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DEMAND: DEFINITION, LAW, TYPES & FACTORS

Demand can be defined as the quantity of a commodity (goods and services) that consumers are willing and able to buy at a given price and at a particular place and time. Demand is quite different from wants, need or desire. ‘Effective Demand’ in economics must meet three conditions which are: Ability to pay Willingness […]

Demand can be defined as the quantity of a commodity (goods and services) that consumers are willing and able to buy at a given price and at a particular place and time. Demand is quite different from wants, need or desire. ‘Effective Demand’ in economics must meet three conditions which are:

  1. Ability to pay
  2. Willingness to pay
  3. Authority to buy a commodity

Demand must be related to price because to a great extent, price determines the quantity which consumers are willing to buy.

 

LAW OF DEMAND

The law of demand states that, all things being equal (Ceteris Paribus), ‘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 quantity of it will be demanded by the consumers and vice-versa.

 

DEMAND SCHEDULE

It is a table of value showing the relationship between prices and quantity of that commodity demanded.

This is a table, which shows the magnitude of demand at various prices. That is, the different quantities of a commodity, which would be bought at various prices, at a particular time.

 

Example: The table below shows Mr. Tunde’s demand schedule for milk.

Price (₦)                                     Quantity Demanded (Tin)

35                                                                       9

30                                                                      12

25                                                                      15

20                                                                      18

15                                                                      21

10                                                                      24

5                                                                      27

From the table we can observe that as price changes the quantity of milk demanded also changes.

The total of the individual demand schedule gives the market or aggregate demand schedule.

 

DEMAND CURVE

The demand curve is the graphical representation of the information contained in the demand schedule. The price is plotted on the vertical axis and the quantity demanded is plotted on the horizontal axis. Normal demand curve slopes downwards from left to right. From Mr. Tunde’s demand schedule, a demand curve is drawn as follows.

               Quantity Demanded

Both the demand schedule and the demand curve illustrate the law of demand which states that “the higher the price of a commodity, the lower the quantity demanded and vice versa.

TYPES OF DEMAND

COMPLEMENTARY (JOINT) DEMAND: This is the demand that occurs when two or more goods are needed or required together at the same time by a consumer, eg tea and sugar, car and petrol. Increase in the demand for car will lead to increase in demand for petrol, vice-versa.

 

COMPETITIVE (SUBSTITUTE) DEMAND: This is the demand that occurs when two goods are close substitute and serve the same purpose. In this case, when there is an increase in the price of one commodity that has close substitute to another, its demand will fall as consumers will shift to the other close substitute goods with lower price and the demand for the close substitute goods will increase, eg fish and meat, tea and coffee, butter and margarine, pen and biro.

 

COMPOSITE DEMAND: This is the demand that occurs when the total demand for a single commodity will serve many useful purposes. For example, cocoa beans is demanded for making cocoa beverages, cocoa bread, cocoa wine and chocolate. Cassava is demanded for making foofoo, garri, starch and cassava powder (Elubo)

 

DERIVED DEMAND: This is the demand that occurs when the demand for a commodity is not for its immediate consumption but for the demand for another commodity. For example, there is a demand (derived) for flour to satisfy the demand for bread and cake.

 

FACTORS AFFECTING THE DEMAND FOR A COMMODITY

  1. Price of the commodity:-The higher the price of the commodity the lower the quantity demanded and vice-versa.
  2. Price of other commodities: This applies to commodities, which are complementary or are close substitutes. If the price of a commodity is high, consumers may demand for the close substitutes.
  3. Income of the consumer: As the income of the consumer increases, his demand for goods and services will also increase
  4. Change in taste and fashion: The demand of people changes according to the reigning fashion of the day and their personal differing tastes.
  5. Distribution of income: The pattern of demand of a population where income is evenly distributed will be different from that of a population where income is concentrated in the hands of a few
  6. Size of the population: – The level/size of the population determines the level of demand. The structure of the population i.e. age distribution, sex distribution etc also determines the level of demand for particular commodities
  7. Weather: The weather condition prevailing at a particular time influences the demand for particular commodities e.g. umbrella has a high demand during the rainy season.
  8. Expectation of future changes in price: – If consumers expect that there will be high or low price of goods in future, demand will increase or decrease.
  9. Advertising:- A well packaged and convincing advertisement specifically targeting a product will lead to increase in demand
  10. Availability of credit facilities:- When there are avenues for consumers to buy goods and defer the payment for the goods to a later time, demand will increase
  11. The introduction of new commodities to replace old ones. This will increase the demand for the new commodities and reduce the demand for the old commodities
  12. Taxation on commodities:- Increase in taxes levied on goods will reduce their demand because the goods will cost more. A decrease in tax levied on goods will have the opposite effect.

 

EXCEPTION TO THE LAW OF DEMAND

Exceptional or Abnormal Demand- is a demand pattern which does not abide by the law of demand, and therefore gives rise to the reverse of the basic law of demand which states that the higher the price, the lower the quantity demanded of a commodity, and vice-versa. In a case of abnormal demand, a higher price may mean a higher demand or no change in demand, while a lower price may mean a lower demand or no change in demand. Conditions for these exceptional cases are:

  1. Goods of Ostentation (Prestigious Goods)
  2. Necessary but Cheap Commodity
  3. Inferior (Giffen) Goods
  4. Expectation of Future Change in Price

 

GENERAL EVALUATION QUESTIONS

  1. With the aid of a diagram define Change in quantity demand.
  2. A demand curve slopes downward from left to right, but this may not be always so. Explain this statement.
  3. Explain the term Opportunity cost.
  4. What is the relevance of Opportunity Cost to an individual?
  5. Describe any five problems of distribution in Nigeria.
  6. What is demand?
  7. Differentiate between a demand schedule and a demand curve.
  8. What is abnormal demand?
  9. Highlight five factors affecting demand

 

WEEKEND  ASSIGNMENT

  1. When demand for a commodity is not back up with willingness and ability to pay, the situation is regarded as ____ (a) a mere desire (b) an effective demand (c) abnormal demand (d) derived demand
  2. The sum total of individual demands for a particular commodity makes up ____ (a) personal demand (b) aggregate demand (c) special demand (d) composite demand
  1. The demand pattern which does not abide by the basic law of demand is ____ (a) effective demand (b) exceptional demand (c) competitive demand (d) normal demand
  2. Two goods x and y are said to be complementary when (a) a fall in the price of x raises the demand for y (b) a fall in the price of  x causes a fall in the demand of y (c) a fall in the price of x does not affect the price of y (d)a rise in the price of x causes a rise in the demand for y.
  3. Effective demand means the (a) quantity of goods demanded (b) quantity of goods supplied

(c) demand that satisfies the consumer (d) demand back by the ability to pay.

 

THEORY

  1. Briefly explain demand in relation to a mere want
  2. Discuss both demand schedule and demand curve.

 

See also

THE MIDDLEMEN

DISTRIBUTIVE TRADE

THEORY OF MULTIPLIER

THEORY OF INCOME DETERMINATION

NATIONAL INCOME

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