Demand is a term used in economics that refers to the desire to have or own a good or service – the amount that consumers, businesses or governments are willing or able to buy – a buyer’s willingness to pay a price for a certain quantity of a good or service. The word also has other meanings (see bottom of page).
It is how much of a particular economic good or service that an individual consumer or group of consumers want to buy at a given price. When the price for a particular good or service goes down, more people will want it – and those who want it may want more of it, but if its price increases then opposite occurs – this is known as the demand curve.
(In this article, the word ‘good’ on its own refers to both ‘good or service’ unless otherwise stated).
Demand for things of economic value is determined by a number of factors apart from just their price, including the price and availability for identical products produced or provided by others, as well as the price and availability of substitute or complementary goods.
Demand and prices are closely linked. When the price of a good goes up, demand usually goes down, but when the price drops, it grows.
Supply has the opposite meaning – the higher the supply the lower the proportional demand (usually), and thus the price. In some cases demand is said to be infinite, i.e. no matter how much supply grows, demand appears to grow with it. One example is bandwidth – as more bandwidth is supplied, people and organisations’ seem to want more of it.
Demand for medical and health services and products appears to be infinite – the more cases we are able to treat or cure, the more demand seems to rise with it.
Factors that determine demand
Several factors and circumstances can affect a consumer’s willingness or ability to purchase a good. The most common ones are:
Its Price: the basic demand relationship between a good’s potential prices and the quantities that would be purchased at those prices. Generally, as price rises a product is less sought after, conversely as price declines people want more of it – this phenomenon is clearly visible in a consumer demand curve.
Several factors determine whether demand remains the same, increases or declines.
Price of Related Goods/Services: examples include substitutes and complements. A complement is something that is used with the primary good or service. Examples include hamburgers and ketchup, cars and gasoline/diesel, or bread and butter – perfect complements behave as a single item, e.g. a left shoe and right shoe.
If the complement’s price increases, sales of the complement decline.
Substitute goods are identical products made by competitors, such as Crest and Colgate (toothpaste), McDonald’s and Burger King hamburgers, Pepsi-Cola and Coca-Cola sodas – they can be used in place of the primary good. If the substitute’s price goes down, the demand for the primary product declines – if Burger King reduces its prices, demand for McDonald’s products also goes down. On the other hand, if Burger King raises prices, people want to buy more McDonald’s hamburgers.
Personal Disposable Income: how much spare cash consumers have. The more disposable income they have, the more demand is likely to grow. Personal disposable income (also: disposable personal income) is income after tax – some people define it as spare money after paying for everything, including your loan/mortgage monthly repayments, food, clothes, holidays, utilities, etc.
Preferences or Tastes: the stronger the desire to obtain or own a particular good, the more likely the consumer is to buy it. Desire and demand are not the same. Desire is a measure of your willingness to purchase a good based on its intrinsic qualities, while demand is your ability and willingness to act on that desire.
Several things can change people’s tastes or preferences. For example, if a famous and popular celebrity or athlete endorses a new product, people will want more of it. However, demand is likely to fall if a new health study warns that a good is bad for your health.
The weather can alter what we want to buy – demand for umbrellas always spikes on rainy days, as it does for ice-cream during a heat wave.
When supply declines demand increases as a proportion of total supply, and prices rise. When supply grows, demand represents a smaller proportion, and prices usually drop.
Consumer Future Expectations: if you expect prices of a particular good to go up soon, you are more likely to buy it now. However, if you expect its price to remain constant over the medium-term, you are less likely to purchase it now.
If you expect your income will soon rise, you are more likely to buy a good now. Availability (supply) as well as expected or predicted availability also impacts both how much we want it, as well as its price.
Population: if a city’s population grows, so will the price of property within that city or within commuting distances (usually).
A Basic Commodity: demand for a basic commodity usually increases over time. A basic commodity is a staple farm produce that is produced in large quantities, such as sugar, rice or corn.
In his book ‘The Wealth of Nations’, Scottish moral philosopher and pioneer of political economy, Adam Smith (1723-1790), known as the ‘father of modern economics’, said that supply and demand should run the market, without government interference. (Image: adamsmith.org)
Economists often talk of the income effect. The income effect refers to how a change in disposable income can change demand for a product, or for other products. Luxury goods, for example, are more sought after when people have more spare cash. However, the opposite occurs with inferior goods, such as bus-passes. When people have more disposable income, they use cheaper forms of transport less, and travel more by car.
Other meanings of ‘Demand’:
– (verb) To ask for something forcibly, as in: “The workers are demanding a 7% pay rise,”
– (verb) – To need something, such as effort, skill, time, or a particular quality, as in: “To play Rimsky-Korsakov’s ‘The Flight of the Bumblebee’ on the piano demands a great deal of concentration.”
– (noun) A strong request, as in: “The authorities are unlikely to give in to the kidnappers’ demands.”
– (noun) Difficult things that must be done, as in: “His new job as an ambulance paramedic makes a lot of demands on him.”
According to BusinessDictionary.com, demand means:
“1. Commerce: a claim for a sum of money as due, necessary, or required. 2. Economics: (a) desire for certain good or service supported by the capacity to purchase it. (b) The aggregate quantity of a product or service estimated to be bought at a particular price. (d) The total amount of funds which individuals or organizations want to commit for spending on goods or services over a specific period. 3. Law: an assertion of a legal right, such as to seek a compensation or relief.”
– “If you want your energy bills to go up, you should support an ever greater dependence on foreign oil, because the rate of new discoveries is declining as demand in China and India is growing, and the price of oil and thus the price of coal will go sky high,” (Al Gore – an American politician and environmentalist, 45th Vice President of the US).
– “To avoid a blackout, electricity generating companies must lower generation in line with low demand,” (Jyotiraditya Madhavrao Scindia – an Indian politician, a Member of Parliament).
– “Teach a parrot the terms ‘supply and demand’ and you’ve got an economis,” (Thomas Carlyle, 1795-1881 – a Scottish satirical writer, philosopher, essayist, historian and teacher).
– “Public-Private Partnership in financing, service delivery and provision of workspaces and training of trainers must be promoted to meet the demand and supply gap in the field of skill development,” (Pallam Raju – an Indian politician, former Union Minister for Human Resources Development in the Central Government).
– “No fundamental social change occurs merely because government acts. It’s because civil society, the conscience of a country, begins to rise up and demand – demand – demand change,” (Joe Biden – an American politician, 47th Vice President of the US).
– “There is a supply for every demand,” (Florence Scovel Shinn, 1871-1940 – an American book illustrator and artist, and New Though spiritual teacher).
– “Monetary policy cannot do much about long-run growth, all we can try to do is to try to smooth out periods where the economy is depressed because of lack of demand,” (Ben Bernanke – an American economist who served two terms as Chairman of the Federal Reserve).
Not all goods behave in the same way when prices change. Giffen goods, for example, follow an unusual pattern. When the price of a Giffen good goes up, so does demand for it. Giffen goods are usually cheap, staple food products that poor people rely on. For example, poor people in China eat rice and meat. However, if the price of rice rises, they might give up meat (which is expensive) altogether and spend all their food money on rice to make sure they get their required number of calories per day.
Video – What is demand?
This 13 Economics video explains what the term means in very easy-to-understand language and examples.