The demand schedule is the simplest form of the demand relationship. It is merely a list of prices and corresponding quantities of a product or service that would be demanded over a particular time period by some individual or group of individuals at uniform prices.
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Constrained utility maximization
The concept of demand is based on the theory of consumer choice. Each consumer 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 constraining on the amount of funds (ie the household budget) available.
Purchasing power: when price of a good decreases, the purchasing power of the consumer has increased.
Substitution effects: when the price of a good decreases, it becomes less expensive in relation to other substitute goods, so the rational consumer can increase his or her satisfaction or utility by purchasing more of the good whose price has declined and less of the substitutes.
Determinants of demand
The customer’s desired rate of purchase can be markedly affected not only by pricing but also by several other marketing decisions.
Income of buyers
Price of substitute goods
Tastes and preferences
Number of buyers
Expected future price
Price elasticity of demand
From a decision-making perspective, any firm needs to know not only the direction but also the magnitude effects of changes in the determinants of demand. Some of these factors are under the control of management, such as price, advertising, product quality, and customer service. Other demand determinantes, including disposable income and the prices of competitors’ products are outside the direct control of the firm. Nevertheless, effective demand management still requires that a manager be able to measure the magnitude of the impact of changes in these other variables on quantity demanded.
The most commonly used measure of the responsiveness of quantity demanded of supplied to changes in any of the variables that influence the demand and supply functions is elasticity.
Price elasticity of demand
In general, elasticity should be thought of as a ratio of the percentage change in quantity to the percentage change in a determinant, ceteris paribus (all other things being held equal). Price elasticity of demand is therefore defined as
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To better classify the different demand groups, we define the sensitivity of the consumers into the following ranges;
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Price elasticity and sales revenue
The relationship between price elasticity and revenue can be derived graphically as well by analyzing the change in revenue resulting from a price change.
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Elasticity-revenue relationship
Elasticity is often the key to marketing plans. A product-line manager will attempt to increase sales revenue by allocating a marketing expense budget among price promotions, advertising, retail displays, trade allowances, packaging, and direct mail, as well as in-store coupons. Knowing whether and at what magnitude demand is responsive to each of these marketing initiatives depends on careful estimates of the various demand elasticities of price, advertising, packaging, promotional displays, and so forth.
Factors affecting elasticity of demand
Several factors determine the responsiveness of the consumers demanding a good
Availability and closeness of substitutes
Percentage of the consumer’s budget
Positioning as income superior
Time period of adjustment
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Other elasticity concepts
Income elasticity of demand: change in disposable income of the target customer to the change of quantity demanded of the good.
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Advertising elasticity of demand: change in advertising expenditure to the change of quantity demanded of the good.
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Cross elasticity of demand: change in the price of the related product in the market to the change of quantity demanded of the good.
