In eco­nom­ics, demand is a con­sumer's desire to buy a good or ser­vice, backed by the will­ing­ness and abil­ity to pay for it. It is always tied to a price: demand tells us how much peo­ple will buy at each price. If every­thing else stays the same, the quan­tity demanded rises when the price falls and falls when the price rises.

This sim­ple idea, together with sup­ply, is what brings a mar­ket to equi­lib­rium. Econ­o­mists look at demand at two lev­els, mar­ket demand and aggre­gate demand.

  • Demand is the con­sumer's desire, backed by abil­ity to pay, to buy a par­tic­u­lar good or ser­vice.
  • Mar­ket demand is the total demand for a par­tic­u­lar good from all buy­ers in the mar­ket.
  • Aggre­gate demand (AD) is the total demand for all goods and ser­vices in the econ­omy.
  • The meet­ing of demand and sup­ply decides the price of a good or ser­vice.

Why firms study demand

Com­pa­nies want to know how much of their prod­uct peo­ple will buy, and many carry out sur­veys to find out. Know­ing the demand at dif­fer­ent price points helps a firm set its prices. But demand on its own is only half the pic­ture; it has to be read together with sup­ply.

Con­sumers want to pay as lit­tle as pos­si­ble, while sup­pli­ers want the best pos­si­ble return. The price of a prod­uct set­tles where the demand curve and the sup­ply curve meet.

Indi­vid­ual demand and mar­ket demand

Demand for a com­mod­ity can be looked at for one con­sumer or for the whole mar­ket.

  • Indi­vid­ual demand is the quan­tity of a com­mod­ity that one con­sumer is will­ing and able to buy at each pos­si­ble price dur­ing a given period of time.
  • Mar­ket demand is the quan­tity of a com­mod­ity that all con­sumers together are will­ing and able to buy at each pos­si­ble price dur­ing a given period of time.

Key terms

Aggre­gate demand (AD)
The total demand for all fin­ished goods and ser­vices pro­duced in an econ­omy.
Inven­tory man­age­ment
The process of order­ing, stor­ing and using a com­pa­ny's stock of raw mate­ri­als, com­po­nents and fin­ished prod­ucts.