Cadburys
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DEMAND THEORY
Business is driven by demand, a firm will not be established or will survive if adequate demand is not there. Hence, it is important to understand factors affecting demand.
Consumer Demand Theory
This theory postulates that the quantity demanded of a commodity is a function of the price of commodity, the consumer’s income, the price of substitutes and complementary commodities and the taste of the consumer.
Qdx = f ( Px, T , Py , T )
Qdx = Quantity demanded of commodity X an individual per time period.
Px = Price per unit of commodity X
I = Consumer’s Income
Py = Price of related ( i.e Substitute and complementary) Commodities
T = Taste of the consumer
Price Elasticity Of Demand
The responsiveness in the quantity demanded of a commodity to a change in its price is very important to the firm. Sometimes lowering the price of the commodity increases sales sufficiently to increase total revenues. Thus price elasticity of demand is given by percentage change in quantity demanded to percentage change in price, holding all other variables constant.
Ep = в?†Q/Q
в?†P/P
Price elasticity of demand depends on
Availability of substitutes
Length of time over which the quantity response to price change is measured
Income Elasticity Of Demand ( EI )
The level of consumer’s income is also very important determinant of demand. Income elasticity measures responsiveness of demand to change in income.
EI = в?†Q/Q
в?†I/I
AIR DECCAN
With economy growing at a rate of about 8% with whole business environment having infectious optimism. The spill over can also be seen in aviation sector. With only less than 14 million passenger flying the domestic sector in 2003, this figure now stands at about 28 million with domestic market growing at almost 50%.
G.R Gopinath, the man who pioneered low face aviation in India, first visualized this opportunity. With a new concept of no-frill low cost airline, it stormed market 3 years back and today enjoys a market share of 21.2%.
Today low cost carrier has about 4 major players i.e. Air Deccan, Spice Jet, Go Air and Paramount holding a market share of about 35% in 2006 and expects to cover about 50% in 2007.
Demand for air line ticket Qa = f (Pa, Y, Ps, T)
Fare of Tickets (Pa) — They are major influencing factors on demand. With steep decline in price of fare, has led to a boom in aviation sector, with a estimation of about 56 million people flying by 2010
Income (Y) — Increase in income provides an ability to purchase and with increasing income more and more people are getting airborne.
Price of Substitutes ( Ps ) — With price of fare of railway and airline coming to same level, people are turning towards airlines.
Price elasticity of demand for airline fare
Long haul domestic business – 1.120
Long haul domestic leisure – 1.520
Short/Medium haul domestic business – 1.390
Short/Medium haul domestic leisure – 0.730
Since demand for airline is highly elastic. Air Deccan with its offering of low fare (as low as Rs1 and Rs500) performed exceedingly well.
Income elasticity –
Long haul domestic business – 0.840
Long haul domestic leisure – 2.169
Short/Medium haul domestic business – 0.807
Short/Medium haul domestic leisure – 2.049
It was seen increasing in income especially at leisure segment had a very positive response on the demand of air ticket. With middle class faring well and purchasing power increasing has led to increase in number of passengers.
Substitute products
For traveling railways and roads has been most common means of transport. At present, there are an estimated 17 to 18 million passengers who daily go by rail and another 10 to 12 million who travel by bus. If just about 5% of this people substitutes with air travel about 1.5 million people would be airborne daily.