Have you ever wondered why the price of something such as gasoline has risen over the years? Is it from the taxes imposed? The oil tycoons in OPEC or all those protesters? Or could it possibly be because the world demand for oil and gas has risen over the years?
Demand affects the prices of items just as much as supply does. The more you like it (preference), the more money you make (income), the price of a similar product, the prospect of future prices, income or availability; and the size of the market or income and age distribution in the area all affect demand.
For example, if you really prefer to wash your dishes with knitted dishcloths. Using the knitted dishcloths would be your preference. Depending on your income, perhaps you could purchase the wool and make them yourself (as this could cost less money). Maybe you could purchase inexpensive other dishcloths at another store or maybe you wish to splurge on this item. Perhaps you find out that there is a wool shortage in the world and this will affect the producers’ ability to create the dishcloths at the same price. Maybe the market where you purchase these dishcloths has an influx of people who also enjoy the dishcloths or maybe more people move into the market area that really enjoys using the same dishcloths. All of these factors would affect the demand of the knitted dishcloths in various ways which may also lead to the price changing in order to reach equilibrium.
On the graph below, I have illustrated how an increase in demand will affect the equilibrium price. Notice in Demand 1 (D1) that the equilibrium price was $3.50 with the quantity demanded and the quantity supplied of 48. With Demand 2 (D2) the equilibrium price is now $4.00 with a demand and supply of 54. An increase in demand will lead to a higher price and a higher supply provided.
So next time you are purchasing a good or using a service (such as electricity) and you notice the price is a certain way, you can evaluate how the demand for this good or service has affected the price of the item and how to prepare for the future demand.
