An Operational Definition of Demand

Demand is commonly characterized as “what the customers want, and when they want it,” sometimes with the added proviso “at a price they are willing to pay, along with any other products they want at that time.”

When we refer to demand, we really mean "unconstrained" or "true" demand, because we take no consideration of our ability to fulfill it. We use the phrase "constrained demand" to describe what's left after incorporating any limitations on our ability to provide the product or service demanded. Thus, constrained demand ≤ demand. So far so good — do I really need to devote a blog entry to something so self-evident?

This definition of "demand" is not problematic until we try to operationalize it, that is, when we start to describe the specific, systematic way to measure it. This is kind of important if we ever expect to measure the accuracy of our "demand forecast." We need to know what actual demand really was. Let's work through an example I originally wrote about in the Summer 2003 issue of Journal of Business Forecasting, dealing with this issue at a manufacturer.

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