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There are many products in the market because there is demand for them. Consumers usually want to buy products at a given price due to demand. So what is demand and how does it work?

Demand is a central theory in economics and without it, economics won’t exist. As demand is related to supply and the supply-demand theory controls the markets, demand acts as a central part of economic theory. Demand is also related to other subjects such as marketing, but its use and meaning remain the same.

What is a Demand?

Demand refers to an economic concept that shows the consumers’ desire to buy a specific item in a specific quantity and to pay a specific price for the product. Price and demand are inversely proportional which means that when the price of a product increases, its demand goes down. On the other hand, if the price of a product goes down in the market, its demand will usually go up.

Demand is a very common concept for both consumers and producers because they have to deal with it every day.

For example, buyers usually buy more of the needed items when the prices of that item are low but may lower the purchase if prices go up or they may stop buying it completely when prices rise.

Demand is the underlying force that propels economic growth and the running of economies. Without demand, the producers won’t be bothered to produce anything to sell in the market. It must be noted that demand is a mutual process between producers and buyers. Once there is an equilibrium between the two, the price of the item is set.

Determinants of Demand

There are five major factors that determine the demand for a product. These are the following −

Price of the product

As mentioned above, price is the most influential factor in determining the demand for a product. Price changes alter the demand for products in an economy. In fact, we can also say that demand is driven by the price of a product because consumers are often willing to buy products that have a mating price they want for it.

Purchaser’s Income

The income of the buyer is also instrumental in determining the demand for the product. A person will never buy a product if it affects his budget or goes against his limited budget. The budget is usually set according to income. So, demand is indirectly related to the income of the buyer.

Prices of substitutes

The demand for a product may also get affected if substitutes for the product are available in the market. When substitutes are available and their prices are low, a consumer may choose the alternative instead of the original product he had desired for. This may affect the demand for the product.

Consumer Choice

The demand for a product is also dependent on the choice of the consumer. A consumer will buy items that he/she chooses and not the one that is undesirable to him.

Consumer’s expectation for a change in price

The future price of a product also affects the demand for the product. If the future price is more than the current product of an item liked by a consumer, he/she may choose to buy it before the price changes. Alternatively, the consumer may wait to buy a product if the future price of the product is lower than the current price of the product.

Types of Demand

In general, seven types of demand can be observed in the market which are the following −

Joint demand

Joint demand is the demand for products that are complementary to each other. These products can be each other’s accessories or items that people buy together. For example, laptops and mousepads can be bought together but the demand for laptops may not equate to the demand for mousepads.

Composite demand

Composite demand refers to the demand for products that are used for multiple reasons. For example, petroleum gas can be used as fuel as well as cooking gas. The demand for one use of such items may lead to a shortage for the other.

Short-run and long-run demand

Short-run demand refers to people’s immediate reaction to price changes. In such a case the elements remain fixed. The short-run demands may not be met sometimes and companies may have to resort to lost profits. On the other hand, long-run demand gives an opportunity to producers to adjust the requirements and avoid lost profits.

Price demand

It refers to the price consumers are willing to spend to acquire the item. This is used to determine the price of a product while entering a new market. The concept of price elasticity which refers to how demand will change depending on the price is also related to this.

Income demand

The demand related to the income of a person is known as income demand. People usually change their tastes and preferences with changes in income. It is generally seen that higher quality products are accepted by an increasing income bracket of individuals.

Competitive demand

If there are alternatives to a product, the demand for products may be switched from one to another. Such types of demand are known as competitive demand. For example, due to climate considerations, the demand for electric vehicles is rising in comparison to petroleum fuel vehicles.

Direct and derived demand

Direct demand is related to a final product. Mobiles, laptops, clothing, and foods are examples of it while derived demand arises due to the use of another item. For example, chargers are required to charge laptops, so the demand for chargers will be derived.

The Law of Demand

The law of demand states that the demand for items is inversely proportional to the price of that item. In simpler words, when the price of an item increases, the demand for that item goes down.

This law derives inference from the law of diminishing marginal utility which states that the consumers derive the most satisfaction from the first consumption while their satisfaction decreases successively with subsequent consumptions.


Economists and marketers use demand for various reasons. It is used to gauge the strength of a market or how much of products can be sold in a market. Demand also helps marketers determine the price of a product while entering a new market.

Good knowledge of demand is necessary for the management of a profit-seeking organization. As the whole theory of profitability revolves around demand, managers must know how to instill and create demand in a market to sell the products and become profitable. Therefore, demand is also related to profitability to a large extent.


Qns 1. What is the law of demand?

Ans. The law of demand states that the demand for a product is inversely proportional to its price. In other words, with increasing prices, the demand for a product decreases. Alternatively, when the price of a product decreases, the demand for it goes up.

Qns 2. Is consumer choice related to demand? If yes, how?

Ans. Consumer choice is directly related to demand because, without a choice, no item will be demanded by consumers. It is the choice that drives the demand for a product in the market.

Qns 3. Is the number of consumers in a market a factor affecting demand?

Ans. Yes. The number of consumers is directly related to demand. The more the number of consumers in the market more will be the chances of a demand for a product in the market.

Updated on 13-Oct-2022 11:19:47