DEMAND

DEMAND

Demand:

This is the amount or quatity of particular economic goods or services that a consumers are willing and are able to purchase at a particular price for a period of time.

Demand is the rate at which consumers want to buy a product. Economic theory holds that demand consists of two factors: taste and ability to buy. Taste, which is the desire for a good, determines the willingness to buy the good at a specific price. Ability to buy means that to buy a good at specific price, an individual must possess sufficient wealth or income.

Both factors of demand depend on the market price. When the market price for a product is high, the demand will be low. When price is low, demand is high. At very low prices, many consumers will be able to purchase a product. However, people usually want only so much of a good. Acquiring additional increments of a good or service in some time period will yield less and less satisfaction. As a result, the demand for a product at low prices is limited by taste and is not infinite even when the price equals zero. As the price increases, the same amount of money will purchase fewer products. When the price for a product is very high, the demand will decrease because, while consumers may wish to purchase a product very much, they are limited by their ability to buy.

Demand Schedule:

This is a table that shows the quantity of product purchase at a prevaling price.

Demand Curve:

This is a graph that shows the relationship between a price and the quantity of goods and serivices.

Samples are shown below;

Please NOTE that the convention in economic theory is to plot the price on the vertical axis and the rate of purchase on the horizontal axisOther factors which influence changes in demand act over a much larger time frame. These factors are assumed to be constant over the time period in which price causes supply and demand to stabilize.

Conditions Affecting Demand Curve or Conditions that Cause Shift in Demand Curve

  • Movement along the demand curve is caused by change in price.
  • Shift of demand curve brought about by other factors but price is always constant. Increase in income increases quantity, shifting the curve upward.
  • Prices of other goods affect the demand curve. Change in taste, expectation, prices


Law of Demand:

It states that if all other factors remain equal (ceteris paribus), the higher the price, the lower the quantity demanded and vice versa.

Types of Demand

  1. Complimentary Demand /Joint Demand
  2. Subtitute/Competitive demand
  3. Derive Demand

Complimentary Demand

These are goods that are used together e.g car and petrol, ink and Biro. The increase in price of one leads to the decrease in quantity of the other

Subtitute Demand

These are goods that are known as alternative. They are alternate to each other. E.g chicken or turkey. Increase in price of one leads to increase in demand of the other e.g mike and bourvita.

Derive Demand

These are goods that are demanded for the production   of others e.g cassava and garri, flour and bread. Increase in price of one leads to decrease in quantity of the other e.g cotton and cloth.
 

Factors Affecting Demand

  1. Change in price of good  and services.
  2. Change in the prices of related goods and services(Subtitute, complimentary, derive).
  3. Change in taste or preference of consumers for goods and services
  4. Change in consumers income
  5. Expectation
  6. Seasonality e.g raining season (umbrella)
  7. Socialogical factor e.g  age, gender, marriage
  8. Advertisement and commercial aid

Elasticity of Demand

Elasticity means responsiveness of one variable to change in another. It shows the degree of a change in a variable due to the change in quantity of another variable.

In Elasticity of Demand we will discuss; Price, Income and Cross Elasticity of Demand

Price Elasticity of Demand (P.E.D)

This is shows the degree of responsiveness of a change in quantity demanded due to a change in price of a product.

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Degree of Elasticity

  1. Elastic Demanded where P.E.D > 1
  2. Inelastic Demanded where P.E.D <1
  3. Unitary Demanded where P.E.D = 1
  4. Perfectly Demanded where P.E.D = 0
  5. Perfectly inelastic Demanded where P.E.D =∞ (infinity)

Elastic Demand

Definition: 

Elastic demand is an economic concept that occurs when the quantity of a product responds intensively to a change in the price of the product. Demand is said to be Elastic when the response of demand is greater with a small proportionate change in the price, in another word when price or other factors have a big effect on the quantity consumers want to buy.

The Price Elasticity of Demand (P. E. D) for an Elastic Demand is greater than 1.

That is    P. E. D > 1  

Example:

An analysis on 80 leaves exercise book at Success Stationary Store is tabulated below;

Draw out the demand curve and determine its degree of elasticity

Solution

The demand curve is shown below;

Now let's determine its degree of elasticity

Since 2>1

therefore, P. E. D > 1.

Hence, it is an Elastic Demand

Inelastic Demand

Definition:

Inelastic is an economic term that refers the demand or supply of a good or service that is not influenced by changes in the price of the good or service. Demand is said  to be inelastic if a larger proportional  change in price brings about a smaller proportional change in quantity demanded, in another word when price or other factors have a big effect on the quantity consumers want to buy.

The Price Elasticity of Demand (P. E. D) for an Inelastic Demand is less than 1.

That is    P. E. D < 1  

Example

From the example given at Elastic demand, suppose the price 100 was replaced with 60. Then its Demand Curve would be;

Now let's determine its degree of elasticity

Since 0.4<1

therefore, P. E. D < 1.

Hence, it is an Inelastic Demand

Unitary Elastic Demand

Definition: 

A unitary elastic demand describes a demand or supply that is perfectly responsive to price changes by the same percentage. Unit elastic demand is an economic theory that assumes a proportionate in price brings equal proportionate change in quantity demanded.

The Price Elasticity of Demand (P. E. D) for an Unitary Demand is equal to 1.

That is    P. E. D = 1  

Example

From the example given at Elastic demand, suppose the  80 goods demanded was replaced with 90 goods. Then its Demand Curve would be;

Now let's determine its degree of elasticity

Since P. E. D = 1.

therefore, it is said to be Unitary Elastic Demand

Perfectly elastic Demand

A perfectly elastic demand curve is represented by a straight horizontal line and shows that the market demand for a product is directly tied to the price. In fact, the demand is infinite at a specific price. Thus, a change in price would eliminate all demand for the product. Therefore a Perfectly Elastic Demand is when no change in price of a product brings an infinite change in the quantity demanded.

The Price Elasticity of Demand (P. E. D) for an Unitary Demand is equal to 0.

That is    P. E. D = 0 

The Demand Curve below shows a Perfectly elastic demand at a given price P.

Perfectly Inelastic Demand

Perfectly inelastic demand is an economic condition in which a change in the price of a product or a service has no impact on the quantity demanded because the elasticity of demand is equal to zero or in another word it is when a change in price brings about no change in quantity demanded.. This idea is largely an economic theory because it rarely happens in the real world. A perfectly inelastic demand curve is represented by a straight vertical line and shows that a consumers have no substitute goods to meet their needs.

The Price Elasticity of Demand (P. E. D) for an Elastic Demand is equal to infinity.

That is    P. E. D =∞   

The Demand Curve below shows a Perfectly inelastic demand at a given quantity demanded Q.

Determinant of Price Elasticity of Demand

  1. Number of Subtitute: The goods that have subtitute are elastic which goods with less/no subtitute are inelastic.
  2. The number of uses
  3. Nature of Product: Necessity are product one can’t do without
  4. Time: Short run/Long run
  5. Proportion of income spent on a commodity
  6. Habit
  7. Durability


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