How to Calculate Excess Demand

Calculator image by Alhazm Salemi from Fotolia.com

Businesses with fixed capacities must manage excess demand. A fixed capacity business is one which can sell only so many units on a given day and cannot make more. For example, a hotel has a fixed number of beds and cannot sell more rooms than what they have. Likewise, an airline has a limited number of seats and cannot accommodate more than that number for a given flight. These industries make use of revenue management tactics to manage excess demand, but first they have to calculate what that demand is.

Forecasting Excess Demand

Total current reservations. Fixed capacity businesses typically operate by taking reservations, particularly when they are in situations of excess demand. Managers will forecast excess demand to determine whether they need to raise prices on the remaining reservations or manage the excess demand in some other fashion.

Review historical data to determine expected incoming reservations. Fixed-capacity businesses that have been in operation for a number of years keep historical data to help with their forecasting. Review the sales made for the past five years on the date for which you are forecasting. Observe any trends and determine how many reservations you could reasonably expect given the historical data.

Research environmental factors that could affect upcoming reservations. If, for example, there is a large women's expo in town for the first time this year, a spa manager might determine that he can reasonably expect a greater number of reservations for spa treatments. Make an estimate of how much those factors will affect your reservations and either add or subtract to the estimate you made in Step 2.

Total current and expected reservations and subtract capacity. For example, if a concert hall has sold 500 reservations, has a history that says it will sell an additional 300 in the week before a concert and they have 700 seats, then the excess demand is 100.

Divide surplus by the total capacity to determine the excess demand percentage. In the example in Step 4, the excess demand percentage would be 100 divided by 700, or 14 percent.

Calculating Historical Excess Demand

Total the number of units sold for a given time period. A manager may need to calculate excess demand for a specific date or for a range of dates such as a week or a month.

Examine historical records to determine how many people were turned away or denied a unit. The reservations department typically records the number of reservation inquiries and how many inquiries had to be turned away because the operation was at capacity.

Divide the number of people turned away by the number of units sold for the excess demand percentage.

Tips

  • In economics, excess demand is defined as the price being set below the equilibrium price. It means there are more consumers who want to purchase the goods than there are goods available at the current price. Raising the price will lower the demand.

    Most fixed-capacity businesses that continually have excess demand will try to increase their available supply in the long run.

References

  • Economic Basics: Demand and Supply
  • "Revenue Management: Maximizing Revenue in Hospitality Operations;" Gabor Forgacs; 2010
  • "Revenue Management" seminar kit; AH&LA Educational Institute; 2001

About the Author

As a professional writer since 1985, Bridgette Redman's career has included journalism, educational writing, book authoring and training. She's worked for daily newspapers, an educational publisher, websites, nonprofit associations and individuals. She is the author of two blogs, reviews live theater and has a weekly column in the "Lansing State Journal." She has a Bachelor of Arts in journalism from Michigan State University.

Photo Credits