What is Demand?

Demand is like your favorite cereal being sold out at the grocery store…

You eat your favorite cereal every morning because you think it tastes the best. Other people seem to agree with you, because when you go to the store, it’s all sold out. The demand for this cereal is high. You could buy another cereal that is well stocked, but you don’t like the taste of this one. The demand for this cereal is low.

In economics, demand is the expression of the consumer’s desire and ability to purchase a good or service. Generally speaking, demand rises as prices drop, and vice versa.

When economists talk about demand, they’re usually referring to one of two kinds:

• Market demand measures the willingness and ability of consumers within a particular market to purchase a specific good or service.
• Aggregate demand is the sum of the demand of all consumers in all markets for all products within an economy at a given time.

Demand is an important part of a successful business. When a business accurately estimates the demand for its products and services, it’s better positioned to maximize sales — And as a result, profit. If a business can’t generate enough of its product to meet demand, it may miss potential sales; if it overestimates demand, it can lose money by making more product than it can sell.

Demand usually refers to either market demand or aggregate demand.

• Market demand reflects the willingness and ability of all consumers in a market to buy a particular product. For example, the market demand for dog treats measures only the demand for dog treats. Think of it as the one that focuses on specifics.
• Aggregate demand looks at the larger picture. It examines the total demand across a whole economy — Everything from dog treats to cars to medicine. It’s the total amount of all things consumers purchase on the open market that economists can track.

The market demand curve is a graphic representation of the relationship between demand and the price of a good or service. The vertical y-axis tracks the price; the horizontal x-axis tracks the quantity. Typically, the market demand curve slopes downward to the right. The shape of the curve shows that consumers are more likely to buy a product when its price goes down.

Keep in mind that the market demand curve includes price as the only factor that influences demand. It assumes that all other factors are constant (or as economists often say, “ceteris paribus”).

In reality, there are many other circumstances and elements that can change demand, like a change in a consumer’s income or preferences. On the demand curve, these factors typically show up as a shift of the entire market demand curve to the left or right, as opposed to a movement along the curve.

Let’s say the demand for paper and pencils is generally higher as the new school year approaches. This would make the demand curve shift to the right, reflecting more sales. Or, if the sale of swimsuits drops as the fall season nears, you would see the demand curve shift to the left, showing lower demand.

The law of demand describes the inverse relationship between price and demand. In other words, as price rises, consumer demand falls (assuming other factors remain the same). Likewise, as price falls, demand rises. When it’s plotted on a graph, the inverse relationship between price and demand typically shows up as a curve sloping down toward the right.

One important thing to note is that the law of demand focuses exclusively on the effect that price has on demand. It doesn’t consider other influences. For example, the law of demand could examine how wedding photographers gain more customers when they lower their prices. But it wouldn’t take into account how the requests for wedding photography might spike during spring and summer or bottom out in the winter, regardless of price.

Demand refers to the overall measurement of a consumer’s willingness to pay across various prices. However, quantity demanded is the demand at a specific price.

One way to distinguish the two is by using the demand curve. When there’s a change in quantity demanded, there’s movement along the demand curve. But when there’s a change in overall demand, there’s a shift of the entire demand curve to the left or right.

A change in quantity demanded happens when the price of a good or service changes. But a change in overall demand is usually triggered something other than price. Economists call these other factors determinants of demand.

The determinants of demand are the conditions (other than price) that influence a consumer’s willingness to purchase a good or service. There’s no consensus among economists on the number of determinants out there, but they typically include things like:

• Prices of substitutes or related goods or services (think peanut butter and jelly)
• Expected increases in price
• Consumer income and wealth
• Expected increases in income and wealth
• Consumer preferences
• Population size and makeup

Here are some examples of determinants of demand and how they can affect a product (assuming price stays constant), like a luxury electric SUV:

Price of substitutes or related goods or services: A rival carmaker introduces its version of a luxury electric SUV at a lower price. Fewer shoppers are willing to pay the higher price for the example SUV. The demand curve shifts to the left (reflect the lower quantity demanded).

Expected increase in price: Competing national tariffs spawn news about how they will likely increase the price of raw materials, like steel, which in turn will raise the price of goods like cars. Consumers who are on the fence about buying an electric SUV decide they want to make their purchase before prices go up. The demand curve shifts right (to reflect the higher quantity demanded).

Income and wealth: A country experiences a period of economic boom, with more jobs and income. People have more money to spend on luxury items like an electric SUV. The demand curve shifts right.

Expected change in income and wealth: The government passes a series of major tax reforms. Taxpayers estimate that the reforms will reduce their tax burden and give them more disposable income. More consumers decide they can now buy that electric SUV they’d been eyeing. The demand curve shifts right.

Preferences: More people want to protect the environment by buying a more fuel-efficient vehicle, like an electric SUV. The demand curve shifts right.

Population makeup: As more people get to retirement age, they also look to minimize their expenses. Buying a luxury SUV doesn’t fit this new lifestyle. The demand curve shifts left.