What is demand theory?
Demand theory is an economic theory that forms part of economists' understanding of the supply and demand curve. The supply and demand curve is often used as a fundamental argument for capitalism. According to the theory of demand and the concept of supply and demand, society will set the perfect price for any item over time.
For every product that exists on Earth, there is a certain level of demand. Demand simply refers to the consumer's desire to buy an item. Given demand is often represented in terms of money. For example, if an item costs too little, many people may want the product, even if they don't really need or use it. On the other hand, if an item is extremely expensive, only those who really want the item will be willing to pay for it.
As a result, demand for a product is directly affected by its cost. There is an optimal level of demand that must be reached under the theory of demand. This level of demand occurs when a product is priced so that only those who really need it buy it. This maximizes efficiency.
Supply can also affect demand. As such, demand theory is intertwined with supply theory. The more a product is manufactured, or the greater the supply, the greater the competition for customers between producers and sellers of that particular product.
When the supply becomes too high, it exceeds the demand for the item. As a result, manufacturers of that product will have to lower the price of the item to increase demand. When the price is reduced, more people will want the item. For example, suppose an ice cream sundae costs $100 US dollars (USD); Demand would be very low. If a manufacturer reduced the price to $1, demand would be very high. In fact, people who didn't even want ice cream would probably buy it simply because the cost to them was so low.
Eventually, the supply and demand curves will meet at the sweet spot. According to demand theory, this means that an industry will determine the exact price at which charging too much would reduce demand and cost money, while charging less would result in lost revenue, even with the additional demand. This is fundamental to the idea of a capitalist society, which believes that the market will set the right price without intervention.