The Definition of Demand in Economics

Demand refers to the consumer’s desire and willingness to buy a product or service at a given period or over time. Consumers must also have the ability to pay for something they want or need as determined by their disposable income budget. Therefore, demand is a force that affects economic growth and market expansion.

There are two factors involved in economic demand. First, it is based on the willingness of consumers to buy a commodity. It can be described as consumer preference and taste. Second, demand is also determined by the consumers’ ability to buy the product or service at a certain price. That means the buyer must have sufficient funds to pay for the purchase.

Demand, along with supply in economics, helps drive the economy and may affect prices.

Calculating the number of goods or services consumers are willing to buy at every given market price will determine market demand.

It can be described in the following mathematical expression:

There are various factors that drive demand, including cost, income, preference and more. These factors also affect consumers’ purchase decisions. Here are the fundamental determinants of demand:

• Cost of a good or service. The law of demand states that, with all factors remaining constant, the number of products or services consumers will buy is based on the price. That means people will purchase less when the price of a certain product increases. On the other hand, consumers will buy more when the price decreases.
• Income of buyers. Income gives consumers buying power. A decrease in income leads to lower demand. However, an increase in income does not always lead to buying more of a particular commodity. Additionally, satisfaction decreases as a person consumes more of a single product or service, as stated by the Law of Diminishing Marginal Utility.
• Cost of related goods or services. There are two types of related costs to consider. First, the cost of a complementary good or service purchased along with a particular item. For example, pancakes and maple syrup or chips and dip. When the price of complementary goods falls, the demand increases. Second, the cost of substitutes bought instead of a product. For example, substituting Coke for Pepsi or choosing a store-brand item over a name-brand. In this case, an increase in the price of substitutes increases demand for the good or service.
• Tastes or preferences. Changes to consumer desires will affect demand. For instance, if consumer preference is in favor of a certain product, the quantity demanded increases. Likewise, if their taste goes against a good or service, the amount demanded falls.
• Expectations. People’s subjective evaluations of value for a certain good or service can affect their purchase decisions. Expectations often refer to whether a buyer thinks the prices of a product will rise or fall in the future. For instance, present demand for a certain product tends to increase if consumers expect it to be more expensive in the future.

Demand schedule refers to a table showing the relationship between pricing and the quantity of demand. It shows different market prices and the quantities demanded at each price. The law of demand serves as the guide for the table or ceteris paribus, which means all other things remain unchanged.

Analysts and economists can plot the demand curve using the data in the demand schedule table. Below is an example of a demand schedule.

Demand curve refers to the graphical representation of the relationship of cost and quantity demanded. It is based on the demand schedule data and represented as a curve on a graph. The Y-axis represents the prices while the X-axis represents the quantity demanded. It also shows the application of the law of demand — where higher prices lead to lower demand.

In understanding markets, demand curves are often combined with supply curves. In doing so, you can determine the equilibrium price and equilibrium quantity. You will find the price point where supply and demand intersect.

Below is an example of how to find the demand curve using the example demand schedule in the above section.

Concept: Relationship of Demand and Supply; Taste and Preference

Square Enix decided to release Final Fantasy 14 as a subscription-based massively multiplayer online role-playing game (MMORPG). Digital copies were sold through the issuance of an access key.

Due to an influx of new players, the high demand made it hard for the company’s servers to keep up. According to speculations, the company decided to briefly pause sales due to overwhelming server demand.

While the increase in the game’s popularity can be seen as a result of influencers, it has been gaining traction consistently due to the cooperative, friendly and engaged community the game has.

Concept: Composite demand

Since the last quarter of 2020, the price of semiconductors have been rising. Some foundries and factories chose to increase their chip prices. These are due to an increase in the cost of materials and logistics.

Additionally, device makers are competing to get adequate supplies since the chip shortage began. They also have to meet the higher demand due to increasing usage of electronics.

Semiconductors are by-and-large the lifeblood of modern electronics and are used in items such as mobile phones, computer parts and automobiles.

Concept: Price demand

Twitch, a popular online streaming platform, allows users to financially support creators via subscriptions. It has gained popularity throughout the years and has expanded its reach beyond video gamers.

Recently, the platform decided to implement region-specific pricing to match the income and willingness to spend of viewers living in less developed regions. This move aims to help expand the platform’s global subscriber base.

Aside from Twitch, other companies also practice region-specific pricing. Examples of these are Netflix and Spotify.

Concept: Competitive demand

Despite having a favorite fast-food chain, consumers can opt to go to a competitor if their first choice is not available. Different fast-food chains compete for the same target market and demand.

MoneyGeek answers some frequently asked questions to help you better understand what demand is and how it impacts the economy.