1.2: Demand States
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It is useful to think about different demand conditions or states. Specifically, there are three: effective demand, latent demand, and negative demand. Much of the class will emphasize effective demand because markets exist for products in a state of effective demand. For products in an effective demand state, you can see equilibrium prices and quantities. It is also possible estimate demand and understand how demand responds to changes in prices, consumer income, or other factors that affect the desirability of the product. In the other two demand states, markets do not yet exist, but there could or would be a market provided technological barriers can be addressed or consumer preferences can be changed. In fact, many product development efforts are aimed at overcoming some hurdle or limitation that would allow a product or service to move from a latent or negative demand state to an effective demand state.
Effective Demand
Normally, the word “demand” refers to a product in a state of effective demand. Effective demand refers to the demand for products that are commercially feasible. These products satisfy consumer wants and needs, and consumers (or some segments thereof) are willing to buy them at prices that justify their production. Automobiles, apples, vacation trips, restaurant meals, or any other good or service readily available in the economy is in a state of effective demand. Since market transactions are observed for products in a state of effective demand, it is possible to measure variables that influence demand. These measurements can be used to estimate and forecast demand to gain insight into business or policy decisions.
Latent Demand
A state of latent demand is said to exist in cases where a need or want exists but a product does not. For example, if there was a cure for cancer, there would be a demand for it. Because of this latent demand, biotechnology companies spend large amounts of money on research and development efforts to create new drugs to more effectively combat cancer. A latent demand state exists when the following conditions are present:
- the product in question is not technically feasible given the current state of science and engineering (as in the case of a complete cure to cancer) or has yet to be conceived by an inventor or entrepreneur, or
- the product is technically feasible but not commercially feasible given current technology, existing infrastructure, or the existing regulatory environment.
With latent demand, one does not actually see market transactions. For this reason, estimating the potential value of products in a latent demand state is often more difficult. Economists often use experimental methods to assess willingness to pay for products in a state of latent demand.
A change in technology, such as the introduction of the microwave oven, can unleash a number of new products that address latent demands and thereby bring them into a state of effective demand. The first link below points to an early television commercial for the microwave. This commercial speaks directly to how the microwave meets the latent demands of those who prepare meals over the eons of human history. Today, much of what is in the frozen section of a supermarket is tailored to the microwave oven. Here is a link to an early microwave oven advertisement emphasizing how the microwave addresses latent demand ( visit youtube.com ).
Negative Demand
Negative demand refers to cases where there is a potential product that could meet a consumer want or need, but consumers are reluctant to purchase the product for one reason or another. For example, many insect species are edible and could be produced at a cost that compares favorably to other food sources. However, insects are not commonly being sold in attractive displays at the local supermarket. The reason for this is that cultural norms in the USA frown upon consumption of insects. This example is a bit “creepy,” and I hope it does not “bug” you too much, but the same general idea can apply to many actual or potential products that are viewed skeptically by consumers. When confronted with negative demand, it may be possible to change the image of the product so that consumers view it as desirable.
- National Geographic segment on edible insects ( visit youtube.com ).
- Fact sheet on entomophagy from the UN Food and Agriculture Organization (FAO) ( visit fao.org ).
Food Irradiation: A Case Example
Food irradiation is a process that many thought could potentially address latent demands for safer food. For example, irradiation could destroy Trichina parasites allowing pork to be cooked and served rare. In the late 1990’s, irradiation was approved by US regulatory agencies for use on raw meat and poultry. There were some predictions that this would become a standard process, akin to pasteurization. This turned out not to be the case. One reason is that irradiated foods also faced a negative demand problem. Consumers have been hesitant to embrace irradiated foods. Review the fact sheet and short video clip from the links below. Both are from reputable organizations: a land-grant university and the United Nations.
- Fact sheet from the University of Wisconsin on food irradiation (visit wisc.edu).
- Short video from International Atomic Energy Agency and FAO ( visit youtube.com ).
Now consider the following questions:
- What fundamental problem (or problems) can food irradiation address?
- Is food irradiation safe?
- Are there labeling requirements that would allow you tell if a food item in a retail store was irradiated?
- Why might consumers be reluctant to accept irradiated foods?
- Why is microwaveable food so widely accepted but irradiated food not?