What is Demand?

What is Demand?

What is Demand? Jonathan Poland

Demand refers to the quantity of a particular good, asset, or other value that market participants are willing and able to purchase at a given price level over a specific time period. It represents the desire and ability of consumers or investors to acquire a product or asset, and it is typically influenced by a variety of factors, such as the price of the item, the income of the potential buyers, the perceived value or utility of the item, and the availability of substitutes. The relationship between demand and price is often depicted in a demand curve, which shows how the quantity of a good or asset that consumers are willing to buy changes as the price changes.

Law of Demand

The law of demand is a fundamental principle of economics that states that, in general, there is an inverse relationship between the price of a good or service and the quantity of it that people are willing to buy. This means that as the price of a good or service increases, the quantity of it that consumers are willing to purchase tends to decrease, and as the price decreases, the quantity that consumers are willing to purchase tends to increase. This relationship is often depicted graphically in a demand curve, which shows the relationship between price and quantity demanded. The law of demand is an important concept in economics because it helps to explain and predict how changes in price can affect the quantity of a good or service that consumers are willing to buy.

Equilibrium

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity of it that consumers are willing and able to purchase at that price. It is typically plotted on a graph with the price on the y-axis and the quantity on the x-axis. The demand curve slopes downward, showing that as the price of a good or service increases, the quantity demanded decreases, and as the price decreases, the quantity demanded increases.

The supply curve is another graphical representation that shows the relationship between the price of a good or service and the quantity of it that producers are willing and able to offer for sale at that price. Like the demand curve, the supply curve is plotted on a graph with the price on the y-axis and the quantity on the x-axis. The supply curve slopes upward, indicating that as the price of a good or service increases, the quantity supplied increases, and as the price decreases, the quantity supplied decreases.

The intersection of the demand curve and the supply curve is known as the market equilibrium. At this point, the quantity of the good or service that consumers are willing to buy is equal to the quantity that producers are willing to sell, and the price of the good or service is determined by the intersection of the two curves. If the price falls below the equilibrium price, there will be excess demand, or a shortage, and the price will tend to rise. If the price rises above the equilibrium price, there will be excess supply, or a surplus, and the price will tend to fall. In an efficient market, prices and quantities are in equilibrium. As such, supply and demand curves can be used to model a wide range of economic conditions and theories.

Elasticity

The price elasticity of demand measures the percentage change in the demand for a good or service in response to a one percent change in price. This elasticity is almost always negative, meaning that demand decreases as price increases. When the elasticity is less than 1, demand is considered inelastic. This means that a small change in price will not significantly affect the quantity of the good or service demanded. On the other hand, when the elasticity is greater than 1, demand is considered elastic. In this case, a small change in price will lead to a significant change in the quantity of the good or service demanded. For firms, optimal revenue is achieved at a price where the elasticity is exactly 1. At this point, a price increase will not significantly affect demand and therefore will not reduce revenue. However, if the elasticity is greater than 1, price increases will result in a decrease in demand and therefore a decrease in revenue.

Learn More
Advantages vs Disadvantages of Technology Jonathan Poland

Advantages vs Disadvantages of Technology

Technology has brought many advantages to modern society, and has greatly improved the way we live and work. Some of…

Economic Advantage Jonathan Poland

Economic Advantage

A competitive advantage is a feature or characteristic that allows a company to perform better than its competitors in a…

Message Framing Jonathan Poland

Message Framing

Message framing is the way in which information and communications are constructed and presented. The way a message is framed…

Abstraction Jonathan Poland

Abstraction

Abstraction is a problem-solving technique that involves looking at a problem in general, rather than specific, terms. It involves using…

Performance Objectives Jonathan Poland

Performance Objectives

Performance objectives are goals that individuals set for themselves on a regular basis, such as quarterly, semi-annually, or annually. These…

Compliance Testing Jonathan Poland

Compliance Testing

Compliance testing is the process of evaluating an organization’s compliance with laws, regulations, and other standards to ensure that it…

Procurement Risk Jonathan Poland

Procurement Risk

Procurement risk is the risk of financial loss or other negative consequences that may arise from the process of procuring…

Recursive Self-improvement Jonathan Poland

Recursive Self-improvement

Recursive self-improvement refers to software that is able to write its own code and improve itself in a repeated cycle…

Foot in the Door Jonathan Poland

Foot in the Door

The foot-in-the-door technique is a persuasion strategy that involves asking for a small favor or agreement first, before making a…

Content Database

Search over 1,000 posts on topics across
business, finance, and capital markets.

Quantum Computing Jonathan Poland

Quantum Computing

Quantum computing is a fascinating and rapidly evolving field that seeks to harness the principles of quantum mechanics to perform…

Upselling Jonathan Poland

Upselling

Upselling is a sales technique that involves encouraging customers to purchase higher-priced, add-ons, or upgraded versions of products or services…

Price Promotion Strategy Jonathan Poland

Price Promotion Strategy

A price promotion is a marketing strategy that involves temporarily lowering the price of a product or service in order…

Factor Market Jonathan Poland

Factor Market

The factor market, also known as the input market, is the market where the factors of production are bought and…

Examples of Capital Intensive Jonathan Poland

Examples of Capital Intensive

An industry, organization, or activity that is capital intensive requires a large amount of fixed capital, such as buildings and…

Program Controls Jonathan Poland

Program Controls

Program controls are the mechanisms that enable a computer program to execute a set of instructions in a specific order…

What is a Turnaround Strategy? Jonathan Poland

What is a Turnaround Strategy?

A turnaround strategy is a business plan that is implemented when a company is facing financial difficulties or declining performance.…

Austrian Economics 101 Jonathan Poland

Austrian Economics 101

Austrian economics is a school of economic thought that originated in Austria in the late 19th century with Carl Menger,…

Concentration Risk Jonathan Poland

Concentration Risk

Concentration risk refers to the risk that a specific investment or group of investments could pose a threat to the…