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 certain price at a given time. At the same time, if we are talking about this category in relation to macroeconomics, then this term has a broader meaning. In this context, the considered quantity of demand is a parameter for the entire economy of the country.
Guidelines
Not only specialized specialists, but also a large number of ordinary people know a simple rule, according to which a decrease in the cost of a product or service leads to an increase in demand for them, and vice versa. At the same time, many cases have been recorded in history when certain adjustments were made to this dogma. An example is the situation in the oil and oil products trade 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 reduction in the price of oil and oil products in 1981-1986. followed by its contraction.
Does this mean that the law of demand does not exist? Not at all. It exists, works and gives a completely objectivea picture of events taking place in certain commodity markets and in the economy as a whole. Another thing is that complex and not always easy to understand processes are observed in the sphere of consumption of goods and services.
Negative addiction
The most important characteristic of demand is its inverse, or negative, dependence on the cost of goods and services. At the same time, other factors should remain unchanged. This kind of dependence, as noted above, is called the law of demand. In other words, if other circumstances are unchanged, then it can be argued that an increase in the price of goods entails a decrease in the quantity demanded, and vice versa.
In addition, there is another important aspect to be noted. Each participant in a particular market needs to know the magnitude and price of demand. It should also be emphasized that the degree of sensitivity of demand to changes in cost is determined by such a factor as price elasticity.
Other factors affecting demand
Most of the experts who study trading markets follow the same algorithm. At the forefront, they set 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 goods. What is this category? This term is understood as an increase in the utility of a certain good as each new unit of this good or service is consumed until the saturation level is reached. In addition, the marginal utility of a good is correlated with the purchasing power of citizens. In other words, their income. The two main factors in the magnitude of demand are the cost of a good or service and non-price circumstances. The latter include consumer preferences, inflation expectations, the purchasing power of citizens, the prices of substitutes for a given product, and the cost of other goods and services.
In this context, it is important to understand that when the value of a trade item changes, the quantity demanded 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 can be described in other words 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 law of demand.
Effect of elasticity on demand
Elasticity is of great importance in the analysis process. This category characterizes the dynamics of the demand for goods and services. She describes those vibrationsof the phenomenon under consideration, which are caused by an increase or decrease in the value of trade items. In addition, the elasticity of demand shows the level of reaction or sensitivity of buyers to price changes. It should be noted that this category depends not only on the cost, but also on the purchasing power of consumers. That is why they separate price elasticity of demand and income elasticity of demand.
It is difficult to overestimate the great practical benefits of knowing the degree of elasticity of demand for a particular product and service. It is this indicator that is a kind of guideline for sellers in the process of choosing a sales strategy and pricing. For example, the cost of a product with a high degree of elasticity can be reduced. This results in increased sales and increased profits. But for items of trade 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. In this case, the lost profit will not be compensated.
The impact of competition on demand
It should be noted that if there are a significant number of suppliers in a certain commodity market, the demand for any product will be elastic. In this case, the following economic mechanism works: even a slight increase in the cost of one of the sellers will force consumers to turn their attention to similar products of its competitors with a lower price. The foregoing once again confirms that the elasticity and quantity of demandare related and important economic criteria.
