plan promotions, and optimize logistics.

7. Government Policies and Regulations

Government decisions significantly affect demand through taxes, subsidies, trade regulations, or public service announcements.

Examples:

• Subsidy on electric vehicles can increase their demand by lowering effective consumer prices.
• Ban or tax on sugary drinks may reduce their demand and shift consumption to healthier alternatives.
• Mandatory health regulations (like banning plastic) may boost the demand for eco-friendly alternatives.

Such policies can either expand or restrict consumer choice and purchasing ability, and companies must adapt their product offerings in response.

8. Technological Changes

Technological innovation influences demand by introducing new products, improving existing ones, or making older products obsolete.

Example: The introduction of smartphones drastically reduced the demand for MP3 players and digital cameras. Similarly, rapid internet connectivity increased demand for streaming services over traditional cable TV.

Technological developments also impact production and distribution, enabling better customization, lower costs, and faster delivery—further shaping consumer demand.

The Determinants of demand for a product:

1. Price of a Product or Service

Affects the demand of a product to a large extent. There is an inverse relationship between the price of a product and quantity demanded. The demand for a product decreases with increase in its price, while other factors are constant, and vice versa.

For example, consumers prefer to purchase a product in a large quantity when the price of the product is less. The price-demand relationship marks a significant contribution in oligopolistic market where the success of an organization depends on the result of price war between the organization and its competitors.

2. Income

Constitutes one of the important determinants of demand. The income of a consumer affects his/her purchasing power, which, in turn, influences the demand for a product. Increase in the income of a consumer would automatically increase the demand for products by him/her, while other factors are at constant, and vice versa.

For example, if the salary of Mr. X increases, then he may increase the pocket money of his children and buy luxury items for his family. This would increase the demand of different products from a single family. The income-demand relationship can be analyzed by grouping goods into four categories, namely, essential consumer goods, inferior goods, normal goods, and luxury goods.

3. Tastes and Preferences of Consumers

Play a major role in influencing the individual and market demand of a product. The tastes and preferences of consumers are affected due to various factors, such as life styles, customs, common habits, and change in fashion, standard of living, religious values, age, and sex.

A change in any of these factors leads to change in the tastes and preferences of consumers. Consequently, consumers reduce the consumption of old products and add new products for their consumption. For example, if there is change in fashion, consumers would prefer new and advanced products over old- fashioned products, provided differences in prices are proportionate to their income.

Apart from this, demand is also influenced by the habits of consumers. For instance, most of the South Indians are non-vegetarian; therefore, the demand for non- vegetarian products is higher in Southern India. In addition, sex ratio has a relative impact on the demand for many products.

For instance, if females are large in number as compared to males in a particular area, then the demand for feminine products, such as make-up kits and cosmetics, would be high in that area.

4. Price of Related Goods

Refer to the fact that the demand for a specific product is influenced by the price of related goods to a greater extent.

Related goods can be of two types, namely, substitutes and complementary goods, which are explained as follows:

• Substitutes: Refer to goods that satisfy the same need of consumers but at a different price. For example, tea and coffee, jowar and bajra, and groundnut oil and sunflower oil are substitute to each other. The increase in the price of a good results in increase in the demand of its substitute with low price. Therefore, consumers usually prefer to purchase a substitute, if the price of a particular good gets increased.
• Complementary Goods: Refer to goods that are consumed simultaneously or in combination. In other words, complementary goods are consumed together. For example, pen and ink, car and petrol, and tea and sugar are used together. Therefore, the demand for complementary goods changes simultaneously. The complementary goods are inversely related to each other. For example, increase in the prices of petrol would decrease the demand of cars.

5. Expectations of Consumers

Imply that expectations of consumers about future changes in the price of a product affect the demand for that product in the short run. For example, if consumers expect that the prices of petrol would rise in the next week, then the demand of petrol would increase in the present.

On the other hand, consumers would delay the purchase of products whose prices are expected to be decreased in future, especially in case of non-essential products. Apart from this, if consumers anticipate an increase in their income, this would result in increase in demand for certain products. Moreover, the scarcity of specific products in future would also lead to increase in their demand in present.

6. Effect of Advertisements

Refers to one of the important factors of determining the demand for a product. Effective advertisements are helpful in many ways, such as catching the attention of consumers, informing them about the availability of a product, demonstrating the features of the product to potential consumers, and persuading them to purchase the product. Consumers are highly sensitive about advertisements as sometimes they get attached to advertisements endorsed by their favorite celebrities. This results in the increase demand for a product.

7. Distribution of Income in the Society

Influences the demand for a product in the market to a large extent. If income is equally distributed among people in the society, the demand for products would be higher than in case of unequal distribution of income. However, the distribution of income in the society varies widely.

This leads to the high or low consumption of a product by different segments of the society. For example, the high income segment of the society would prefer luxury goods, while the low income segment would prefer necessary goods. In such a scenario, demand for luxury goods would increase in the high income segment, whereas demand for necessity goods would increase in the low income segment.

8. Growth of Population

Acts as a crucial factor that affect the market demand of a product. If the number of consumers increases in the market, the consumption capacity of consumers would also increase. Therefore, high growth of population would result in the increase in the demand for different products.

Demand refers to the desire for a good or service backed by the ability and willingness to pay for it at a given price over a specific period of time. It is not merely the desire to own a product, but also the capacity and readiness to actually purchase it. Therefore, effective demand requires both intent and purchasing power.

For instance, if a person wants a car but cannot afford it, that desire does not count as demand in economic terms. Only when the individual is both willing and able to buy the car does it become a part of market demand.

Demand is influenced by several factors, including the price of the good, consumer income, tastes and preferences, prices of related goods (substitutes and complements), future expectations, and population size. All these elements determine how much of a product consumers are ready to buy at various price levels.

The relationship between the price of a good and the quantity demanded is expressed through the Law of Demand, which states that, other things being equal, as the price of a good falls, the quantity demanded rises, and vice versa. This negative relationship is typically represented by a downward-sloping demand curve.

Objectives of Demand:

• Understanding Consumer Behavior

One primary objective of demand is to understand how consumers behave in response to changes in price, income, and preferences. It helps businesses and economists analyze why, when, and how much consumers are willing to buy at various price points. This insight assists in crafting products and services that align with consumer needs and expectations. By studying demand patterns, firms can predict purchasing trends, identify target segments, and better understand customer decision-making processes in a dynamic market environment.

• Price Determination

Demand plays a crucial role in determining the price of goods and services in the market. Prices are influenced by the interaction of demand with supply. When demand increases and supply remains constant, prices tend to rise, and when demand falls, prices generally decrease. Understanding demand elasticity helps firms set optimal pricing strategies to maximize revenue and market share. Accurate demand estimation allows businesses to strike the right balance between cost, price, and profitability.

• Planning Production Levels

A key objective of analyzing demand is to help plan the level of production required to meet market needs. Businesses rely on demand forecasts to avoid overproduction or underproduction. Producing more than demanded leads to surplus and waste, while underproduction results in lost sales and dissatisfied customers. By estimating future demand accurately, firms can allocate resources efficiently, optimize inventory levels, and ensure smooth production cycles aligned with customer expectations.

• Efficient Resource Allocation

Demand analysis enables optimal allocation of scarce resources. Knowing where demand is high allows businesses and policymakers to direct resources toward the most profitable and essential areas. In an economy, understanding demand helps determine what goods and services should be produced and in what quantity. This minimizes wastage and ensures that limited resources like labor, capital, and raw materials are used efficiently to satisfy the most pressing consumer needs.

• Forecasting Market Trends

Demand helps in forecasting future market trends, enabling businesses to anticipate shifts in consumer preferences, seasonal variations, and market fluctuations. This foresight is essential for strategic planning, inventory management, and investment decisions. Accurate demand forecasts help companies prepare for peak periods and manage downturns effectively. In addition, understanding long-term demand trends supports innovation and the development of new products to meet changing customer demands and technological advancements.

• Policy Formulation

For governments and public agencies, analyzing demand is crucial in formulating economic policies. It helps in understanding public needs for goods like food, housing, healthcare, and education. Demand studies guide decisions related to taxation, subsidies, and welfare schemes. For example, if the demand for affordable housing rises, the government may allocate more funds to housing projects. Understanding demand also aids in controlling inflation and planning macroeconomic goals such as employment and growth.

• Facilitating Marketing Strategies

An objective of demand analysis is to support effective marketing strategies. Marketers use demand data to decide pricing, product positioning, promotional offers, and target markets. It helps identify customer segments with the highest potential and adjust marketing tactics based on demand sensitivity. Demand elasticity helps firms decide whether to use skimming, penetration, or competitive pricing. By aligning marketing efforts with demand behavior, businesses can boost customer satisfaction, loyalty, and profitability.

• Investment and Expansion Decisions

Businesses use demand analysis to guide investment and expansion plans. High or increasing demand signals potential growth, prompting firms to invest in new plants, infrastructure, or markets. Conversely, declining demand warns firms to cut back or innovate. Investors and entrepreneurs analyze demand trends to evaluate the viability of launching new products or entering new markets. Thus, demand plays a foundational role in shaping strategic decisions that impact long-term business sustainability.

Types of Demand:

• Price Demand

Price demand refers to the relationship between the price of a product and the quantity demanded by consumers. It follows the law of demand, which states that, all other things being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa. This inverse relationship is represented by a downward-sloping demand curve. Price demand is influenced by consumer preferences, income, and the availability of substitutes. For example, if the price of smartphones drops, more consumers are likely to buy them, increasing demand. Businesses analyze price demand to determine optimal pricing strategies that maximize revenue and market share. It helps firms understand how sensitive consumers are to price changes, also known as price elasticity of demand. Understanding price demand is essential for product pricing, discount planning, and sales forecasting. It provides a foundation for setting competitive prices and making supply decisions in both short and long terms.

• Income Demand

Income demand represents the relationship between a consumer’s income level and the quantity of goods or services demanded. As a consumer’s income increases, demand for most goods also increases. These are called normal goods. However, for some goods, known as inferior goods, demand may decrease as income rises—consumers may shift to better-quality alternatives. For example, as income increases, demand for public transport may fall while car purchases rise. Income demand plays a significant role in determining market size and consumption patterns. Businesses monitor income trends to predict changes in consumer buying behavior and tailor their products accordingly. This type of demand is especially important during economic expansions and recessions, where fluctuations in disposable income affect overall sales. Understanding income demand helps businesses segment markets, price goods appropriately, and develop marketing strategies based on income groups. It also assists policymakers in assessing the effects of income distribution on consumption and economic growth.

• Cross Demand

Cross demand refers to the demand for a product in response to the change in price of a related product—either a substitute or a complementary good. If two goods are substitutes (e.g., tea and coffee), an increase in the price of one (say, coffee) will increase the demand for the other (tea), as consumers switch preferences. Conversely, if two goods are complements (e.g., cars and petrol), a rise in the price of petrol may reduce the demand for cars. Cross demand is vital for businesses operating in competitive or interdependent markets, where pricing decisions for one product can impact others. This type of demand helps businesses anticipate market behavior and adapt their marketing, pricing, and production strategies accordingly. It is especially important in bundled product strategies and industries with high cross-product dependencies. Understanding cross demand allows firms to avoid pricing errors, forecast demand fluctuations more accurately, and remain competitive by aligning their offerings with market relationships.

• Joint Demand

Joint demand occurs when two or more goods are used together to satisfy a particular need, meaning the demand for one is linked directly to the demand for another. These goods are known as complementary goods. For example, printers and ink cartridges, cars and tires, or smartphones and mobile apps are products that exhibit joint demand. When the demand for a car rises, so does the demand for related accessories or components. Joint demand is essential for businesses involved in product ecosystems or bundled services, as the sale of one item often drives the demand for another. Companies must ensure that complementary products are available and competitively priced to avoid disruptions in sales. Understanding joint demand is helpful for bundling strategies, cross-promotions, and inventory planning. It enables businesses to increase customer value, encourage repeat purchases, and build integrated product offerings that enhance user experience. Effective joint demand management improves customer satisfaction and boosts overall profitability.

Levels of Demand:

• Individual Demand

Individual demand refers to the quantity of a good or service that a single consumer is willing and able to purchase at a given price over a specific period. It reflects personal preferences, income, and needs. For instance, if a person buys 2 litres of milk daily, that becomes their individual demand. This level of demand is useful for understanding consumer behavior and tailoring marketing strategies to target individuals through personalized pricing or offers. Factors influencing individual demand include the product’s price, the consumer’s income level, tastes, preferences, and the prices of related goods. Businesses study individual demand to forecast personal buying patterns and adapt their offerings to meet specific consumer expectations.

• Market Demand

Market demand is the total quantity of a product or service that all consumers in a specific market are willing to buy at a given price over a certain period. It is the aggregate of all individual demands for a particular product. For example, if 1,000 individuals each demand 2 litres of milk daily, the market demand would be 2,000 litres per day. This level of demand is critical for businesses as it helps in estimating the overall demand in the industry and aids in production planning, marketing strategies, and pricing decisions. Factors affecting market demand include average income levels, population size, cultural trends, and overall economic conditions.

• Organization/Industrial Demand

Organizational or industrial demand refers to the demand for goods and services by businesses, industries, and institutions, not for direct consumption, but for further production or operations. For example, a car manufacturer’s demand for steel, rubber, or machinery. This demand is typically derived demand, meaning it depends on the demand for the final consumer product. It is more sensitive to changes in economic activity, interest rates, and production costs. Understanding this level of demand is crucial for B2B firms, as it helps in supply chain management, inventory planning, and strategic investment decisions.

• Short-Run Demand

Short-run demand is the demand for a product over a brief period, during which consumers and businesses have limited ability to adjust to price or income changes. In this period, demand is relatively inelastic, as buyers may not immediately change their consumption patterns. For example, demand for electricity may not drop significantly even if prices rise suddenly, as consumers can’t quickly reduce usage. Businesses analyze short-run demand to manage immediate production and distribution needs, respond to market shocks, and apply short-term pricing strategies. It is highly useful during festivals, seasons, or emergency conditions.

• Long-Run Demand

Long-run demand represents the demand for a product over a longer time horizon, where consumers and producers have sufficient time to adjust to price, income, or preference changes. In the long run, demand is generally more elastic, as buyers can find substitutes or alter consumption habits. For example, if petrol prices rise continuously, consumers may shift to electric vehicles over time. Studying long-run demand is vital for strategic planning, R&D investments, and capacity expansion. It reflects structural changes in consumer behavior, technology, and macroeconomic trends, helping businesses to forecast future trends and build sustainable strategies.