All of us in our daily life, consume various goods and services within our given income constraint. Whenever we visit the market to purchase a particular item to match our requirement, we often get puzzle by the multiplicity of the goods, which are all they near to our requirement. This is the point where we make choices to obtain the maximum possible satisfaction by spending the minimum of our income. Though we may differ in our likes and dislikes, as consumer we are assumed to behave rationally and consistently. Our likes and dislikes are reflected through our preferences. We choose an item from our preferences that suits our budget. The theory of consumer behavior deals with reconciliation of our dreams with the budgets.
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 and 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 hangs on an analysis of demand.