How is Demand used in Economics?

What is the Law of Demand? What Factors affect Demand? What is the Demand Curve? What is Aggregate Demand? Why is Demand Important in Business? How are Demand and Monetary Policy related?
how is demand used in economics
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The economy of Germany is considered the best economy in the world because it has the highest gross domestic product (GDP). Demand works in every sphere of life and for everything. But how does demand work in the economy? Any ideas? Is it the same demand that you made for a new iPhone? No? Well, today you will get to know how is demand used in economics, why is demand important and what are examples of demand.

1. What is Economics?

The term economics was derived from an Ancient Greek word, oikonomikos, which means practice in the management of a house or family. But before the 19th century, the term was Political Economy because it was used in the context of an inquiry into the nature and causes of the wealth of a nation. (See What is POI in Trading?)

2. What is the Definition of Economics?

The most commonly accepted definition of economics was given by an economist, Lionel Robbins, in 1932. He states that economics is the science that studies human behavior as a relationship between ends and scarce means which have alternative uses. (See What is a Fundamental Economic Problem?)

3. What is Demand in Economics?

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In economics, demand can be defined as the quantity that a consumer is willing and able to purchase at a given price for a given period of time. However, the demand depends on various factors that will be discussed throughout the article.

4. What are Types of Demand?

Demand in economics is interrelated to various factors. One thing affects the other, therefore, the following is the list of different types of demand that is seen in the market.

  • Price demand: It includes the demand for a product that a customer will buy at the prevailing price, other things remaining unchanged
  • Income demand: It states the product or service a consumer will buy at a given income and that changes with income. This is how is demand used in economics.
  • Cross demand: The demand for one product arises with the demand for another product. For example, pen and refill.
  • Direct demand: The demand for a product that directly satisfies the wants of a consumer is direct demand. For example, bread.
  • Indirect demand (derived demand): It is the demand for a product for manufacturing another product. For example, milk to make coffee, and raw materials to make goods.
  • Joint demand: It is the demand for the products together. For example, to make pizza, the demand for flour, oven, and even flour mills is affected.
  • Composite demand: The demand for a product that is used more than one time for satisfying the wants of the consumer.  (See What is Empowered Consumerism?)

5. What is the Law of Demand according to How is Demand used in Economics?

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The law of demand states how is demand used in economics such that the quantity demanded of a product comes down when the price of the commodity goes up, whereas other factors remain unchanged. It happens because the customer will go for another product for a low price. But there are exceptions to this as well, because not every customer will buy a cheap substitute because some are brand loyal and will stick to the same product. However, if their income does not allow them to do so, then, their brand loyalty will not last long. (See: Why is Quantitative Research Important?)

6. What are Some Examples of Demand?

  • To begin with, the examples of demand, let’s take groceries. Customers demand products to satisfy their urgent needs more. They will demand toiletries, eatables, etc. before moving towards those highly discounted products.
  • Another one is for movie tickets. When the customer feels satisfied and does not wish to watch any more movies, the demand will fall, otherwise, it will remain high.
  • Lastly, a hungry customer buying a pizza slice will derive the most utility from it but with another slice, the utility declines as the customer are not much hungrier. The concept here is, that the customer will readily pay without debating while buying the 1st slice but with every slice after that he wants it to be cheaper. (See Different types of Customers in Marketing and Retail)

7. What Factors affect Demand?

There are numerous factors affecting the demand for a commodity. Knowing some common factors affecting how is demand used in economics are as follows:

  • Consumers in the market: It’s about the number of customers demanding that particular good or service at the given price.
  • Future expectations of consumer: If the customer expects the price to fall in the future, they will not purchase now but if fear price rise in the near future they will stock up.
  • Income of the consumer: The purchasing power of the customer at different income levels differs.
  • Population: The overall population in an economy that creates the demands also impacts.
  • Price of substitute goods: The price of alternate goods affects the demand. For example, if Loreal Paris is selling eyeliner at a higher price than Maybelline New York, people will move towards Maybelline New York.
  • Price of the commodity (good or product): The average price of the commodity or service with other things remaining the same.
  • Tastes and preferences of the consumer: What a customer likes and dislikes are the major concerns and demand goes up and down according to that. (See What is Scarcity and Choice in Economics?)

8. What is the Demand Schedule?

It is the table that has the data of the demand for a particular product at different prices, ceteris paribus (other things remaining unchanged). Below is the specimen of the demand schedule: the column on the left has the price and the right column has the commodity demanded.

Price per pound Quantity (Pound)
$3.40 10.0
$3.50 9.8
$3.65 9.4
$3.80 9.1
$3.95 8.9
$4.05 8.5
$4.40 8.0

From the above chart, it became clear that the demanded quantity considerably reduced with the price rise. (See What is Production Concept in Marketing?)

9. What is the Demand Curve?

Demand curve
From corporatefinanceinstitute.com

To know further about how is demand used in economics, let’s see the demand curve. The graphical representation of a demand schedule is termed a demand curve. It is in the form of a line graph. The demand curve can be made for a single commodity, more than one commodity, and the whole economy too. The y-axis measures the price, denoted by P. the x-axis measures the quantity, denoted by Q. A flat demand curve states that the purchase is good with a slight price change. A steep demand curve will show no change in quantity demanded even after huge changes in prices. (See What is the difference between public debt and external debt?)

10. What is the Elasticity of Demand?

The term elasticity means the changes in demand with every price change. It is measured in ratio, and it is calculated by dividing the percentage change in the quality demanded by the percentage change in the price. Three types of elasticity of demand are as follows:

  • Elastic demand is when the percentage change in demand is greater than the change in price.
  • Inelastic demand is when the percentage change in demand is lesser than the percentage change in price.
  • Unit elastic demand occurs when the percentage change in demand is exactly the same as the percentage change in price. (See How to Develop a New Product from Concept to Market?)

11. What is Aggregate Demand?

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It is the demand from people therefore, it is also termed market demand. It is used to measure the demand for the products produced by a country and their demand in the world. The next step in knowing how is demand used in economics is these 5 components of gross domestic product:

12. Why is Demand Important in Business?

The main purpose of a business is to maximize profit by selling products and services to the ultimate consumers. They carry out advertising, and other marketing tactics to showcase their products to the masses. For example, the prices of Apple products are higher in the market, and they prevail because their products are demanded new technological features.

But if the demand falls, they will have to cut short their prices as well. After all, they need to make sales to cover up the production costs. But if the demand continues to fall, the company will have to reduce production. This will adversely affect the economy as a whole. So, this is the way how is demand used in economics in business. (See How to build the entrepreneurial mindset?)

Fiscal policy means to use the government funding and amount raised from taxes to promote growth and stabilize the economy as a whole. It is related to demand because the government uses fiscal policy to generate demand by either cutting taxes or purchasing itself. In contrast, when the government wants to drop demand, it will increase taxes. (See Why Do You Have To Pay Taxes?)

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During inflation, monetary policy and federal reserves are the refuges. The Federal department will raise interest rates to cut down inflation. It reduces lending and the money supply. If it wants to increase demand it will lower the interest rates.

So, now you know how is demand used in economics along with why is demand important, discussing the examples of demand.  (See What Caused the Asian Financial Crisis of 1997)

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