What is Demand: A Complete and Easy Guide 2026

The concept of what is demand supports the ability to interpret consumer behaviour in respect to the reason for the purchase of particular products (i.e. the purchase occurs because of the demand for that product as well as the market’s reaction to demand).

Every market day, 1000s of decisions are made, from large multinational companies deciding to launch their next product to students deciding whether to buy the latest notebook or save their money for future purchases. All of these decisions are based on the same basic question: what is demand?

Example: A student who is preparing for semesters looks at the pricing of books and thinks about whether to buy them or not. His/her decision will be a reflection of the same market principles that dictate the workings of the global economy. People have wants, are able to compare prices, are able to determine whether they can afford the product, and will make choices based on perceived value.

With the proper knowledge of demand, it becomes easier for businesses to plan and for students to learn fundamental economic concepts, as well as for everyone to make informed financial decisions an understanding often explored when learning what is CFA and how it builds strong financial and economic foundations.

Definition of Demand

To comprehend the demand definition in economics, we must first define the term. Demand is not only a person’s wants or needs; rather, it can be measured and understood by economists, companies, and those who create economic policy (i.e., government policy) to help those studied understand how consumers will act in various economic circumstances.

There are two primary ways of looking at demand; these two views have been established as the best approaches when examining this subject.

Economic Definition of Demand

Demand is defined in the field of economics as the total amount of a commodity or service at various prices over a temporary time period.

Let’s break this down clearly:

• Quantity: How many people want to buy.
• Willing and able: People must want the product and also have the money to buy it
• Different prices: Demand changes when the price changes
• Time period: Demand is always measured for a specific time (per day, per month, per season)

As a result, demand is a measurable quantity, a predictable quantity, and therefore a useful commodity for business, government, and others.

Everyday Definition of Demand

The demand for a product is how many people want to buy that product; the higher the demand, the greater the amount of that product there is available for purchase.

Therefore, as demand increases, so too does the amount that can be purchased; conversely, if demand decreases, then there will be less available.

Key Features of Demand

Understanding the essence of demand requires knowledge about the 5 core ingredients that give demand its significance:

1. Need: The consumer must feel they “need” the item for there to be any real demand for it.
2. Willingness to Spend: Consumers need to be willing to spend their money on this product rather than something else.
3. Ability to Purchase: Even if someone wants to buy an item, demand for that item only exists if the person can afford it.
4. Time Frame For Demand: Demand is always dependent on a specific time frame (e.g., days, months, seasons).
5. Price-Demand Relationship: As the price changes, demand will also change:

As a general rule, when the price increases, the demand tends to decrease, and when the price decreases, the demand tends to increase. This inverse relationship is the basis of the law of demand.

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Types of Demand

The types of demand give you a clear view of how and why consumers purchase products in different circumstances. The various types represent different patterns of behaviour, and being able to identify these patterns will help you understand what demand means in the field of economics.

Each type of demand meaning is generally explained and outlined for someone who is beginning to learn. 

1. Individual Demand

A person’s willingness and ability to purchase an item at a variety of prices inadvertently indicates how much they personally desire the item.

Example of Individual Demand: An individual is a student who purchased a total of two notebooks when they were priced less, and as the price rose, he only bought one notebook. 

2. Market Demand

Market demand is the total amount of a product being sold at different price points by the whole market.

Example of Market Demand: There are 10,000 students buying notebooks on a monthly basis in a city. This will quantify the market demand for the notebooks being sold in that particular market.

3. Normal Demand

Normal demand occurs when an increase in a person’s income leads to higher demand for items, or a decrease in income results in reduced demand.

Example of Normal Demand: When a person has more money, they are more likely to purchase better quality shoes, designer clothing, and/or premium grocery items. This scenario exemplifies normal demand.

4. Joint Demand

Joint demand occurs when two products are bought together and one product’s demand affects the other.

A Few Simple Examples

• Smartphones and chargers
• Cars and gasoline
• Laptops and software

As demand for a smartphone increases, so does the demand for its charger.

5. Composite Demand

Composite demand occurs when an individual product has multiple uses.

A Few Simple Examples

Milk can be used:

• In tea
• In coffee
• As an ingredient in desserts
• For drinking
• In baking

The total demand for the product is generated based on its multiple uses, since each use contributes to the product’s overall demand.

6. Derived Demand

Derived demand is the demand for an item created by the demand for another item.

Examples:

• Cars: Create demand for steel
• Homes: Create demand for cement, bricks, and wood
• Online Education: Create demand for laptops and internet connections.

The demand for the final product creates the necessity of all the raw materials that go into making that product.

7. Seasonal Demand

Seasonal demand is affected by the seasons, weather conditions, or certain seasons of the year.

Examples:

• Summer = Air Conditioners
• Winter = Heaters
• Monsoon = Raincoats
• Holidays = Festive Products

Determinants of Demand

Product demand is never constant; it shifts over time as a result of many different factors, including changes in price, consumer income, customer preferences, and customer or market expectations. These are referred to as the determinants of demand because they indicate how much of any given product a consumer will purchase.

By analysing these determinants, we can gain insight into the factors that cause increases or decreases in demand within the real world.

1. Price of the Product

The demand for a product is driven most powerfully and directly by its price. When the price rises, demand generally falls; conversely, when the price falls, demand generally increases. 

Consumers are bound by their budgets, so purchasing an item at a high price causes them to look at alternative options or to decrease the number of items purchased. Conversely, if an item is priced low, consumers will be more likely to buy it.

Example: If a laptop originally cost ₹50,000 and is now being sold for ₹40,000, then we can expect to see increased demand from students and professionals purchasing laptops. On the other hand, if the same laptop were to increase to a price of ₹60,000, many consumers would simply delay their purchase or not purchase at all.

2. Income of Consumers

A person’s income has a significant impact on their demand. As income rises, the ability of consumers to pay for many goods and services increases. Conversely, a decrease in income will lead to a decrease in the amount of money spent.

There are distinctions in how the demand for various types of goods is influenced by changes in a person’s income:

1. Normal Goods: In general, as the income of consumers increases, their demand for these goods also increases.
2. Inferior Goods: When a consumer’s income rises, and he or she no longer has the need for the less expensive alternative, the demand for these goods diminishes because consumers typically “upgrade” to something better.

Example: An increase in income results in a consumer’s purchase of higher-priced goods, such as famous-name clothing, rather than less expensive alternatives. Conversely, a decrease in income usually results in a consumer’s return to purchasing lower-priced or generic-brand products.

3. Prices of Related Goods

Not only does the price of a product affect its own demand, but it also affects the demand of other products that are related to it. Related products can be classified into two categories:

1. Substitute Products: These are products that can take the place of one another. For instance, when the price of a substitute increases, then there should be an increase in the demand for the original product.

Example of a substitute product:

If the price of tea increases, then there may be an increase in the demand for coffee, as customers will switch to a less expensive alternative.

2. Complementary Products: These products are used together. If the price of a complementary product increases, then this would lead to a decrease in the demand for that associated product.

Example of a complementary product:

If gasoline becomes very expensive, then that would mean an increase in the price of operating a car, which could lead to decreased demand for cars.

4. Consumer Preferences & Tastes

Changes in consumer taste, preference, or value can significantly impact demand for products or services.

Some of the factors that influence consumer preferences include:

• Trends and fashions
• Culture and lifestyle
• Health consciousness
• Advertising and Social Media
• Seasonal Festivals
• Technological Advances

Additionally, any shift in preference will impact the level of demand regardless of price. For example, if new trends promote fitness, the demand for athletic wear, gym memberships, and healthy foods will increase as a result of this new trend. 

5. Expectations of Future Prices

Consumers now consider future price expectations when making purchases, which influences current demand. If people anticipate higher prices in the future, they are likely to buy now, increasing overall demand. 

Conversely, if they expect prices to drop, they will hold off on purchasing, leading to decreased demand. This behaviour affects various markets, such as electronics and real estate. 

For instance, if consumers expect smartphone prices to rise due to new tax regulations, they will purchase immediately, boosting demand. However, if there are upcoming sales with significant discounts, consumers will delay their purchases, reducing current demand.

Examples of Demand

To make the concept clearer, here are the two types of demand examples asked for:

1. Real-Life Examples

• Festive Season Shopping: During Diwali or Christmas, demand for sweets, clothing, and electronics rises sharply.
• Summer Drinks: Demand for soft drinks, juices, and ice creams increases as temperatures rise.
• Petrol Demand: Even if petrol prices rise, demand may not fall much because it’s a necessity for commuting.

2. Industry/Market Examples

Automobile Industry

Demand depends on:

• Fuel prices
• Interest rates
• Consumer income
• Economic growth

Example:

• If interest rates fall, car EMI becomes cheaper, and demand increases.
• Technology Industry: New launches cause temporary spikes in demand. For example, when a new iPhone is released, demand for cases, chargers, and screen guards also rises (derived demand).
• Agriculture: Demand for crops like rice, sugar, and wheat is stable, but demand for exotic fruits varies seasonally.

Importance of Understanding Demand

Understanding what demand is and how it affects business growth is a critical component to the success of a business.

Here are a few reasons why understanding demand is critical:

Pricing Strategy

• Understanding how much your customer will react to price changes is important to establishing your correct price point.
• Therefore, as your demand drops because of increased pricing, you will want to adjust your pricing.

Inventory Management

When you understand demand patterns, you can prevent:

• Overstocking (loss of profit)
• Understocking (loss of revenue)
• Retailers, supermarkets, e-commerce businesses, etc., all depend heavily on demand forecasting.

Production Planning

Manufacturers use demand forecasting for:

• Raw materials
• Labour
• Machinery usage
• Supply chain operations
• Market Analysis

By analysing demand, businesses can identify:

• Growing customer segments
• Declining product categories
• Opportunities for new products

Business Growth

Recognising unmet needs can help businesses introduce new products or enter new markets.

Example:

With increasing demand for plant-based foods, manufacturers have developed vegan products to meet the needs of consumers.

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Conclusion

What is demand in economics? Learning demand is one of the most important things students, entrepreneurs, marketers, and decision-makers need to know. Demand is no longer just desire; it includes both being willing to and being financially able to purchase an item, as well as being sensitive to the price of that item, the timing, and all the other factors associated with it in the marketplace.

When you learn about what demand means, the different types of demand, some characteristics of demand, examples of demand, and what factors determine the level of demand, you will better understand all of the factors that play into how consumers make decisions about buying things—knowledge that forms a key part of the CFA certification curriculum.

FAQs on What is Demand

What do you mean by demand ?

Demand means what consumers are ready, willing, and able to purchase at a certain price at a given time. The wider the ‘demand curve’, the more desire or want consumers have for the product or service, and the more likely they are to have the financial means to make the purchase.

What are the different types of demand in economics?

There are 7 main types of demand used by economists in analysing purchasing decisions: individual demand, market demand, normal demand, joint demand, composite demand, derived demand, and seasonal demand.

How is demand different from need?

‘Need’ signifies that something is needed for basic existence (food, shelter), and ‘demand’ signifies that someone wants something and is willing to pay for it. Every demand originates from either need or want, and not every need will develop into  

What are the key determinants of demand?

Demand is affected by several factors that are often referred to as ‘the determinants of demand’, which include the price of the product, the number of people who can afford to buy it, the prices of related goods, the tastes and preferences of consumers, and the expectations regarding future prices of the product.

Can demand change over time?

Demand may also change over time as a result of price changes, changes in consumer income, changes in trends and fashions, the seasons of the year, the impact of new or improved technology on consumer demand, and the impact of future expectations on the consumer’s level of demand.

What is derived demand with examples?

Derived demand refers to the fact that the level of demand for one good or service is dependent upon the level of demand for another good or service. 

For example, an increase in demand for cars will create an increase in the steel demand, and an increase in demand for bread will result in an increased demand for wheat.

Current Role

Co-Founder & CEO at Zell Education

Education

• ACCA – Association of Chartered Certified Accountants, Finance (2011 – 2014)
• Bachelor of Commerce (BCom), Financial Markets from H.R. College Of Commerce & Economics (2010 – 2013)

Location

Mumbai, India

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ACCA Certified