Concept of Demand

Demand
Demand is widely used term and is commonly considered synonymous with terms like wants and desire. However in Economics demand has a definite meaning which is different from ordinary use. Demand is one of the crucial requirements for the existence of any business enterprise. The profit and / or sales of a firm depend partially upon the demand for its product. The management decision regarding the production, advertising, cost allocation, pricing etc. call for an analysis of demand

Concept of Demand
Demand simply indicates the quantities of a good (or services) which the household/individual would be willing & financially able to purchase at various prices A demand can be effective only if it is supported with: - desire/want to buy - Means to buy - Willingness to part with the means to fulfill the want

Demand Function
Demand function is a comprehensive formulation which specifies the factors that influence the demand for the product. Dx = F ( Px, Py, Pz, I, E, T, U) Dx = Demand for good X Px = Price of good X Py = Price of substitutes Pz = Price of complements I = Income of the consumer E = Price expectation of the consumer T = Taste & Preference of the consumer U = All other factors

Law of demand
It States that there is an inverse relationship between own price & quantity demanded, provided other factors affecting demand remains constant.

Hence Demand Function : Dx = F ( Px, Py,Pz I, E,T, U) With other factor keeping constant reduces to: Dx = F(Px)

Explaining the Law

Individuals demand & Market demand

Individuals demand is the demand shown by the individual buyer for a particular good at different prices. If we trace this effect of a goods price and the quantity of the good consumer want to buy in a price-quantity axis, we get an Individual demand curve Market demand is the horizontal summation of all the individual demand curves for a particular good in the market at any point of time

Individual Demand Curve

Market Demand Curve

Case study : Conflict in McDonald

The case points the turmoil in the early 1990s between one of the franchisee outlets of the McDonald and the Mac itself in the USA
The key issue centered on the operating autonomy of the franchisee

Issues of conflict
Issues raised by franchiser Issues raised by franchisee Insisted on periodic This was rejected by the remodeling of the premise franchisee This was opposed by the franchiser. Rather they wanted to expand promotional discounts The parent body sought longer store hours and multiple express lines to cut down on lunchtime It favoured raising prices on best selling items

Such moves were resisted by the franchisees

Points to discuss
How would one explain these conflicts? What is their economic sources? What can the parent and the franchisee do to promote cooperation? If franchising is a profitable activity, then why are there so many conflicts?

Suggested Solution
Franchisee faces the individual demand curve the demand for the store . He can maximize his profit by charging a higher price, and having a captivated customers at the cost of advertisements and promotional expenditure by the parent It also want to push up the sales but keeping in mind that it should not increase their cost so much that their individual profit will go down

 The parent company is facing the market demand (summation of all demands faced by the individual franchisee). It want to captivate customers by providing a better ambience with the objective of creating and improving its image across the market. But the cost of any remodeling will have to be borne by the individual outlet It wants to offer promotional discounts for overall image building , though it may not be profitable for the franchisee Since the parent company gets royalty and marketing fee, it want to go in for sales maximization by having longer working hours and multiple express lines but this becomes an higher cost on part of individual franchisees

Hence here we see a classic case where individual demand (from the franchisee) is conceptually and economically different (and conflicting) from the market demand(from the franchiser) Franchiser-franchisee business can be successful only when these two demands are satisfied by a common policy-pool