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Main Dictionary D


Demand is an economic category that reflects the desire and ability of consumers to buy any quantity of goods at a certain price at a certain time. If all other factors remain unchanged, the higher the price of goods and services, the lower the quantity demanded, and vice versa. Demand is one of the key factors in market pricing. Market demand is a set of individual demands that all buyers (consumers) present for a product in a particular market. The real prices and volume of goods in the market are determined by demand and supply.

Why Demand is so important

Business considers the demand and relevance for the product as one of the significant criteria to pay special attention to. Statistical analysis of consumer demand for products (goods and services of an enterprise) is important for a store both online and offline, since it is the determining information basis when choosing an assortment that can make a profit. For manufacturers, distributors and retailers, the correct demand forecast is extremely important, because it allows them to estimate the required volume of supply and schedule deliveries.

Self-regulation of the market occurs due to the interaction of market mechanisms: supply and demand, which are intimately connected with each other. The relationship between supply and demand is easy to follow. They depend on the same facts, chief among which is the price. When the price drops, the demand for the product increases significantly. The relationship between demand and price of a product is inverse - the higher the price, the lower the demand. The supply is directly related to the price - the higher the price of the goods, the more goods the producers are ready to offer. 

Aggregate Demand

Aggregate demand is the real volume of national production, the volume of goods and services which are demanded in the markets of the country and which consumers, enterprises and the government are ready to buy at a given price level (at a given point in time, under given conditions).  

Aggregate demand is determined by the expenditures that households and entrepreneurs plan. The sources of demand are also the state and foreign countries. Demand for goods by a separate macroeconomic entity is formed under the influence of various motives that are taken into account when constructing their demand functions. 

Aggregate demand depends on a number of factors not directly related to price changes. This may be a change in consumer income, a change in the taxation system, the possibilities and conditions for granting a loan, the state of money circulation, the stability of the economic situation, etc. 

Market equilibrium

Market equilibrium is a situation in the market when supply and demand are equal. It will be observed under such conditions, when the possible price at which buyers are willing to buy the quantity of goods (demand price), coincides with the possible price at which producers will be ready to sell it (offer price) and also in the situation, when at the current market price level the production volume that buyers are willing to purchase (the quantity demanded), will coincide with the volume of goods that producers will be willing to sell (the quantity supplied). Either way, competitive markets tend to push prices toward market equilibrium. Graphically, the equilibrium point is considered to be the point of intersection of the supply and demand curves.

How does a Demand curve work

The quantity demanded is one point on the curve corresponding to the price. And demand is a set of points belonging to the all curve. Thus, demand is the relationship between the quantity demanded for a product and its price. The law of demand states that this relationship is inverse. On a graph where the price is plotted on the vertical axis and the quantity of goods on the horizontal axis, demand will be represented by a downward-sloping curve reflecting the fact that as the prices of goods and services decrease, the number of their purchases will increase, and vice versa, as prices rise, the quantity purchased goods and services will decrease.

Graphically, the change in demand can be shown through a change in the position of the demand curve. An increase in demand can be reflected by moving the curve to the right, away from the coordinate axes. Moving the curve to the left, closer to the coordinate axes, means a decrease in demand. In addition, for each product and service, there are unique factors of supply and demand that affect the slope of the curve on the graph.

The change in the demand itself occurs under the influence of non-price factors. In this case, the relationship between the quantity demanded and the price of the goods will change, which means that this will be reflected in the displacement of the all curve. When the product demand remains constant, the quantity demanded may change due to a change in the product price. This is reflected by the movement of one point along the demand curve, which is always caused by a change in the price factor.

Demand in macroeconomic policy 

Aggregate demand is managed through fiscal and monetary authorities (ex. Federal Reserve). For instance, if it is necessary to reduce demand, the prices are raised by curbing growth in the supply of money and credit and increasing interest rates. This situation also works in reverse, and then it allows consumers and businesses to spend more money.

However, the Fed may not always have a significant impact on demand in the market, for example, in the case of rising unemployment, people still cannot afford to spend or take on cheaper debt, even at low interest rates.

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