Theoryofdemand
- 1. ECONOMICS THEORY OF DEMAND Short revision series
- 2. What is demand? Demand for a product refers to the amount of it which will be bought per unit of time at a particular price. Demand is always related to price and time (e.g demand for mangoes by a household at a price N100/kg is 5kg mangoes/week
- 3. Individual demand/market demand Individual demand: it refers to demand from the individuals/family/household. It is a single cosuming entity’s demand. Market demand: It refers to the total demand of all buyers, taken together. It is the aggregate of the quantities of a product demanded by all the individual buyers at a given price over a given period of time.
- 4. Factors determining demand Price of product Consumer income Tastes and habits of consumer Price of other related products Seasonal variations Population Technology/advertising Future expectations about prices
- 5. Law of demand States that: The higher the price of a commodity, the smaller the quantity demanded; the lower the price, the larger the quantity demanded. In other words, other things being constant, demand varies inversely with price. D = f(P)
- 6. Demand curve Price N Qty demand ed 5 100 4 200 3 300 2 400 1 500 Demand for commodity X (units per week) price Y 5 4 3 2 1 0 100 200 300 400 500 X
- 7. Assumptions of the law of demand The law of demand is based on certain assumptions: 1. No change in consumer’s income 2. No change in consumer’s preferences 3. No change in fashion 4. No change in price of related goods 5. No expectations of future price changes or shortages 6. No change in government policy
- 8. Exceptions to the law of demand 1. Giffen goods: in case of certain inferior goods called Giffen goods (named after Sir Robert Giffen), inspite of price rise, demand will also rise. This is because the next cheapest alternative is also expensive. 2. Speculation: when people speculate about prices on the commodity in the future, it may not act according to the law of demand. Speculating the prices of the commodity will further increase the demand because people will buy the commodity in order to hoard for future use.
- 9. Exceptions to the law of demand 3) Article of snob appeal: Certain commodites are demanded because they happen to be expensive or prestige goods, having them is more of a status symbol. So increase in price will lead to increase in demand for such goods. Eg diamonds, expensive cars etc 4) consumer psychological bias: when a customer is wrongly biased against quality of a commodity, a fall in price may not lead to an increase in demand.
- 10. Various types of demand Autonomous demand: refers to spontaneous demand for goods to satisfy a want directly. Derived demand: When the demand for a product depends on the demand for some other product. E.g demand for doors derived from demand for houses.
- 11. Types of demand cont. Short run demand: refers to existing demand with its immediate reaction to price changes, income changes e.t.c. The demand is not elastic (not very responsive to change) Long run demand: is that which will ultimately exist as a result of the changes in pricing, promotion, or product improvement, after time is allowed to to let market adjust to the new situation
- 12. Types of demand cont. Joint or complementary demand: when 2 or more goods are demanded in conjunction with one another at the same time to satisfy the same want. E.g razors and shaving sticks, cars and fuel, pen and ink. Composite demand: when a commodity is wanted for several different uses. E.g steel needed for cars, railways, buildings; coal for factories, railways.
- 13. Types of demand cont. Price demand: refers to the various quantities of a product purchased by a consumer at alternate prices D = f(p) where D – demand, f – functional relationship, p – price of product. Income demand: refers to various quantities of a commodity demanded by the consumer at alterntive levels of changing money income D = f(M) where M – income variable Cross demand: refers to the various quantities of a commodity (X) purchased by a consumer in relation to changes in price of a related commodity (Y), which may be a substitute/complimentary product D x = f (P y) where D x – demand for X and Py – price of commodity Y
- 14. END