What is demand?
The demand is the willingness and the ability to purchase a commodity or a service at a particular price and time. It can also mean the total quantity of goods and services that can be bought at a specific price and time. Source: merriam-webster.com.
This term goes together with supply which is the total amount of goods and services that can be sold at a particular price and time. Both terms are very important in economics.
How does demand work?
Demand can be interpreted as the quantity consumers are willing to buy at a given price. This will determine how much products and services (supply) companies will be providing. With too much or less demand, the market loses equilibrium.
If the demand increases, companies will respond by increasing prices and supply. This will lead to more products sold. However, there is a point where the product will become too expensive to buy. At this point, the demand will start decreasing. As a result, the price and supply will decrease until the market reaches equilibrium.
On the other hand, a decrease in demand will lead to a lower quantity. This will reduce the price. Depending on the cause of low demand, the supply could remain the same or follow the same trend. For example, Apple no longer produces the iPhone 3. All parameters in the supply and demand curve were reduced to a much lower equilibrium price.
Examples
- We have seen a huge improvement in technology. As new inventions are discovered, old ones are being discarded even if they are good. Let’s look at the iPhone for example. iPhone 3 was the most valuable cellphone in the world when it first came out. A few years later none wants iPhone 3. The demand for this phone has decreased to almost zero. This is due to the fact that its technology is obsolete, and therefore, no one wants it.
- Before the corona-virus, hygienic products were not bought like crazy. When the outbreak started, people started buying these products(toilet papers, hand sanitizers, etc) at a huge number. The equilibrium was disrupted. Because of this high demand, some companies increased prices and put in place measures to discourage consumers.
Supply, demand, and investing
It is important to educate yourself about the commodities you are investing in. This is due to the fact that sales and prices of these commodities are seasonal, cyclical, and can change overnight due to external factors such as political, natural disasters, etc.
Knowing this information will help you manage your investments and allocate your assets accordingly.
