Demand

Demand is defined as the quantity of commodities that consumers are willing and able to buy at a given price and at a given period of time. Demand refers to how much (quantity) of a product or service is desired by buyers.

Demand Schedule

A demand schedule is a table that shows the relationship between the price of a commodity and the quantity demanded at each price level.

Types of Demand Schedule

1. Individual Demand Schedule

This shows the various quantities of a commodity that a single consumer is willing and able to purchase at different prices within a specific period.

2. Market Demand Schedule

Also known as aggregate or composite demand schedule, it shows the total quantities demanded by all consumers in the market at different price levels.

Example: Mr John's Weekly Demand Schedule for cups of beans

Demand Curve

A demand curve is a graphical representation of the relationship between the price of a commodity and the quantity demanded. It is drawn from a demand schedule and typically slopes downward.

Credit: Siba Sankar Mohanty on Reseachgate

Types of Demand

1. Joint (Complementary) Demand

This occurs when two goods are consumed together. A change in the demand for one will affect the demand for the other. Examples include bread and butter, and cars and petrol.

2. Derived Demand

Derived demand arises as a result of demand for another good. For example, the demand for flour and sugar increases because of the demand for bread.

3. Composite Demand

Composite demand refers to demand for a commodity that can be used for multiple purposes. For example, flour can be used for baking bread, cakes, and snacks.

4. Competitive Demand

Competitive demand occurs when goods are close substitutes and serve similar purposes. An increase in demand for one may lead to a decrease in demand for the other. Examples include Coca-Cola and Pepsi, or Milo and Bournvita.

Law of Demand

The Law of demand states that, the higher the price of a commodity, ceteris paribus (i.e. all other things being equal), the lower the quantity demanded; and the lower the price, the higher the quantity demanded. This law means that a rational consumer will buy more of a commodity if its price is lowered and less if its price is increased. This law holds for most commodities, except for some special cases like giffen good.

Giffen goods are goods that still command high demand despite increase in their prices. That is the quantity demanded by consumers will not be reduced because of increase in price.

Factors affecting Demand

1. Commodity Pricing The cost of a product directly influences consumer purchasing behavior. Generally, when prices decrease, consumers tend to buy more, while price increases typically lead to reduced demand.
2. Consumer Income Levels When consumers have more disposable or real income available, they typically increase their spending on goods and services. Conversely, reductions in income usually result in decreased purchasing activity.
3. Government Regulations Public policy decisions can either stimulate or suppress demand. Government subsidies can effectively lower prices and boost demand, while increased taxation tends to raise prices and decrease consumer interest.
4. Consumer Preferences and Trends Shifts in tastes and fashion significantly impact demand patterns. Consumers naturally purchase more of products they prefer. When preferences align with a particular product, its demand rises, while unfavorable trends lead to decreased demand.
5. Related Product Pricing The relationship between goods can be either substitutive or complementary. When a product's price increases, demand for its substitutes typically rises (positive relationship), as seen with items like tea and coffee. Conversely, when a product becomes more expensive, demand for its complementary items decreases (negative relationship), such as cars and gasoline.
6. Future Price Expectations Anticipated economic changes can influence current purchasing behavior. Government announcements regarding future income increases, tax reductions, or other favorable policies may encourage consumers to make purchases even before these changes take effect.
7. Seasonal and Weather Factors Environmental conditions can positively or negatively affect demand for specific products. For instance, umbrellas and raincoats experience higher demand during rainy seasons compared to dry periods.
8. Population Demographics The size and age composition of a population directly impacts product demand. Population growth typically increases demand for essential items like food, while population decreases lead to reduced demand. Age distribution also affects which products are in higher demand.
9. Product Taxation Changes in taxes, tariffs, and duties directly influence product demand. Increased taxation on specific goods typically reduces consumer interest and purchasing, while tax reductions may stimulate demand.
10. Changes in Purchasing Power Variations in real disposable income affect demand across different product categories. For example, when academics and researchers experience income increases, they often spend more on specialized products like computers, internet services, and educational subscriptions.

Elasticity of Demand

Elasticity of demand measures how responsive the quantity demanded of a commodity is to changes in factors that influence demand.

Types of Elasticity of Demand

1. Price Elasticity of Demand (PED)

This measures the responsiveness of quantity demanded to changes in the price of the same commodity.

2. Cross Elasticity of Demand (CED)

This measures the responsiveness of demand for one commodity to changes in the price of another commodity. For example, how the demand for yam changes when the price of potatoes changes.

3. Income Elasticity of Demand (YED)

This measures how demand responds to changes in the real income of consumers.

Factors Determining Elasticity of Demand

1. Availability of Substitutes

   The ease with which a commodity can be replaced by another determines its elasticity of demand. Goods with close substitutes tend to have elastic demand because consumers can easily switch when prices change. Examples include garri and semovita, or Ovaltine and Bournvita.

   However, goods without close substitutes, such as salt, tend to have inelastic demand since consumers have limited alternatives.

2. Proportion of Income Spent on the Commodity

   The larger the percentage of income spent on a commodity, the more elastic its demand tends to be. Expensive goods are usually more price-sensitive because price changes significantly affect consumers' budgets.

   On the other hand, inexpensive goods such as salt, pepper, or sweets tend to have inelastic demand because price changes have little effect on consumers’ overall income.

   Luxury goods, such as expensive cars or jewelry, usually have elastic demand since consumers can easily reduce purchases when prices rise.

3. Degree of Necessity

   Essential goods (necessities) generally have inelastic demand because consumers cannot easily reduce their consumption even if prices increase.

4. Habit or Addiction

   If consumers are strongly attached or addicted to a commodity, its demand tends to be inelastic. They will continue to purchase it even when prices increase.

5. Consumer’s Income

   The level of income affects how responsive a consumer is to price changes. Consumers with higher incomes are generally less sensitive to price increases, making their demand relatively inelastic.

6. Number of Uses

   The more uses a commodity has, the more elastic its demand tends to be. If the price falls, consumers may increase usage for different purposes.

   Goods with limited uses usually have inelastic demand because price changes may not significantly affect the quantity demanded.

7. Time Period

   Demand is generally more elastic in the long run than in the short run. Over time, consumers can adjust their spending habits and find substitutes, making demand more responsive to price changes.

Types of Price Elasticity of Demand

1. Perfectly Elastic (Infinitely Elastic) Demand

   Demand is perfectly elastic when consumers respond extremely to changes in price. They are willing to buy all available quantities at a specific price but will buy nothing if the price rises even slightly.

   The coefficient of elasticity in this case approaches infinity.

2. Perfectly Inelastic (Zero Elasticity) Demand

   Demand is perfectly inelastic when a change in price does not affect the quantity demanded at all. Consumers continue to buy the same amount regardless of price changes.

   The coefficient of elasticity is equal to zero.

3. Unitary (Unit) Elasticity of Demand

   This occurs when the percentage change in quantity demanded is exactly equal to the percentage change in price.

   The coefficient of elasticity is equal to 1.

4. Fairly Elastic Demand

   Demand is fairly elastic when a small percentage change in price leads to a greater percentage change in quantity demanded.

   For example, if a 20% decrease in price results in a 50% increase in quantity demanded, the coefficient of elasticity is greater than 1 but less than infinity.

5. Inelastic (Fairly Inelastic) Demand

   Demand is inelastic when a change in price causes a smaller percentage change in quantity demanded.

   For example, if a 15% increase in price leads to only a 10% decrease in quantity demanded, the coefficient of elasticity is less than 1 but greater than zero.

Cross Elasticity of Demand

Mathematical Definition:

Cross Elasticity of Demand (CED) =

% Change in Quantity Demanded of Commodity X
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% Change in Price of Commodity Y

Interpretation of Cross Elasticity Coefficient

• If elasticity (e) is negative, the goods are complementary (jointly demanded).
• If elasticity (e) is positive, the goods are substitutes.
• If elasticity (e) is zero, the goods are independent or unrelated.

Income Elasticity of Demand

Mathematical Definition:

Income Elasticity of Demand (YED) =

% Change in Quantity Demanded
--------------------------------
% Change in Consumer’s Income

Interpretation of Income Elasticity Coefficient

• If elasticity (e) is negative, the good is an inferior good (demand decreases as income increases).
• If elasticity (e) is positive, the good is a normal good (demand increases as income increases).