What is demand?
Demand is an economic principle referring to a consumer’s desire to buy goods and services and their willingness to pay a price for a specific good or service. By keeping all the other factors constant, an increase in the price of a good or service will decrease the quantity demanded and vice versa. Market demand is the total quantity demanded from all consumers in a market for a given good. Global demand is the total demand for all goods and services in an economy. Several storage strategies are often necessary to manage demand.
Key points to remember
- Demand refers to the desire of consumers to purchase goods and services at given prices.
- Demand can mean market demand for a specific good or aggregate demand for the total of all goods in an economy.
- Demand, as well as supply, determines the real prices of goods and the volume of goods that change hands in a market.
What is demand?
Understanding the demand
Businesses often spend a considerable amount of money to determine the amount of public demand for their products and services. How much of their product can they actually sell at a given price? Incorrect estimates either result in money on the table if demand is underestimated, or in losses if demand is overestimated. Demand is what fuels the economy, and without it, businesses would produce nothing.
Demand is closely linked to supply. While consumers are trying to pay the lowest prices for goods and services, suppliers are trying to maximize profits. If the suppliers charge too much, the quantity demanded decreases and the suppliers do not sell enough products to make sufficient profits. If suppliers charge too little, the quantity demanded increases, but lower prices may not cover supplier costs or allow profits. Some factors affecting demand include the attractiveness of a good or service, the availability of competing goods, the availability of financing and the perceived availability of a good or service.
Supply and demand curves
Supply and demand factors are unique for a given product or service. These factors are often summarized in the supply and demand profiles plotted as slopes on a graph. On such a graph, the vertical axis indicates the price, while the horizontal axis indicates the quantity requested or supplied. A demand curve goes down, from left to right. As prices rise, consumers demand less of a good or service. A supply curve tilts up. As prices rise, suppliers provide more of a good or service.
The point of intersection of the supply and demand curves represents market compensation or the market equilibrium price. An increase in demand shifts the demand curve to the right. The curves cross at a higher price and consumers pay more for the product. Equilibrium prices generally remain in a state of flux for most goods and services because the factors affecting supply and demand are constantly changing. Free and competitive markets tend to push prices towards market equilibrium.
Market demand vs global demand
The market for each good in an economy is faced with a set of different circumstances, which vary in type and degree. In macroeconomics, we can also look at aggregate demand in an economy. Global demand refers to the total demand for all goods and services of all consumers in an economy across all markets for individual goods. Since the aggregate includes all the goods in an economy, it is not sensitive to competition or substitution between different goods or to changes in consumer preferences between different goods in the same way as demand on good individual markets.
Macroeconomic policy and demand
Tax and monetary authorities, such as the Federal Reserve, devote a large part of their macroeconomic policy to managing aggregate demand. If the Fed wants to reduce demand, it will raise prices by dampening the growth in the supply of money and credit and raising interest rates. Conversely, the Fed can lower interest rates and increase the supply of money in the system, thereby increasing demand. In this case, consumers and businesses have more money to spend. But in some cases, even the Fed cannot keep up with demand. When unemployment is rising, people may still not be able to afford or spend less on debt, even with low interest rates.