Financial Dictionary -> Investing -> Demand

Demand is simply how popular a product is or how much the consumer wants or needs it. This reflects the amount of units made by the business or businesses. A company can be seen as not meeting demand, exceeding demand or meeting demand. Something in high demand that isn't being made to meet demand can be sold at a higher price, like diamonds.

Some products sell for a long time at a rather consistent level of demand, such as Coca Cola, whereas the music from a 'flash in the pan' pop singer, might sell well for a few months then never sell again.

Often changes in demand occur simply because people's tastes and preferences change or something negative hits the media like ('breaking news bread causes cancer'). Consumer choices are often fickle and unpredictable, meaning a company has to be prepared for fluctuations in demand.

The economy itself plays a big part in demand. During economic crisis, luxury items and entertainment usually see a decrease in sales. People are less likely to go to big concerts or go on expensive cruises when their stock is becoming worthless and they are losing their homes. For a business things like competition also play a part in the demand for your product. If you own a mom and pop fast food store and McDonalds opens across the street demand will fall.

The price of products significantly affects demand and during times of inflation (general rise in prices), people may pull back on spending. A good example of how price affects demand can be seen in the computer game market. When a new console hits the shelves a lot of people hold back their purchase until the price is slashed after about a year. Companies know the hardcore fans will buy it right away at whatever price, but eventually they need to bring the price down to keep sales consistently high and bring in the masses.