Demand Curve free essay sample

Determining the demand for a product is often the responsibility of the strategic marketer. (a) Define and describe the â€Å"demand curve†. (b) Assess what information may be helpful to the strategic marketer in order to determine demand. (c) Discuss the factors that may create a fluctuation in demand. The demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together. Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price (the price at which sellers together are willing to sell the same amount as buyers together are willing to buy, also known as market clearing price) and the equilibrium quantity (the amount of that good or service that will be produced and bought without surplus/excess supply or shortage/excess demand) of that market. In a monopolistic market, the demand curve facing the monopolist is simply the market demand curve. According to convention, the demand curve is drawn with price on the vertical (y) axis and quantity on the horizontal (x) axis. The function actually plotted is the inverse demand function. The demand curve usually slopes downwards from left to right; that is, it has a negative association. The negative slope is often referred to as the law of demand, which means people will buy more of a service, product, or resource as its price falls. The demand curve is related to the marginal utility curve, since the price one is willing to pay depends on the utility. However, the demand directly depends on the income of an individual while the utility does not. Thus it may change indirectly due to change in demand for other commodities. Information to determine demand Levels of income A key determinant of demand is the level of income evident in the appropriate country or region under analysis. As a generality, the higher the level of aggregate and/or personal income the higher the demand for a typical commodity, including forest products. More of a good or service will be hosen at a given price where income is higher. Thus determinants of demand normally utilize some form of income measure, including Gross Domestic Product (GDP). Population Population is of course a key determinant of demand. Although all forest products do not necessarily enter final consumer markets, the actual markets are largely presumed to be functionally related to population. Growing populations are positively correlated to timber demands in the aggregate, as well as specifically to individual forest products. Frequently, population and income estimators are combined, as in the case of the use of Gross Domestic Product per capita. End market indicators The use of end market indicators as determinants of demand is frequently incorporated into demand analysis. For example, much of the final use of forest products is linked to construction (residential and total). Indicators and trends related to construction activities, or which are determinants of construction, provide indirect estimates of the influence of these activities as the source of derived demand for wood. Housing starts, public investments, interest rates, etc. can be highly correlated to timber demand. Availability and price of substitute goods Consumption choices related to timber are also influenced by the alternative options facing users in the relevant marketplace. The availability of potential substitute products, and their prices, weigh heavily in determining the elasticity of demand, both in the short run (static) sense and over time (long run). Fuelwood, as a dominant use of timber in the Asia Pacific Region, reflects conditions of very limited options for energy sources at reasonable prices. Rural low income or subsistence populations simply do not have options regarding energy they use wood or go without. Demand, at this basic level, in almost perfectly inelastic. The cost (if only implicit in terms of gathering time) does not materially affect consumption quantity. Suitability of alternative goods and services is, in part, a question of knowledge as well as availability. Market information regarding alternative products, quality, convenience, and dependability all influence choices. Under conditions of increased scarcity and rising prices for tropical hardwood panels, for example, users have a positive incentive to search for and investigate the suitability of alternatives that were previously overlooked or ignored. Tastes and preferences All markets are shaped by collective and individual tastes and preferences. These patterns are partly shaped by culture and partly implanted by information and knowledge of products and services (including the influence of advertising). Different societies use forest products differently because of these differences in taste and preferences. For example, markets for wood products in Japan are commonly recognized as requiring very high product quality standards, the importance of visual attributes of wood, and other preferences not commonly found in many other markets. Factors that may create a fluctuation in demand Innumerable factors and circumstances could affect a buyers willingness or ability to buy a good. Some of the more common factors are: * Changes in Prices of Related Goods: Think about items that go together, or are Complements for each other. If the price of either product changes it affects the other product. An example might be peanut butter and jelly. Assuming most people eat PB and jelly together. What happens if the price of PB increases? If you like PB and jelly together, then you are now going to purchase less jelly. Not because you like either product any less, but only because you aren’t buying as much of one so you don’t need as much of the other. Another example might be steak and chicken, these things are usually considered to be Substitutes; meaning that they replace each other. So if the price of chicken goes down, then people buy more chicken and less steak†¦ simply because it’s cheaper not because you like steak any less. Nothing happened to steak, it still costs the same amount, only now the other option is cheaper so people buy less. In this example you would move along the Demand Curve for chicken (because the price changed) and you would shift the Demand Curve for steak to the left because your desire to purchase steak decreased. Changes in Income and Wealth: Changes in Income or Wealth cause your demand to change. Think about all the junk you eat now because it’s cheap, Mac ‘n Cheese, Ramen Noodles, $1 menu items at McDonalds, etc†¦. If you were offered a job tomorrow making $100,000 a year what would you buy when you went grocery shopping; are you still going to buy as much Mac ‘n Cheese and Ramen Noodles? For most people the answer is no, you are going to spend less money on these items despite the fact that you have more money overall to spend. In this case, Mac n Cheese would be an Inferior Good. Inferior Goods are goods you buy less of when you have more money. Inferior Goods are goods you buy because you can’t afford the things you really want. Some people may say that they really, really like Ramen Noodles. For those people, they would probably purchase more if their income increased. For those people Ramen would be considered a Normal Good. A Normal Good is something you buy more of as your income increases. Note: At this point we do need to make the distinction between Wealth and Income. Income is the amount of money your paycheck is for; while wealth is all the other money you have. If you win the lottery and quit your job, then you have no income but a great amount of wealth. Either one of these will cause your demand to change, but it is important to know the difference between the two for later in the course. Changes in Tastes and Fads: People have changes in taste all the time. Look at fashion, would you still be willing to buy the same clothes you bought 10 years ago? If you would be willing to, are you still willing to pay the prices you paid then? As peoples tastes change it changes how much they are willing to spend, pushing that Demand Curve either to the right (they are willing to pay more and/or purchase more) or pull it to the left (they aren’t going to spend as much money on this product and don’t want as much of it). Changes in Expectations: Expectation is what you think will happen tomorrow. For example those students who have student loans are spending money now, because they anticipate an education will earn them more future income. They have the expectation that they will get a higher paying job, this higher paying job will allow them to afford the higher loan payments and still end up with more disposable income than they would have earned without schooling. They have no problem spending thousands of dollars a year now, despite the fact that they don’t have that kind of money. In Graduate School, the expectation is that you will make more money†¦ so you are willing to spend more money by taking out more loans, and purchasing more courses.