Loading the player...

What is 'Demand'

Demand is an economic principle referring to a consumer's desire 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 demand, and vice versa. Think of demand as your willingness to go out and buy a certain product. For example, market demand is the total of what everybody in the market wants.

BREAKING DOWN 'Demand'

Businesses often spend a considerable amount of money to determine the amount of demand the public has for their products and services. 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, demand drops and suppliers do not sell enough product to earn sufficient profits. If suppliers charge too little, demand 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.

Aggregate Demand vs. Individual Demand

Every consumer faces a different set of circumstances. The factors she faces vary in type and degree. The extent to which these factors affect market demand overall is different from the way they affect the demand of a particular individual. Aggregate demand refers to the overall or average demand of many market participants. Individual demand refers to the demand of a particular consumer. For example, a particular consumer’s demand for a product is strongly influenced by her personal income. However, her personal income does not significantly affect aggregate demand in a large economy.

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 profile 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 less 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.

The Federal Reserve and Demand

The Federal Reserve plays a key role in demand. If the Fed wants to reduce demand, it will raise prices by increasing interest rates. By doing so, the central bank reduces the country’s money supply, therefore reducing lending. That, in turn, leads to a drop in demand because people and businesses have less money to spend even though they may want more. 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. 

RELATED TERMS
  1. Demand Theory

    Demand theory is theory relating to the relationship between ...
  2. Aggregate Demand

    Aggregate demand is the total amount of goods and services demanded ...
  3. Demand Schedule

    In economics, the demand schedule is a table of the quantity ...
  4. Quantity Demanded

    A term used in economics to describe the total amount of goods ...
  5. Change In Supply

    A change in supply is a term used in economics to describe a ...
  6. Supply

    Supply is a fundamental economic concept that describes the total ...
Related Articles
  1. Investing

    Why You Can't Influence Gas Prices

    Neither big oil companies nor consumers are responsible for oil prices: it's basic economics.
  2. Insights

    4 Factors That Shape Market Trends

    Discover the four major factors that shape market trends: Government, international transactions, speculation/expectation, and supply and demand. These areas are all linked as expected future ...
  3. Insights

    The Dangers Of Deflation

    We look at what life would be like in a deflationary environment, and what you can do to protect your investments.
  4. Insights

    Do Deflationary Shocks Help Or Hurt The Economy?

    Find out how deflationary shocks can both benefit and hurt consumers and businesses.
  5. Trading

    Top Economic Factors That Depreciate The $US

    A variety of factors contribute to currency depreciation, including monetary policy, inflation, demand for currency, economic growth and export prices.
  6. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  7. Investing

    Why Housing Market Bubbles Pop

    Home price appreciation is not assured. Can you withstand the volatility in this market?
  8. Investing

    Effect of Fed Fund Rate Hikes on Oil

    Find out how oil markets might react to an interest rate hike by the Federal Reserve, and why consumers and bondholders could love a rising interest rate.
RELATED FAQS
  1. What's the difference between regular supply and demand and aggregate supply and ...

    Understand how businesses use supply and demand and aggregate supply and demand to forecast economic activity. Learn about ... Read Answer >>
  2. How does aggregate demand affect price level?

    Read about the relationship between aggregate demand and the general price level, and learn why it is difficult to determine ... Read Answer >>
  3. What are some examples of the law of demand in real markets?

    Find out how the price of a good or service affects the quantity demanded, and explore instances of consumption reflecting ... Read Answer >>
  4. Do the laws of supply and demand ever not apply to markets?

    Learn about the laws of supply and demand in a market-based economy, and how they can be distorted by regulation, monopolies ... Read Answer >>
  5. What Factors Cause Shifts in Aggregate Demand?

    Find out how aggregate demand is calculated in macroeconomic models. See what kinds of factors can cause the aggregate demand ... Read Answer >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center