What Is Demand?
Demand is an economic principle that refers to the willingness and ability of consumers to make discretionary purchases at a given price.
All else being equal, demand will decrease as price increases and vice versa, but there are many factors which affect demand.
Demand is closely related to supply which is the amount of goods available to be sold in an economic market.
What Is Supply?
Supply is another fundamental economic concept that refers to the overall quantity of goods and services available to consumers in an economy.
Supply can relate to the availability of goods at a specific price or total availability.
Supply vs Demand
The relationship between supply and demand can be realized using a supply and demand curve graph.
In this graph, price is mapped to the vertical axis, and quantity is mapped to the horizontal axis.
Demand is represented by a downward trending slope, and supply by an upward slope.
The first graph below shows how, supply being constant, an increase in demand (shown by an outward shift in the slope) leads to both an increase in quantity and price.
Inversely, a decrease in overall demand would lead to a decrease in both quantity and price.
The second graph shows how, demand being constant, an increase in supply leads to an increase in quantity but a decrease in overall price.
Point of Equilibrium
When the supply and demand curves intersect they are said to be in equilibrium.
On the graphs, this is where the dotted lines meet.
This point of equilibrium is what sets an established price for a good or service based on the overall level of supply and demand in the market.
Changes in either demand or supply can shift the point of equilibrium around, and thus alter the price of goods.
The primary factor that influences the level of demand for a good is price.
When a change in price has a significant impact on consumer demand, it is said to be price elastic.
For example, if the price of Coca-Cola were to increase significantly, many customers would likely start to choose a cheaper drink, and demand for Coke would decrease.
Price inelasticity is when a change in price has little or no impact on the overall demand.
For example, if the price of insulin were to increase, it is unlikely that there would be any change in demand, since insulin is a medicine that many people require to live, regardless of price.
Other Factors That Affect Demand
Beyond changes in price, there are lots of other factors that can affect demand.
The tastes and preferences of consumers, for example, can either increase or decrease demand.
Say that a new study comes out that says hamburgers are actually a far healthier food than previously thought.
It stands to reason that the demand for hamburgers would go up.
Increased overall income can also increase demand, as more spending money generally increases overall economic spending.
Demand can also increase if the number of consumers in the market increases.
Typically the demand for luxury goods, such as fancy foods, expensive cars, and so on, are more elastic and sensitive to price changes than non-luxury goods like groceries, medicine, rent, or other essentials.
What Is Demand FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.