Demand is the economic principle that describes a consumer's desire and willingness to purchase a specific quantity of a good or service at various prices. Think of it as the engine of any market economy. At its heart lies a simple, intuitive relationship known as the law of demand: all else being equal, as the price of something falls, people will demand more of it. Conversely, as the price rises, they will demand less. This fundamental concept from microeconomics is not just academic; it is the lifeblood of a company's sales and profitability. For an investor, understanding the forces that drive demand for a company's products is a critical first step in assessing its long-term value and potential for growth. A business can have the most innovative product in the world, but without sufficient demand, it's just a great idea collecting dust on a shelf.
Imagine your favorite coffee shop decides to slash the price of a cappuccino from €4 to €2. You'd probably be tempted to buy it more often, maybe even treating a friend. Your coworker, who usually brings coffee from home, might now decide it's worth buying it from the shop. This is the law of demand in action. Economists visualize this relationship with a demand curve, which is a simple graph plotting price on the vertical axis and quantity demanded on the horizontal axis. Because of the inverse relationship, the curve slopes downwards from left to right. For an investor, this isn't just a pretty line on a chart. It represents the company's immediate sales potential at different price points. A company that deeply understands its demand curve can optimize its pricing strategy to maximize revenue. Setting a price too high might lead to a sharp drop in sales, while setting it too low might leave money on the table.
While a change in a product's own price causes a movement along the existing demand curve, other factors can shift the entire curve left or right. A shift to the right means consumers are willing to buy more at every price level, while a shift to the left means they will buy less. Astute investors are always on the lookout for these shifts, as they can signal major changes in a company's future fortunes.
Several key factors can cause the entire demand curve to move:
For a value investing practitioner, analyzing demand isn't about chasing hot trends. It's about understanding the durability and predictability of a company's customer base.
A value investor seeks businesses with strong, stable, and preferably growing demand. You can get clues about this by examining a company's revenue growth, sales volumes, and market share over many years. Does the company consistently sell more year after year? This is directly linked to the concept of an economic moat, or a durable competitive advantage. Companies with powerful brand loyalty (like Apple or Coca-Cola) or products that are deeply integrated into a customer's life (like Microsoft Windows) have very predictable demand. Customers are less likely to switch away even if prices nudge up. This is a sign of what economists call low price elasticity of demand, and it gives a company incredible pricing power and financial resilience—a beautiful sight for any investor.