What Is Consumer Demand? (With Determinants and Examples)
Updated October 3, 2022
Knowing how consumer demand works can help when interpreting market trends, developing business models and creating marketing strategies. Consumer demand measures the desire for specific products or services. Understanding this concept and how it affects the sales market can help businesses improve their revenues and operations.
In this article, we discuss the definition of consumer demand and demand theory and the factors that affect them with examples of how demand fluctuates.
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. Businesses use consumer demand projections and data to evaluate their pricing, revenues and strategies when selling products or services.
What is demand theory?
Demand theory is a set of economic principles and ideas that seeks to connect 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. Here are two primary economic principles associated with demand theory:
The 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 increases, people buy less of it. The accuracy of these proportional relationships depends on the stability of outside factors and doesn't 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 directly contradict the demand curve. When the price of a luxury item increases, demand for that item increases as well.
5 key determinants of consumer demand
Understanding consumer behavior can help with 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. Many businesses aim to develop a pricing strategy that keeps demand high while still providing sufficient profits.
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 represents the amount of money consumers have 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. 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 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's less likely that they buy a third car and even less likely that they 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 goods
Related or complementary goods refer to items that have a relational effect on other items. When the price of a related item changes, demand for the original item likely changes as well. Complementary items are goods that connect to another item—like the way cotton relates to sweatshirts. Substitute items refer to items that a potential buyer may easily purchase in place of the business's products.
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 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 may choose to purchase their tickets from a competitor.
4. Consumer preference
Consumer preference refers to public opinion, social precedent and desires. As public opinion or preference for a good or service increases, so does demand. Many businesses aim to increase their consumer preference status through marketing, endorsements and public relations.
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.
Related: What Is a Marketing Campaign?
5. Consumer expectations
Consumer expectations refer to the predictions that people make about the value that a good or service may have in the future. When people expect the value of something to rise, demand also rises. Many businesses predict consumer expectations to determine the projected equilibrium price. Equilibrium price is the balance between what consumers might pay for an item and the price at which a producer is willing to sell it. 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 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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