# Demand: How It Works Plus Economic Determinants and the Demand Curve

> **Definition**
>
> Demand is a consumer's desire to purchase goods and services and willingness to pay a specific price at a specific time.

## What Is Demand?

Demand is a consumer's willingness to buy something, and demand is generally related to the price that consumer would have to pay. Generally speaking, demand increases when prices drop and decreases when prices rise. Market demand is the total quantity demanded by all consumers in a market for a given good, and aggregate demand is the total demand for all goods and services in an economy.

### Key Takeaways

*   The law of demand concerns consumers' changing desire to purchase goods and services at given prices.
*   Demand can refer to either market demand for a specific good or aggregate demand for the total of all goods in an economy.
*   Demand and supply determine the actual prices of goods and the volume that changes hands in a market.
*   Businesses study demand to price products to meet demand and generate profits.
*   The demand curve demonstrates visually how the decreasing price for a product increases the quantity purchased.

![Demand](https://www.investopedia.com/thmb/q39H40rpefb6zCVhqmdp9XfuLWM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Demand_Final_4197913-237d38b10e334b539ee7fe1edc23558d.jpg)

*Demand is not static and can be influenced by factors such as price and consumer income and tastes. — Investopedia / Paige McLaughlin*

## Understanding Demand

As noted above, demand refers to how many goods and services a consumer purchases at a certain price. Shoppers tend to [buy more products and services when prices are low](https://www.investopedia.com/ask/answers/041615/what-are-some-examples-law-demand-real-markets.asp). When prices rise, shoppers buy fewer or perhaps none at all.

Businesses spend a lot of money to determine the demand for their products and services. Incorrect estimates can result in lost sales from willing buyers if demand is underestimated or losses from leftover [inventory](https://www.investopedia.com/terms/i/inventory.asp) if demand is overestimated. Demand helps fuel profits and the economy. That's why it's an important concept.

Demand is closely related to the concept of [supply](https://www.investopedia.com/terms/s/supply.asp). While consumers try to pay the lowest prices they can for goods and services, suppliers try to maximize profits. Demand drops if suppliers charge too much for a product and suppliers may not sell enough 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](https://www.investopedia.com/terms/r/ratchet-effect.asp) of a good or service.

> **Fast Fact**
>
> Demand elasticity relates to how sensitive the demand for a product is as its price changes. For example, if there's a big change in demand due to a small price change, demand elasticity is high. Shoppers may choose attractive substitute products if the price for their usual product has increased somewhat. That could indicate high demand elasticity and is useful for businesses to know.

## What Determines Demand?

Five main factors drive demand:

*   **Product/service price:** When prices are low, demand usually increases.
*   **Buyer's income:** Demand tends to increase when people earn more and have more money to spend.
*   **Prices of [substitute](https://www.investopedia.com/terms/s/substitute.asp) goods:** Substitute goods can satisfy demand for a similar product. When the price for substitutes rises, demand for the original product may increase.
*   **Consumer preferences:** Demand generally increases when people develop a preference for that product.
*   **Consumer expectations for a price change:** Consumer demand will likely increase if they expect prices to rise in the future.

As these factors change, so can the demand for a product or service. They change all the time, so demand can be constantly in flux.

## The Law of Demand

The law of demand highlights the [inverse relationship](https://www.investopedia.com/ask/answers/033115/why-there-negative-correlation-between-quantity-demanded-and-price.asp) between demand and prices. It states that when prices rise, demand will fall. Conversely, when prices fall, demand will rise.

The law of demand involves price only. None of the other drivers of demand mentioned above are involved. As such, things like consumer preferences, substitutes, and price expectations don't apply. If they do come into play, the functioning of the law can be affected. Demand can be seen to change for reasons other than price.

## Demand Curve

A [demand curve](https://www.investopedia.com/terms/d/demand-curve.asp) is a graph that displays the change in demand resulting from a price change. It's a visual representation of the law of demand. It's a useful tool for businesses because it can show them the prices at which consumers buy more or less. It can point out prices at which a company can maintain consumer demand and support reasonable profits.

The vertical axis on a demand curve graph denotes the price, while the horizontal axis denotes the [quantity demanded](https://www.investopedia.com/terms/q/quantitydemanded.asp). A [demand schedule](https://www.investopedia.com/terms/d/demand-schedule.asp), or a table created by a business that lists the quantity of a product that consumers will buy at particular price points, can provide the figures for the demand curve chart.

Once plotted, the demand curve slopes downward, from left to right. As prices increase, consumers demand less of a good or service. A [supply curve](https://www.investopedia.com/terms/s/supply-curve.asp), on the other hand, slopes upward. As prices increase, suppliers provide more of a good or service.

![Demand Curve](https://www.investopedia.com/thmb/xT7w0gOjDJalPEYHy_RF_YpHRow=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/demand_curve2-1a87890730a044e79de897ddb61ccc76-8992212cef3345418bc4707c0b10419d.JPEG)

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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 two curves then intersect at a higher price, which means consumers are willing to pay more for the product.

[Equilibrium prices](https://www.investopedia.com/terms/e/equilibrium.asp) typically change for most goods and services because factors affecting supply and demand always change. 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 type and degree. In [macroeconomics](https://www.investopedia.com/terms/m/macroeconomics.asp), we also look at aggregate demand in an economy. [Aggregate demand](https://www.investopedia.com/terms/a/aggregatedemand.asp) refers to the total demand by all consumers for all goods and services in an economy across all the markets for individual goods.

Since aggregate demand includes all goods in an economy, it is neither sensitive to competition, the substitution of goods, nor due to changes in consumer preferences between various goods. Demand in individual goods markets can be affected by these factors.

## Demand and Macroeconomic Policy

Fiscal and monetary authorities, such as the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp), devote much of their macroeconomic policy-making to managing aggregate demand.

If the Fed wants to reduce demand, it can raise interest rates and increase prices by curtailing the growth of the [money supply](https://www.investopedia.com/terms/m/moneysupply.asp) and credit. If it needs to increase demand, the Fed can lower interest rates and increase the money supply, giving consumers and businesses more money to spend.

In certain cases, even the Fed can’t fuel demand. When unemployment is on the rise, people may not be able to afford to spend or take on cheaper debt, even with low interest rates.

## What Are Some of the Types of Demand?

Demand is an economic concept that indicates how much of a good or service a person will buy based on its price. Demand can be categorized into various categories, but the most common are:

*   Competitive demand, which is the demand for products that have close substitutes
*   Composite demand or demand for one product or service with multiple uses
*   [Derived demand](https://www.investopedia.com/terms/d/derived_demand.asp), which is the demand for something that stems from the demand for a different product
*   Joint demand or the demand for a product that is related to demand for a complementary good

## What Is the Demand Curve?

The demand curve is a graphical representation of the law of demand. It plots prices on a chart. The line that connects those prices is the demand curve. The vertical axis represents the prices of products. The horizontal axis represents product quantity. Typically, the curve starts on the left side high up the vertical axis, and descends across the chart to the right. The slope indicates that as prices decrease, demand, as shown by a growing number of products purchased, increases.

## Why Is Demand Important?

Economically speaking, the principle of demand is important for both consumers and businesses that sell products and/or services. For businesses, understanding demand is vital when making decisions about inventory, pricing, and aiming for a particular profit. Consumers who have an understanding of demand can make confident decisions about what products to buy and when to buy them.

## The Bottom Line

Demand is a core economic concept that shows how much of a good or service consumers are willing to buy at different prices. The concept is used by businesses to determine prices and used by consumers to know when to make a purchase. The demand curve visually depicts how demand changes in relation to price: when price increases, demand decreases; when price decreases, demand increases.

> **Article Sources**
>
> 1.  Federal Reserve Board. "[The Fed Explained What the Central Bank Does](https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf)."