Economics, SS 1, Week 6
Topic: Theory of Demand
- Definition of demand
- Law of Demand
- Demand Schedule
- Demand curve
- Types of Demand
Theory of Demand
Theory of Demand is a theory relating to the relationship between consumer demand for goods and services and their prices. Demand theory
states that as more of a good or service is available, demand drops and therefore so does the equilibrium price.
Definition of Demand
Demand can be defined as the ability and willingness to buy a specific quantity of goods or services at a given price and at a particular period of time.
Demand is not the same as want or desire , as want or need is defined is just a mere desire for a commodity but not backed up by the willingness to ability to pay for that commodity at the same time. To differentiate demand from want we call it effective demand; this is a situation where desire is backed up by the ability and willingness to pay for specific quantities of a commodity at alternative prices within a period time.
Law of Demand
The law of demand states that all things being equal, 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 regarded as the first law of demand and supply; it means when the price of a commodity like beans for instance is high in the market and the price of rice is low, more people will demand for rice and less of beans.
This law holds under the following assumption
- That the consumer’s income remain constant
- That no close substitutes of a commodity exist
- That the habits of the consumer remain the same
- That there will be no change in taste and preference of the consumer
Demand schedule can be defined as a table showing the relationship between prices and the quantity of that commodity demanded.Demand schedule is of two types. Which are individual and market demand schedule.
Individual demand schedule: This is the table that shows the different quantities of a commodity which an individual or consumer would purchase at various prices and at a particular time.
Market demand schedule: It is known as the aggregate or total demand or composite demand schedule, it is the schedule of all consumers of a commodity in a market
Mr.Adelabu’s demand schedule for cups of rice
|Price per cup of rice (naira)||Quantity demanded per week|
The demand schedule above shows the relationship between the various prices of cup of rice and the quantity Mr Adelabu is willing to buy at each price per week.
Demand curve is defined as a graph showing the relationship between the price and quantity of a commodity demanded. It is a diagrammatic representation of a demand schedule.
Types of Demand
- Joint or complementary demand: This is the demand which occurs when two commodities that are related to each other are demanded at the same time. The commodities are said to be complementary to each other as a change in the demand of other will cause a change in the demand of the other commodities. Example of joint or complementary demand is bread and butter, car and petrol.
- Derived Demand: Derived demand is the one that occurs as a result demand for other commodities. Example: the demand for flour and sugar to meet the demand for bread. The demand for pen and book to meet the demand of a student.
- Composite Demand: A composite demand is the demand which is required to serve two or more purposes. Example: The demand of flour can be used for baking bread, baking cake, for making snacks etc.Therefore if there is a high supply of flour there will also be a high demand for it.
- Competitive Demand: When two commodities are fairly close substitutes to each other, they are competitive demand, demand that serves the same purpose or similar function. Here, the high demand for one will bring a fall in the demand for the other. Examples of commodities with competitive demand are coca cola, fanta, pepsi, sprite. Milo, Bournvita, ovaltine etc
Test and Exercise
- Define demand
- Differentiate between demand and want
- Explain the various types of demand with Examples
- State law of demand
- Define demand schedule
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