Understand How Demand Affects Prices

Remember a time where you discovered a sale. You bought things that you wouldn’t usually buy because they were at a lower price. The price of an item changes its demand. When prices increase, fewer people will choose to purchase a product. When prices decrease, more people will buy.

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Think back to a time when you received a pay rise. You started to buy things you didn’t before. When incomes change, demand changes, too. When incomes increase, the demand for goods and services increases. This is good for jobs, as businesses hire more employees to serve their customers. When incomes decrease, the demand for products decreases, too, and so does job availability.

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Consider how Americans once preferred to drive large cars that used a greater amount of gas. As the price of gas increased, Americans changed their preferences and started buying smaller cars. This occurred because gas is a complementary product to cars. You need gas to run a car. As gas prices increased, the demand for cars that use a large amount of gas decreased.

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Imagine you are shopping and you can’t decide whether to buy a blue shirt or a green shirt. They both fit the same and have the same quality fabric, but the blue shirt has a lower price. You might choose to buy the blue shirt based on price. The shirts are substitute goods. The demand for the green shirt decreased because the very similar blue shirt was available at a lower price. Businesses constantly innovate to release new and better products. By incorporating new features or better design into their products, competitor products are no longer an adequate substitute.

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When you were a teenager, you probably liked different music than your parents. This is a repeating cycle and an example of changing consumer tastes. The demand for music artists who were popular decades ago has decreased, as have sales of their music. The demand for recent artists has increased, and they are now achieving high sales of their music.

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The price you expect to pay for an item in the future will affect how much you are prepared to pay for it now. If there is a product or service you would like to have, you will rush to purchase it if you know the price is expected to increase. Investors purchase assets, such as shares or property, when they expect them to increase in value. The reverse is also true: customers will wait to purchase goods when they expect prices will go down. You might wait to purchase a new TV until the Black Friday sales.

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The number of people who would like to, and are able to, buy a product will affect demand. Think about what would happen if the legal drinking age was raised or lowered in your region. This would increase or decrease the number of people buying alcohol. When unemployment rates are low, more buyers have money available to buy luxury goods. This increases the demand for luxury goods. When unemployment rates are high, fewer buyers have money, decreasing demand.

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To understand demand, it is essential to understand the economic principle of supply. The purpose of a business is to maximize profits. A business will seek to supply as many goods or services as it can, as long as it is making money. As prices increase, new businesses will enter the market. Businesses face different costs of production. For example, an American worker is likely paid more to work in a factory than a Chinese worker. So, a company that produces in China will produce goods at a lower price than a company that produces goods in America. As prices go up, businesses with higher production costs can make a profi,t so they will enter the market to sell the product.

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The demand for products shifts and changes based on various factors. Most importantly, though, as prices rise, the quantity demanded of that product declines. Conversely, as prices rise, the quantity of that product supplied by businesses increases. Businesses will make adjustments to prices until the market reaches equilibrium. This is the point where the amount of product supplied by businesses is equal to the amount of product demanded by customers.

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When demand is high, this can lead to inflation, while low demand leads to deflation and, eventually, recession. The federal government uses a range of fiscal policies and the Federal Reserve uses monetary policies to slow down rates of inflation and deflation and maintain a stable economy.

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