What Is Demand Destruction?

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Demand destruction is when a product’s price is above the historical norm or supply is limited for a long period of time, and consumers switch to a substitute product. This causes the demand for the original product to see a permanent or sustained decline.

Key Takeaways

  • Demand destruction typically refers to the permanent or sustained decrease in demand for commodity goods due to high prices.
  • Destruction of demand can occur when prices for a product remain high and consumers switch to alternatives.
  • Demand destruction depends on a good’s elasticity of demand or available substitutes.
  • Consumers' expectations play a role in whether a product faces demand destruction or a temporary decrease in demand.

How Does Demand Destruction Work?

Demand destruction occurs when demand is reduced, or when consumers switch from that product or service to alternatives. It often occurs with demand for oil or other energy commodities like ethanol.

If prices are caused by a temporary lack of supply, demand may not be reduced permanently if few consumers switch to an alternative product before prices fall back down.

For example, when the price of a case of water rises due to a snowstorm, the water company will face a drop in demand, but not a sustained one. When there are limited delivery trucks to bring in new shipments of water, there temporarily will be fewer cases of water available to buy. As a result, the price of a case of water rises. However, a temporary rise in water-bottle prices may not cause demand destruction if consumers are aware that the increase in the price is not permanent.

Consumer expectations matter for the demand for a product to decline for a sustained period. If consumers believe prices will remain high, they will consider alternative options, which can destroy demand for the original product.

Demand destruction can severely impact the company that produces the product that lost demand. If consumers want to purchase fewer units of a product for a longer period of time, then the company that produces it may have to reduce production and lay off workers.


Since many commodity products are produced worldwide, demand destruction in one economy can hurt foreign economies. On the other hand, consumers switching to alternative goods can spur innovation and trigger growth in new industries.

Examples of Demand Destruction

Typically, demand destruction refers to the increase in prices in commodities such as oil, fuel, and ethanol, but it can refer to demand for any product that has been permanently lowered.

For example, if gasoline prices remain high for an extended period of time, consumers will switch from using gasoline vehicles to a more fuel-efficient option, such as electric vehicles, public transportation, or even biking.

As a result, consumers will have a sustained decrease in their demand for gasoline because they do not need to purchase the same amount of gasoline as before. As enough consumers make fuel-conscious decisions to switch from gasoline, the demand for gasoline will be lower permanently. This permanent decrease in demand due to higher prices is demand destruction.

Think of It Like This

Another way to think of demand destruction would be to imagine if the fee for delivery food rose to $50 per order. You would likely cut back the amount of delivery food you buy and shift to grocery shopping or picking up your food from restaurants. In this scenario, the high price of delivery food would lead to sustained lower demand.

In another scenario, imagine that the price of a pint of strawberries increased by $20. Would you continue to buy strawberries in the same quantity as before? Most consumers would probably switch to alternatives such as raspberries or blueberries. The demand for strawberries would be destroyed due to sustained higher prices.

Demand destruction works in similar way with oil and energy commodities.

What Determines if a Product Will Face Demand Destruction?

Whether a product will experience demand destruction depends on its elasticity of demand. If there are few substitutes for a product, then the product is said to have an inelastic demand, meaning that as the price increases, the quantity demanded decreases at a slower rate in percentage terms.

In this case, consumers may be forced to still buy the product even if prices remain high for an extended period of time. However, if there are many substitutes for a product (elastic demand), then consumers will be more likely to abandon the product with the higher price and switch to an alternative. A product's elastic demand can contribute to demand destruction.


Another factor that contributes to demand destruction is household wealth. If prices are rising on some goods while wages or wealth are not keeping up with inflation, consumers will be more likely to cut back on buying.

Frequently Asked Questions (FAQs)

What is demand?

Demand in economics is the desire and ability of the consumer to purchase goods or services. It’s an underlying force behind economic growth and expansion. According to the law of demand, demand and price are related so that the higher the demand, the higher the price, all other factors being equal.

What is oil demand destruction?

Oil demand destruction is when the demand for oil is permanently reduced due to sustained high prices or low supply, and consumers turn to alternative products, such as electric cars.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Reserve Bank of Kansas City. “Tenth District Energy Activity Expanded Moderately.

  2. Federal Reserve Bank of Dallas. “High Fuel Prices in the U.S. May Crimp Oil Demand Soon.”

  3. Federal Reserve Bank of San Francisco. “What Are the Possible Causes and Consequences of Higher Oil Prices on the Overall Economy?

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