Significance of Demand Analysis
Demand is one of the crucial requirements for the functioning of any business enterprise, its survival and growth. Information on the size and type of demand helps the management in planning its requirements of men, materials, machines and money. For example, 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 sale is increasing, the firm needs to plan undertake some sales promotion activity like advertisement. If the firm’s supply of the products is unable to meet the existing demand, the firm may be required to revise the production plan and schedule; or the firm may have to review its purchase plan for inputs and the suppliers’ response to input requirement by the firm. In the same way, larger the demand for the firm’s product, the higher is the price the firm can charge. The common theme underlying these examples is that the whole range of planning, cost budgeting, purchase plan, market research, pricing decision, advertisement budget, profit planning etc. call for an analysis of demand. In fact, 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.
CHOICE AND UTILITY THEORY
Whenever a set of alternatives are open to us at the same point of time, we often make choices. Provided we are all rational beings, it can be said that, behind all activities, our basic motive is to maximize the total level of satisfaction. Whatever we choose in our daily life depends on the way we value it. For example, if you are given with alternatives, either to study Economics or to practice Mathematics, you will choose the alternative that gives you more satisfaction. Again, when the number of available alternatives is more than two we may choose a combination.
Here we have to understand the difference between preferences and choices. From a bunch of goods available to the consumer, there may exist a difference in his preference and choice. This is because; while we make preferences we only express our likes and dislikes. On the contrary, we choose something from the preferred alternatives that suits our budget best.
The concept of utility has been developed by economists to explain the basic principles of consumer choice and behavior. By utility we mean the extent of satisfaction obtained from the consumption of goods and services preferred by consumers. Given the available resources, the level of income, and market prices of various goods, the rational consumer allocates his spending in such a way that the preferred combination gives him the highest utility.
To compare the various goods available to the consumer, two basic approaches are followed; ‘the cardinalist approach’ and ‘the ordinalist approach’. According to the cardinalist approach, utility can be measured in subjective units. Whereas, the ordinalists opine that utility cannot be measured, but can only be ranked in order of preference. For example, let us consider that there are five goods, X1, X2, X3, X4 and X5, from which the consumer has to choose only one. Following the cardinalist approach, let us assume that the amounts of utilities obtained from the various goods are:
Here we choose the good X5 as it is measured to give the maximum amount of utility, i.e. 17 utils. Whereas, following the ordinalist approach, we would have ranked the available alternative in order of preference. So in ordinal approach instead of measuring the amount of utility obtained from the goods, we simply rank them in order to preference to match our choice.
Demand is one of the crucial requirements for the functioning of any business enterprise, its survival and growth. Information on the size and type of demand helps the management in planning its requirements of men, materials, machines and money. For example, 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 sale is increasing, the firm needs to plan undertake some sales promotion activity like advertisement. If the firm’s supply of the products is unable to meet the existing demand, the firm may be required to revise the production plan and schedule; or the firm may have to review its purchase plan for inputs and the suppliers’ response to input requirement by the firm. In the same way, larger the demand for the firm’s product, the higher is the price the firm can charge. The common theme underlying these examples is that the whole range of planning, cost budgeting, purchase plan, market research, pricing decision, advertisement budget, profit planning etc. call for an analysis of demand. In fact, 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.
CHOICE AND UTILITY THEORY
Whenever a set of alternatives are open to us at the same point of time, we often make choices. Provided we are all rational beings, it can be said that, behind all activities, our basic motive is to maximize the total level of satisfaction. Whatever we choose in our daily life depends on the way we value it. For example, if you are given with alternatives, either to study Economics or to practice Mathematics, you will choose the alternative that gives you more satisfaction. Again, when the number of available alternatives is more than two we may choose a combination.
Here we have to understand the difference between preferences and choices. From a bunch of goods available to the consumer, there may exist a difference in his preference and choice. This is because; while we make preferences we only express our likes and dislikes. On the contrary, we choose something from the preferred alternatives that suits our budget best.
The concept of utility has been developed by economists to explain the basic principles of consumer choice and behavior. By utility we mean the extent of satisfaction obtained from the consumption of goods and services preferred by consumers. Given the available resources, the level of income, and market prices of various goods, the rational consumer allocates his spending in such a way that the preferred combination gives him the highest utility.
To compare the various goods available to the consumer, two basic approaches are followed; ‘the cardinalist approach’ and ‘the ordinalist approach’. According to the cardinalist approach, utility can be measured in subjective units. Whereas, the ordinalists opine that utility cannot be measured, but can only be ranked in order of preference. For example, let us consider that there are five goods, X1, X2, X3, X4 and X5, from which the consumer has to choose only one. Following the cardinalist approach, let us assume that the amounts of utilities obtained from the various goods are:
| Good Utility Rank order (in utils) |
| X1 14 2nd X2 03 5th X3 10 3rd X4 08 4th X5 17 1st |
Here we choose the good X5 as it is measured to give the maximum amount of utility, i.e. 17 utils. Whereas, following the ordinalist approach, we would have ranked the available alternative in order of preference. So in ordinal approach instead of measuring the amount of utility obtained from the goods, we simply rank them in order to preference to match our choice.
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