Composite demand

From CEOpedia | Management online

Composite demand is a market situation in which the demand for a given product or service is derived from the demand for multiple other products or services. It occurs when the demand for one product or service is dependent on demand for other products or services. For example, the demand for a certain type of mobile phone may be derived from the demand for mobile data plans and accessories.

Composite demand can be broken into three main components:

  • Direct demand: This is the demand for a product or service that is independent of any other product or service. For example, the demand for a certain type of mobile phone may be independent of the demand for mobile data plans.
  • Indirect demand: This is the demand for a product or service that is derived from the demand for another product or service. For example, the demand for a certain type of mobile phone may be derived from the demand for mobile data plans.
  • Cross-elasticity of demand: This is the change in demand for a product or service due to a change in the demand for another product or service. For example, the demand for mobile phones may increase if the demand for mobile data plans increase.

In summary, composite demand is a market situation in which the demand for a given product or service is derived from the demand for multiple other products or services. It is composed of direct demand, indirect demand, and cross-elasticity of demand.

Example of Composite demand

The demand for cars is an example of composite demand. The demand for cars is composed of the demand for cars themselves, the demand for car parts, the demand for fuel, the demand for automobile insurance, and the demand for automobile financing.

Direct demand for cars is the demand for cars themselves, as consumers are buying cars for their own use. Indirect demand for cars comes from the demand for car parts, fuel, insurance, and financing. For example, if the demand for car parts increases, then the demand for cars will likely increase as well. Finally, cross-elasticity of demand occurs when the demand for cars is affected by the demand for other products or services. For example, if the demand for automobile financing increases, then the demand for cars will likely increase as well.

Formula of Composite demand

The formula for Composite Demand is:

Composite Demand = Direct Demand + Indirect Demand + Cross Elasticity of Demand

In this formula, the Direct Demand is the demand for a product or service that is independent of any other product or service. The Indirect Demand is the demand for a product or service that is derived from the demand for another product or service. The Cross Elasticity of Demand is the change in demand for a product or service due to a change in the demand for another product or service.

When to use Composite demand

Composite demand can be used to understand how changes in demand for one product or service can affect the demand for another. It can also be used to identify opportunities for product or service development or marketing campaigns. For example, if the demand for a certain type of mobile phone is dependent on the demand for mobile data plans, then marketers can target campaigns to increase demand for both products.

Types of Composite demand

  • Price composites: This type of composite demand is based on the price of the product or service. For example, the demand for a certain type of mobile phone may increase if the price of the phone decreases.
  • Competitor composites: This type of composite demand is based on the performance of a competitor's product or service. For example, the demand for a certain type of mobile phone may increase if a competitor's phone outperforms it.
  • Substitute composites: This type of composite demand is based on the availability of a substitute product or service. For example, the demand for a certain type of mobile phone may increase if a substitute phone becomes available.

Steps of Composite demand

The steps of composite demand can be broken down into four main steps:

  • Identifying the components: This involves identifying the components of the demand for the product or service. This includes identifying direct demand, indirect demand, and cross-elasticity of demand.
  • Estimating the components: This involves estimating the components of the demand for the product or service. This includes estimating the direct demand, indirect demand, and cross-elasticity of demand.
  • Analyzing the components: This involves analyzing the components of the demand for the product or service. This includes analyzing the direct demand, indirect demand, and cross-elasticity of demand.
  • Modeling the components: This involves modeling the components of the demand for the product or service. This includes modeling the direct demand, indirect demand, and cross-elasticity of demand.

Advantages of Composite demand

  • Increased market visibility: Composite demand allows businesses to better understand their customers’ needs and preferences. This can lead to increased market visibility, as businesses are able to identify trends in the market and adjust their product or service offerings accordingly.
  • Improved pricing strategies: Composite demand also allows businesses to develop more effective pricing strategies. By understanding the demand for related products or services, businesses can adjust their pricing to maximize profits.
  • Streamlined operations: Composite demand can also lead to more efficient operations, as businesses are able to identify the most cost-effective ways to produce and deliver their products or services.

Limitations of Composite demand

Composite demand has several limitations that can make it difficult to accurately measure and predict.

  • Lack of reliable data: Many of the components of composite demand are difficult to measure accurately, due to lack of reliable data or the complexity of the relationships between products or services.
  • Changes in consumer preferences: Consumer preferences can change quickly, making it difficult to accurately measure and predict the effects of changes in the demand for one product or service on the demand for another.
  • Difficult to isolate effects: Changes in the demand for one product or service can have an effect on multiple other products or services, making it difficult to isolate and measure the exact effects.

Other approaches related to Composite demand

  • Price Discrimination strategies: Price discrimination strategies involve charging different prices for the same product or service based on certain criteria, such as the customer's income level or location. By doing so, companies can increase their profits by charging different prices to different customers.
  • Monopoly Power: Monopoly power is the ability of a company to control prices in a market. Companies that have monopoly power are able to set prices above the competitive level, resulting in higher profits.
  • Price Discrimination and Monopoly: Price discrimination and monopoly power can be used together to increase profits. By setting different prices for different customer segments, companies can increase their profits without sacrificing their monopoly power.

In summary, other approaches related to composite demand include price discrimination strategies, monopoly power, and the use of price discrimination and monopoly power together. These approaches can be used to increase profits and maximize market share.


Composite demand — recommended articles
Price sensitivity — Demand curve shift — Price stickiness — Level of competition — Diseconomies of scale — Market for product — Fragmented market — Administered price — Modeling in marketing

References

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