Table of Contents
- Demand Definition
- What is Demand in Economics?
- Types of demand
- Other classifications of demand
- Law of demand
- Determinants of demand (Factors that affect/determine demand)
- Demand Schedule
- Demand curves
Demand in Economics is a term that describes a desire to own and purchase goods or services. It is the number of goods or services a consumer or a group of consumers are willing and able to buy at a given price. This means that when the price of a product goes up, the demand will fall. When the price goes down, more people will want to go for that product. Hence, a fall in price makes people go for more of it. We call this the response of demand to change in price and demand curve. In other words, it is an economic principle that refers to a consumer’s desire to buy goods and services and is the willingness to pay a given price for a particular good or service.
There is a very close relationship between demand and supply. Suppliers’ target is towards maximizing their profits while consumers attempt to pay the lowest prices possible for goods and services. When suppliers overcharge, the quantity demanded falls drastically and the sales of the suppliers will decrease. That is, suppliers will not be able to sell enough to generate sufficient profits. When suppliers decide to charge very little, the quantity demanded will increase but these lower prices may not be able to cover up the costs of the suppliers and give room for profits. This implies that demand alongside supply determines the real price of goods and the number of goods that causes a change in the hands in a market. A major importance of demand in business is that it helps business firms in the course of designing their pricing policy.
What is Demand in Economics?
People demand goods and services because they want to satisfy their wants. Utility means a want satisfying power of a commodity, that is the amount of satisfaction a person derives from consuming a commodity. It is a subjective entity, thus resides in the minds of humans. It varies as different individuals derive different amounts of satisfaction from a specific commodity. An individual’s desire (demand) for a commodity depends on the utility he expects from it. The greater utility he expects from a commodity, the greater his desire for it becomes.
Economists look at the demand for a commodity fundamentally the attitude and reaction of the consumers towards that commodity (consumer behavior). To be precise, the demand for a commodity is the number of it that a consumer will be ready to take. In Economics, it implies both the desire to purchase and the ability to pay for the goods.
For example, if a poor man is hardly able to meet his needs and wishes to have a car, his wish or desire will not constitute a demand for the car. This is because he cannot afford to pay for it, that is, he does not have the purchasing power to make his wish or desire effective in the market. Willingness has to be backed up with the ability to purchase the commodity.
Businesses usually spend a reasonable amount of money to determine the public’s level of demand for their goods and services. They try to determine how many goods they will be able to sell at a given price. Inaccurate appraisals can either result in leftover if there is an underestimation in demand or losses if there is an overestimation in demand. Demand fuels economic growth and without it, businesses will not produce anything.
Types of demand
The types of demand help marketers forecast the demand for a product. This has to do with estimating the total amount of sales within a particular period when the product is in the market. We shall explain the common types of demand;
This has to do with the various quantities of goods and services consumers are willing to purchase at a given price within a specific period of time. People are mostly concerned with the price demand and it is a remarkable notion in economics. It has an inverse relationship with price, that is, as price increases, demand falls and as price decreases, demand rises.
It refers to the different quantities of a good or service that consumers are willing to buy at different levels of income. This is assuming other things being equal. Mostly, the demand for a commodity increases with a proportional increase of a person’s income. The reverse happens when the commodity is an inferior good. There is an inverse relationship between demand for inferior goods and income.
Here, the demand for a commodity does not depend on its own price. It depends on the prices of other related commodities. This where we take commodities that are close substitutes for one another.
For example, Coca-Cola and Pepsi are substitutes for one another. If the price of Pepsi rises, it will cause the consumer to buy more of Coca-Cola, hence increasing the demand for Coca-Cola. In cases of close substitutes, when prices of related commodities increase or decrease, the demand for other related commodities will either increase or decrease
When we say that goods or services have direct demand, it means that they satisfy our wants directly. For example, every consumer good such as food, clothing, cell phones, satisfies our wants directly. It is the demand for final goods or for products that come from the use of others.
In the manufacturing process, there is a need for many things. If you want to manufacture bread, you will need flour, sugar, an oven, etc., This is a typical example of joint demand. That is, one cannot do without the other.
Composite demand for a commodity means that the commodity serves different purposes, not just one. It satisfies different needs or wants. An example is coal, coal is useful in many ways; for factory purposes, domestic fuel, railway purposes, etc.
This is the demand for each of the factors of production or intermediate goods which happens as a result of the demand for other intermediate goods. The demand for a factor of production depends on the demand for those products by consumers which firms produce.
The demand for a factor of production depends on consumers’ demand for final products which that factor is used to produce.
Other classifications of demand
In general, this takes place when all the target customers dislike the commodity. Even though the commodity has a good quality with a low price, the demand is negative because consumers do not need it. As a result, it becomes very difficult for the marketer to sell these products to its customers. They have to resort to convincing or even manipulating their customers just to achieve their marketing objectives.
Major reasons for negative demands are usually defective products, unattractive market campaigns, and deceptive advertisements.
For example, insurance policies and dental services do encounter situations like this because people would prefer to take preventive measures just to avoid paying for these services. Another reason could be that these services are not up to standard. The insurance policy is probably fraudulent in nature or the dental service is causing more complications.
This is another phase of negative demand. The demand for products under this factor can lead to negative effects on the consumer or other humans. Examples of these products are cigarettes, guns, pirated movies, alcohol, and tear gas.
The difference between the negative and the unwholesome demand is that under the negative, the consumer doe not need or does not feel the urge to buy the product. Under the latter, the consumer desperately wants to consume the product but should not decide to buy it.
Under this, marketers think there is a demand for their product while in real terms, there is no demand for them. This can be very injurious to any variety if the market research is inaccurate. Mostly, companies tend to lose their market value when they fail to carefully analyze this factor. In essence, if a company keeps producing a product, thinking there is a demand for it, it will end up incurring huge losses. This is because consumers will not purchase these products and this will result in losing market share and the brand’s reputation. An example of this is the blackberry and the Motorola mobile phones which are no longer in demand but yet the companies keep producing them.
In this situation, the product is not available or the companies have not developed the products to date. The product is capable of meeting only a few needs but meanwhile, there are many needs of the people that the marketer has not yet noticed or identified. When a new product is not able to tackle a new need.
A good example is smartphones. Studying the evolution of phones shows that there has been an upgrade over the years. That is, launching a new model of phones usually tackles a new need of the consumer. Such as social media, video calls, and online shopping.
This means that the demand for a product is decreasing over time. It depends on the product and this usually happens when there is a new invention in the field of that product, a decrease in the quality of that product, or bad brand marketing. Different products exist a new technology leads to a decline of the previous technologies.
This directly has to do with the technological fields even though food sectors do face this challenge as well.
This occurs when a company changes its marketing strategy repeatedly from time to time. The rate at which the sales of a product or service fluctuates is too high, sometimes extreme, and sometimes very low. It usually happens because of the seasonal needs of the products. Consumers only need or want at a specific period of time or season. They only buy these products during a specific season. It is seasonal (or time-based) in nature.
We can notice irregular demand for air conditioners and seasonal clothes. Approaching the heat period, the demand for light clothes and air conditioners rises, but the demand for these items drops during cold seasons.
A company experiences its golden period when it is having full demand. This is when the customers are loyal to the brand of that product, and the brand ensures that every consumer is pleased with their products. In this state, the supply is equal to the demand. We can call it full market coverage because the company has completely fulfilled most of the market demands.
Examples include smartphones like Tecno, the company sells its products whenever it launches a new model.
This happens in situations whereby the company has a limited manufacturing capacity. That is, the level of demand is less than the manufacturing capacity of the company which implies more demand but less supply. This situation affects the brand equity of a company and companies sometimes use de-marketing techniques to reduce the demand for their commodities so that there will be a balance between demand and supply. This happens occasionally in cases like cement industries where the demand is occasional but very high.
The company’s limited manufacturing power increases the chance of consumers switching to another brand thereby loss in market share and brand equity.
The marketer has to engage in fast and accurate decision-making because these challenges and their effects can destroy a company’s reputation.
Law of demand
The law of demand is fundamental in economic concepts. It expresses a functional relationship between demand and prices. This law is one of the best-known and important laws in economic theories. It states that other factors being equal if the price of a commodity rises, the quantity demanded will decline and if the price of a commodity falls, the quantity demanded will rise. According to this law, there is an inverse relationship between price and quantity demanded, other things remaining the same. The law assumes other factors affecting demand remain constant. If these factors change, then the inverse relationship between price and quantity demanded may not be applicable. The constant state of these factors is what qualifies this law to be in place.
We commonly state the law of demand as, “the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded. This is because of the diminishing marginal utility. In essence, demand responds to changes in consumer preference, income, and other related goods.
Economics basically studies how people use their limited resources to satisfy their unlimited wants. People place more priority on urgent wants than the less urgent wants in their economic behaviors.
Determinants of demand (Factors that affect/determine demand)
Several factors affect the level at which consumers are willing and able to buy goods or services.
In general, when the price of a product rises, consumers buy less of it. On the other hand, when the price of a product falls, consumers will buy more of it. This shows the law of demand and it is visible on the demand curve.
Disposable income is the income left after deducting personal tax and other expenses. It affects the willingness and the ability of a consumer to buy a commodity or a service. When an individual’s disposable income increases, his purchasing power will definitely increase. On the other hand, a consumer’s purchasing power decreases when his disposable income decreases.
Prices of complements
Complements have to do with the things or goods we use together with the primary goods. For example, when one buys bread and butter. Butter is the complement of bread, that is, we consume bread with butter. If a commodity’s complement increases, it can lead to a decrease in the sales of the primary product. Another typical example is when the purchase of motor vehicles decreases, it will affect the purchase of petrol.
Consumer taste and preference
The stronger the desire of a consumer to own or consume a particular commodity, the higher he is likely to buy it. This desire is the driving force of demand in this case. We also base our willingness to buy a commodity on its inherent quality alongside desire. Many factors can change our tastes and preferences. For example, if a public figure officially approves a product, some people will buy more of it.
Demand for a product tends to fall when a health study reveals that the product is harmful to one’s health.
Weather is another factor that affects one,s taste and preference. A typical example is a higher demand for umbrellas in the rainy season.
This factor influences a consumer’s purchase decisions. It can either encourage people to buy a product or even put them off and this happens, it is a quality creep.
A quality creep comes in place when improving a product’s quality over time becomes bad for sales. Here, the company improves the product’s quality and increases the price as well. When prices of these products become too high, the demand falls drastically. Consumers become unwilling to pay for such products and choose to find their substitute somewhere else.
When consumers expect the price of a commodity to rise, they will want to buy more of it at the moment. They buy less when they expect the price to remain constant. Also, one is likely to buy more products when he expects his personal income to rise very soon. expecting the level of the availability of a product as well as expecting its future price affects how the consumer is willing and able to buy that product. Also, if households are expecting insecurity, they will want to buy more foodstuffs and other items at home. This is because they are scared of the hunger and scarcity that may result thereafter.
The number of consumers in a market determine the number of commodity that consumers are willing and able to buy. When there are fewer consumers in the market, the demand will be less and when there are more consumers, demand will increase.
A demand schedule is a table that displays the quantity demanded of products and services at different prices. It commonly consists of two columns, the price column, and the quantity demanded column. These prices and the quantity demanded are usually listed in either ascending or descending order. These prices are usually based on market research.
In other words, the schedule represents the number of goods or services that consumers are willing and able to buy at a given price in a tabular form.
There are two types of demand schedules which are the individual and the market demand schedule.
Individual demand schedule
This shows the different quantities of goods an individual will buy at different prices at a specific period. Here is an example of an individual schedule;
An individual Demand Schedule (hypothetical) of commodity X
The above demand schedule shows the relationship between the various prices of commodity X and the quantity an individual Y is willing and able at each given price within a particular time interval. As the price of this commodity falls, the individual is willing to buy more of it.
Market demand schedule
It also refers to an aggregate, composite, or total demand schedule. In theory, we can combine the demand schedules of all the consumers of that commodity to form a market demand schedule. It shows the total quantities of a particular commodity that all the consumers of that commodity are willing to buy at different prices and at a specific period of time. The market demand schedule is usually more important because companies place more emphasis on the total demand for a particular commodity than the individual schedules. Here is an example of a market demand schedule;
|Price per unit
|Quantity demanded by individuals||Total quantity demanded|
A market demand schedule (hypothetical) of commodity X
In the above market demand schedule, we assumed that only four consumers of commodity X exist in the market. The table also shows the relationship between the different prices of commodity X and the total quantity that all the consumers (A, B, C, and D) will buy at each price at a specific time interval.
A demand curve is a graphical representation of the demand schedule. In other words, it displays the relationship between the price of goods or services and the quantity consumers are willing to buy at a specific period of time. We can represent both the individual and the market demand schedule in a graphical form.
The curve usually slopes downward from the left to the right thereby expressing the law of demand. This implies that price is the independent variable and quantity demanded the independent variable.
Looking at the image above, the Y-axis represents the price of each commodity per unit while the X-axis represents the quantity of that commodity demanded at each given price.
Exceptional (abnormal) demand curves
This curve does not slope downward from the left to the right, it slopes upward from the left to the right. This curve violates the law of demand which states that consumers are willing to buy more commodities at a lower price and vice-versa. In this case, consumers are willing to buy more commodities at a higher price. In other words, the higher the price, the higher the quantity demanded and the lower the price, the lower the quantity demanded. While a normal demand curve has a negative slope, an exceptional curve has a positive slope. A curve that has more than one slope also is abnormal. Another factor that leads to an abnormal demand curve is an extreme case of elasticity of demand. We will explain the elasticity of demand later.
There are reasons for this abnormality which includes;
- Articles of obstentation
- Fear of future changes in prices
- Rare commodities
- Giffen goods
- The elasticity of demand.
Articles of obstentation
These are commodities that consumers use to show off how wealthy they are. In this case, the higher the price, the more valuable people think these commodities are. They are willing to buy more of these commodities at higher prices. Examples of these commodities are gold, diamond, expensive dresses, etc.
Fear of future change in prices
In this case, people fear that prices will either rise or fall in the future. If people think that prices will rise in the future, they will buy more of the commodity now even if the prices are high. On the other hand, they will buy less of the commodities now because they feel that prices will go down in the near future even if the prices are presently low. This leads to an abnormal sloping curve.
Rare commodities have an abnormal demand, their curves usually have more than one slope. Consumers are willing to buy rare commodities at higher prices. When the prices are lower, these commodities have a normal demand.
Also known as inferior goods are goods that demand changes inversely with the changes in one’s income. When the income of consumers increases, the demand for these commodities decrease. These commodities most times have higher demand when the consumer’s income is low. In other words, it is usually the people with lower income that buy these commodities. A fall in the price of an inferior good may not necessarily lead to an increase in the quantity consumers are willing to buy.
Elasticity of demand
The elasticity of demand is the degree of responsiveness of demand to the changes in the factors affecting demand. It measures how sensitive demand is to a change in other variables. There are three major types of elasticity which include price elasticity, income elasticity, and cross elasticity. In the case of the relationship between the change in quantity demanded and price, the elasticity is price elasticity. The elasticity that has to do with the relationship between the quantity demanded and the change in consumers’ real income is known as the income elasticity of demand. Cross elasticity of demand is the degree of responsiveness of demand to the change in the prices of other commodities. When this elasticity is extreme, it leads to an abnormal slope in the demand curve.
Chyou is a published author who focuses on the field of international business. After an established career facilitating mergers and acquisitions for medium to large corporations, Chyou turned to writing to help students better understand international business concepts.