Demand Analysis: Law of Demand, Determinants, Demand Function and Demand Forecasting Methods 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

State the law of demand.

Accepted Answer

Other things remaining constant, quantity demanded rises when price falls and falls when price rises.

Question 3

What is a demand function?

Accepted Answer

A demand function expresses quantity demanded as a function of its determinants like price, income, tastes, substitutes, etc.

Question 4

What is demand forecasting?

Accepted Answer

Demand forecasting is the prediction of future demand for a product for planning purposes.

Question 5

Give one example of a substitute good.

Accepted Answer

Tea and coffee are substitute goods.

Question 6

What is meant by ceteris paribus?

Accepted Answer

Ceteris paribus means other factors remaining the same.

Question 7

Differentiate between want and demand.

Accepted Answer

Want is only a desire for a good or service, even if the person cannot purchase it. Demand is a want supported by willingness and ability to pay, and it is considered for a specific time period and price.

Example: Wanting a luxury car is a want, but it becomes demand only when the consumer has money and intends to buy it.

Question 8

Explain the determinants of demand (any six).

Accepted Answer

Determinants of demand (any six):
1) Price of the product (own price)
2) Income of consumers
3) Prices of substitutes
4) Prices of complements
5) Tastes and preferences
6) Advertisement and promotion
7) Population/demographics
8) Expectations about future prices/income

A change in these factors causes demand to shift.

Question 9

Explain the law of demand and state any two exceptions.

Accepted Answer

Law of demand states that, other things remaining constant, quantity demanded increases when price falls and decreases when price rises.

Two exceptions are:
1) Veblen/prestige goods: higher price increases status, so demand may rise (designer products).
2) Expectations: if prices are expected to rise further, consumers may buy more even at higher current price.

(Other exceptions include Giffen goods and necessities with low sensitivity.)

Question 10

Distinguish between movement along demand curve and shift of demand curve.

Accepted Answer

Movement along demand curve occurs due to a change in the good's own price while other factors remain constant; it results in expansion or contraction of quantity demanded.

Shift of demand curve occurs due to changes in non-price factors like income, tastes, substitutes, complements, advertisement, etc.; demand increases (right shift) or decreases (left shift) at the same price.

So price changes cause movement, other factors cause shift.

Question 11

Explain objectives of demand forecasting (any three).

Accepted Answer

Objectives of demand forecasting (any three):
1) Production planning: decide output and capacity utilisation.
2) Inventory planning: maintain optimum stock and reduce carrying cost.
3) Financial planning: estimate cash flows, budgets and working capital needs.

It also helps in pricing, marketing strategy and manpower planning.

Question 12

Write a general demand function and explain the meaning of variables briefly.

Accepted Answer

A general demand function can be written as: Qd = f(P, Y, Ps, Pc, T, A, E, N).

Where P = price of the good, Y = income, Ps = price of substitutes, Pc = price of complements, T = tastes/preferences, A = advertising, E = expectations, N = number of buyers.

This shows demand depends on multiple factors, not only price.

Question 13

Explain demand analysis and the law of demand. Include assumptions, exceptions and managerial importance.

Accepted Answer

Demand analysis studies the behaviour of consumers and the factors that determine the quantity of a product demanded. It helps managers estimate how demand will respond to changes in price, income, tastes, substitutes, complements and advertising.

Law of demand (statement): Other things remaining constant (ceteris paribus), quantity demanded varies inversely with price—when price falls demand rises, and when price rises demand falls.

Assumptions (ceteris paribus conditions):
1) Income of consumers remains constant.
2) Tastes and preferences do not change.
3) Prices of related goods (substitutes/complements) remain constant.
4) No change in expectations and quality.

Exceptions (any three with examples):
1) Veblen/prestige goods: higher price may increase demand due to status (designer products).
2) Giffen goods (rare): demand may rise with price for very inferior goods in special cases.
3) Expectations: if price is expected to increase further, people buy more now even at higher current price.
4) Necessities: demand may not fall much when price rises.

Managerial importance:
- Pricing decisions: understanding how price changes affect sales.
- Production/inventory planning: aligning output with expected demand.
- Marketing strategy: deciding promotion and segmentation based on demand factors.

Thus, demand analysis and the law of demand provide a base for rational business decisions.

Question 14

Explain demand forecasting. Describe major methods of forecasting and state when each is suitable.

Accepted Answer

Demand forecasting means predicting future demand for a product so that the firm can plan production, inventory, capacity and marketing. It reduces uncertainty and supports better decision-making.

Major methods of demand forecasting:

1) Survey/qualitative methods
- Consumer survey: ask consumers about intended purchases.
- Sales force opinion: salespeople estimate based on market experience.
- Expert/Delphi method: experts give forecasts in multiple rounds.
Suitable for: new products or markets where past data is limited.

2) Statistical/quantitative methods
- Trend projection: extend past sales trend to future.
- Moving average: average last few periods to smooth fluctuations.
- Exponential smoothing: weighted average giving more weight to recent data.
Suitable for: stable products with sufficient historical data.

3) Econometric methods (regression analysis)
- Estimate demand function using data: Q depends on price, income, advertising, etc., then predict demand.
Suitable for: when demand depends on multiple factors and data is available.

4) Barometric/leading indicators method
- Use indicators like orders, income index, business cycle indicators to predict demand.
Suitable for: industries sensitive to economic cycles.

Thus method selection depends on data availability, time horizon, market stability and required accuracy.

Question 15

Explain demand function and distinguish between demand estimation and demand forecasting. Add suitable examples.

Accepted Answer

Demand function shows the relationship between quantity demanded and its determinants.

General form:
Qd = f(P, Y, Ps, Pc, T, A, E, N)
where P = price, Y = income, Ps = substitutes' price, Pc = complements' price, T = tastes, A = advertising, E = expectations, N = number of buyers.

A simple linear demand function often used is: Qd = a − bP, where b>0 indicates an inverse relation between price and quantity demanded.

Demand estimation vs demand forecasting:
- Demand estimation focuses on measuring the relationship (how Q changes with price/income/ads) using past data, often through statistical methods like regression.
  Example: Estimate that a ₹1 price increase reduces demand by 50 units.
- Demand forecasting uses such relationships (and other information) to predict future demand for planning.
  Example: Forecast next quarter demand will be 10,000 units based on trend and expected income growth.

In short: Estimation gives the demand relationship; forecasting uses it to predict future quantities for managerial decisions.

Demand Analysis: Law of Demand, Determinants, Demand Function and Demand Forecasting Methods

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