6.3 - The Role of Demand

Demand is a term that defines the amount of products and services which customers are prepared to buy. Witha limitless desire of wants and needs, demand identifies with the scarce nature of goods and services. Hence it focuses on the exact number of goods and services that will be sold instead of on perceived desires of the customers.

There is a more accurate measure of the demand of a product or service because the sales figures provide factual evidence of the customer behaviour towards the products. Furthermore, their willingness to pay for the product helps reinforce the demand.

When a product is high in demand, it could be limited in supply. However, aslong as the people are wiling to pay for the product, it would be available in the market. Although in this case, frequently at a premium price.

On the other hand, when there is a large amount of products or services available which exceeds demand, these will be sold at a low price so that people will be attracted to buy the products.


Relationship of Demand and Price

Price and demand are inseparably linked for almost every product or service. With essential goods and services, the demand for these goods remain high despite the cost. These types of goods include basic items like water, groceries and other similar products. People need food to survive and a scarcity of food does not deter people from buying it. Even when the price is high, it will be purchased (unless there are cheaper alternatives readily available).

Expensive products and services tend to have a lower demand. In order to make such products attractive and stimulate the demand, businesses make available various long-term payment plan options and also encourage the use of credit.


Relationship of Demand and Competition

The greater the intensity of competition in a market, the greater the impact on price. Businesses innovate themselves in various ways to maintain high levels of demand and retain their customers. With tough competition however, established businesses with trusted brands that consumers are loyal to still thrive well in such environments. This is known as brand loyalty.

As long as customers trust a brand they will often be prepared to pay a higher price for it, as long as they remain satisfied with that product. Once the brand stops satisfying their needs, they will switch to another brand. The major reason for such a switch in brand is the price. Once there is a better value available, customers will go for it. Therefore competition between brands can affect demand.

Demand is also affected by close substitutes competing with each other for customers. Hence, when a customer moves between similar products to satisfy their needs, then the demand is also affected.


Relationship of Consumer Income and Demand

A consumer's disposable income will affect the demand for products and services. The higher a consumers income, the greater will be the spending power of the consumer. However, when the income is lower, there will be a reduction in spending power. In effect, the amount a consumer is willing to spend on goods and services depends on their disposable income.

Every business must be aware of the need to advertise it's existence and it's products or services. Regardless of the high standard of quality of goods, when the marketing strategy is poor, the demand will be relatively poor.

Seasonal fluctuations can also affect demand. Due to the nature of certain businesses, there are periods during the year which are busier than others.