Market capacity from the viewpoint of logistic analysis/Rinkos talpa: logistines analizes poziuris.
Knyviene, Indre ; Girdzijauskas, Stasys ; Grundey, Dainora 等
1. Introduction
In modern society market activity is the most important tool for
the organization of an entire economy (Zavadskas and Kaklauskas 2008;
Girdzijauskas 2002, 2003, 2004, 2005). This paper discusses market in
the view of its capacity. Market is considered from the standpoint of
logistic analysis. Here the capacity of market is defined by the
possibility of transactions, their volume and value. The volume and
value of transactions can be calculated within a certain time period
(e.g. a year) and during the life-time of a commodity or service.
The aim of the research was to study markets from the standpoint of
logistic analysis (see Fig. 1), i.e. to evaluate the capacity of markets
according to their closeness with respect to logistic analysis, and to
differentiate markets according to their capacities.
Object of the research is the market capacity and the problem of
its closeness as well as other related components, i.e. potential
market, market niche, real market, market gap and other subjects.
Research methods: theoretical analysis based on literature analysis
and conclusions, comparisons, evaluation; generalization; abstraction,
systemic analysis and modelling. Logistic model was studied by means of
IT.
[FIGURE 1 OMITTED]
The logic of the current study is presented in Fig. 1. The focus of
defining terminology would lie on establishing types and characteristics
of the following terms and concepts: a) markets; b) types of markets; c)
market potential (and related concepts from Economics and Marketing); d)
supply and demand. Further on, supply and demand equilibrium is pointed
out as a precondition for a new theoretical approach introduced in this
paper, namely the logistic approach, which is finally followed by the
conclusions.
2. Defining terminology
The purpose of this section is to introduce the major terms in our
research field, namely: a) a market; b) the types of markets; c) market
potential; d) supply and demand. These terms would serve us a joint
moment to follow our research goal of introducing the logistic approach
in market capacity evaluation.
2.1. Defining a market
The literature of economics and marketing provides a number of
various market definitions. Below are some of the most common ones:
"Market is a combination of commodity and monetary
relationships, an exchange of commodities and services that take place
between customers and salesmen according to the laws of production and
circulation" (Jakutis et al. 2007).
"Market is an economic exchange system where two groups of
market subjects interrelate based on different interests: customers and
salesmen (consumers and manufacturers)" (Davulis 2009).
"Market is a sphere of exchange where a process of purchase
and sales takes place" (Martinkus and Zilinskas 1997).
"Market is a meeting place for customers and salesmen, where
demand and supply equilibrium exists, regulating mechanism expressed in
price during the commodity exchange process" (Pranulis et al.
2008).
As indicated in the definitions above, the focus of the market is
the exchange, whether defined by economists or marketing specialists.
The economics would emphasise the demand and supply equilibrium and
commodity and monetary relationships; while marketers would be more
interested in customers and salespeople on one hand, and consumers and
manufacturers, on the other one--focusing on market participants.
The size of market is associated with the number of consumers who
need a certain market offer. Market is also associated with the price
level. In economic literature (Davulis 2009), price is emphasized as the
most important market parameter which indicates trade surplus and
shortage. It should be emphasized that competition is one of market
elements because it leads to setting the price.
2.2. Defining the types of markets
Economic literature (Mankiw 2008; Mankiw and Taylor 2006; Hall and
Lieberman 2008; Hirschey 2009; Parkin et al. 2008; Carbaugh 2006;
McConnell and Brue 2006) distinguishes these types of markets:
1. Perfect competition market, where consumers buy goods and
manufacturers sell them at the same price.
2. Monopolistic market which refers to one manufacturer in the
market.
3. Monopolistic competition market, i.e. a market where small
manufacturers (service providers) prevail and produce similar products
or provide similar services.
4. Oligopolistic market is dominated by some large competing
companies producing the same product or close substitutes.
The fifth type of market is determined as the market for the
factors of production is differentiated from the markets of
product/service factors and includes the elements of land, labour,
capital and entrepreneurship (Madura 2006; Friedman 2007; Grundey 2007;
Mankiw 2008; Krugman and Obstfeld 2008; Grundey 2008; Todaro and Smith
2009). The market of factors of production is limited by the demand of
products which need certain production factors.
In our paper, the market for the factors of production is discussed
in the light of supply and demand of production factor in a particular
economic sector. Here, by factors of production, we consider:
a) natural resources or land,
b) labour or labour force,
c) capital or production implements,
d) qualification as the fourth production factor is emphasized.
2.3. Defining the market potential: a variety of perspectives
Market has to function, only then it has potential. Among the
parameters pertaining to the market is primarily market size that is
inseparable from the market potential (Table 1). Here again, the focus
of our perspective is the economic and marketing approaches.
We have to emphasise that three major perspectives and terms have
been identified in the literature:
Perspective No. 1: the market potential.
Perspective No. 2: the marketing potential.
Perspective No. 3: the potential market.
Here we present a polemic discussion on the three identified
concepts.
The potential market is a group of consumers interested in market
offer (Kotler and Keller 2007). Other authors consider potential
consumers (who might be interested in commodities offered by a company)
to be potential market, but only those who have earnings to obtain these
commodities (Pranulis et al. 2008). The potential market is also defined
as a total of product sales an organization makes in a specific market
(Stanton et al. 1991). Stevens et al. (2006) indicated that
"marketing potential is a quantitative measure of a market's
capacity to consume a product in a given time period, which is a
prerequisite for assessing profitability" (Stevens et al. 2006:
100).
"Marketpotential has been defined as the maximum possible
sales opportunities for all sellers of a good or service. As such, it
refers to the potential sales that could be achieved at a given time, in
a given environment, by all the firms active in a specified
product/market area or segment. Thus the concept of market potential
extends our view of the market for our product, in that we see the
product as competing against alternative means of satisfying the same
need" (McDonald and Christopher 2003: 182).
Kotler and Armstrong (2010: 589) have identified and grouped
indicators for market potential as follows:
Group 1: demographic indicators (education, population size and
growth, population age composition);
Group 2: sociocultural indicators (consumer lifestyles, believes
and values, business norms and approaches, cultural and social norms,
languages);
Group 3: geographical indicators (climate, country size, population
density--urban, rural, transportation structure and market
accessibility);
Group 4: political and legal indicators (national priorities,
political stability, government attitudes towards global trade,
government bureaucracy, monetary and trade regulations);
Group 5: economic indicators (GDP size and growth, income
distribution, industrial infrastructure, natural resources, financial
and human resources).
Thus, market is more than a direct consumer demand for goods or
services. In fact, consumers are interested in market products; they
have specific income level and opportunity to accept a specific offer to
buy a product or service.
In our further studies and calculations, we will consider the
market potential as the maximum amount of capital that can be rationally
invested in a particular market. Such investment can be calculated in
absolute values (monetary units) or use of the values within a time
unit.
2.4. Defining supply and demand: modern perspective
The market is a meeting place of sellers and buyers, where in the
process of exchange of goods or services, there is supply and demand
equilibrium governing mechanism. Consequently, demand and supply must
meet the equilibrium (Schall and Haley 1991). Actually, the place for
the meeting of buyers and sellers may be virtual in nature.
The laws of market can be more easily understood when considering
an ideal model of a competitive market in which there are two main
parties: a) those who purchase goods and services, and b) those who sell
them.
Thus, an individual buyer (consumer) and an individual seller
(manufacturer) are two forces acting in an ideal competition market. The
buyer, as an acting force, shapes market demand and the seller shapes
market supply.
Even though, the aim of this paper does not imply a broad
discussion on the origins of defining supply and demand, a brief summary
could be beneficial. The polemic discussion on demand and supply could
be dated back as far as 1776, when Adam Smith offered his perception on
the matter in the well-known piece of research The Wealth of Nations.
This book proposed the idea of supply price being fixed. On the other
hand, the demand was perceived as increasing or decreasing depending on
the price situation, which could also be decreasing or increasing.
Further on, a well known economist David Ricardo presented his
perception of the economic model in his book Principles of Political
Economy and Taxation in 1817. From today's perceptive, we
acknowledge that Mr. Ricardo's model preconditioned his ideas in
defining supply and demand.
From today's perception, supply is an economic category
listing the volume of goods and services that can be offered by
manufacturers (suppliers) at different prices (Shone 2001). Whereas,
demand could be defined a need or desire to obtain an item or service
within the scope of available funds (Sterman 2000). The most important
profitability factor of the company is the demand of its products or
services.
Thus, supply and demand are the basic concepts of every economic
system. Based on the interaction of these two factors, market price is
developed in an ideal competition market. This is understood as a law of
demand and supply. By drawing the so-called demand and supply curves it
is possible to find out how the behaviour of consumers and manufacturers
changes with changes in the prices (Martinkus and Zilinskas 1997).
Hence, the supply is the dependence of the amount of services sold
by companies and the prices (Pranulis et al. 2008). To put it simply, it
is a disposition to sell based on the desire and ability to sell.
Factors determining supply (Sterman 2000; Carbaugh 2006; Parkin et
al. 2008):
--price of goods and services;
--price of alternative goods and services;
--change of technologies;
--price of resources;
--taxes;
--other factors.
3. Supply and demand equilibrium in market capacity: the logistic
approach
Since the supply is directly linked to the price and quantity, the
law of supply, i.e. supply curve is formulated in the following way:
there will be more goods offered and sold if their price increases. It
could also have a reverse version: there will be less goods and services
offered and sold if their price declines. Accordingly, the increase of
price will increase the amount of supply, and the decrease in price will
reduce supply.
Factors that determine the supply curve shifts are the same as
those determining supply, except the price of the commodity. In other
words, the supply curve will move to another location if one of the
component factors starts to change. Movement of the supply curve up or
down depends on the change of product's price. If there is no
change in price but in any other factor, then the supply curve moves to
the right or to the left.
The supply of some goods can adapt much more rapidly to changes in
price than the supply of other products reflecting the elasticity of
supply. When the supply of goods can not be quickly changed in
negotiating the change of price, and when the amount of products to be
sold does not change after the price has been increased, then the supply
is said to be inelastic. On the contrary, when the supply of goods can
quickly adapt to fluctuations in the price and when the slightest
increase in price leads to increase in the quantity of supply of goods
or vice versa, the decrease of price decreases the supply of goods, then
the supply of such product is said to be elastic (Bhaskar 2000).
The most important factor in the company's profitability is
the demand for its goods (services).
Demand is a willingness to buy. It refers to the ability and desire
to buy. Demand determining factors are as follows (Varian 2003; Krugman
and Obstfeld 2008):
--price;
--customer income;
--taste and prioritizing;
--price of alternative goods/services;
--expectations on price change.
An inverse relationship between the volume of price and sales when
everything else does not change is called a demand-based approach, i.e.
a demand curve. This law states that there will be more goods or
services purchased if their price declines with no changes in all other
factors. Likewise, there will be less goods/services bought if their
price increases with no changes in all other factors.
Factors that determine the demand curve shifts are the same as
those determining the demand of goods/services except their price. The
demand curve shifts to another location if a factor other than price
changes. The equilibrium of supply and demand is the relationship
between the volume of service (Q) and price (P) which satisfies the
buyer's and seller's interests when their desires and
possibilities overlap (see Fig. 2).
The equilibrium price reflects that the amounts of goods sold and
bought are even. When the price is higher, the supply exceeds the
demand. The unsold goods and competition between companies lead to a
price reduction to the equilibrium point (Po) (see Fig. 2). With the
price lower than the equilibrium, similar forces increase the price.
When companies increase the price, the demand exceeds the supply to the
equilibrium point.
[FIGURE 2 OMITTED]
Surplus (B) is when supply exceeds demand (price above the
equilibrium point). Shortage (A) is when demand exceeds the supply (the
price below the equilibrium point). A typical case is a market situation
when the demand curve goes down and the supply curve goes upward, then
market forces cause the price to move toward the equilibrium. This
ensures market stability.
Thus, the amount of goods/services which a company wants and is
able to sell in the market, the relation to the price at which the
product/service is sold is called supply (Varian 2003). The relation
between change in price and that of the amount of goods/services
purchased in the market is relatively stable: the size of the demand of
goods/services changes in the opposite direction with regard to the
change in price (Girdzijauskas and Boguslauskas 2005). To summarize, it
can be stated that the more developed the economy of a country, the
richer and the higher is the number of goods/services. This fact
indicates the direct dependency of the demand for goods/services on the
supply.
High demand fills the market. Resolution of market capacity problem
would make it possible to learn the essence of financial bubbles or that
of credit trap (Girdzijauskas et al. 2009; Girdzijauskas and
Streimikiene 2008, 2009; Kaklauskas et al. 2009a,b, 2010). Market
capacity can be defined as the amount of goods/services actually sold.
Hence, market capacity can be understood as market receptivity to a
particular product or service.
In practice, the impact of market capacity as well as that of
market (capital) niche occurs if only the investment is valued on the
basis of the logistical function of capital growth. Market capacity can
be understood as capital amount which can be efficiently assimilated by
the investment environment (Bodie et al. 2001). Considering the
population size (K) a function of time (t), the absolute growth of
product can be modelled by exponential formula (Girdzijauskas 2008):
K = [K.sub.0][(1 + i).sup.t], (1)
where [K.sub.0]--the initial value of the product (product amount);
i--growth rate.
In economy the growth of product is limited due to the market
saturation. Let us consider the P. F. Verhulst's (1804 to 1849)
differential equation on the population growth.
dK/dt = (l- K/[K.sub.p])x k x K, (2)
where [K.sub.p]--a potential (limiting or maximum) value of
biological population or other product expressed by units estimating
product quantity; k--growth rate evaluating coefficient (increase over a
time unit).
Of all the possible proportion coefficient k values let us
accentuate one that is equal the capital growth rate logarithm, i.e. fc
= ln(l + i). Then, considering population a capital and having replaced
time t by n, we will have as follows (Girdzijauskas 2002):
K = [K.sub.p] x [K.sub.0] x [(1 + i).sup.n] / ([K.sub.p] -
[K.sub.0]) + [K.sub.0] x [(1 + i).sup.n] (3)
Here we will find the value of market capacity [K.sub.p].
[K.sub.p] = K x [K.sub.0] x [((1 + i).sup.n]-1 / [K.sub.0] x (1 +
i).sup.n] - K (4)
The obtained market capacity equation was used for evaluation of
the dependency of market capacity size (potential value) on the value of
invested capital at various interest rates (Fig. 3).
[FIGURE 3 OMITTED]
In terms of market capacity, we see that its size depends on the
value of invested capital: with the increase of invested capital, the
capacity of market increases. The specific nature of growth should be
noted: slow growth at the beginning and sudden, especially fast growth
in later stages. Growth characteristics are the same at different
interest rates. The difference here is merely that at higher interest
rates, rapid growth phase occurs later.
How should the sudden growth be considered? If capital gradually
increases when all other variables do not change (i.e. constant),
capital values are achieved at which, due to the specifics of logistic
system, it is necessary to rapidly increase market capacity. If market
capacity cannot be increased, it is necessary to change other
parameters, such as interest rate. If this cannot be done, the system
becomes unstable.
While examining the markets from logistics aspect, we observe
limitations of the markets or their closeness (in the latter formula it
is the Kp value). A more detailed analysis shows that according to the
degree of closeness (change in Kp value) markets may be opened or
closed. There are also intermediate markets: the so-called half-closed
or half-opened markets, i.e. with more than one characteristic. Here the
logistical aspect of markets closeness should be distinguished from
other types of coverage--geographical, political or other (although
there is a certain, indirect connection among them). Most markets are
opened or partially opened. For modelling open markets, composite
interest (exponential) models are best suited.
As we see, closed markets are modelled by means of logistic models.
The analysis of such models shows that there are two ways for the
emergence of a closed market (Girdzijauskas 2008).
The first one occurs due to the continuing growth in profitability
of investment, the supply may exceed the real demand and the
insufficient demand limits the capacity of market. Often, this is the
case of a real estate market. It is formed when the demand is
artificially increased for speculative purposes (Girdzijauskas et al.
2007, 2008, 2009).
The second way is when limited supply brings about huge demand
(frequently the demand is met during auctions). An example may be a rare
items market. Essentially, these are rare goods. Here the market
consists of that single commodity. These are mostly antiques, unique
works of art, rare precious stones, some archaeological finds, etc.
Trade in such goods is carried out in an auction, which highlights the
specificity of consumer behaviour (bidding excitement, passion for
gambling, hedonistic approach to consumption, etc.) (Girdzijauskas and
Streimikiene 2008, 2009; Streimikiene and Girdzijauskas 2008).
Logistic analysis shows that with the increase of market closeness
the behaviour of producers changes, herewith, increasing the possibility
of the occurrence of economic paradoxes. It should be emphasized,
however, that not only the niche, but also the capacity of market volume
is not a constant. With changes in market capacity there occur changes
in the degree of market closeness with all its consequences, such as
threats of instability, etc.
4. Conclusions
1. The capacity of market is defined by the possibility of
transactions, their volume and value. The volume and value of
transactions can be calculated over a certain period of time (e.g. a
year) and throughout the entire lifetime of a product or service.
2. From the logistic analysis point of view, markets can be
classified according to their degree of closeness. In this respect,
markets can be opened, closed or intermediate.
3. For modelling open markets, the composite interest (exponential)
models are best suited.
4. From the perspective of logistic analysis, closed markets are
more important. Capital growth in such markets can be modelled by means
of logistic models.
5. There are two possible ways for a partially closed market
formation. First, when supply starts to exceed real demand and the
insufficient demand limits (closeness) market capacity. Second, when
limited supply causes a high demand.
6. Logistic analysis shows that with the increasing closeness of
the market, the behaviour of producers and consumers also changes thus
increasing the possibility of the occurrence of economic paradoxes.
doi: 10.3846/tede.2010.42
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Indre Knyviene (1), Stasys Girdzijauskas (2) , Dainora Grundey (3)
(1) Kaunas College, Pramon?s pr. 20, LT-50468 Kaunas, Lithuania
(2) Kaunas Faculty of the Humanities, Vilnius University,
Department of Informatics, Muitines g. 8, LT-44280 Kaunas, Lithuania
(3) Kaunas Faculty of the Humanities, Vilnius University,
Department of Business Economics and Management, Muitines g. 8, LT-44280
Kaunas, Lithuania
E-mails: (1) indre@kauko.lt; (2) stasys.girdzijauskas@vukhf.lt; (3)
dainoragrundey@yahoo.co.uk
Received 6 April 2010; accepted 20 October 2010
Indre KNYVIENE. Head of Studies at the Business Management Faculty
in Kaunas College (Lithuania). In 2007, she graduated with the
Master's Degree in Quality of Education from Vytautas Magnus
University (Lithuania). In 1986, she graduated from Vilnius University,
with a 5-year diploma in Economic Cybernetic. Research interests
incorporate problems related to the market capacity and quality of
education.
Stasys GIRDZIJAUSKAS. Dr (HP), Professor at the Department of
Informatics, Kaunas Faculty of the Humanities, Vilnius University. Prof.
Girdzijauskas is the author of almost 100 scientific publications and 6
books. He developed logistic theory of financial management and wrote
one monograph on this topic in the Lithuanian and English languages. He
is Member of the Editorial Board of "Transformations in Business
& Economics". In 2008, he has founded an informal scientific
group of senior and junior researchers on a university level to further
develop his unique theory on logistic capital management. Prof.
Girdzijauskas supervises doctoral students at Kaunas Faculty of
Humanities, Vilnius University, on financial pyramids, economic bubbles
and logistic capital management, which is the focus of his current
scientific research. He lectures for bachelor and master degree students
on applied mathematics, insurance economics and strategies.
Dainora GRUNDEY. Dr (HP), Professor at the Department of Business
Economics and Management at Kaunas Faculty of the Humanities, Vilnius
University, Lithuania. She is Founding Editor of the International
Journal of Scholarly Papers "Transformations in Business &
Economics" and she is also Founding Editor and currently
Editor-in-Chief of IJORTISS. She serves on the Editorial Boards of at
least other 15 journals in Poland, Romania, Latvia, Slovenia, Ukraine,
Lithuania and the United Kingdom. Her research interests cover
marketing, interdisciplinary approach to market behaviour, sustainable
consumption, emotional and green marketing, marketing and consumption
ethics, brand management issues, cross-cultural management and
marketing, customer service and customer behaviour.
Table 1. Selected definitions on market potential
Identified
No. Source Definition Approach
1. McDonald and Market potential has Economics
Christopher (2003: 182) been defined as the
maximum possible sales
opportunities for all
sellers of a good or
service.
2. Stevens et al. (2006: 100) Marketing potential is Economics-
a quantitative measure Marketing
of a market's capacity
to consume a product
in a given time
period, which is a
prerequisite for
assessing
profitability.
2. Kotler, Keller (2007) The potential market Marketing
is a group of
consumers interested
in market offer.
Source: compiled by the authors.
