What is demand (simple definition)
Demand is the quantity of a good or service that buyers are both willing to purchase and able to pay for at a given price and time. It combines two ideas: desire to buy and the financial ability to pay. Demand usually varies with price: when price falls, the quantity demanded tends to rise; when price rises, quantity demanded tends to fall.
Core concepts and definitions
– Quantity demanded: the amount of a good consumers will buy at a particular price.
– Demand curve: a chart showing how quantity demanded changes across different prices. Price is plotted on the vertical axis and quantity on the horizontal axis; the curve usually slopes downward from left to right.
– Demand schedule: a table listing quantities demanded at a set of prices; it is the data behind a demand curve.
– Law of demand: the principle that, holding other factors constant, higher prices lead to lower quantity demanded and lower prices lead to higher quantity demanded.
– Price elasticity of demand: a measure of how sensitive quantity demanded is to a change in price. Numerically, elasticity = (% change in quantity demanded) / (% change in price). If the absolute value is greater than 1, demand is elastic; if less than 1, demand is inelastic.
– Market demand vs. aggregate demand: market demand is the total demand for a specific good across all buyers. Aggregate demand is the total spending on all goods and services across the whole economy (used in macroeconomics).
What determines demand (major drivers)
Common factors that shift the demand curve (i.e., change demand at every price) include:
– Consumer income (higher income usually raises demand for normal goods).
– Tastes and preferences (more attractive products increase demand).
– Prices of related goods (substitutes and complements).
– Expectations about future prices or incomes.
– Number of buyers in the market.
– Credit and financing availability (easier credit can increase demand).
Changes in these factors move the entire demand curve left (decrease) or right (increase). The law of demand refers only to movements along a demand curve caused by price changes, not to these other causes.
Why demand matters
For businesses: estimating demand helps set prices, size production, and avoid stockouts or excess inventory. For policymakers: aggregate demand guides monetary and fiscal policy decisions—central banks, for example, adjust interest rates to cool or stimulate overall demand.
Short checklist: how to analyze demand for a product
1. Collect historical sales and price data.
2. Build a demand schedule (price vs. quantity).
3. Plot the demand curve to visualize slope and intercepts.
4. Estimate price elasticity of demand (see worked example below).
5. Test effects of non-price factors (income, substitutes, seasonality).
6. Run small pricing experiments if feasible (A/B or regional tests).
7. Use findings to set pricing, inventory, and marketing strategy.
8. Reassess regularly as market conditions change.
Worked numeric example (demand, supply and elasticity)
Assume
Assume the following linear demand and supply functions:
– Demand: Qd = 100 − 2P
– Supply: Qs = 20 + 3P
Where Q is quantity (units) and P is price (currency units). These are simple, common functional forms used for demonstration.
Step 1 — Find the competitive equilibrium
Set Qd = Qs:
100 − 2P = 20 + 3P
Rearrange: 100 − 20 = 3P + 2P → 80 = 5P → P* = 80/5 = 16
Plug back to get quantity: Q* = 100 − 2(16) = 100 − 32 = 68
Equilibrium: Price = 16, Quantity = 68.
Step 2 — Compute price elasticity of demand at the equilibrium
Price elasticity of demand (ε) measures the percent change in quantity demanded for a 1% change in price. For a linear demand curve, the point (Marshallian) elasticity is:
ε = (dQ/dP) × (P/Q)
Here dQ/dP = −2, so at the equilibrium:
ε = −2 × (16 / 68) = −32/68 ≈ −0.4706
Interpretation: Demand is inelastic at the equilibrium (absolute value < 1). A 1% increase in price reduces quantity demanded by ≈0.47%.
Step 3 — Effects of a per‑unit tax (incidence example)
Introduce a per‑unit tax t = 5 collected from producers. With tax, producers receive Pp = Pc − t, where Pc is price paid by consumers. The supply curve expressed in terms of Pc becomes:
Qs = 20 + 3(Pc − t) = 20 + 3(Pc − 5)
Set demand = new supply:
100 − 2Pc = 20 + 3(Pc − 5)
100 − 2Pc = 20 + 3Pc − 15 → 100 − 2Pc = 5 + 3Pc → 95 = 5Pc → Pc = 19
Quantity with tax: Qtax = 100 − 2(19) = 62
Producer price: Pp = Pc − 5 = 14
Tax incidence (who bears the tax):
– Consumers: price rose from 16 to 19 → consumers pay +3
– Producers: price received fell from 16 to 14 → producers receive −2
Total tax per unit = 5 = 3 + 2, shared between consumers and producers.
Step 4 — Relate incidence to elasticities
Compute supply elasticity at the taxed outcome:
Supply elasticity (εs) = (dQs/dP) × (Pp/Q