Demand

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:

• Consumer Income: For most things, which economists call normal goods, when people's incomes rise, they buy more. Think more vacations or better cars. However, for inferior goods, the opposite happens. As incomes rise, demand for things like instant noodles or cheap fast food may fall as consumers upgrade to better alternatives.
• Prices of Related Goods:
  • Substitutes: These are products that can be used in place of another. If the price of Android phones skyrockets, the demand for iPhones will likely increase (the iPhone demand curve shifts right).
  • Complements: These are products often used together. If the price of gasoline soars, the demand for large, fuel-guzzling SUVs will likely decrease (the SUV demand curve shifts left).
• Tastes and Preferences: This is all about what's hot and what's not. The surge in health consciousness has massively increased demand for plant-based foods and gym memberships, while shifting it away from sugary sodas. Fads, cultural trends, and effective advertising can dramatically alter the landscape of demand.
• Consumer Expectations: If you expect the price of a new video game console to drop significantly after the holidays, you'll probably wait to buy it, decreasing current demand. Conversely, if you hear rumors that a company's stock is about to be acquired at a premium, demand for its shares will surge now.
• Number of Buyers: A growing population or the entry into a new international market can increase the total number of potential customers, shifting the demand curve to the right for many goods and services.

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.

• Opportunities: A great value opportunity can arise when the market overreacts to a temporary dip in demand. Perhaps a harsh winter hurts an ice cream company's quarterly sales, or a product recall spooks customers of an otherwise solid automaker. If you believe the long-term drivers of demand are still intact, the resulting drop in stock price could be a fantastic buying opportunity.
• Risks: The biggest risk is a permanent, structural decline in demand. Think of companies like Kodak, which failed to adapt as demand shifted from film to digital photography, or Blockbuster, which was wiped out by the shift to streaming. A value investor must be ruthless in assessing whether a company's products are facing obsolescence. No matter how cheap the stock seems, if nobody wants what the company sells anymore, you're not buying value—you're catching a falling knife.