Precautionary demand is the demand

Supply and demand

Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...

 for financial assets, such as securities

Security (finance)

A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

, money

Money

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 or foreign currency

Currency

In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

; it is money people want in case of emergency.

In economic theory

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, specifically Keynesian economics

Keynesian economics

Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

, Precautionary demand is one of the determinants of demand for money (and credit), the others being transactions demand

Transactions demand

Transactions demand, in economic theory, specifically Keynesian economics, is one of the determinants of demand for money , the others being speculative demand and precautionary demand. Transactions demand is illustrated as a vertical line on the money demand graph.The demand of money is arisen...

 and speculative demand

Speculative demand

Speculative demand is the demand for financial assets, such as securities, money or foreign currency that is not dictated by real transactions such as trade, or financing.The need for cash to take advantage of investment opportunities that may arise....

.
Precautionary demand for money refers to real balances for the use in contingency.As receipts and payments cannot be perfectly foreseen, people hold precautionary balances to minimize the potential loss arising from a contingency.
the precautionary demand is depended on the size of income and the availability of credit. With more income the precautionary demand will increase with the size of income. However, with more income, credit is more available to high income group. therefore, precautionary demand is assumed to be positively related to income.