At the end of this chapter, students should be able to:
- Explain the meaning of demand and supply, draw schedules and curves of a given commodity
- State the laws of demand and supply
- Determine equilibrium price and points for a commodity
- State and explain the factors that affect the demand and supply for a commodity
DEFINITION OF DEMAND
Demand may be defined as the quantity of goods or services that consumers are willing and able to buy at alternative prices over a given period of time.
wantIn economies, demand is quite different from want or need. Want or need refers to a mere desire for a commodity but not backed up by the willingness and ability to pay for it.
priceIn order to differentiate demand from need or want, economists usually talk about effective demand. Effective demand is defined as desire backed-up by ability and willingness to pay for specific quantities of commodity alternative prices and within a period of time.
If Mr.Bayo has the money to purchase a brand new car and is able to pay for it, then he has the effective demand for the car. Bayo therefore demands the car. But if Mr. Okorodudu on the other hand desires to have a motorcycle and he does not have money and therefore unwilling to pay for it, he merely wants or needs the motorcycle and has no effective demand for it.
In summary, when a consumer’s demand is backed-up by the necessary ability and willingness to pay, it is, said to be effective demand. But if the consumer does not have the means (money) to buy the commodity, it means he merely wants or needs or desires the commodity.
LAW OF DEMAND
goodsThe law of demand states that all things being equal, the higher the price, the lower the quantity of goods that will be demanded: or the lower the price, the higher the quantity of goods that will be demanded.
This law is often regarded as the first law of demand and supply. It simply means that when the price of a commodity like yam, for instance, is high in the market, very few quantities of it will be demanded by the consumer and vice versa.
All things being equal, this law will hold under the following assumptions:
That there will be no change in taste and preference of the consumer.
That the consumer’s income remains constant.
That no very close substitutes of a commodity exist.
That the habits of consumers remain unchanged.
That there is no change in the quality of the product.
Demand schedule can be defined as a table showing the relationship between prices and the quantity of that commodity demanded. In other words, a demand schedule is a table which shows the different quantities of a commodity that would be bought at various prices, at a particular time. There are two types of demand schedule, namely: individual demand schedule, and market demand schedule.
- Individual demand schedule: This is a table which shows the different quantities of a commodity’ which an individual (or a consumer) would purchase at various prices and at a particular time. Let us consider a trader, Mr. Kayode, who has purchased several tins of milk at various prices as shown in Table 3.1.
Table 3.1: Mr. Kayode’s demand schedule for tins of milk
|Price per tin(Naira)||Quantity demanded(No. of tins per week)|
|100 80 60 40 20||10 20 30 40 50|
The demand schedule above shows the relationship between the various prices of milk and the quantity which Mr. Kayode is willing to buy at each price per week.
At a time when the price was N 100, he was able to purchase only 10 tins of milk but as the price decreased to as low as N20.00. he was able to purchase as much as 50 tins of milk per week. It is seen from the schedule that Mr. Kayode’s demand is in consonance with the law of demand which states that the higher the price, the lower the quantity of a commodity that will be demanded and vice versa.
- Market demand schedule: Market demand schedule, also known as aggregate or total demand or composite demand schedule, is a schedule of all consumers ofa I commodity in a market. In other words, a market demand schedule is a table which shows the total quantities of a commodity which all consumers of that commodity are willing to buy at various prices, at a particular period of time.
- It is a combination of all individual consumers’ demand in a market.
Table 3.2 A market demand for milk
|Price perTin (N)||Quantity demanded by||Total quantity Purchased Per week|
|Mr. Adebayo||Mrs. Ojo||Mr. Uche||Alh. Tanko||Mrs. Esan|
In the above market demand schedule, it is assumed that there are only five consumers of milk. The table also reveals the relationship between the different prices of milk and the total quantity which will be consumers at each price, every week. The table is also in consonant with the law of demand.
Demand curve is a graph showing the relationship between the price and quantity of a commodity demanded. In other words a demand curve can be defined as a graphic or diagrammatic representation of a demand schedule. It should be noted that the demand curve is derived from a demand schedule as discussed earlier
As a rule and in accordance with law of demand, demand curve normally slopes downwards from left to right, which shows that at higher price, fewer quantity of a commodity will be demanded and also at a lower price, a large quantity will be demanded
FACTORS AFFECTING DEMAND
- Price:The higher the price of any commodity, the lower the quantity that will be demanded and vice versa.
- The price of other commodities: This applies to commodities that have close substitutes. If the price of such a commodity is high the consumer may demand for the close substitute.
- Income of the consumer:The higher the income of a consumer, the higher the quantity of commodities that he/she will demand for and vice versa.
- Changes in taste:of consumer: If consumers change their taste for a particular commodity, the demand for that commodity will also change.
- Population: Increase in population in an area will lead to high demand for commodities and vice
- Periods of festival: It is well known that people demand more of specific commodities during certain festivals.
- Expectation of changes in price: If people expect that there will be high prices of commodities in the nearest future, demand will increase and vice versa.
- Taxation: An increase in taxation means a reduction in purchasing power of the consumers which may result in decrease in the demand for certain commodities.
- Changes in fashion: As fashion changes, people’s demand for the reigning fashion also changes.
- Weather and climate:Variations in weather and climate or season may affect the demand for certain commodities. For example, rain coat, umbrella and rain boots, are highly in demand during the rainy season.
- Government policy: Government policy over the consumption of some commodities may either encourage or discourage the demand for such commodities.
- Advertisement: A good advertisement for a commodity can lead to an increase in demand for it and vice versa.