Demand (economics)
Demand in economics refers to the relationship between the quantity of a good or service that consumers are willing to purchase and its price. This concept is foundational in predicting market behaviors and economic growth, as it links consumer desires and purchasing power with the availability of products. The law of demand states that an increase in the price of a good typically leads to a decrease in consumer demand for that good, while a decrease in price generally results in increased demand.
However, there are notable exceptions, particularly with essential goods, where demand may not fluctuate as expected with price changes. Factors such as consumer expectations about future prices, income levels, and external influences like seasonal availability or production disruptions also play crucial roles. Moreover, the advent of innovative products has shifted traditional demand dynamics; companies now often seek to create demand for new offerings that consumers may not yet recognize they need. Overall, understanding demand is essential for navigating the complexities of a free market, where pricing strategies and consumer trends are intrinsically linked.
On this Page
Subject Terms
Demand (economics)
In traditional economic theory, demand refers to the relationship between quantity and price. Historically, demand has become one of the fundamental principles that guide any prediction concerning the workings of a free market economy, predictions essential in directing and responding to the fluctuations in economic growth or consumer buying trends. Demand measures the relationship between what consumers want (both their needs and their taste), their willingness to purchase that good or service, and the availability (and quantity) of that product or service. Demand must also factor in expectations of the good’s continued availability and likely changes in pricing and even changes in consumer income levels. Although calculating a demand curve and reading its implications are among the more dense mathematical formulations for predicting sustained market activity, the premise of demand is actually grounded in logic basic to consumer mentality: purchase when the price is at a minimal.
Overview
Demand covers the relationship between consumer desire and the willingness (or need) to pursue a purchase. Specifically, the law of demand states that when the price of a good or service rises, the demand for that good or service will inevitably fall, and, as corollary, that when the price of a good or service drops, the demand for that good or service will invariably rise. Although there are significant exceptions to this principle of demand (most notably goods or services deemed necessities, such as water or utilities wherein market demand does not necessarily correlate with price charged or even the price consumers are willing to pay), the expectations of demand theory have long been intrinsic to predicting sustained economic growth.
Demand itself has become a cornerstone principle of economic growth predictions because its logic is so inescapably obvious. Consumers will purchase more melons, for example, when the fruit is in season and the price is low. When melons go out of season or when conditions outside market control impact melon production or availability (for example, a weather crisis or spikes in fuel costs that impact transportation and availability), demand will drop significantly from in-season retail activity. Indeed, when consumers are forewarned that a spike in fuel costs will impact melon prices, consumers will expect higher prices—the price rises as a way for the market to self-correct, raising prices will lower demand, and thus a limited commodity will last longer. The law of demand impacts virtually every sale and pricing decision in a free market from blue jeans to homes, fuel, and legal services—lowering prices increases demand for a product or service.
However, traditional assumptions about demand—factoring in the price of a good, the availability of a good, the disposable income available for a purchase—have been radically upended in an era when the market can be reshaped by cutting-edge products and services for which there is no current demand. Certainly one of the most revolutionary economic realities of the computer age, most notably enunciated by Apple icon Steve Jobs, is that now companies must actually anticipate demand, even create a demand for a product that the public does not even know exists.
Bibliography
Cachon, Gerard, and Christian Terwiesch. Matching Supply with Demand: An Introduction to Operations Management. New York: McGraw, 2012. Print.
Moon, Mark A. Demand and Supply Integration: The Key to World-Class Demand Forecasting. Upper Saddle River: FT, 2013. Print.
Mullainathan, Sendhil, and Eldar Shafir. Scarcity: Why Having Too Little Means So Much. New York: Times, 2013. Print.
Prasch, Robert E. How Markets Work: Supply, Demand, and the Real World. Cheltenham: Elgar, 2008. Print.
Rampell, Catherine. “Why Is Turkey Cheaper when Demand Is Higher?” New York Times. New York Times, 19 Nov. 2013. Web. 18 Feb. 2014.
Slywotzky, Adrian, and Karl Weber. Demand: Creating What People Love before They Know They Want It. Phoenix: Crown, 2011. Print.