Demand is an economic concept that reflects the ability and desire of consumers to purchase a certain amount of certain goods or services at a specific price at one time or another. At the same time, when it comes to this category with respect to macroeconomics, this term has a broader meaning. In this context, the magnitude of demand under consideration is a parameter for the entire economy of the country.
Basic principles
Not only specialized specialists, but also a large number of ordinary people know a simple rule, according to which lowering the cost of a product or service leads to an increase in demand for them, and vice versa. At the same time, there are many cases recorded in history when certain corrections were made to this dogma. An example is the situation in the oil and oil products trading market. So, in the period from 1973 to 1980, an increase in the price of these products was recorded. But demand also increased. But the cheapening of oil and oil products in 1981-1986. accompanied by its reduction.
Does this mean that the law of demand does not exist? Not at all. He is, works and gives a completely objective picture of the events taking place in various product markets and in the economy as a whole. Another thing is that in the sphere of consumption of goods and services complex and not always easy to understand processes are observed.
Negative relationship
The most important characteristic of demand is its inverse, or negative, dependence on the cost of goods and services. However, other factors should remain unchanged. This kind of dependence, as noted above, is called the law of demand. In other words, if the remaining circumstances are unchanged, then it can be argued that an increase in the price of goods entails a decrease in demand, and vice versa.
In addition, another important aspect should be noted. Each participant in a particular market needs to know the size and price of demand. It should also be emphasized that the degree of sensitivity of demand to changes in value is determined by such a factor as price elasticity.
Other factors affecting demand
Most market research experts follow the same algorithm. They focus on the task of determining the direct magnitude of supply and demand, and then expressing their changes in quantitative terms. Such a scheme is classical in microeconomic analysis and is widely used in economic theory. At the same time, on the example of the oil market, one can see that such studies often require a more complex approach, taking into account the interconnection of a huge number of factors, interactions and interests represented in the industry.
The basis of the magnitude and volume of demand is considered to be the marginal utility of the product. What is this category? This term refers to the increase in the usefulness of a certain good as each new unit of a given product or service is consumed until a saturation level is reached. In addition, the marginal utility of the product is in correlation with the purchasing power of citizens. In other words, their income. The two main factors in the magnitude of demand are the value of the goods or services and non-price circumstances. The latter include consumer preferences, inflation expectations, purchasing power of citizens, prices for substitutes for these products, as well as the cost of other goods and services.
In this context, it is important to understand that when the value of the subject of trade changes, the value of demand also changes. This is an immutable rule. At the same time, fluctuations in non-price parameters lead to a shift in the so-called demand curve. It, in turn, is one of the characteristics of the magnitude of demand. This moment in other words can be described as follows. The demand curve shows the amount of goods and services that consumers can buy depending on the cost and, in addition, shows the effect of the law of demand.
The effect of elasticity on demand
Of great importance in the analysis process is elasticity. This category characterizes the dynamics of the magnitude of demand for goods and services. It describes those fluctuations of the phenomenon under consideration that are caused by the growth or decrease in the value of items of trade. In addition, the elasticity of demand indicates the level of reaction or sensitivity of customers to price changes. It should be noted that this category depends not only on cost, but also on the purchasing power of consumers. That is why the elasticity of demand by price and the elasticity of demand by income are shared.
It is difficult to overestimate the great practical benefit of knowing the degree of elasticity of demand for a particular product and service. This indicator is a kind of guideline for sellers in the process of choosing a sales strategy and pricing. For example, the cost of goods with a high degree of elasticity can be reduced. At the same time, an increase in sales and profit growth is achieved. But for items with low elasticity of demand, this strategy does not seem appropriate. Reducing the cost of production in this case will not bring any significant effect. However, lost profits will not be compensated.
The effect of competition on demand
It should be noted that if there are a significant number of suppliers in a certain product market, the demand for any product will have elasticity. In this case, the following economic mechanism works: even a slight increase in value by one of the sellers will force consumers to turn their attention to similar products of its competitors at a lower price. The aforementioned once again confirms that elasticity and demand are related and important economic criteria.