Demand

# Demand

Demand is the amount of a product consumers are willing and able to buy at a given price over a particular time period. The keywords are willing and able, meaning consumers would like to have the good or service (willing) and they can pay for it (able). This kind of demand backed by the ability to pay is known as effective demand. There is another type of demand called ineffective demand which is a mere desire to possess a product for which there is no ability to pay. We will focus on effective demand.

Demand schedule
A demand schedule is a tabular representation of the relationship between price and quantity demanded.  The amount of the good purchased decreases as price increases and vice versa.

Table 1: Demand schedule for rice

 Price per bag (\$) Quantity (in bags) 50 3000 60 2800 70 2400 80 1800 90 1000

Demand curve

This is a graphical representation of the relationship between price and quantity demanded. A demand curve is a diagrammatic expression of the demand schedule.

Figure 1: A demand curve

Individual demand versus market demand
The demand of only one consumer of a product is known as individual demand while the total demand of all the consumers of a product is the market demand. The market demand is obtained by summing up the demand of all the consumers of a product.

The Law of Demand
The law of demand says “the amount of a product that consumers are willing to buy increases as the price falls while it decreases as the price rises”. In other words, the relationship between price and quantity demanded is inverse or negative. If two variables are inversely or negatively related, they move in opposite directions.

Why the Law of Demand is true
The first explanation of the law is that, given two commodities, the consumer will always buy more of the one with a falling price since it is now relatively cheaper. This supports the fact that as price decreases quantity purchased increases. Also, consumers will purchase less of the product with rising prices as they have comparatively become more expensive. This is what economists call the substitution effect because people are buying more of the cheaper product instead of the one that is more expensive. Consumers are switching or substituting one product for another one.

The income effect is another reason why the connection between quantity demanded and price is negative or inverse. As the price of a good decreases, the consumer is richer not in monetary terms but in terms of the amount of good he can now buy with his income. We say there is more real income or purchasing power as price decreases, thereby making the consumer to increase the quantity he buys. On the other hand, the consumer is poorer (he has less income) when the price of a product rises because he can now buy fewer quantities than he could buy before.

Why the Law of Demand may not be true
There are exceptions to the law of demand because people have different motives for buying a commodity. This is why economics is a social science – human behaviour varies with the circumstance.

Some people that belong to a higher social class would refuse to buy a product that has been falling in price but demand for more when the price starts going up. Examples are luxury items, like pieces of jewelry, that support an ostentatious lifestyle.  This is known as the Veblen effect. It contradicts the normal relationship between price and quantity; it is, therefore, an abnormal situation.

Poor people have been found to buy more of certain goods as their prices increase and less when their prices fall; these goods are called Giffen goods. The quantity of staple food the poor purchase increases as price increases because it is a necessity; they would rather spend all their money on this good that has become more expensive because the money that will be left will not be enough to buy other types of good. But when they become rich, they buy less of this good even when its price is decreasing.

Figure 2: An abnormal demand curve

Changes in the demand curve

Movement along the demand curve
This kind of movement occurs when it is the price of the commodity itself that increases or decreases. Economists also refer to this as a change in the quantity demanded.  If the price of a product increases there is a decrease in the quantity demanded (see Figure 4) while it is known as an increase in the quantity demanded when a good’s own price falls (see Figure 3 below). A decrease in the quantity demanded is also known as a contraction of demand while the increase in the quantity demanded is also called an extension of demand.

Figure 3: Increase in quantity demanded

Figure 4: Decrease in quantity demanded

Shift of the demand curve
A shift is a leftward or rightward movement of the demand curve. This shows either an increase in demand (rightward movement) or a decrease in demand (leftward movement). The factors responsible for a shift include income, prices of related products, population, advertising, consumer expectation, weather, taste and preferences.

A rise in the income of consumers increases the units of a good that can be obtained which is shown by a shift of the demand curve from D1 to D2 (Figure 5 below) while a fall in income leads to a leftward shift from D1 to D2 (Figure 6 below). Consumers’ real income or purchasing power can increase if the government cuts income tax, thereby leaving the people with more disposable income for spending on more units of goods and services.

Figure 5: An increase in demand

Figure 6: A decrease in demand

Related goods are either substitutes or complements. A consumer buys more of one product if its substitute has increased in price – he switches to the cheaper alternative making the amount demanded to rise. The reverse is the case when the price of a substitute good drops. Complements are goods that are used together. And people tend to buy less of a product when the price of its complement has increased. For example, why do you want to buy more pens when books have become more expensive?

Another condition that makes demand to change is the size and structure of the population. A rise in population due to high birth rate, access to better medical facilities, immigration will definitely raise the demand for many goods in an economy. The age distribution of a country’s population can also influence the demand for age-specific goods. A rise in the population of old people, for instance, will increase demand for eyeglasses, diapers, wheelchairs, old people’s homes, nurses and other things used by aged members of the society.

Advertising creates awareness about a product and a successful advertising campaign is capable of shifting the demand curve from D1 to D2 (Figure 5 above). Likewise, a change in preference or taste, which may be caused by advertising, makes more people switch to the desirable product.

Consumer expectation can be a reason why people will change their demand for a product. If the political or economic conditions make people to anticipate scarcity or price rise in the near future, demand will increase now. But people will buy less now if they expect prices to fall in the future.

Sales of some goods and services skyrocket in a particular period of the year. The tourism industry is an example. The demand for air travel and accommodation increases in summer.

Types of demand
Composite demand is the demand for a product that can be used for more than one purpose. If more of it is demanded for a purpose, less is available for other purposes. The use of some crops for biofuel will reduce the quantity available for food. The demand for substitute goods, e.g. Coke and Pepsi, is competitive demand while derived demand is the type of demand for a good that is used to make other goods such as machinery. Goods like cocoa, sugar and milk are in joint demand because are all wanted to make tea.