Success or failure in business depends on how accurately you gauge effective, or actual, demand for your product or service. A well-researched prediction of future consumer demand should inform every aspect of your operation, from the amount of supplies you purchase to the number of employees you hire.


Markets are made up of sellers and buyers. Sellers have a supply of goods, and buyers have a supply of money. If the price is right, a seller and a buyer agree to make a trade. The amount of buyer interest that exists at a specific price level is called the demand. At low prices, demand is high because many buyers want to get in on the bargain. At high prices, demand is low because buyers would rather save their money or spend it on something else.

Notional Demand

Economists sometimes use a term called notional demand to highlight the difference between buyers wanting to purchase a product and buyers actually demanding a product. For example, notional demand is high for fast sports cars, although relatively few people can afford this sort of luxury purchase. Notional demand reflects a consumer’s wants, which are theoretically unlimited, so the term does not reflect any actual demand that exists in a real-life market.

Effective Demand

Effective demand is the term economists use to refer to the actual demand that exists in a market. In other words, effective demand exists when a buyer has both the desire and the ability to buy a product. So the effective demand for sports cars might be measured by the actual number of sports cars sold at a certain price during a particular period.


Knowing what your customers want in an abstract way isn’t as helpful as knowing what they are actually willing to buy at a particular price level, so the concept of notional demand isn’t useful for most small-business owners. Predicting effective demand, on the other hand, can help you streamline your business and maximize profits. For example, if a restaurant owner accurately gauges how many customers will come in each week at his current menu prices, he can purchase just enough ingredients to meet the demand and thus reduce waste and overhead. Of course, accurate predictions are difficult, but even close predictions can help business owners maintain a supply sufficient for effective demand while keeping costs as low as possible.