What is Demand?

Demand is an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease the quantity demanded, and vice versa. Market demand is the total quantity demanded across all consumers in a market for a given good. Aggregate demand is the total demand for all goods and services in an economy.

Key Takeaways

  • Demand refers to consumers' desire to purchase goods and services at given prices.
  • Demand can mean either market demand for a specific good or aggregate demand for the total of all goods in an economy.
  • Demand, along with supply, determines the actual prices of goods and the volume of goods that changes hands in a market.
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What is Demand?

Understanding Demand

Businesses often spend a considerable amount of money to determine the amount of demand the public has for their products and services. How much of their goods will they actually be able to sell at any given price? Incorrect estimations either result in money left on the table if demand is underestimated or losses if demand is overestimated. Demand is what helps fuel the economy, and without it, businesses would not produce anything.

Demand is closely related to supply. While consumers try to pay the lowest prices they can for goods and services, suppliers try to maximize profits. If suppliers charge too much, the quantity demanded drops and suppliers do not sell enough product to earn sufficient profits. If suppliers charge too little, the quantity demanded increases but lower prices may not cover suppliers’ costs or allow for profits. Some factors affecting demand include the appeal of a good or service, the availability of competing goods, the availability of financing, and the perceived availability of a good or service.

Supply and Demand Curves

Supply and demand factors are unique for a given product or service. These factors are often summed up in demand and supply profiles plotted as slopes on a graph. On such a graph, the vertical axis denotes the price, while the horizontal axis denotes the quantity demanded or supplied. A demand curve slopes downward, from left to right. As prices increase, consumers demand less of a good or service. A supply curve slopes upward. As prices increase, suppliers provide more of a good or service.

Market Equilibrium

The point where supply and demand curves intersect represents the market clearing or market equilibrium price. An increase in demand shifts the demand curve to the right. The curves intersect at a higher price and consumers pay more for the product. Equilibrium prices typically remain in a state of flux for most goods and services because factors affecting supply and demand are always changing. Free, competitive markets tend to push prices toward market equilibrium.

Market Demand vs. Aggregate Demand

The market for each good in an economy faces a different set of circumstances, which vary in type and degree. In macroeconomics, we can also look at aggregate demand in an economy. Aggregate demand refers to the total demand by all consumers for all good and services in an economy across all the markets for individual goods. Because aggregate includes all goods in an economy, it is not sensitive to competition or substitution between different goods or changes in consumer preferences between various goods in the same way that demand in individual good markets can be.

Macroeconomic Policy and Demand

Fiscal and monetary authorities, such as the Federal Reserve, devote much of their macroeconomic policy making toward managing aggregate demand. If the Fed wants to reduce demand, it will raise prices by curtailing the growth of the supply of money and credit and increasing interest rates. Conversely, the Fed can lower interest rates and increase the supply of money in the system, therefore increasing demand. In this case, consumers and businesses have more money to spend. But in certain cases, even the Fed can’t fuel demand. When unemployment is on the rise, people may still not be able to afford to spend or take on cheaper debt, even with low interest rates.