Demand
What Is Demand?
Demand –often referred to as the law of demand– is an economic principle that refers to the way consumers react to changes in the prices of goods and services.
Variables that determine demand include what the average consumer can afford at a given price, as well as consumer preferences and tastes. A change in these variables can affect both the demand and supply of a product or service.
If all other factors remain the same, the theory is that an increase in the price of a product or service will lower the demand for it. In other words, people are less willing to buy something when it becomes more expensive. And, people are more inclined to purchase something when its price goes down.
What Are the Different Types of Demands?
Here are some terms and phrases associated with the different types of demand.
What is derived demand?
Derived demand is the consumer desire or need for a product or service that is related to the demand for another (often related) good or service. An example would be an increased demand for cases or other cellphone accessories after the release of a new cellphone model. Derived demand can impact the derived product's price and availability.
What is aggregate demand?
Aggregate demand is the overall demand for all goods and services in an economy. This type of demand is measured as the full monetary amount exchanged for those goods and services at a specific price level and point in time. Therefore, aggregate demand equals the gross domestic product (GDP) of an economy.
The five components of aggregate demand are:
- Consumer spending
- Business spending
- Government spending
- Exports
- Imports
Other Concepts Related to Demand
There are many other terms related to demand and theories around it. Here are some quick summaries:
Demand theory: The principle that the higher the price of a product or service, the lower the demand for it. According to this theory, other market factors must remain the same.
Demand elasticity or inelasticity: These terms refer to the fact that some goods and services are more sensitive to changes in demand than others. Inelastic goods have few substitutes and are considered necessities by consumers.
(Examples of inelastic goods are tap water, gasoline, medical services, and prescription drugs. Elastic goods include furniture, vehicles, cruises, and luxury items.)
Demand shock: A demand shock is an unexpected temporary event that leads to a change in the demand for goods or services. A demand shock can be either positive or negative to the economy. The 2020 shutdowns due to the pandemic are a clear example of a negative demand shock. Conversely, the government stimulus checks are an example of a positive demand shock.
Demand curve: A demand curve is a visual way to chart the law of demand. The relationship between quantity and price will follow the demand curve as long as the determinants of demand remain the same.
What determines demand?
Many different factors can influence demand for a product or service. The primary determinates of demand are:
- The perceived value of the product or service
- Consumer income
- Availability of alternatives
- Consumer preferences
- Market size
- Price of related goods or services
- Buyer expectations (especially about future prices)
Consumer demand drives production and supports a healthy economy. In return, a thriving economy relies on the willingness of consumers to purchase goods and services and the ability of businesses and individuals to supply them.
Helpful Resources:
Business Jargons - What are the types of Demand?
Iowa State University - Elasticity of Demand
The Balance - Demand Curve: Definition, Types, and How It Works
What Is Demand?
Demand –often referred to as the law of demand– is an economic principle that refers to the way consumers react to changes in the prices of goods and services.
Variables that determine demand include what the average consumer can afford at a given price, as well as consumer preferences and tastes. A change in these variables can affect both the demand and supply of a product or service.
If all other factors remain the same, the theory is that an increase in the price of a product or service will lower the demand for it. In other words, people are less willing to buy something when it becomes more expensive. And, people are more inclined to purchase something when its price goes down.
What Are the Different Types of Demands?
Here are some terms and phrases associated with the different types of demand.
What is derived demand?
Derived demand is the consumer desire or need for a product or service that is related to the demand for another (often related) good or service. An example would be an increased demand for cases or other cellphone accessories after the release of a new cellphone model. Derived demand can impact the derived product's price and availability.
What is aggregate demand?
Aggregate demand is the overall demand for all goods and services in an economy. This type of demand is measured as the full monetary amount exchanged for those goods and services at a specific price level and point in time. Therefore, aggregate demand equals the gross domestic product (GDP) of an economy.
The five components of aggregate demand are:
- Consumer spending
- Business spending
- Government spending
- Exports
- Imports
Other Concepts Related to Demand
There are many other terms related to demand and theories around it. Here are some quick summaries:
Demand theory: The principle that the higher the price of a product or service, the lower the demand for it. According to this theory, other market factors must remain the same.
Demand elasticity or inelasticity: These terms refer to the fact that some goods and services are more sensitive to changes in demand than others. Inelastic goods have few substitutes and are considered necessities by consumers.
(Examples of inelastic goods are tap water, gasoline, medical services, and prescription drugs. Elastic goods include furniture, vehicles, cruises, and luxury items.)
Demand shock: A demand shock is an unexpected temporary event that leads to a change in the demand for goods or services. A demand shock can be either positive or negative to the economy. The 2020 shutdowns due to the pandemic are a clear example of a negative demand shock. Conversely, the government stimulus checks are an example of a positive demand shock.
Demand curve: A demand curve is a visual way to chart the law of demand. The relationship between quantity and price will follow the demand curve as long as the determinants of demand remain the same.
What determines demand?
Many different factors can influence demand for a product or service. The primary determinates of demand are:
- The perceived value of the product or service
- Consumer income
- Availability of alternatives
- Consumer preferences
- Market size
- Price of related goods or services
- Buyer expectations (especially about future prices)
Consumer demand drives production and supports a healthy economy. In return, a thriving economy relies on the willingness of consumers to purchase goods and services and the ability of businesses and individuals to supply them.
Helpful Resources:
Business Jargons - What are the types of Demand?
Iowa State University - Elasticity of Demand
The Balance - Demand Curve: Definition, Types, and How It Works