Exam Question # Q.2. What are the types of demand determinants? Ans. i. Producers’ Goods and Consumers’ Goods:

  


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Producers’ goods are also called as capital goods. These goods are used in the production of other goods. Machinery, tools and implements, factory buildings, etc. are some of the examples of capital goods.

Consumers’ goods are those goods, which are used for final consumption. They satisfy the consumers’ wants directly. Examples of consumers’ goods can be ready-made clothes, prepared food, residential houses, etc. The differentiation between a consumer good and a capital good is based on the purpose for which it is used, rather than, the good itself. A loaf of bread used by a household is a consumer good, whereas used by a sweet shop is a producer good.

Consumer goods are further classified as durable and non-durable goods. Examples of non-durable goods are sweets, bread, milk, a bottle of Coca-Cola, photoflash bulb, etc. They are also called single use goods. On the other hand, durable consumer goods are those which go on being used over a period of time, e.g., a car, a refrigerator, a ready-made shirt, an umbrella and an electric bulb.

Of course, the lengths of time for which they can go on being used vary to a good deal. A shirt may last a year or two. A car or a refrigerator may provide fairly useful service for 10 to 15 years. Old furniture can go on being used almost indefinitely so long as it is properly looked after. Durable goods are necessarily durable but not all non-durable goods are perishable. For example, coal can be stored indefinitely.


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ii. Durable Goods and Non-Durable Goods:

Durable products present more complicated problems of demand analysis than products of non-durable nature. Sales of non-durables are made largely to meet current demand which depends on current conditions. Sales of durables, on the other hand, add to the stock of existing goods that are still serviceable and are subject to repetitive use. Thus it is a common practice to segregate current demand for durables in terms of replacement of old products and expansion of total stock.

Demand analysis for durable goods is complex. Determination of demand for these goods has to take into consideration the replacement investment and expansion of the industry. The reasons for replacement investment are due to technological developments making the existing technology outmoded and the depreciation of the capital over a period of time.

Besides durable consumers’ goods, the acceleration principle is also applicable to durable producers’ goods. Suppose the demand for consumer goods expands. Then there will be a need to expand the production of capital goods in order to produce the consumer goods. Thus, if more bicycles are demanded, more machinery will be required to produce bicycles.

iii. Derived Demand and Autonomous Demand:

When the demand for a product is tied to the purchase of some parent product, its demand is called derived demand. For example, the demand for cement is derived demand, being directly related to building activity. Demand for all producers’ goods, raw materials and components are derived. Also, the demand for packaging material is a derived demand. However, it is hard to find a product in modern civilization whose demand is wholly and has supposed to have less price elasticity than autonomous demand.

iv. Industry Demand and Company Demand:

The term industry demand is used to denote the total demand for the products of a particular industry, e.g., the total demand for steel in the country. On the other hand, the term company demand denotes the demand for the products of a particular company, e.g., demand for steel produced by TISCO.

It may be noted here that within an industry, the products of one manufacturer can be substituted by products of another manufacturer even though the products themselves might be differentiated by brand names.


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Thus an industry covers all the firms producing similar products which are close substitutes to each other irrespective of the differences in trade names, e.g., Dalda, Rath, Panghat and No.1. Obviously, firms producing distant substitutes would be excluded from the purview of the industry. Ghee and ground-nut oil, being used as cooking media, can be substitutes and will be excluded from Vanaspati industry as such.

An industry demand schedule represents the relation of the price of the product to the quantity that will be bought from all the firms. It has a clear meaning when the products of the various firms are close substitutes. It becomes vague when there is considerable product differentiation within the industry.

Industry demand can be classified customer group-wise; for example, steel demand by construction and manufacture, airline tickets by business or pleasure and geographic areas by states and districts.

From the managerial point of view, mere industry demand is not enough. What is more important is the company’s share in the total industry demand and the relationship between the two, as also the relationship between the company’s share of the demand and that of the competing firms. However, projection of the industry demand is the first step in forecasting company’s sales.


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The industry demand schedule is a useful guide for studying the demand for a company’s products. The relation of the individual company’s sales to its price should be determined by the industry demand schedule. The degree of relationship will depend upon the competitive structure of the industry.

v. Short-Run Demand and Long-Run Demand:

Short-run demand refers to the demand with its immediate reaction to price changes, income fluctuations, etc. Long-run demand is that which will ultimately exist as a result of the changes in pricing, promotion or product improvement, after enough time has been allowed to let the market adjust itself to the new situation.

For example, if electricity rates are reduced, in the short-run, existing users of electrical appliances will make greater use of these appliances ultimately leading to a still greater demand for electricity. The distinction is important in a competitive situation. In the short- run, the question is whether competitors will follow suit; while in the long-run, entry of potential competitors, exploration of substitutes, and other complex and unforeseeable effects may follow.