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Demand Function in Paint Sales

Essay by   •  April 22, 2011  •  Case Study  •  1,160 Words (5 Pages)  •  1,068 Views

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1. Learning Issues

1.1 What is demand

The concept of demand is based on the theory of consumer choice. Each customer faces a constrained optimization problem, where the objective is to choose among the combinations of goods and services that maximize satisfaction or utility, subject to a constraint on the amount of funds available.

In this constrained utility-maximizing frame-work, economists have identified basic factors , income and substitution effects that cause increase in quantity demanded as the result of a price reduction.

The demand schedule is merely a list of prices and corresponding quantities of a commodity, holding constant the influence of all other factors that would be demanded by some individual or group at uniform price. Market demand serves as a basis for making many pricing and output decisions. Durable goods may be stored and the replacement may be delayed from period to period.

We are considering the demand for consumer goods that are purchased largely to meet current needs and then generally provide service on short-term basis (non-durable goods). Producer's good are produced as raw materials, capital equipment and parts in manufacturing process.Demand for producer goods are thought as derived demand because it is derived from customer desire or request.

Demand has tended to become more variable and uncertain. Managing such uncertain demand require significant contribution and systematic collection of data when the demand shows a lumpy pattern . Lumpy demand can be defined as variable and therefore characterized by relevant fluctuations , sporadic because the demand series is characterized by many periods of very low or no demand , and nervous , reflecting the low auto-correlation of the demand . Lumpy demand might caused by the numerousness and heterogeneity of customer in market , order frequency , variety and correlation of customer request.

1.2 What are the possible factors that determine the demand for a product

The possible factors that determine the demand for a product , called determinants or independent variable that explained the dependent variable are listed partially as per below :

P=Price of the goods or services

Ps=Price of substitute goods or services

Pc=Price of complementary goods or services

Y=Income of Consumers

A=Advertising and promotion expenditures

Ac=Competitors' advertising and promotion expenditures

N=Size of the potential target market ( demographic factor )

Cp=Consumer tastes and preferences for the good and service

PE=Expected future price appreciation or depreciation

TA=Adjustment time period

T/S=Taxes or subsidies

Changes in Price (P) of the good or service will result only in movement along the demand curve (change in quantity demanded), whereas changes in any of the other demand determinants or factors other than price in the demand function will shift the curve (change in demand).

When price of goods decline, the real income or purchasing power of the consumer increase, known as the income effect.When price of goods declines, the rational consumer can increase his or her satisfaction or utility by purchasing more of the goods or services whose price has declined and less of the substitutes. This situation is known as the substitution effect of the price change. Although it increases the demand , it will not cause a steep increasing demand curve due to timeliness and usefulness

A decline in price will always have a positive impact on the quantity demanded for income-superior goods and services. For income-inferior goods and services, the income and substitution effects have opposite impacts on the quantity demanded but the net effect, is that more goods and services will be demanded as price declines.

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