Pent Up Demand

Last Updated :

21 Aug, 2024

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Dheeraj Vaidya

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Pent Up Demand Meaning 

Pent up demand refers to the sudden strong increase in consumer demand for leisure products and services after a prolonged economic recession. Economists use it to symbolize the economy's recovery, stabilization of employment, and increase in confidence of the consumers in the market after a long-decreased spending period.

Pent-up Demand Overview

Pent-up demand plays an important role in boosting the economy that has just normalized from the impact of the recession or depression. The recession is a significant factor in creating the demand for goods and services. The fear in the minds of consumers due to unemployment, higher inflation, and a higher rate of interest lead to refraining in consumer spending. It results in a built-up of pent-up demand.

  • Consumer pent up demand means consumers refrain from buying luxurious items and services during a recession and, in turn, increase their savings, converting to a huge demand for goods and services after the recession ends.
  • It indicates a revival in production, creation of jobs, and economic growth.
  • A recession is an important factor for this type of demand as its increases consumers' savings due to fear of uncertainty in employment and income. 
  • It results in a rapid increase in demand, economic growth, and short-term inflation.

Pent Up Demand Explained 

Pent up demand meaning describes the delaying or unwillingness purchases luxury products during the recession by the consumers. It creates a huge backlog of demand for them after the recession. As a result, when the recession ends, the economy stabilizes, and employment increases. Then the consumers buy luxury products like luxurious vacations, iPhones, and apartments. Economists, analysts, and policymakers observed a pent-up demand period after the 2008  recession of the American economy.

The basic mechanism of consumer pent up demand is that during the recession, unemployment increases, and inflation is at a high peak. Also, goods become costlier, and the bank rates go high too. All of these lead to a situation where consumers start saving their income instead of spending on luxurious items. In other words, savings increase, discretionary income decreases, and purchasing power decrease.

In this situation, people stop spending on goods other than essential commodities like food items, fuel, garments, shoes, and groceries. But start waiting for the economy to heal itself to start buying the luxury products like vehicles and appliances. It gradually builds up demands. Pent up demand for travel, big-ticket and durable goods keep increasing, or it starts building up.

People refrain and fear extra spending. Consumers start saving on thwarting uncertain economic situations for fulfilling future requirements. They try to combat future monetary troubles like liquidity constraints and limited credit accessibility. Their pent-up desire and need for certain goods and services increase. However, as soon as the economy returns to its normal level, people get confident about jobs. Their income sources increase. Therefore, people start to have increased discretionary income at their disposal. With the increased discretionary income, their purchasing power also increases after the end of the economic slowdown.

Pent Up Demand Cause

The recession also creates a lot of consumer savings and a huge build-up of consumer demand for luxurious items. The central banks of nations also bring down their interest rates to increase the flow of money in the economy. As a consequence of this demand, consumers start demanding the products in large numbers at one go after the recession ends. Moreover, sometimes it may also lead to a shortage of some products or a short-term surge in pent up inflation that falls back to normal after a while. However, most of the time, pent-up demand can push faster economic growth owing to increased production and supply of goods accompanied by employment generation. 

Example 

Let's look at a pent-up demand example to understand the concept better. 

Since 2020, the global coronavirus pandemic has been affecting the world. When the first wave of coronavirus swept across the globe in March 2020, every country decided to enforce a lockdown. Governments did it to curb the impact of coronavirus. According to The Bureau of Economic Analysis (BEA), in 2019-2020, the average age of fixed assets and consumer goods observed an upward trend compared to the earlier years. As a result, global economic activities like production, courier, and transportation came to a grinding halt. In addition, many people lost their jobs during this period. Hence, a shadow of economic uncertainty loomed over every sector of the business and the lives & aspirations of people.

In such a grim situation, people stopped spending more money on luxury items and services to cope with the job and income losses. Instead, it started building gradual demand for luxury items and services. Examples include stock investing, luxury vacations, clothes & watches, and phones until the first and second phases of coronavirus lockdowns ended.

When the second phase of the coronavirus pandemic ended, the global economy started recovering, and jobs were restored. Then the consumers started getting discretionary income apart from their average savings. As a result, the purchasing power increased, and the pent-up demand for luxury items and services built during the two phases of coronavirus suddenly increased to high levels. So, consumers started demanding these products rapidly in large numbers leading to a shortage of some goods and services and a rise in production of some goods. Hence, the pent-up demand led to the economy's fast growth and temporary inflation.

Frequently Asked Questions (FAQs)

Is pent up demand real?

Pent up demand meaning describes a real circumstance in which consumers create strong demand for a particular product or a service in a market. An economist generally uses this to describe the return of the common masses to increased spending after a brief period of reduced expenditure by them. Usually, the period after the recession's end sees a surge in pent up demand situations.

Which is the best example of pent up demand?

Currently, the world is going through the impact of coronavirus, albeit the first phase of extreme casualties and loss of business. However, after the first wave of 2020, all the business sectors are seeing a huge surge in product demand. It is a result of the reopening of markets globally. Hence, the post-coronavirus period of the consumer-demand surge is the best example of pent up demand.

What is pent up consumer spending?

The spending by consumers after the end of the recession to buy goods and services is called pent up consumer spending. It happened just after the recovery of the American economy in 2008. Economists and policymakers again expect to happen globally post-coronavirus pandemic.

What 1919 teaches us about pent-up demand?

During 1918-1919, a world war and a deadly pandemic created a pent up demand for basketball and other industries. A huge crowd of basketball fans crowded the stadium after the government lifted the constraints after the pandemic, and economic demand increased.

This article has been a guide to what is Pent Up Demand and its meaning. Here we discuss cause and example of pent up demand along with detail explanation. You can learn more about from the following articles –