In economics, the concept of demand is defined as the desire to own something

Demand is defined as 'that quantity of a good or service that would be bought at each and every price over a period of time'. This means that demand combines:

• The desire for a product
• A willingness to pay for it
• The ability to pay for it

This definition is important. You have to pass all three tests for it to be demand.

Look at these questions:

• Would you like to own a Ferrari? Probably, yes. Test 1 OK
• Would you be prepared to pay for one? Yes. Test 2 OK.
• Have you got the money? Probably not. Test 3 failed. Not counted as part of the demand for a Ferrari.

In other words to count as demand, the demand for something has to be what is known as effective demand. This means that the demand has to be backed by a willingness AND ability to pay (tests 2 and 3 above).

The law of demand

This assumes that consumers act in a rational manner, so that, other things being equal, the lower the price of a good, the greater the quantity demanded and the higher the price, the less the quantity demanded. Thus, in the diagram below (Figure 1), as the price falls from OP1 to OP2, the quantity demanded increases from OQ1 to OQ2. If price were to rise from OP2 to OP1, the quantity demanded would fall from OQ2 to OQ1.

Figure 1 Demand curve

It is quite important to distinguish between individual and market demand. The difference is hopefully clear. Individual demand is demand from an individual - like you or me! This will be affected by all the factors we identified in section 2.1. However, a whole market is made up of hundreds, thousands and sometimes millions of individuals and so to get market demand we need to add together all the individual demand curves. This will give us market demand.

To add the demand curves, we need to add the individual demand curves at each price. We can see this in Figure 2 below, where we assume that the market is made up of just two individuals - Posh and Becks.

Figure 2 Individual and market demand

Determinants of demand

The demand curve shows that demand depends on price. However, price is only one of the factors which influence demand, or is one of the determinants of demand, as economists call them. The full list of the determinants, including price, is:

If you understand how all these factors influence price, fine. If not, try to explain them yourself, then click as usual.

Shifts of the demand curve and movements along the demand curve

A change in price will produce a movement along an existing demand curve, but a change in one or more of the 'ceteris paribus' factors will shift the demand curve to a new position.

N.B. The demand curve is drawn on the assumption that only price has changed and everything else has remained the same. This is an important assumption to note. In reality many factors are changing at the same time, but if we are to analyse the factors causing a change in the market, we first need to isolate each of the factors. This assumption, known as 'ceteris paribus' or 'other things being equal' enables us to do this. See Unit 1 for more detail on this assumption.

Movements along the demand curve

When the price of the good, and only the price, changes there is a movement along the demand curve. A movement up a demand curve, to the left, is known as a contraction of demand. The price rises and quantity demanded falls. A movement down the demand curve is known as an expansion of demand. Both of these are shown in the diagrams below:

Figure 3 Expansion of demand

Figure 4 Contraction of demand

Shifts of the demand curve

These will occur as a result of any factor, apart from price, changing. A shift of a demand curve to the right will mean that more will be demanded at each and every price. A shift to the left will reduce the quantity demanded at each and every price. These possibilities are shown below.

Figure 5 Increase in demand

A shift to the right, an increase in demand at each and every price, will come from one or more of the following;

Demand in economics is the consumer's desire and ability to purchase a good or service. It's the underlying force that drives economic growth and expansion. Without demand, no business would ever bother producing anything.

Key Takeaways

• In economics, demand refers to how much of a good or service consumers are willing to buy at a given price.
• The law of demand states that as price increases, demand generally falls, and vice versa.
• The law of demand for a given product or service can be plotted on a chart as a demand curve.
• Demand can be elastic, meaning that demand changes by almost the exact same percentage as price changes, or it can be inelastic, meaning that demand remains fairly consistent regardless of price change.

Law of Demand

The law of demand governs the relationship between the quantity demanded and the price. This economic principle describes something you already intuitively know. If the price increases, people buy less. The reverse is also true. If the price drops, people buy more. 

But the price is not the only determining factor. The law of demand is only true if all other determinants don't change.

Note

In economics, this is called ceteris paribus. The law of demand formally states that, ceteris paribus, the quantity demanded for a good or service is inversely related to the price.

Determinants of Demand

There are five determinants of demand. The most important is the price of the good or service itself. The second is the price of related products, whether they are substitutes or complementary. 

Circumstances drive the next three determinants. The first is consumer income, or how much money they have to spend. The second is buyers' tastes or preferences in what they want to purchase. If they prefer electric vehicles to save on gasoline, then demand for Humvees will drop. The third is their expectations about whether the price will go up. If they are concerned about future inflation they will stock up now, thus driving current demand.

Demand Schedule

The demand schedule is a table or formula that tells you how many units of a good or service will be demanded at the various prices, ceteris paribus. Here is an example of a demand schedule:

Amount of Beef Bought at Each Price PointPrice/lb.Quantity (in lbs.)$3.4610.0$3.55  9.8$3.69  9.5$3.80  9.4$3.85  9.3$3.88  9.3$3.88  9.3$4.01  9.1$4.09  8.9$4.45  8.5

Demand Curve

If you were to plot out how many units you would buy at different prices, then you've created a demand curve. It graphically portrays the data that's been detailed in a demand schedule. 

Note

In the chart above, price is on the x-axis, and quantity bought is on the y-axis. At P2, the higher price, the consumers will only buy Q0, the lower quantity. If the price drops to P1, then the quantity bought will increase to Q1.

When the demand curve is relatively flat, then people will buy a lot more even if the price changes a little. When the demand curve is fairly steep, then the quantity demanded doesn't change much, even though the price does.

Elasticity of Demand

Demand elasticity means how much more, or less, demand changes when the price does. It's specifically measured as a ratio. It's the percentage change of the quantity demanded divided by the percentage change in price. 

There are three levels of demand elasticity:

1. Unit elastic is when demand changes by the exact same percentage as the price does.
2. Elastic is when demand changes by a greater percentage than the price does.
3. Inelastic is when demand changes by a smaller percentage than the price does.

Aggregate Demand

Aggregate demand, or market demand, is the demand from a group of people. The five determinants of individual demand govern it. There’s also a sixth: the number of buyers in the market.

Aggregate demand can be measured for a country. It's the quantity of the goods or services the country produces that the world's population demands. For that reason, it is composed of the same five components that make up gross domestic product:

1. Consumer spending
2. Business investment spending
3. Government spending
4. Exports
5. Imports, which are subtracted from aggregate demand and GDP

What Business Depends on Demand

All businesses try to understand and guide consumer demand. They seek to understand it with market research. They attempt to guide it with marketing, including public relations and advertising. 

Companies with a competitive advantage draw more demand. One advantage is to be the low-cost provider. For example, Costco provides bulk purchases with low prices per unit. Another is to be the most innovative. Apple charges higher prices because they are the first to the market with new products.

Note

If something is in high demand, businesses make more revenue. If they can't make more fast enough, the price goes up. If the price increase sustains over time, then you have inflation.

If demand drops, then businesses will lower prices. They hope that's enough to shift demand from their competitors and take more market share. If that doesn't work, they will innovate and create a better product. If demand still doesn't rebound, then companies will produce less and lay off workers. If that happens across the board, it can cause an economic contraction. That phase of the business cycle creates a recession.

Demand and Fiscal Policy

The federal government also tries to manage demand to prevent either inflation or recession. This ideal situation is called the Goldilocks economy.

Note

Policymakers use fiscal policy to boost demand in a recession or lower it during periods of inflation.

To boost demand, it either cuts taxes or purchases more goods and services. It can also give subsidies to businesses or benefits to individuals such as unemployment benefits. It increases demand by raising confidence and creating enough jobs. Research shows that the best ways to create those jobs is government spending on mass transit and education.

To lower demand, Congress can raise taxes, cut spending, or withdraw subsidies and benefits. This often angers beneficiaries and leads to the elected officials being booted out of office.

Demand and Monetary Policy

Most inflation fighting is left to the Federal Reserve and monetary policy. The Fed's most effective tool for reducing demand is by raising interest rates. This shrinks the money supply and reduces lending. With less to spend, consumers and businesses might want more, but they have less money to do it with.

The Fed also has powerful tools to boost demand. It lowers interest rates and increases the money supply. With more money to spend, businesses and consumers can buy more.

Even the Fed is limited in boosting demand. If unemployment remains high for a long period of time, then consumers don't have the money to get the basic needs met. No amount of low interest rates can help them, because they can't take advantage of low-cost loans. They need jobs to provide income and confidence in the future. That's when Congress must step in with expansionary fiscal policy.

Frequently Asked Questions (FAQs)

What is demand-side economics?

Demand-side economics is another way of referring to Keynesian economic theory. During the Great Depression, British economist John Maynard Keynes promoted the theory that demand is the driving force in an economy. He believed stimulating demand can improve struggling economies. This is the opposite of supply-side economics.

What is excess demand in economics?

Excess demand occurs when there isn't enough supply to meet demand at current prices. In other words, there is a shortage or scarcity of supply.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

1. Board of Governors of the Federal Reserve System. "How Does the Federal Reserve Affect Inflation and Employment?"

   What is the economic concept of 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.

   Which economic term is defined as the desire?

   Which economic term is defined as the desire to have a good or service and ability to pay for it? Demand.

   Does demand mean desire?

   “Demand means effective desire or want for a commodity, which is backed by the ability (i.e., money or purchasing power) and willingness to pay for it.” That is one should have the desire and capacity to buy a commodity and should be willing to pay its price to constitute effective demand for that commodity.

   What is the definition of demand in economics quizlet?

   demand. the desire, willingness, and ability to buy a good or service.