Deciphering Demand in Diwali: A basic concept of Economics
Businesses in India are optimistic about a much-needed boost from the festival of Diwali. This is traditionally a time when consumer spending spikes.
Sales, discounts and across the board increase in footfalls in shops and digital footfall for e-commerce websites alike means demand increases. More festive demand means more to cheer for the businesses.
All who study economics in their lifetime have heard of this term called ‘Demand’. Literally if the world moves around something then it’s the demand.
Is wanting something similar to demand?
In Economics, not really. Wants of an individual are infinite. However, demands of an individual are limited because it is defined as the willingness to buy plus ability to buy. In simpler terms, demand is the want that is supported by the purchasing power.
An increase in the price of a good or service tends to decrease the quantity demanded. Likewise, a decrease in the price of a good or service will increase the quantity demanded.
Market demand is the total quantity demanded by all consumers in a market for a given good. Aggregate demand is the total demand for all goods and services in an economy.
Role of Demand for Business:
Businesses can spend a considerable amount of money to determine the amount of demand the public has for their products and services. How many of their goods will they actually be able to sell at any given price?
Incorrect estimations can result in lost sales from willing buyers if demand is underestimated or losses from leftover inventory if demand is overestimated. Demand helps fuel profits and the economy. That’s why it’s an important concept.
Without demand, no business would ever bother producing anything.
Role of Demand in Economy:
When individuals who have the ability to buy goods or services ask for it in the market, it can be considered as a ‘Demand’. When producers or manufacturers receive the information regarding such demand, they accordingly produce and provide goods and services which can be called ‘Supply’. The place, not necessarily a physical one where exchange of demand and supply occurs is called a ‘Market’.
Further, when a person to satisfy her or his demand buys that product and uses it, this is known as the consumption.
An economy where consumption rate is higher, producers are encouraged to manufacture more and more as there is a demand in the market. This encouragement to producers leads to investment where firms put extra money to do business in either the same venture or different.
If demand drops, then businesses will lower prices. They hope that’s enough to shift demand from their competitors and take more market share. If that doesn’t work, they will innovate and create a better product. If demand still doesn’t rebound, then companies will produce less and lay off workers. It can cause an economic contraction, if same situation happens across sectors. That phase of the business cycle creates a recession.
Demand through consumption and investment steer the economy’s movement both upward and downward. Hence the role of demand is undeniably important for an economy.
In economics the terms change in quantity demanded and change in demand are two different concepts.
Change in quantity demanded refers to change in the quantity purchased due to increase or decrease in the price of a product.
On the other hand, change in demand refers to increase or decrease in demand of a product due to various determinants of demand, such as consumer’s income, preference, cost of product and its substitute etc. while keeping price at constant.
Changes in quantity demanded can be measured by the movement of the demand curve, while changes in demand are measured by shifts in the demand curve. The terms change in quantity demanded refers to expansion or contraction of demand, while change in demand means increase or decrease in demand.
Demand-side economics is another way of referring to Keynesian economic theory. During the Great Depression, British economist John Maynard Keynes promoted the theory that demand is the driving force in an economy. He believed stimulating demand can improve struggling economies. This is the opposite of supply-side economics.
Role of government in influencing demand:
The government tries to manage demand to prevent either inflation or recession.
To boost demand, it either cuts taxes or purchases more goods and services. It can also give subsidies to businesses or benefits to individuals such as unemployment benefits. It increases demand by raising confidence and creating enough jobs.
The Central bank’s most effective tool for reducing demand is by raising interest rates. This shrinks the money supply and reduces lending. With less to spend, consumers and businesses might want more, but they have less money to do it with.
Demand in Diwali:
Consumption tends to spike significantly during Diwali. Even [the risk of] an inflation-ridden recession on the global front cannot dampen the festive spirit. As a consumer-driven economy, Diwali is a critical time of the year for many sectors in India. Alongside the retail sector, manufacturing and other industries also benefit from the uptick in spending.
The Confederation of All India Traders forecasts that, with Covid-19 curbs lifted, sales during Diwali this year will be up 30 per cent compared to 2021 for the industry group’s 80 million small and medium-sized businesses, which generate more than $1.5 trillion in sales annually.
The retail industry is facing some brunt due to lesser walk-ins. A known contributor to this phenomenon has been the e-commerce space.
A survey shared that one in three Indian households plan to spend an estimated ₹10,000 this festive season, with footfalls in stores and markets set to jump by 20%.
Festival seasons are very important for the Indian economy as the spending increases multifold, involving a huge boost to the economy of the country. This basically steers the demand cycle that is essential for growth.