What is Consumer Demand? - Theory & Examples

Instructor: Michelle Reichartz

Michelle has lead multiple training initiatives and has a master's degree in Business Administration.

In this lesson, you will learn what consumer demand is, how it works together with supply, how it applies to the economy, and different methods for generating or understanding demand.

Getting the Basics

Think about your own life for a moment. We are surrounded by products and services, but which of those are the absolute essentials? The first ones that probably come to mind are food, water, and heat, right? Even though these are the things we truly need to live, we have so many more items in our lives. For example, two-thirds of Americans own a smartphone. What caused you to buy those products? What made you want to get those services?

The word you are looking for to describe why you bought those products or services is consumer demand. Demand, in short, is the willingness to buy a product or service based on the consumer's desire.

There are two different types of demand. Aggregate demand is the overall or average demand of consumers. Individual demand is the demand for a particular consumer.

Demand's Connection with Supply

Demand and supply go hand in hand. Supply is the amount of product available for consumers to purchase. Consumers, those who buy the products, want to pay the lowest price while the supplier attempts to maximize their profits. If the suppliers charge too much, they'll have too much supply and not enough demand to sell their products. If the suppliers charge too little, they'll run out of supply and not make enough profit to continue their business. The focus is to charge enough to make a profit, but not so much that you lose too much consumer interest. In the perfect scenario, you maximize on profit while still satisfying the consumers.

An example of poorly managed supply and demand is the recent iPhone 7 announcement. The company stopped taking pre-sale orders for the new version of their high sales phone due to the inability to meet the demand. In response, the price of the company's stock decreased and consumers were left unsatisfied. Definitely not a happy ending for the company or the consumers.

Supply and demand can be impacted by other factors as well too.

This list includes:

  • Availability of competing goods or services
  • Quality of the product
  • Availability of financing
  • Perceived availability of a good or service

Understanding and Generating Demand

There are multiple strategies you can use for either understanding the demand for a product or creating demand for a product.

1. Get to Know Your Consumer

The better you understand your consumer, the more likely you are to be able to sell a product to them. How can you sell someone a product unless you know what they're looking for?

One company that does a great job at this is Starbucks. Through their website, any consumer can provide a product idea that they could potentially turn into reality. It's one way the company takes the power of the people and turns it into a new profit source.

2. Provide Content Online

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