Demand is the willingness of a consumer to buy a product or pay for a service at a specified price. Many factors can determine demand and understanding these factors can be critical to increasing sales. Our analysis is focusing on demand at a macro level. Although governments and central banks are the key players that try to influence demand at the macro level, understanding how general economic concepts affect individual product demand can be helpful for individual companies as well. The primary demand drivers we will look into include product price, prices for related goods, income, expectations and number of buyers.
Increases in price generally mean a fall in the quantity demanded. Similarly a drop in the price of a commodity will consequently result in a rise in the commodity’s demand. Businesses tend to increase their prices if inventory is limited and there is excess demand. The goal here would be gaining increased profitability on the limited number of products sold. On the other hand, if product demand is weak then businesses can decrease prices with the hopes of trying to sell more goods in a weak demand climate.
2. Prices of related goods:
Prices for complementary and substitute goods or services will also affect a commodity’s demand. As the price for complementary goods increases then demand for your goods will probably decrease. This is because an increase in price lowers demand for the complementary good and in turn lowering demand for your goods as well. For example, as prices for a certain mobile phone increase, demand for cases of that mobile phone will probably decrease. The exact opposite reaction is true for price increases of substitute commodities. Price increases for substitute products will decrease demand for those products and increase demand for your products as they are a substitute. A similar example here might be as the price for a competing mobile phone increases, demand for that phone might decrease and demand for your phone will probably increase.
An increase in income will tend to increase the demand for commodities as buyers have more purchasing power. But when income falls, buyers' purchasing power falls as well and hence demand will fall also. However, a doubling of purchasing power may not double the demand for your product. Increases in income and increases in demand of a product will not have a strictly linear relationship.
When buyers have an expectation that a commodity’s price will soon increase, they tend to demand more of it at the current, more favorable price. Suppose housing prices are expected to rise next year, people will in turn try to buy houses sooner with the expectation that the longer they wait the more expensive it will get. Similarly if consumers feel the economy is picking up, their consumer sentiment may increase causing them to spend a greater percentage of their income on product purchases.
5. Number of potential buyers in the market structure:
A rise in the number of buyers will also result in increased demand for the commodity. If new homes are constructed in an area then it is likely that local businesses in that area will see more demand for their products as well.