What Is Demand
The concept of demand reflects the desire and opportunity to purchase goods. If one of these characteristics is missing, there is no demand. For example, a certain consumer has a desire to buy a car for $15,000, but he does not have such an amount. In this case, there is a desire, but there is no possibility, so there is no demand for a car from this consumer. The law of demand is limited in the following cases:
- in the case of excessive demand caused by the expectation of price increases;
- for some rare and expensive goods, the purchase of which is a means of accumulation (gold, silver, precious stones, antiques, etc.);
- when switching demand for newer and better products (for example, from typewriters to home computers; lower prices for typewriters will not lead to an increase in demand for them).
Demand shows the amount of product that consumers are ready and able to buy at each specific price from a number of possible options over a certain period of time. It reflects a number of alternative opportunities that can be presented in the form of a table or graph, showing the number of products for which demand will be presented at different prices.
The demand curve is a curve showing how much of economic good the buyers are willing to purchase at different prices at a given time. Demand function is a function that determines demand depending on various factors influencing it.
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It is necessary to distinguish between the concepts of demand and its value. The demand value is the amount of goods or services that a buyer is ready to purchase at a specific price during a certain period. The demand for goods is the consumer’s willingness to purchase goods at all kinds of prices, that is, the functional dependence of the demand on prices.
When considering the demand curve, other conditions affecting the value, except for the price, are assumed to be unchanged. The demand changes because of the price.
As a rule, the higher the price, the lower the demand, and vice versa. In some cases, there is a so-called paradoxical demand - an increase in demand with increasing prices. This is observed in cases of wasteful consumption, the purpose of which is to demonstrate wealth (expensive cars, fashion clothes, jewelry). Goods whose demand behaves in this way are called Veblen goods. Another exception relates to the opposite end of the spectrum: consumers in very poor countries may start to buy less low-quality products, such as rice, if their prices decline. This is due to the fact that consumers will be able to spend the remaining money (after a cheaper purchase) on the other, more diverse products. Such goods are called “Giffen goods” for the reason that the influential economist Alfred Marshall attributed, perhaps erroneously, the honor of discovering this exception to Sir Robert Giffen. Demand is also characterized by elasticity. If with an increase or decrease in price the goods are bought in almost the same quantities, then such demand is called inelastic. If the change in price leads to a sharp change in the value of demand, then it is elastic.
As a rule, the demand for basic necessities is inelastic, whereas the demand for other goods is more elastic. Demand for luxury goods or status attributes is often paradoxical.
Non-Price Demand Factors
There are also non-price factors that shift the demand curve and help to get a better understanding of what is demand:
- Incomes of consumers. With increasing consumer income, demand usually increases. However, it changes the structure of consumption, and therefore some products do not follow the general pattern. Thus, the demand for the cheapest, low-quality goods (for example, second-hand clothes, cheap leather substitute shoes, low-grade food products), on the contrary, decreases, because people who were forced to buy these goods are now able to purchase better products. Goods whose demand grows with an increase in cash income are called normal goods, or goods of the highest category. Goods whose demand changes in the opposite direction are called lower category goods. In this model, goods from the category of normal goods are considered.
- Tastes, fashion. Changing consumer tastes under the influence of fashion, advertising, and other factors cause a corresponding change in demand for goods. With an increase in consumer preferences, demand for goods increases and vice versa. This factor has the greatest impact on products that are prone to fashion (clothing, shoes) and least on durable goods.
- The number of consumers. An increase in the number of buyers in the market causes an increase in demand and vice versa. The number of consumers may vary due to different factors, for example, a change in population due to natural growth or migration. Under the conditions of international trade, the number of consumers grows when promoting goods on the markets of other countries. On the contrary, a decrease in export and import quotas or the introduction of an economic embargo reduces the number of consumers in the world market. Although the number of customers significantly affects the demand, this is true only for products that are equally in demand everywhere. For example, the entry of domestic cars into the US market, although it will significantly increase the number of potential buyers, will not lead to a significant increase in demand, since for American buyers these cars will seem insufficient quality. The same situation develops with any goods demanded only within the framework of any of the cultures, such as national clothes or products of national cuisine.
- Substitute prices. Almost all products in the market have substitute products that perform the same or almost the same functions, such as different brands of cars. Substitute goods divide the market of this type of goods among themselves. In the event that the price of one of the interchangeable goods rises, some of its customers, for reasons of economy, will switch to another, cheaper product. On the contrary, if the price drops, it will attract buyers who use substitute goods. Thus, an increase in the price of substitute goods causes an increase in demand for a replaced product and vice versa. This factor is most important for those products that are most similar to their substitutes, for example, mineral water. If the product has some unique properties in which it is difficult to find a full-fledged substitute, the value of this factor decreases.
If non-price factors lead to an increase in demand, the curve on the chart shifts to the right and up. If non-price factors lead to a reduction in demand, the curve shifts to the left and down.
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