What is Demand Destruction?
- Posted on October 10, 2022
- Financial Terms
- By Glory
Demand destruction is the term used in economics to
describe a long-term drop in the demand for a particular good as a result of
persistently high pricing or a constrained supply. Consumers may conclude it is
not worthwhile to purchase much of that good due to persistently high prices,
or they may look for substitutes.
Demand
Destruction Explained
Demand destruction occurs when there is no indication
that demand will rebound in the near future when a good or brand experiences a
major drop in demand over a very short period of time. In essence, demand has
been obliterated.
Demand destruction could completely eliminate a
certain commodity in some marketplaces.
The demand for oil products or other
energy-related commodities is most frequently linked to demand destruction. High
prices can cause demand destruction, particularly in the energy sector, but
only if they cause consumers to alter their habits in a way that is at least
somewhat long-lasting. Prices typically increase in all economic sectors when
inflation occurs. As a result, rising gas prices may also result in rising
expenses for housing, food, and automobiles.
For instance, the market would eventually respond if
gasoline prices continued to rise sharply and steadily. Most likely, if gas
prices remained so high, customers would eventually make more significant
changes as a result of the cost-benefit analysis. They would either switch to
mass transit as their preferred mode of local transportation or swap in their
current automobile for a more fuel-efficient model. The number of fuel
purchases made by consumers who switched to public transportation or bought new
cars would decrease, thereby, permanently destroying demand.
The choice of a vehicle is also influenced by the
assumption of future pricing and their protracted maintenance at non-economic
levels for a specific amount of usage. Marginal consumers are compelled to sell
their less-efficient vehicles if fuel prices are so high that they can no
longer afford at the same mileage without upgrading to a more efficient model.
The scenario described above is demand
destruction on a microeconomic level. Although the alteration has not spread
widely enough to cause actual demand destruction on a regional or global level,
the consumer has irrevocably destroyed that source of demand.
Demand in an open market refers to how much of a
product customers wish to buy at a specific price. The amount that producers
are able to produce and sell in the same price range, on the other hand,
is the supply.
Demand
Destruction vs Demand Reduction
Demand destruction frequently alters a market's
structure permanently, sometimes even making the good in question useless. The
decrease in demand, however, might only be momentary under other circumstances.
This is highly dependent on whether consumers have access to workable
substitutes they can adopt and switch to throughout the demand destruction
period.
Demand decreases happen occasionally. For instance,
fewer drivers are on the road during certain months of the year, and those who
are, cover fewer miles. This lowers the demand. This decrease in demand is
anticipated to return, unlike demand destruction.
When an industry places limitations on demand, this is
called demand restraint. This can take many different forms, from encouraging
people to carpool to explicit demand constraints that set a gas consumption
cap. Gasoline rationing during World War II is a historical illustration of
demand constraint.
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