Demand for money refers to that portion of wealth which an individual or a firm wants to hold in the form of cash or money balance. Individual, as well as institutions do not hold all their wealth in the form of assets, i.e., buildings, landed property, bonds, shares, debentures, gold, etc. A part of wealth is always kept in the form of money or cash. The cash balance or the proportion of wealth is always kept in the form of money or cash. form of money or cash. The cash balance or the proportion of wealth people want to hold in money is called the demand for money. How much proportion of their wealth people would like to hold with them in the form of cash rather than other assets depends partly on their requirement for money for conducting their current business transactions (purchase and sale)and partly on their inclination to keep money for their future requirements, i.e., to buy goods and services in future as and when their need arise. Thus, money is demanded both for the transaction purpose as well as for precautionary purpose, i.e., as a store of value to meet future requirements.
Demand for goods, as we know, is a direct demand, which means that goods are demanded because they give utility or satisfaction to person. Money too, gives us satisfaction but, this satisfaction is born out of the fact that with money we purchase goods and services. But would money give us any satisfaction if it could buy no goods or services either at present or in future. Surely in such a case money would be useless and no one would like to keep money. In other words, money id demanded because it represents purchasing power, it can buy goods and services at present, or it can stored to buy things in future. Thus, demand for money is derived demand which arises out of its two most important functions, viz., (i)” medium of exchange and (ii) store of value.
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