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What are the Different Types of Demand in Market?
What is a Demand in Market?
Demand is an economic principle that refers to the desire of consumers to buy a product or avail a service from the market by paying a price. In simpler words, market demand is the demand or need for a product or service in the market. The more the demand for a product, the more is its supply The more a product generates revenue, the more is its demand in marketing.
However, there is no direct connection between the price of a product and its demand. A product’s price is determined by the elasticity of demand, the cost of production, the import and export duties and the quantity of product available in the market.
For example, iPhones are expensive, yet they have a huge demand in the market. This establishes that demand doesn’t have a direct link to pricing. Similarly, during the covid-19 pandemic, face masks were highly in demand and there wasn’t sufficient supply. Thus, the prices went up by a large margin.
What is Demand Management?
Demand management is the process that is used to plan or forecast demand, supply, and pricing. It looks at demand from all possible angles: supply, production capacity, customer or market trends, needs, and competition. It also helps a business identify the gaps and in demand, and adjust the business strategies accordingly.
Demand management helps formulate an action plan to meet the current and anticipated conditions in target markets. The process provides data and insights to marketing, demand planning. production and sales forecasting teams to help them achieve company goals.
Key Steps involved in Demand Management
There are four key steps in demand management. They are as follows −
Modelling
This step requires the concerned team in a business to acquire data linked to sales and demand drivers such as innovation, market demand and social media strategy. This data is further uploaded to demand management software or is manually analysed for exercises such as model review, reality assessment, mathematical modelling, and data collection and preparation.
Forecasting
This requires an organisation to use predictive analysis to forecast future demands for a product or service. Demand forecasting helps to make reliable supply decisions based on future sales and revenue. Factors considered include objective setting, collection and data recording, measurement and data analysis, and budgeting.
Demand Planning
This process predicts whether a product or service demand satisfies the target customers. Demand planning helps to assess whether the inventories meet the demand, without creating a surplus. The best practices include use of past sales data, customer feedback/response, managing and combining forecasts, and re-examining the available data.
Supply Planning
Supply planning is the part of the demand management process handled by supply or inventory management. The goal is to identify and address the most critical problems, plan across multitier locations and simulate potential responses to optimize inventory and customer service costs.
Different Types of Demand in Market
There are generally seven types of demand considered in the market. They are as follows −
Joint demand
Composite demand
Short-run and long-run demand
Price demand
Income demand
Competitive demand
Direct and derived demand
Let us briefly look into each type of demand in market.
Joint Demand
This is the demand for products that compliment each other, or in other words, the products or services that are brought together.
For example, consumers generally buy a pack of butter or jam along with bread, or they buy certain accessories or insurance along with a new vehicle.
Composite Demand
Composite demand rises when one product has multiple uses.
For example, sugar is used for making ice-creams as well us chocolates. So, if the demand for sugar for making ice-cream rises, the less it will be available for making chocolates.
Short-Run and Long-Run Demand
American economists Parkin and Bade have defined short- and long-run as: “The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied.”
For example, a cricket bat manufacturer can produce 100 bats in day. Now when the demand goes up, the production can be increased to 150 by increasing the variables such as labour and raw material, but not altering the infrastructure or machinery. This is a short-run demand.
Similarly, if the manufacturer decides to increase the overall production without considering the seasonal demands and by adding to the infrastructure and machinery, that is a long-run demand.
Price Demand
Price demand has reference to the amount a consumer is willing to spend on a product. Businesses use this information to figure out what would be the right price point for a new product to enter the market. Price elasticity refers to how the demand will change with fluctuations in price.
Income Demand
As the consumers’ income increases, the quantity demand increases as well. In simple words, people tend to buy more when they earn more. Consumers will often buy a product or service they can afford. They may also opt for lower quality products. However, the demand for these lower-quality products will decrease as income increases.
Competitive Demand
Competitive demand arises when the customers have the option to choose from alternative services or products.
For example, if we consider the entry level car segment in India, consumers have an array of choices to select from, based on their budget and requirement.
Direct and Derived Demand
Direct or autonomous demand is the requirement for a final product such as food, clothes etc. This demand is not dependent, directly or indirectly, on the demand for any other product.
On the other hand, derived demand is the demand for a product that arises from the usage of other products.
For example, the increased demand for cricket balls will result in an increased demand for leather and sewing threads as well.
Factors Influencing Demand in the Market
Demand is influenced by both consumers as well as businesses. Businesses influence demand through marketing efforts, whereas consumers influence demand through their preferences, income, and resistance to price increases.
Some of the most common influencers of demand are as follows −
Consumer Expectations
Consumers tend to buy more of such things, whose value they expect to go up in the future. For example, shares, property, gold, etc.
Consumer Income
Consumer income and demand are directly proportional to each other. The more the income, the higher the demand. However, consumers who earn more wouldn’t purchase more of one item than what they require.
Price of Product
Demand and price are inversely proportional to each other, which means that when the prices go up, the demand goes down. In certain cases, the opposite is also true. Sometimes, the anticipation of a price rise increases the demand for a product.
Availability of Alternatives
Alternatives products are products that are closely related/similar. Consumers will turn to an alternative product when the price of one increase.
For example, when the price of one brand of oil increased, people moved to another brand that still offered a low price.
Complementary Products
Demand for products that are complementary to the main product fluctuates, depending on the price of the main product. If the price of the main product goes up, the demand for complementary products goes down.
Consumer Preferences
Consumers buy things based on their lifestyle or how they perceive the brand. Hence, consumer preferences differ from individual to individual
Market size
Market size depends on the number of buyers of a product and the revenue generated from its sales. Overall demand increases when the number of buyers increases.
Conclusion
Every business needs to understand the different types of demand to assess the quantity of products required. The characteristics of demand projects a clear picture of the economy or how the market is performing. Based on this, new products and services are introduced.
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