What is pent-up demand?3 min read
Pent-up demand Meaning
Pent-up demand refers to a situation when demand for a service or product is unusually strong.
The meaning of Pent-up or Pent-up demand is when demand for a service or product is robust.
Since the recent rally in the stock markets, we have heard this term quite a lot from different sources like analysts, news anchors, etc. In this blog, we will discuss exactly what is the meaning of pent-up demand in Economics.
How does pent-up demand build up?
So, how is pent-up demand built up? Before diving into this question, let us see what actually is pent-up meaning in English. Pent-up in English means to hold something inside.
Pent up consumer demand in Economics refers to the unusually strong desire for a product or service after a period of decreased spending. Economists use the term to describe the public’s return to consumerism following a recession when people start buying again because they see hints of recovery.
These days, many market participants attribute the rally in Indian stock markets to the revival of pent-up demand. Whenever economies go through downfalls like recessions, depression, or lock-down in recent times, consumers tend to defer non-essential purchases and save costs. This results in lower demand. When the economy starts reviving from the recent downfall, consumers gain confidence and again resort to spending they had deferred before. This leads to unleashing the demand trapped earlier because of the recession. This pent-up is mainly related to discretionary rather than non-discretionary spending.
What are discretionary and non-discretionary spending?
- Need-based expenses are included in non-discretionary spending. A household/ business cannot avoid these expenses since they are essential to its operation.
Examples of non-discretionary expenses are household expenses like rent, electricity bills, food costs, etc.
- Discretionary spending on the other hand, discretionary spending is the expenses without which households and businesses can get by. These expenses are often on things one “wants” rather than one “needs” and can be deferred or avoided.
Examples of discretionary spending include vacation costs, expenditure on luxury items, etc.
In recent times, which sectors are showing signs of pent-up demand?
- Automobile sector – Consumers prefer personal mobility due to social distancing during COVID-19. Hence, an entry-level segment in 4-wheeler and 2-wheeler are seeing good traction. Also, due to favorable rain forecasts and good rabi season, tractors are seeing demand revival.
- In the consumer goods sector, the shift to a “work-from-home” culture and the shortage of domestic help are resulting in the unloading of trapped demand for items such as dishwashers, washing machines, etc.
Recently, we can see signs of pent of demand being released as the economy is opening up. However, this demand must remain for a longer time horizon for economic recovery.
Pent-up demand is a term that refers to a sudden spike in demand for a service or product after a period of low spending. During a recession, consumers prefer to put off purchases, building up a demand backlog that is released when signs of recovery arise. Pent-up demand is particularly noticeable in the case of high-ticket, long-lasting goods. Pent-up demand frequently increases the economic recovery period following an economic downturn.