DEMAND
In our last article we talked about price mechanism which is the determination of prices by the forces of demand and supply. Now we ll be looking as the Demand aspect.
What is Demand?
In a layman terms, demand simply means a desire, a wish, or a mere want. In economics, demand
goes beyond the expression of mere desire, wish or want. It is the desire, wish or want which is
backed up by the ability to pay for what consumer desire, wish or want i.e. effective demand.
Demand is the quantity of goods and services which a consumer is willing and able to buy at a particular price over a given period of time where all other demand factors are held constant. In economics effective demand is what is only being referred to here.
Law of Demand
It states that ceteris paribus, there is an inverse relationship between price and quantity demanded.
Ceteris paribus meaning all other things (other factors affecting demand) held constant.
Inverse meaning as one variable is going up, the other variable is coming down (price and quantity demanded). In other words, the law states that all other factors affecting demand held constant, the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded.
Explanation of law of Demand, you are a consumer and you want to buy an item if the price of the item is high, lesser quantity would be bought but if the price is low, higher quantity would be bought. The relationship between price and quantity demanded is inverse.
Representative Of Demand
The demand for a commodity may be represented as a schedule, a curve or an equation.
Demand Schedule
It is a tabular representation that shows the relationship between price and quantity demanded
Demand Schedule for Bread
From the schedule above, we can see that as the price of Bread in bags are increasing the quantity demanded is deceasing and if the price is decreasing from N7,000 to N1,000 the quantity demanded is increasing.
Demand Curve
It is a graphical illustration that shows the relationship between price and quantity demanded or that shows the demand schedule
Demand curve For Bread
The Demand curve from the above graph is downward slope from left to right (negative slope) indicating that are price is coming down (reducing) more quantity is bought (increasing). Or upward slope from right to left indicating that as price is going up(increasing), less quantity is bought (decreasing).
The Demand Function/Equation
In defining demand, we said it is the quantity of goods or services that consumers are willing and able to buy at a particular price over a given period of time where all other demand factors are held constant. The “other factors” that influence demand are expected to remain fixed and thus include prices of related goods and services (PR), consumer income (Y), consumer taste and preference which is in turn influenced by advertisement (A). The demand function or demand equation is a mathematical expression that relates the quantity demanded of goodsand services to all demand factors including the own price of the good or service. That is quantity demanded is affected by factors affecting demand.
Mathematically, the general demand function is stated as follows:QD = f (Po, Y, PR, A)Where QD = quantity demanded;Po = the own price of the commodity;Y = consumers’ incomes;PR = prices of other commodities;A = advertisement expenditure on good and service
This function or equation is read as, “Quantity demanded is a function of (or
depends on) the commodity’s own price, consumer income, prices pf other related
commodities, and the advertisement
When the other demand factors apart from the
commodity’s own price are held constant the general demand function reduces to:
Qd = f (Po )
Illustration
The demand function for Bread is given as:Qd = 140 – 0.02P,
where P is the price and Qd, the quantity demanded of the product.
Find the quantity that will be consumed when price is
(a) N1,000 (b) N1,500
SolutionFrom the demand function:Qd = 140 – 0.02 P
(a) If price is N1,000, the quantity consumed will be:Qd = 140 – 0.02 (1,000) = 140 – 20 = 120i.e. consumers will buy 120 bags of Bread if the price is fixed at c1,000.(b) If price is N1,500, the quantity consumed will be:Qd = 140 – 0.02 (1,500) = 140 – 30 = 110i.e. consumers will buy 110 bags of Bread if the price is fixed at N1,500
Factors affecting Demand
1. Price: it is one of the major factors that affects demand. Because is the basis which goods and services are demanded. Like earlier stated, as prices increases where other factors affecting demand are held constant, quantity demanded reduced. converse is the same when price reduces.
2. Consumer IncomeA change in consumer income may bring about a change in the demand for a good or service. However, the direction of change in demand will depend on the type of commodity in question.
i. For a normal good, demand might increase when consumer income
increases and demand might fall as consumer income falls, ceteris
paribus.
ii. For an inferior good, demand might decrease when consumer
income increases while demand might fall as consumer income
increases, ceteris paribus. Therefore, inferior goods are those goods
that we consume more when we are worse of financially and less
when we are better of. For instance, who would want to buy
“second hand” goods when he becomes richer?
iii. For a necessity, a change in consumer income may not affect
demand.
3. Prices of Related GoodsGoods relate to each other in two ways. Goods are either compliments or
substitutes
(i) Complimentary goods are goods with joint demand. They are needed jointly
before a want could be satisfied, e.g., car and petrol With complimentary
goods, a steep rise in the price of one will lead not to only to a fall in its
consumption but also a decrease in demand for the other good. A fall in the
price of car would lead to an increase in the demand for petrol
(ii) Substitute goods are goods that only one is needed to satisfy a want/need
(not both). For substitutes, a fall in the price of one leads to a decrease in
demand for the other while an increase in the price of one leads to an
increase in the demand for the other, ceteris paribus. For example,
margarine and butter could be considered as examples of substitute goods.
An increase in the price of Klin will let people consume more
good mama if the price of butter does not change.
4. Consumer Taste/Preference Any change in consumer taste or preference causes demand to change. Increased taste or preference for a particular good causes demand to increase whilst declining taste or preference causes demand to fall, ceteris paribus. Taste or preference for goods and services are influenced by advertisement, fashion and sales promotions.
5. Consumer Expectations The decision to buy commodity today is influenced by the expected future price of the commodity and expected change in consumer income. If a consumer anticipates the price of a commodity to increase in future, today’s demand for the commodity will increase but if the consumer anticipates a fall in future price, then today’s demand for the commodity will fall. Similarly, an expected consumer income increase may cause current demand for a normal commodity to increase and vice
versa.
Types of demand
1. Joint/Complementary Demand Goods are said to be in joint/complementary demand when they produce more consumer satisfaction when consumed together than when consumed separately. They are mostly consumed together.Examples include bread and butter, car and petrol etc.
2. Competitive Demand Goods are said to be in competitive demand when they all compete for the same consumer’s income. They are seen as closed substitute to each other i.e. goods that are alternative to one another in consumption. Examples are peak milk and dano milk; coke and pepsi etc.
3. Derived Demand This is where the demand for a final product leads to the demand for a second product which is used to produce this final product For example, the demand for furniture derives the demand for wood, the demand for petrol derives the demand for crude oil. Generally, demand for any factor of product is a derived demand.
4. Composite Demand A commodity is said to have a composite demand when it is demanded for alternative uses. For example, wood has composite demand because it is demanded for several alternative uses such as the making of table, chairs, windows, doors, body of vehicles, leather for making shoes, belt etc.
What is Demand?
In a layman terms, demand simply means a desire, a wish, or a mere want. In economics, demand
goes beyond the expression of mere desire, wish or want. It is the desire, wish or want which is
backed up by the ability to pay for what consumer desire, wish or want i.e. effective demand.
Demand is the quantity of goods and services which a consumer is willing and able to buy at a particular price over a given period of time where all other demand factors are held constant. In economics effective demand is what is only being referred to here.
Law of Demand
It states that ceteris paribus, there is an inverse relationship between price and quantity demanded.
Ceteris paribus meaning all other things (other factors affecting demand) held constant.
Inverse meaning as one variable is going up, the other variable is coming down (price and quantity demanded). In other words, the law states that all other factors affecting demand held constant, the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded.
Explanation of law of Demand, you are a consumer and you want to buy an item if the price of the item is high, lesser quantity would be bought but if the price is low, higher quantity would be bought. The relationship between price and quantity demanded is inverse.
Representative Of Demand
The demand for a commodity may be represented as a schedule, a curve or an equation.
Demand Schedule
It is a tabular representation that shows the relationship between price and quantity demanded
Demand Schedule for Bread
Demand Curve
It is a graphical illustration that shows the relationship between price and quantity demanded or that shows the demand schedule
Demand curve For Bread
The Demand curve from the above graph is downward slope from left to right (negative slope) indicating that are price is coming down (reducing) more quantity is bought (increasing). Or upward slope from right to left indicating that as price is going up(increasing), less quantity is bought (decreasing).
The Demand Function/Equation
In defining demand, we said it is the quantity of goods or services that consumers are willing and able to buy at a particular price over a given period of time where all other demand factors are held constant. The “other factors” that influence demand are expected to remain fixed and thus include prices of related goods and services (PR), consumer income (Y), consumer taste and preference which is in turn influenced by advertisement (A). The demand function or demand equation is a mathematical expression that relates the quantity demanded of goodsand services to all demand factors including the own price of the good or service. That is quantity demanded is affected by factors affecting demand.
Mathematically, the general demand function is stated as follows:QD = f (Po, Y, PR, A)Where QD = quantity demanded;Po = the own price of the commodity;Y = consumers’ incomes;PR = prices of other commodities;A = advertisement expenditure on good and service
This function or equation is read as, “Quantity demanded is a function of (or
depends on) the commodity’s own price, consumer income, prices pf other related
commodities, and the advertisement
When the other demand factors apart from the
commodity’s own price are held constant the general demand function reduces to:
Qd = f (Po )
Illustration
The demand function for Bread is given as:Qd = 140 – 0.02P,
where P is the price and Qd, the quantity demanded of the product.
Find the quantity that will be consumed when price is
(a) N1,000 (b) N1,500
SolutionFrom the demand function:Qd = 140 – 0.02 P
(a) If price is N1,000, the quantity consumed will be:Qd = 140 – 0.02 (1,000) = 140 – 20 = 120i.e. consumers will buy 120 bags of Bread if the price is fixed at c1,000.(b) If price is N1,500, the quantity consumed will be:Qd = 140 – 0.02 (1,500) = 140 – 30 = 110i.e. consumers will buy 110 bags of Bread if the price is fixed at N1,500
Factors affecting Demand
1. Price: it is one of the major factors that affects demand. Because is the basis which goods and services are demanded. Like earlier stated, as prices increases where other factors affecting demand are held constant, quantity demanded reduced. converse is the same when price reduces.
2. Consumer IncomeA change in consumer income may bring about a change in the demand for a good or service. However, the direction of change in demand will depend on the type of commodity in question.
i. For a normal good, demand might increase when consumer income
increases and demand might fall as consumer income falls, ceteris
paribus.
ii. For an inferior good, demand might decrease when consumer
income increases while demand might fall as consumer income
increases, ceteris paribus. Therefore, inferior goods are those goods
that we consume more when we are worse of financially and less
when we are better of. For instance, who would want to buy
“second hand” goods when he becomes richer?
iii. For a necessity, a change in consumer income may not affect
demand.
3. Prices of Related GoodsGoods relate to each other in two ways. Goods are either compliments or
substitutes
(i) Complimentary goods are goods with joint demand. They are needed jointly
before a want could be satisfied, e.g., car and petrol With complimentary
goods, a steep rise in the price of one will lead not to only to a fall in its
consumption but also a decrease in demand for the other good. A fall in the
price of car would lead to an increase in the demand for petrol
(ii) Substitute goods are goods that only one is needed to satisfy a want/need
(not both). For substitutes, a fall in the price of one leads to a decrease in
demand for the other while an increase in the price of one leads to an
increase in the demand for the other, ceteris paribus. For example,
margarine and butter could be considered as examples of substitute goods.
An increase in the price of Klin will let people consume more
good mama if the price of butter does not change.
4. Consumer Taste/Preference Any change in consumer taste or preference causes demand to change. Increased taste or preference for a particular good causes demand to increase whilst declining taste or preference causes demand to fall, ceteris paribus. Taste or preference for goods and services are influenced by advertisement, fashion and sales promotions.
5. Consumer Expectations The decision to buy commodity today is influenced by the expected future price of the commodity and expected change in consumer income. If a consumer anticipates the price of a commodity to increase in future, today’s demand for the commodity will increase but if the consumer anticipates a fall in future price, then today’s demand for the commodity will fall. Similarly, an expected consumer income increase may cause current demand for a normal commodity to increase and vice
versa.
Types of demand
1. Joint/Complementary Demand Goods are said to be in joint/complementary demand when they produce more consumer satisfaction when consumed together than when consumed separately. They are mostly consumed together.Examples include bread and butter, car and petrol etc.
2. Competitive Demand Goods are said to be in competitive demand when they all compete for the same consumer’s income. They are seen as closed substitute to each other i.e. goods that are alternative to one another in consumption. Examples are peak milk and dano milk; coke and pepsi etc.
3. Derived Demand This is where the demand for a final product leads to the demand for a second product which is used to produce this final product For example, the demand for furniture derives the demand for wood, the demand for petrol derives the demand for crude oil. Generally, demand for any factor of product is a derived demand.
4. Composite Demand A commodity is said to have a composite demand when it is demanded for alternative uses. For example, wood has composite demand because it is demanded for several alternative uses such as the making of table, chairs, windows, doors, body of vehicles, leather for making shoes, belt etc.
Article by: Monday Desmond
No comments:
Post a Comment