Pent-up demand refers to the consumer demand for goods and services that accumulates over time, usually due to a recession. After postponing purchases of goods and services due to uncertainty surrounding the economic downturn, individuals are typically eager to spend money on consumer goods.
Definition and Examples of Pent-up Demand
Pent-up demand refers to the high level of demand that is released into the market once the recession ends. This demand accumulates over time as people spend less money during the recession due to uncertainty about their jobs and the economy in general. Once individuals feel comfortable with the economy and their job security and income, they usually begin to spend money again on goods and services.
With pent-up demand, people usually don’t just purchase ordinary goods and services; they also spend money on purchases that were postponed for several months due to the recession. Durable goods purchasing is typically delayed more during a recession because they are more expensive. When pent-up demand hits the market during the economic recovery process, companies will try to increase supply to meet the need.
How Does Pent-up Demand Work?
People postpone purchasing goods and services during a period of economic contraction or recession. If a sufficient number of people do this and are eager to buy products in the market once the economy is restored, it will lead to a very high level of demand being released into the market all at once. Pent-up demand can cause certain products to become unavailable due to the rapid increase in spending on them after a period of low or no spending.
Note: If demand increases rapidly, it can lead to short-term equilibrium price increases in many markets. If the overall price level rises, the economy will experience inflation.
Notable Events
Due to the pandemic and business closures in 2020, people postponed purchasing goods and services, leading to the emergence of pent-up demand.
The graph below illustrates pent-up demand for durable goods in the United States. This is measured by actual personal consumption expenditures (PCE), which is a measure of consumer spending on goods and services.
While the line in the graph initially drops because people have postponed purchasing durable goods, pent-up demand for durable goods is evident from the significant increase in durable goods purchasing throughout the economic recovery process following the pandemic. The graph also shows the impact of stimulus checks on spending.
Note: In addition to people postponing purchases during the recession in 2020, strong unemployment benefit programs and pandemic relief programs put more money into consumers’ hands. This led to heightened demand levels for certain goods and services, such as durable goods.
Although consumers often postpone durable goods purchases during a recession, the period of pent-up demand in 2020 saw higher levels of durable goods purchasing during the economic recovery. This is partly due to consumers spending more time at home and completing tasks that they might have purchased as services before the pandemic.
For example, people may not have been dining out frequently during the pandemic because they were cooking at home. Once the economic recovery began, people might spend money upgrading kitchen appliances for cooking at home or may start dining out at restaurants again.
Source: https://www.thebalancemoney.com/pent-up-demand-5220344
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