The Definition of Demand in Economics
What Is Demand?
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.
Formula for Demand
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:
- Q refers to the quantity demanded or the line on a graph.
- A represents all factors affecting the price of the product or service.
- The slope of the demand curve is represented by b.
- The price of a good is represented with P.
What Affects Demand?
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.
Market Demand Schedule
Qty demanded per day
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.
Examples of Demand
FFXIV runs out of digital copies
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.
Semiconductor prices set to hike in 2022
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.
Twitch implements region-specific pricing
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.
Fast-food chain pricing
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.
The 7 Types of Demand
A change in the cost of an item with multiple uses can result in a large change in demand across various usages. For example, if the cost of milk increases, demand for cheese, butter and cream may decrease. Likewise, a rise in demand for any of these products can lead to a shortage in supply for the other ones. Therefore, prices may rise.
This type of demand refers to the number of goods or services a buyer is willing to purchase at a given price and period. It can also be seen as the amount a person is willing to spend to get a product or service.
This is the demand for a quantity of a product or service determined based on consumers’ [high or low income level](https://www.moneygeek.com/living/resources/how-to-live-on-low-income/). Generally, demand tends to increase as consumers make more income.
Additionally, preferences and expectations may also change along with a change in income level. Income demand shows that consumers often make purchase decisions based on what they can afford.
Competitive demand is seen when consumers have alternative goods or services to choose from. For instance, consumers may prefer name-brand over store-brand items. However, demand for store-brand items will increase when name-brand items are out of stock.
Direct and Derived Demand
Direct demand, which is also known as autonomous demand, applies to final products, such as mobile phones, clothes and food. Meanwhile, derived demand is for products that come from other items' usage. When the demand for one product increases, the demand for production for an intermediate good will increase. For example, demand for cheese can cause an increase in demand for milk. In another example, the demand for steel depends on the demand for its uses, such as for producing cans and car parts.
MoneyGeek answers some frequently asked questions to help you better understand what demand is and how it impacts the economy.
Understanding demand will give you an idea of how prices move. MoneyGeek interviewed an industry leader and an academic to provide expert insight about this concept.
- What is the most important thing people should know about demand in economics?
- What is the best way for individuals to understand how demand impacts the economy?
Faculty School of Business, Hospitality and Global Trade (Eastfield)
Assistant Professor of Economics at Niagara University
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About Nathan Paulus
- InvenGlobal. "Final Fantasy 14 sells so well Square Enix ran out of digital copies." Accessed December 14, 2021.
- Msefer, K. & Whelan J. (MIT). "Economic Supply & Demand." Accessed December 13, 2021.
- Twitch. "Local Subscription Pricing Countries." Accessed December 14, 2021.
- University of Minnesota. "Principles of Macroeconomics: 3.3 Demand, Supply, and Equilibrium." Accessed December 13, 2021.
- University of Pittsburg. "Supply and Demand." Accessed December 13, 2021.
- University of Victoria. "Principles of Microeconomics: 3.3 Other Determinants of Demand." Accessed December 13, 2021.