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This article will discuss the types of demand. What is a demand? Economists define it as the willingness and ability of consumers to buy goods at any given price. Willingness means we want things. Ability means we have the money (resources) to buy.
Some consumers may have a desire and are willing to buy a product. But, they have no money and, therefore, cannot afford to buy. Therefore, it doesn’t lead to demand. In other cases, some rich people may have a lot of money but don’t want the product. Therefore, it also doesn’t generate demand.
In other words, our desire to buy goods leads to demand if it is backed by the ability to buy. And, if we have enough money, it will lead to demand if we spend it on the things we want.
What are the types of demand?
Understanding the different types of demand is important for businesses. They exist to satisfy the needs and desires of consumers. In other words, they are trying to fulfill demand.
Thus, understanding the types and characteristics of demand gives how well their market is growing. It is also possible to offer ideas about where new goods or services can be introduced. In addition, they can also anticipate how many products they can sell.
There are different types of demand. And in this article, you will find terms such as primary demand, direct demand, derived demand, short-run demand, and so on.
Primary demand is directed to certain categories or types of products. It does not lead to a specific brand. Thus, it focuses on broader benefits without highlighting the benefits of using goods from a particular brand.
Thus, when companies promote, they aim to drive interest in a particular product category or type of product without directing viewers to a particular brand.
For example, an electric car manufacturer launched an advertising campaign to encourage consumers to switch from carbon-fueled cars. The company invites consumers to participate in preserving the environment by reducing their carbon footprint.
Secondary demand means directed to certain brands or products in a wider product category. For example, the demand for the soft drink product category is primary demand. Meanwhile, the demand for Coca-Cola brand soft drinks is secondary demand.
Promotion to create secondary demand leads to brand competition. Companies compete with each other to highlight their respective brands and try to create preferences. Thus, consumers choose their brands over competing brands.
Latent demand has not been active, cannot be observed, or has not been realized. It appeared for several reasons. First, consumers want a product, but they don’t have the money to buy it. Thus, their wishes are not realized. Or they have hidden and undisclosed desires. It requires marketers to dig deep through marketing research.
Second, consumers want a product. However, the product is not available because it has not been produced or is under-produced. Thus, the product is not available in their vicinity.
Third, consumers want a product, but they don’t know it’s available. So, they have not been able to satisfy their needs and wants, even though they have money to buy.
Direct demand refers to the demand for direct consumption purposes. They are not dependent on the demand for other products. Examples are the demand for clothing products, canned food, and smartphones.
Derived demand points to the demand for a product, which arises and depends on the demand for other products. An example is gasoline demand. It depends on the demand for the car. When the demand for cars increases, it will also increase the gasoline demand.
Another example is the demand for wood. It depends on the demand for furniture.
Sometimes we refer to derived demand as indirect demand. The reason is, it is affected by the demand for the related product. For example, it is common for various items to be further processed to produce other items such as wood for furniture in the example above.
Another example is the demand for aluminum with the demand for cars. Or a pulp demand with a paper demand is another good example.
Negative demand is when a product tends to be avoided or disliked by consumers. For example, medical care tends to have a negative demand. This is because consumers tend to take disease prevention measures rather than having to buy medical services. Likewise, insurance policies are similar. People tend to be careful rather than having to spend regular money to pay for policies.
Negative demand also occurs if a product has a negative image. So, people tend to avoid it. Liquor and pork in Muslim countries are good examples.
Historical demand comes from customers who have purchased a product or service in the past. Marketers typically use their data as a guide for forecasting future demand. In addition, the data is also used to examine demand patterns, buyer characteristics, and purchase volume.
Historical data helps businesses make decisions about future operations. For example, by forecasting market demand, they can target how much volume will be sold in the future, they can make decisions about production volumes, the number of workers to be recruited, and the equipment to be purchased.
Current demand refers to the quantity consumers are willing and able to buy at the current price level. We can calculate it by multiplying the total number of buyers by the average quantity or value purchased from each buyer.
For example, at the current price of $10, the consumer is willing to buy 10 units of the product. If there are 3,000 consumers in the market, the current demand is 30,000 units. If the price changes, the volume will also change.
Potential demand is the estimated demand based on customers who might buy products and services if certain criteria are met. For example, consumers have the ability to buy but have not made a purchase. They may still be waiting for the right moment. For example, they are waiting for the price to drop slightly from what it is now.
Effective demand refers to the desire for a good accompanied by the ability to pay for a given price. So, consumers want and have the money to buy these goods.
Effective demand is different from latent demand. For the latter, consumers only have the ability, but not the inability to buy.
Declining demand is when demand shows a lower trend over time. It is usually the final part of the product life cycle. Consumers may no longer like the product because they find a better alternative.
The decline can be short or long, depending on each product type. It is usually associated with technological innovation. Or, it is also due to changes in consumer tastes or preferences, for example, due to increased awareness of the environment and health. Regulatory changes can also be a reason, such as a smoking ban or a significant increase in cigarette taxes.
Irregular demand occurs when it fluctuates over time. For example, it may be seasonal as tourism products increase during the holiday period. Or the increased demand for chocolate on Valentine’s Day. In this case, demand increases during peak season and decreases during the normal season.
Alternatively, fluctuations may also occur eventfully without establishing a seasonal or cyclical pattern. Demand indeed increases and decreases but forms a random pattern. This category is more difficult to predict.
Joint demand is when the demand for two or more goods is interdependent. They usually complement each other. For example, the demand for gasoline and cars or the demand for printers and ink. Or, one item may be an accessory to another, such as tires with cars.
Composite demand is when a product can be used to fulfill two or more purposes or uses. For example, we can use corn as animal feed, eat it directly, or as raw material for ethanol.
Another example of composite demand is crude oil. We can use it to produce fuel or plastic.
The next example is the land. We can use it for agricultural areas. Or, we use it to build factories, office buildings, or housing.
As a result of such a relationship, an increase in demand for one use reduces availability for the other. Since supply usually cannot grow at the same pace, it leads to price increases. Besides, such situations usually require us to ration.
Short term demand
Short-run demand refers to demand when consumers react relatively slowly to price changes. It may be because they had no other alternative. Or, other alternatives may not yet be available.
Changing demand takes more time. It is usually associated with changes in lifestyle choices or tastes. For this reason, short-run demand tends to be inelastic.
Take, for example, consuming food for a diet. Consumers may completely direct the demand to the desired menu. It could be because it is not available or there are few variations. Or, because they are usually more expensive, they don’t have enough money to divert their spending right away.
Then, changing tastes also takes time. So even though they started to change the menu, but once in a while, they might still do the old habits.
Long-run demand is demand when consumers are fully flexible in responding to price changes. It is relatively elastic.
For example, in the case of the diet above, consumers have fully adapted to the diet menu. Their tastes have changed completely, and they no longer stick to the old habits. In addition, in the long term, various diet menu variations may be available in the market. Or they have completely adjusted the budget.
Take reducing the demand for carbon fuels as another example. Consumers do not immediately replace their cars with electric cars. These alternatives may be available but are expensive and well over budget. So, it takes time to collect enough money to buy them. Over time, more and more electric cars are available at lower prices. On the other hand, consumers have also accumulated enough money to buy.
Competitive demand arises when we have several alternative products to choose from. And, when we choose one, we leave the other. In other words, these products are substitutes for each other and fulfill our common needs.
Take, for example, chicken and beef. Both replace each other in meeting our protein needs. Hence, when we choose beef, we ignore chicken, and we don’t buy both at once because, for example, we don’t have enough money.
For example, beef prices soared due to a decrease in supply. As a result, we turn to a cheaper substitute (chicken). Hence, the demand for chicken meat increases.
Market demand represents the total quantity demanded by all individuals in a market for a good. These consumers not only want goods but also have the ability to buy at a given price level.
For example, in the chocolate market, there are 10 consumers. At $4, they bought an average of 5 units. In this case, we can calculate market demand by multiplying the number of consumers by their average buying volume (10 x 5 units = 50 units).
Individual demand is the quantity demanded by a person at a certain price level, which he not only has the desire to buy but also has the money to do so. In short, the demand came from one person.
Economists usually use price to describe the quantity demanded by a person. Other influencing factors, but not explained in the model, are income, tastes and preferences, expectations of future prices, substitute goods’ prices, and complementary goods’ prices.
What to read next
- Demand Curve: Types, How to Draw It From a Demand Function
- Reasons For a Downward-Sloping Demand Curve
- What is the difference between a movement and a shift in the demand curve?
- What is the Law of Demand? How does it work?
- Three Assumptions Underlying the Law of Demand
- What Are the Five Exceptions to the Law of Demand?
- What is the difference between a change in demand and a change in quantity demanded?
- Individual Demand: Definition, Its Curve, Determinants
- Market Demand: Definition, How to Calculate, Determinants
- What are the six non-price determinants of demand? Examples.
- What Are The Types of Demand?
- Demand in Economics: Meaning and Determinants