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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. 

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