Demand Analysis: Demand Concepts, Determinants, Law of Demand and Demand Forecasting Basics Questions

Question 1

Define demand.

Accepted Answer

**Demand** is the quantity of a good that consumers are **willing and able** to buy at a given price during a given time period.

Question 2

What is demand forecasting?

Accepted Answer

**Demand forecasting** is the process of estimating future demand for a product for a specified period.

Question 3

State the law of demand.

Accepted Answer

Other things remaining the same, **price and quantity demanded are inversely related** (price ↑ → demand ↓).

Question 4

What is meant by ceteris paribus?

Accepted Answer

**Ceteris paribus** means “other things remaining the same/constant”.

Question 5

Write any one determinant of demand.

Accepted Answer

One determinant is **consumer income** (income changes can raise or reduce demand depending on the good).

Question 6

What is a demand function?

Accepted Answer

A **demand function** expresses demand as a function of factors like price, income, tastes, and prices of related goods.

Question 7

Explain determinants of demand (any six).

Accepted Answer

Determinants of demand (any six):
- **Price of the product**: price ↑ → demand ↓ (generally).
- **Income**: normal goods (income ↑ → demand ↑), inferior goods (income ↑ → demand ↓).
- **Prices of related goods**: substitutes and complements.
- **Tastes and preferences/fashion**.
- **Advertising and promotion**.
- **Population/number of consumers**.
- **Expectations** about future prices/income.
- **Season and climate**.

Thus, demand depends on many price and non-price factors.

Question 8

Explain the law of demand with reasons (any three).

Accepted Answer

The **law of demand** states that price and quantity demanded move inversely (ceteris paribus).

Reasons (any three):
- **Diminishing marginal utility**: extra units give less satisfaction, so consumers buy more only at lower prices.
- **Income effect**: price fall increases real purchasing power, raising demand.
- **Substitution effect**: cheaper price makes the good relatively attractive vs substitutes.

Hence, demand generally rises when price falls and vice versa.

Question 9

Explain exceptions to the law of demand (any three).

Accepted Answer

Exceptions (any three):
- **Veblen (prestige) goods**: higher price may increase demand due to status.
- **Giffen goods**: very inferior goods where income effect dominates (rare).
- **Speculation/expectations**: expected future price rise can increase current demand.
- **Quality perception**: high price is treated as better quality by some consumers.

Thus, in special cases price and demand can move in the same direction.

Question 10

Differentiate between change in quantity demanded and change in demand.

Accepted Answer

Difference:
- **Change in quantity demanded** occurs due to a change in the **price** of the good; it shows **movement along** the same demand curve (extension/contraction).
- **Change in demand** occurs due to **non-price factors** (income, tastes, related goods, ads); it causes a **shift** of the demand curve (right/left).

Hence, price change causes movement; other factors cause shift.

Question 11

Explain objectives/importance of demand forecasting (any five).

Accepted Answer

Importance of demand forecasting (any five):
- plan **production and capacity**
- manage **inventory** (avoid stockouts/overstock)
- plan **purchasing** and supply chain
- plan **manpower** and budgeting
- support **pricing and marketing** decisions
- reduce business risk and improve profits

Therefore, forecasting provides a base for planning and control.

Question 12

Explain the difference between substitutes and complements with examples.

Accepted Answer

**Substitutes** are goods that can replace each other.
- Example: **tea and coffee**, **Pepsi and Coke**.
- If the price of coffee increases, demand for tea generally **increases**.

**Complements** are goods that are used together.
- Example: **car and petrol**, **printer and ink**.
- If the price of petrol increases, demand for cars may **decrease**.

Thus, substitutes satisfy similar needs, while complements are jointly consumed and affect each other’s demand.

Question 13

Explain law of demand with assumptions and exceptions (exam-style with table).

Accepted Answer

### **Law of Demand**

**Statement:** Other things remaining the same, quantity demanded varies **inversely** with price.

### **Assumptions (any five)**
- income remains constant
- tastes and preferences do not change
- prices of related goods remain constant
- no expectation of immediate future price change
- quality remains the same

### **Exceptions (any four)**

| Exception | Explanation |
|---|---|
| **Veblen goods** | higher price → higher demand due to status |
| **Giffen goods** | inferior goods where income effect dominates |
| **Speculation** | expected price rise increases current demand |
| **Quality perception** | higher price seen as higher quality |

```text
Normally: Price ↑ → Demand ↓   (but exceptions exist)
```

Thus, the law is generally true, but special cases can show opposite behaviour.

Question 14

Explain demand forecasting methods and steps with a flowchart (basics).

Accepted Answer

### **Demand Forecasting (Methods and Steps)**

**Methods (overview):**
- **Survey methods**: consumer surveys, market experiments/test marketing.
- **Statistical methods**: trend projection, moving average, regression.
- **Expert opinion methods**: Delphi method, sales force composite.

**Steps (basic):**
1. define objective and time period
2. identify product and target market
3. collect past and current market data
4. choose suitable forecasting method
5. prepare forecast and check accuracy
6. monitor actual demand and revise

```text
Objective → Data collection → Select method → Forecast → Compare with actual → Revise
```

Thus, forecasting combines data and judgement to estimate future demand for planning decisions.

Question 15

Explain movement along demand curve vs shift in demand with a diagram/flow and examples (exam-style).

Accepted Answer

### **Movement along Demand Curve vs Shift in Demand**

#### **1) Movement along the same demand curve (change in quantity demanded)**
- **Cause**: change in **price** only.
- **Result**: extension (price ↓) or contraction (price ↑).

#### **2) Shift of demand curve (change in demand)**
- **Cause**: factors other than price (income, taste, ads, related goods, expectations).
- **Result**: demand curve shifts **right** (increase) or **left** (decrease).

| Basis | Movement along curve | Shift of curve |
|---|---|---|
| Cause | **Price change** | **Non-price change** |
| Effect | quantity demanded changes | demand changes |

```text
Price change → Move along curve
Non-price change → Curve shifts left/right
```

Example:
- Price fall of tea → more tea bought (movement).
- Increase in income or strong advertising for tea → higher demand at same price (shift).

Demand Analysis: Demand Concepts, Determinants, Law of Demand and Demand Forecasting Basics

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