ECONOMICS MICROECONOMICS

Demand
REVIEWED BY JIM CHAPPELOW | Updated Jun 25, 2019

What is Demand?
Demand is an economic principle referring to a consumer's desire to purchase goods and
services and willingness to pay a price for a specific good or service. Holding all other factors
constant, an increase in the price of a good or service will decrease the quantity demanded, and
vice versa. Market demand is the total quantity demanded across all consumers in a market for
a given good. Aggregate demand is the total demand for all goods and services in an economy.

KEY TAKEAWAYS
Demand refers to consumers' desire to purchase goods and services at given prices.
Demand can mean either market demand for a specific good or aggregate demand for
the total of all goods in an economy.
Demand, along with supply, determines the actual prices of goods and the volume of
goods that changes hands in a market.
What is Demand?

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Understanding Demand
Businesses often spend a considerable amount of money to determine the amount of demand
the public has for their products and services. How much of their goods will they actually be
able to sell at any given price? Incorrect estimations either result in money left on the table if
demand is underestimated or losses if demand is overestimated. Demand is what helps fuel the
economy, and without it, businesses would not produce anything.

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Demand is closely related to supply. While consumers try to pay the lowest prices they can for
 y pp y y p y p y
goods and services, suppliers try to maximize profits. If suppliers charge too much, the quantity

demanded drops and suppliers do not sell enough product to earn sufficient profits. If suppliers
charge too little, the quantity demanded increases but lower prices may not cover suppliers’
costs or allow for profits. Some factors affecting demand include the appeal of a good or
service, the availability of competing goods, the availability of financing, and the perceived
availability of a good or service.

Supply and Demand Curves

Supply and demand factors are unique for a given product or service. These factors are often
summed up in demand and supply profiles plotted as slopes on a graph. On such a graph, the
vertical axis denotes the price, while the horizontal axis denotes the quantity demanded or
supplied. A demand curve slopes downward, from left to right. As prices increase, consumers
demand less of a good or service. A supply curve slopes upward. As prices increase, suppliers
provide more of a good or service.

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Market Equilibrium
The point where supply and demand curves intersect represents the market clearing or market
equilibrium price. An increase in demand shifts the demand curve to the right. The curves
intersect at a higher price and consumers pay more for the product. Equilibrium prices typically
remain in a state of flux for most goods and services because factors affecting supply and
demand are always changing. Free, competitive markets tend to push prices toward market
equilibrium.

Market Demand vs. Aggregate Demand

The market for each good in an economy faces a different set of circumstances, which vary in
The market for each good in an economy faces a different set of circumstances, which vary in
type and degree. In macroeconomics, we can also look at aggregate demand in an economy.

Aggregate demand refers to the total demand by all consumers for all good and services in an
economy across all the markets for individual goods. Because aggregate includes all goods in an
economy, it is not sensitive to competition or substitution between different goods or changes
in consumer preferences between various goods in the same way that demand in individual
good markets can be.

Macroeconomic Policy and Demand

Fiscal and monetary authorities, such as the Federal Reserve, devote much of their
macroeconomic policy making toward managing aggregate demand. If the Fed wants to reduce
demand, it will raise prices by curtailing the growth of the supply of money and credit and
increasing interest rates. Conversely, the Fed can lower interest rates and increase the supply of
money in the system, therefore increasing demand. In this case, consumers and businesses
have more money to spend. But in certain cases, even the Fed can’t fuel demand. When
unemployment is on the rise, people may still not be able to afford to spend or take on cheaper
debt, even with low interest rates.

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Related Terms
Demand Theory Definition
Demand theory is a principle relating to the relationship between consumer demand for goods and
services and their prices. more

Law of Demand Definition

The law of demand states that quantity purchased varies inversely with price. In other words, the higher
the price, the lower the quantity demanded. more

Understanding Demand Schedules

In economics, a demand schedule is a table that shows the quantity demanded of a good at different
price levels. more

Aggregate Demand
Aggregate demand is the total amount of goods and services demanded in the economy at a given overall
price level at a given time. more
Disequilibrium Definition
Disequilibrium is a situation where internal and/or external forces prevent market equilibrium from being
reached or cause the market to fall out of balance. more

Learn about Law of Supply and Demand

The law of supply and demand explains the interaction between the supply of and demand for a
resource, and the effect on its price. more

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