Types of Demand

In economics, demand is not simply want or need. It is defined as the willingness to pay for a certain product. Traditional economics (by Adam Smith) also further sub-divide demand into: Absolute Demand and Effectual Demand.

Absolute Demand is our desire or need for certain goods (like food, water, transportation, etc), but absolute demand does not take into account of the willingness to pay. That is to say someone might want to high-end car, but his willingness to pay is too low (i.e. the car is not affordable to him). Thus, his demand does not induce supply. It does not create incentive that causes the manufacturing of high-end car like Rolls-Royce to happen.

Effectual Demand, on the other hand, is the demand accompanied with at least just the right willingness to pay to bring the products or services demanded into the market. If enough rich people are willing to spend, say, 5 million bucks on every high-end car made, then this would be a sure incentive for auto-producers to begin the manufacturing of the high-end car. Effectual demand is, in essence, what drives and keeps afloat our economy.

The educational video below, however, seeks to explain and raise awareness about a higher-order demand, “the quality of demand”. They distinguish between good and bad demands.

Of course, this is much relevant to the modern economy we live in, but I have to disagree with their claim that demand quality is not of or of little concern to economists. Regardless, the effort they put into making the video is commendable, and I would like to share this great piece of art with you.

Credit goes to: The School of Life. Check out their youtube channel via the link below: