What Is Demand?


In economics, demand is essentially the amount of a product that consumers are able and willing to buy at different prices over a period of time measured in units. The relationship between demand and supply is known as the demand curve. In economics, the two concepts are used to analyze how the supply and demand functions affect one another.

Economics describes how consumers and producers within a market relate to the external environment. One way to think about the relationship between demand and supply is to think in terms of allocative efficiency. Allocative efficiency is the degree to which an economic activity can be planned with a knowledge of the effect it will have on future consumers or producers. The more knowledge that is made available the better the planning. For example, if the firm wants to increase its capacity to produce, it can make additional capital investments that will allow it to increase production levels at a faster rate while using the same amount of resources.

Economists study the effect of changes in market elasticity on the level of overall demand. Elasticity, or the ability of demand to respond to changes in the supply of certain goods and services, is referred to as dependability. The concept of elasticity can be defined as the ability of demand to respond to changes in the price of specific goods and services over a period of time, especially in the short run. In the short run, the changes in price elasticity may not have any long-run impact, but in the longer run, they can affect productivity. For example, if a firm produces goods that are not in high demand but in high supply, then the firm can reduce its operations that consume a lot of resources without incurring any loss of income.

The concept of demand elasticity refers to the ability of a firm to satisfy a demand when it becomes available. If a firm is not able to satisfy a demand because there is no enough supply of an item, it will be forced to sell at a higher price to cover its own expenses and make a profit. However, if there is enough demand for the item then the firm may be willing to sell for a lower price in order to meet the demand and earn a profit. Since demand and supply are in equilibrium, the price level is determined by equilibrium economic conditions.

If there is an increase in the supply of some goods but a decrease in demand for others, the equilibrium would be broken and the economy will have to experience a deficit. Because the elasticity of demand is proportional to the size of the economy, when the supply increases but the demand does not increase, the surplus profit is distributed among those who benefit from the increased supply and those who do not benefit, resulting in a reduction in the aggregate volume of investment, employment, and income. Since the demand is not elastic, the economy cannot absorb the increase in demand.

On the other hand, when the elasticity of demand in a market decreases, investment, employment, and income tend to increase because firms can afford to buy more of an item and invest more. When this condition is present, the equilibrium is broken because the economy is temporarily damaged. The damages can be short term or long term.

One study shows that there is a relationship between the changes in the unemployment rate and the demand elasticity of the economy. When unemployment is high, firms tend to invest more and generate more employment whereas when the unemployment rate is low, firms tend to invest less and generate less employment. In a market where the demand for some items is constant while demand for other items fluctuates, the situation is said to be ‘over-determined’. In this case, the market may undergo fluctuations until demand matches the supply, resulting in equilibrium.

An over-determined market situation causes the economy to experience surplus production and employment losses. An economy can reach over-determined equilibrium if demand is too high while the supply is too low, resulting in the firms producing too much and the consumers buying even more. When demand matches the supply, employment will decrease but the equilibrium is broken because the economy cannot go back to equilibrium.