Finance: Understanding Demand (GCSE)

Demand is defined as:

The amount (quantity) that customers are prepared to buy at a given price

As customers, in an ideal world we would be able to buy whatever we wanted. However, we are restricted by a simple problem – we don't have unlimited money!

So, economists often prefer to talk about "effective demand" – which means the quantity that customers are able to buy.

Effective demand is all about the ability and willingness of customers to pay – or how much they can afford.

Normally, the quantity demanded for a product will increase if the price falls. Conversely, an increase in price will normally lead to a fall in quantity demanded.

The relationship between quantity demanded and price can be shown graphically by drawing a demand curve, as illustrated below:

Factors that affect demand

The demand for a product will be influenced by several factors:

Price

The most important factor that affects demand. Products have different sensitivity to changes in price. For example, demand for necessities such as bread, eggs and butter does not tend to change significantly when prices move up or down

Income levels

When an individual's income goes up, their ability to purchase goods and services increases, and this causes demand to increase. When incomes fall there will be a decrease in the demand for most goods

Consumer tastes and preferences

Can have a significant effect on demand for different products. Persuasive advertising is designed to cause a change in tastes and preferences and thereby create an increase in demand. A good example of this is the surge in sales of smoothies!

Competition

Competitors are always looking to take a bigger share of the market, perhaps by cutting their prices or by introducing a new or better version of a product

Fashions and technology

When a product becomes unfashionable or out-dated, demand can quickly fall away. The rapid decline in sales of Crocs is a great example