Demand

Demand is how much society wants of a good or service. Demand will be a function of how many potential buyers there are for a product, as well as whether there are other products that could serve the same purpose. The selling price will usually affect demand, but not always. The demand for soft drinks would probably change if the price changed very much. If the price went up, consumers would shift to other brands of soft drinks, or possibly to juice or water. If the price declined, consumers would likely purchase more. However, demand for a good like milk would be less subject to changes in price. Increases in price may not affect demand much because there are no good substitutes for milk. Similarly, a decrease in price might not create more demand for milk. This difference in sensitivity of demand to price changes is called elasticity and is discussed in depth in the microeconomics section.

Let’s return to our gold necklace and gerbil bedding example. Demand for gold necklaces will depend to some extent on fashion trends. If it became “trendy” to wear gold necklaces, demand would increase. The desire to be in fashion could cause many consumers to buy a gold necklace, even though they had not owned one before. This increase in demand would probably lead to higher prices, as producers realized that they could charge more. Why are they able to charge more? Because there are more potential buyers for their product. More buyers means higher demand.

Demand could also decrease if gold necklaces became unfashionable. If such necklaces were considered an ostentatious display of wealth, for example, consumers would hesitate to wear them. Fewer buyers would exist, and demand would fall.

Demand for gold necklaces would also depend on prices. If gold prices increased dramatically, consumers would buy fewer gold necklaces. Consumers might even consider other types of necklaces, such as necklaces made of silver. If gold prices dropped, consumers would likely buy more. For one thing, more consumers could afford to buy gold necklaces, and demand would increase due to the higher number of potential buyers. In fact, the law of demand states that consumers will buy more of a good as the price of that good declines.

Demand for gerbil bedding will also be a function of the number of potential buyers, and of the price. For example, if a popular children’s movie starred a gerbil in the leading role, more children would want gerbils. Presumably, more gerbils would mean a greater need for gerbil bedding, and demand would increase. Gerbil bedding probably has less price sensitivity than gold necklaces. A decrease in price would be unlikely to inspire consumers to rush out and buy a gerbil because bedding was so cheap. However, a price increase would affect demand. High prices for gerbil bedding would push consumers to find other products that would serve the same purpose. Since there are several cheap alternatives (e.g., shredded newspaper, leaves), demand for gerbil bedding would fall.

The alternative products mentioned above (silver necklaces, shredded newspaper) are called substitutes. They are products that serve the same purpose. If prices for a product change, it will affect demand for substitutes, and vice versa. With substitutes, an increase in demand for one product will lead to a decrease in demand for the other.

There are also situations where demand for one product will affect demand for a related product that is not a substitute. For example, we mentioned how increased popularity of gerbils would lead to an increase in demand for gerbil bedding. Gerbils and gerbil bedding would be considered complements. With complements, an increase in demand for one product leads to an increase in demand for another.

From our discussions of supply and demand, you have probably come to the conclusion that it is the interaction of these two economic conditions that sets prices. Neither supply nor demand alone is sufficient. We see that regardless of whether a product is expensive or cheap to produce, if no market exists (no demand for the product), it won’t sell at any price. If a strong market exists for the product, it will sell, regardless of the cost to produce it. However, profits depend upon the price received. That price, in turn, depends upon the number of buyers relative to the number of sellers (i.e., the demand relative to the supply).