What is Demand?
Definition: Demand is a key pillar in commerce and without it, there would be no business. It is defined in economics as the quantity or amount of products or services that consumers are willing to pay a specific amount of money for.
Think about it this way. One cannot sell a product if there is not someone out there that is willing to purchase what they are selling. So essentially, one can make a product and look for someone to buy. However, it makes more sense to make a product based on an already existing need in the market to boost the chances of success. Demand is what happens when you pop into a convenience store looking for a specific product. That means you contribute to the demand for a specific product.
The Dualism Between Demand and Supply
Demand works hand in hand with supply. They are like Ying and Yang because a change in the variables of one affects the other. There has to be the supply of a particular product for there to be sustainable demand and similarly, the demand for a product affects the supply. This is the core concept behind the law of supply and demand.
The Law Supply and Demand
According to the laws of supply and demand, there is an increase in the quantity of products in the market when prices increase. The inverse is also true, meaning that a price drop in the market also leads to a decline in the quantity of products supplied in the market. This happens because sellers or producers want to maintain good profit margins. They want to sell their products at a high price so they can increase their profit margins and so they control the supply. Similarly, they shift gears and supply less of the products when the market prices are low.
Note that the market prices influence the buyers’ spending habits and this has a noteworthy impact on the demand. The demand for the product goes high when the prices are low and there is low demand when the prices are high. This means that the law of supply and demand paints a picture of the push and pull forces that exist in the market and these forces are shaped by both the buyers and sellers.
The laws of supply and demand explain how an economy works in the simplest form. Supply and demand are therefore important factors that manufacturers consider when pricing their products. The goal is to strike the right price that will allow the company to optimize its selling potential at specific market conditions. The laws are summed up into four main components that producers use as a guide.
- An increase in demand without a change in supply results in an increase in quantity and equilibrium price.
- A decrease in demand while supply remains constant causes lower quantity in the market and a lower equilibrium price.
- An increase in supply while demand remains constant causes a higher quantity in the market and higher equilibrium price.
- A decrease in supply with continual demand leads to lower quantity and higher price in the market.
Factors that Influence Supply and Demand
The above laws of supply and demand are usually tested by various factors in the market that cause changes in variables. For example, price fluctuations tend to cause a significant impact in both demand and supply since it influences the producer’s decision the quantity to supply and also the consumer’s purchasing decision.
Another key factor that influences supply and demand is income. This is because the level of income determines the purchasing power. Consumers with higher incomes have more money at their disposal which they can use to purchase more products. Access to credit is also another factor that has an impact on purchasing power in an economy. Supply and demand may also be swayed by seasons and trends in the market. Some products sell more during the holidays and so producers can structure the availability of their products based on such data. Consumers tend to spend more during the holidays.