Demand theory and estimation

Abstract

In a commercial environment, the success of the organisation is dependent on its ability to produce the goods customers want, and sell them at a price customers are prepared to pay. A knowledge of the firm’s demand conditions is then essential decision information, controlling the decisions of what and how much to produce, as well as the more obvious marketing decisions such as price and advertising. New investment decisions, whether to replace equipment, the quantity of labour to employ, are each related to the anticipated level of sales. It is then vital that the decision-maker understands the relationship between the likely level of sales and the internal and external variables that influence sales. Moreover, any decision involves a comparison of the anticipated costs and benefits of following a particular action. In the business context, the benefits from that action are usually expressed in the form of revenues.