Understanding Consumer Demand (With Examples and FAQs)
By Indeed Editorial Team
Updated March 22, 2021 | Published January 29, 2021
Updated March 22, 2021
Published January 29, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Knowing how consumer demand works is vital for interpreting market trends, developing business models and creating marketing strategies. In this article, we explain what consumer demand is and the factors that affect it, offer examples of how demand fluctuates and explain how consumer demand relates to marginal utility and equilibrium price.
What is consumer demand?
Consumer demand is an economic measure of a group’s desire for a product or service based on availability. It represents the buying habits of consumers and helps determine the purchasing trends of specific populations.
What is demand theory?
Demand theory is a set of economic principles and ideas that seeks to tie consumer demand to the prices of goods and services on the market. Demand theory addresses how quantity, price and supply impact consumer demand and buying habits. Additionally, this theory is the basis for the economic principles of the demand curve and luxury buying.
Demand curve is an economic principle that depicts the inverse relationship between the price of a good or service and the demand for that item. It means that as the price of a good or service goes up, people buy less of it. The accuracy of these proportional relationships depends on the stability of outside factors and does not apply to luxury goods or giffen goods—which are basic, non-luxury items like rice or salt.
Luxury buying is a consumer trend in purchasing non-basic goods or services that typically represent social status or wealth. Luxury buying trends and habits are an element of demand theory that directly contradicts the demand curve. When the price of a luxury item goes up, demand for that item goes up as well.
Read more: What Is a Demand Curve?
Key determinants of consumer demand
Understanding consumer behavior is critical to navigating market trends, developing business models and creating marketing strategies. Also, studying the effects that certain factors have on consumer demand helps investors, financial planners and economists make predictions about the stock market and the larger economy. Here are five elements that are considered the main determinants of understanding consumer demand:
1. Item price
Price is the value attributed to a good or service. According to demand theory, the amount of demand falls when prices rise.
Example: Consider the busiest shopping day of the year, Black Friday, when thinking about how price affects demand. As prices drop for clothing, toys, electronics and household appliances, the quantity of demand for those items increases exponentially.
2. Buyer income
Buyer income relates to socioeconomic status, and it represents the amount of money a consumer has at their disposal to buy items. As income rises for a person or group of people, and their purchasing power increases, so does the quantity of demand. Additionally, the price of basic goods has the potential to change a buyer's real income.
Marginal utility is the concept that the more you buy an item, the less useful they become to you. An increase in buyer income generally increases buying habits and hence, demand.
Marginal utility is a factor that slows that increase. For example, if a household income rises from $58,000 per year to $158,000 per year, a family may purchase a second car. However, it is less likely that they would buy a third car and even less likely that they would buy a fourth car.
Example: The economy rebounded from the slump of the previous decade in the mid- 1980s. Jobs and wages increased, and changes in family dynamics resulted in a rise in dual-income households. As household income rose, so did the demand for consumer goods.
3. Price of related or complementary items
Related or complementary items are those that have a relational effect on other items. When the price of a related item changes, demand for the original item is likely to change as well. Complementary items are goods that are connected to another item—like the way cotton relates to sweatshirts.
Substitute items are those that a potential buyer could easily purchase instead of a certain product.
Example: Consider the original item, commercial airplane tickets, and the related item, jet fuel. The price of jet fuel indirectly causes an inverted demand affecting the price of the airplane ticket. If the price of jet fuel increases, the demand for airplane tickets declines. Conversely, some airline pricing models might respond differently to jet fuel price increases. If a consumer notices that their preferred airline has higher prices for their travel dates than other airlines, then they might choose to purchase their tickets from a competitor.
4. Consumer preference
Consumer preference refers to public opinion, social precedent and taste. As public opinion or preference for a good or service goes up, so does demand.
Example: A celebrity endorsement of a product can have a dramatic effect on the demand for that item. For example, if an actress known for her fashion sense appears in a television show or a social media post wearing a name-brand shoe, then demand for that shoe is likely to increase significantly.
5. Consumer expectations
Consumer expectations are predictions that people make about the value that a good or service might have in the future. When people expect the value of something to rise, demand also rises.
Equilibrium price is the balance between what consumers are willing to pay for an item and the price a producer is willing to sell it for. An item with an optimal equilibrium price reflects appropriate demand.
Example: When consumers predict that the price of housing is going to increase, many people will try to purchase homes before the increase in price occurs. In this way, the increase in expectation causes a rise in consumer demand.
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