13 Aug Demand
What is Demand?
Definition: The demand for a product or a service is determined by the ability and willingness of consumers to purchase it. It’s important to remember that both conditions must be satisfied. There should be a need for the product or service in question, and this need should be accompanied by the readiness of consumers to acquire it.
What does Demand mean?
Several factors determine demand. These include:
⇨ The price of the product – lower prices will usually attract more customers. If prices are raised, demand is likely to fall.
⇨ Alternative products or services – if customers have a choice, they could switch to other products or services. For example, if train fares between two locations are hiked steeply, commuters could opt to travel by road.
⇨ Level of income – as incomes rise, the demand for certain goods could increase. The sale of luxury goods could go up with an increase in income levels.
⇨ Consumer tastes and preferences – consider the example of the fashion industry. Last year’s styles and designs need to be discounted steeply to push sales.
The following graph illustrates the relationship between demand and prices:
The chart demonstrates that as prices rise, the quantity demanded falls.
Example of Demand
Highland Company, a Chinese manufacturer of refrigerators, washing machines, microwave ovens, and other consumer durables is trying to expand its presence in the U.S. market. Although its sales have been growing in recent years, it now wants to gain a much larger market share.
It decides to drop the prices of all its products by 10%. Although this will lead to a steep erosion in margins, the company is willing to sacrifice profits to increase its sales.
Highland’s strategy is successful. Over the next two years, its revenues in the American market grow by 15%. Although there is a drop in the profits that the company makes on individual products, its total net income increases.
The primary determinant of the demand for a product or a service is its price. However, other factors such as the availability of alternatives and consumer tastes also play a role.