Definition
Market demand can be described as total demand for a particular product or service in a given geographical area. In other words, it can also be defined as the total volume which is expected to be purchased by the willing buyers at the offered price.
The price is set by the two market forces that are demand and supply. These forces ultimately set the price when the demand and supply curves meet each other and are termed a market price.
Explanation
The market demand is a business concept driven by one of the most prominent economic principles of all time. There are two important factors in this mechanism that plays a vital role in determining the market demand and market price.
Now we will try to discuss the main features of this economic principle at length. Many factors play a role in determining the market demand in the real situation.
In order to have a good familiarity, this principle keeps some variables constant and only focuses on the demand and supply.
Keeping some variables constant, the market demand for a particular product increases upon decreasing its prices and vice versa.
This principle is mainly based on human psychology, which describes that an ordinary individual will try to purchase more when the prices of the products or services are lower.
On the other hand, he will try to reduce his consumption of a particular good or service when the prices go up. Human psychology allows humans to invest more in such items for which they will have to pay less and restrict from purchasing such items for which they will have to pay more.
The two main market factors, demand, and supply, ultimately set the market prices for any product or service. According to this economic principle, the demand and supply for a particular product or service are presented through a graphical presentation. The market price is set at a place where the demand and supply curves intersect each other.
Thus, in a nutshell, market demand for a good will be higher at a lower price and vice versa. This is the reason every business organization employs highly paid employees to determine the market demands.
The wrongful calculation of this market demand may be harmful to the entity in either way. If it calculates less than actual demand, it incurs a loss in terms of loss of profitability. If it calculates more than actual, it incurs a loss in terms of the net realizable value of inventory due to obsolescence.
Thus, it requires a meticulous calculation while considering the portion of market demand fulfilled by the rivals. The little increase in market demand can be achieved by lowering the market prices for the necessities, however a huge change in market demand in luxury goods.
Examples
To better understand this theory of economics, we will take two examples of the current situation in the economy. Its nature and usage may also influence the market demand for a particular product or a service.
Nowadays the prices of agricultural products are very high, especially the prices of tomatoes.
Similarly, the prices of motor vehicles also increased because of heavy import duties levied by the authorities. Both of the goods are consumer products, but the nature of both the products is quite different.
Due to their common consumption by every household, Tomatoes are termed as a basic good or a basic necessity. However, motor vehicles are considered a luxury good because one can live alive without having a vehicle.
Thus, the reactions to the market demand for both of the goods are different with changes in the market prices of the products.
The increase in prices of tomatoes, though, decreases the demand for tomatoes, but this change is very little because no one can cook the food without adding tomatoes to the dishes.
This is why the increase in the price of tomatoes did affect the market demand for tomatoes.
However, in motor vehicles, the increase in prices of the motor vehicles affects a great decrease in demand because many of the low earning families decided not to purchase the vehicle where they have to pay a higher price of the product.
Many families decided to divert such investment in purchasing and fulfilling the necessities to their families instead of purchasing high-priced vehicles.
Because of this behavior from the customers, the market demand for the vehicles drastically decreased with increases in prices.