What Is Marginal Demand?

In economics, "marginal demand" is a term that is used to describe how the demand for a good or service is likely to be impacted by a shift in the unit price of a product. This approach is often used to project what would likely happen to sales of a given product if the unit price that consumers pay is either increased or decreased. Using the projection of the marginal demand helps companies determine if making a change one way or the other is likely to result in an improved bottom line, or if the current pricing should remain in place.

Key to understanding marginal demand is having a firm grasp of the degree of supply and demand that currently exists for the products under consideration. Assuming that demand in general is growing, a company that manufactures the products may begin to speculate on what effect a chance in pricing would have on its market share. For example, if the company has relatively few competitors, projecting the price elasticity of demand may reveal that the company has little to nothing to gain from adjusting a price downward. At the same time, the marginal demand that is revealed may also project that making a slight increase in unit price will have no detrimental impact on the number of units that consumers buy, making it possible to increase gross profits without damaging sales figures.

In a more competitive environment, the consideration of marginal demand may provide valuable clues in how a company that must vie for customers against a relatively broad range of competitors must proceed in order to maintain current market share as well as have a chance to increase its share of the limited consumer market. Here, projecting the marginal demand if unit prices are decreased in specified increments can help reveal if the resulting upswing in sales would be enough to offset the loss of profit on each unit sold. If the calculation of marginal demand indicates that the volume of purchases made will increase sufficiently to allow the business to ultimately take in more revenue from that higher volume, the price change may be justified and aid in capturing a greater market share.

Assessing marginal demand is an ongoing task. As conditions within a consumer market shift, companies that do business in those markets must also consider the effectiveness of the current pricing to attract customers and keep the demand within an acceptable range. For this reason, companies tend to evaluate market conditions regularly, consider their current pricing strategies in light of those new circumstances, and then project what would happen if specific changes in pricing are implemented.