DEMAND
2.3 Demand
2.3.1 definition of demand.
2.3.2 price and demand.
2.3.3 individual and market demand.
2.3.4 conditions of demand.
By the end of this chapter you will be able to:
▪ Define demand
▪ Draw a demand curve
▪ Recognise the link between individual and market demand in terms of aggregation
▪ Distinguish between extensions and contractions in demand
▪ Analyse the causes of shift s in the demand curve
Demand: is the willingness and ability to buy a product.
Demand refers to the willingness and the ability of consumers to pay a given price to
buy a good or service.
Demand and price
The amount of a good or service demanded at each price level is called the quantity demanded.
A demand schedule is a table showing a list of different quantities demanded of a product, at different prices over a
particular time period.
A demand curve is a graph showing different quantities demanded of a product, at different prices over a particular
time period.
When drawing a demand curve; price is measured on the vertical axis (the line going up) and quantity demanded on
the horizontal axis (the line going across).
Demand and price
Demand and price are inversely related.
The quantity demanded falls as price
rises, while the quantity demanded rises
at lower prices; this is called the law of
demand.
Use the demand schedule below to illustrate a demand curve
Price ($) Quantity demanded
50 2200
45 2500
40 3000
35 3800
30 5000
25 7000
A demand curve over the full range of prices
Market demand
Market demand is the total demand for a product at different prices. It is found by adding up each individual’s demand at
different prices.
Market Demand Schedule:
Market Demand Schedule is defined as a table showing the quantities of a given commodity which all consumers will buy
at all possible prices at given moment of time. In a market, there are several consumers, and each has a different liking,
taste, preference and income. Every consumer has a different demand.
The market demand actually represents the demand of all the consumers combined together. When a particular
commodity has several brands or types of commodities, the market demand schedule becomes very complicated because
of various factors. However, for a single item, the market demand schedule is rather simple. Study the market demand
schedule for milk in table 7.2.
Price X’s demand Y’s demand Market demand
1 5 6
2 4 5
3 3 4
4 2 3
5 1 2
Market demand curve
The effect of a change in price on demand
Change in quantity demanded: Extension in demand: a rise in Contraction in demand: a fall in
a rise or fall in the quantity the quantity demanded caused the quantity demanded caused by
demanded caused by a change by a fall in the of the product a rise in the price of the product
in the of the product itself. itself. itself.
Determinants of demand
Income of the Consumer: A key determinant of demand is the level of income i.e., the higher the level of income the
higher the demand for a given commodity. Consumer’s income and quantity demanded are generally related
positively Goods and services that are characterised by this relationship are called normal goods. Most products are
like this and include things like cars, restaurant meals, quality clothing, etc. It means that when income of the
consumer rises he wants to have more units of that commodity and when his income falls he reduces the demand.
The ability to pay is vital when considering the importance of effective demand. For any individual, the demand for
goods and services invariably depends upon disposable income. (Usually this is taken to mean what a person has
left after tax has been deducted).
In consumer theory, an inferior good is a good that decreases in demand when consumer income rises. This is
a negative relationship. Typical examples are poor quality foodstuffs; as consumers become better-off, they are
more likely to buy less of these and, instead, purchase more fish, meat and premium priced foods with their
increased income. Also Cheaper cars are examples of the inferior goods. Consumers will generally prefer
cheaper cars when their income is constricted. As a consumer’s income increases the demand for cheap cars
decreases and demand for costly cars increases.
Prices and availability of Related Goods: Consumption choices are also influenced by the alternative options available to
users in the relevant market place. Market information regarding alternative products, quality, convenience and dependability
all influence choices. The two products may be related in two ways- Firstly, as complementary goods and secondly as
substitute goods.
Complementary goods are those goods which are used jointly and consumed together to provide utility to the consumer like
tennis ball and a racket, petrol and car, bread and butter, gun and bullet. The relationship between the price of a product and
the quantity demanded of another is inverse. For example if the price of cars were to rise, less people would choose to buy
and use cars, switching perhaps to public transport-trains. It follows that under these circumstances the demand for the
complementary good petrol would also decrease.
Goods which are perceived by the consumer to be alternatives to a product are termed as substitute goods. There is
direct relationship between the demand for a product and the price of its substitute. Typical examples are Coca-Cola and
Pepsi, both well-known brands of cola, tea and coffee, different brands of tooth paste (Colgate and close up).
The increase in price of tea would decrease its quantity demanded and people would switch over to its substitute
commodity coffee.
Consumers’ Tastes and Preferences (Fashion, taste and attitudes): These factors are more difficult to explain since
they are largely a matter of individual behaviour. As consumers, we are unique and have our particular likes and dislikes.
Demand for a product is affected by the tastes and preferences of the consumers. As tastes and preferences shift from
one commodity to the other, demand for the first commodity reduces and that of the other rises. For some products, our
attitude might have been built up over time or it could have been influenced by what we have read or what advertisers
would like us to believe about their product.
Advertising — marketing messages are used to inform, remind and persuade customers to buy a fi rm’s products.
Companies such as McDonald’s, Apple and Samsung spend hundreds of millions of dollars each year on their advertising
budgets in an attempt to increase the demand for their products.
Government policies — rules and regulations such as the imposition of taxes on tobacco and alcohol will affect the
demand for certain products. Sales taxes cause prices to increase, thereby reducing the level of demand. By contrast,
government subsidies for educational establishments and energy-efficient car makers help to encourage more demand for
education and environmentally friendly cars due to the relatively lower prices.
Conditions of demand
Changes in demand: shifts in
the demand curve. It is caused
by change in other factors that
affect demand for the product
when its price is constant.
Increase in demand: a
rise in demand at any
given price, causing the
demand curve to shift to
the right.
Decrease in demand: a fall
in demand at any given
price, causing the demand
curve to shift to the left.
