What is Market Demand?

What is Market Demand?

Definition

Market demand is the total demand for a good or a service at a certain price. If the demand by each individual is aggregated, the result will be the market demand.

What does market demand mean?

It’s important to remember that market demand signifies the quantity of a good or a service that consumers are able and willing to buy at a specific price. It does not indicate the desire for a product. Instead, market demand refers to the readiness of consumers to purchase a product at a predetermined price.

How can we determine market demand? If the market for a good is small or restricted to a limited number of consumers, it may be possible to add up the quantities demanded by each individual buyer.

However, this may not be possible for every type of good or service. In this situation, market demand is determined by taking a representative sample of customers and calculating the demand for them. This data can then be extrapolated to compute the figure for the entire market.

What determines the aggregate demand for a product or service? Here are the factors that contribute:

⇨ The number of consumers and the quantity that each buys.

⇨ The price of the product or service.

⇨ The availability and price of alternatives.

⇨ Consumer preferences and tastes.

Example of market demand

John Reade, Chief Market Strategist at the World Gold Council, estimates that the market demand for gold will go up in 2018. How does he arrive at this conclusion? He says:

⇨ There has been a sustained rise in equity prices for many years. Mr Reade thinks that investors will divert their money to gold if the stock market remains expensive.

⇨ The U.S. dollar has been strengthening relative to other currencies in recent years. A reversal of this trend could result in greater demand for gold. ⇨ Rising demand for gold in China could lead to a spike in sales. Of course, it is difficult to arrive at a realistic figure for gold demand. But market analysts can use the data pertaining to earlier years and the other information available with them to arrive at an approximate figure.

Summary

Determining the market demand for a product could be an inexact exercise. But experts can use sample data and the other details that they have to arrive at an estimate of the aggregate demand.