THEORY OF

DEMAND
T O D AY ’ S T O P I C
LEARNING OBJECTIVES:

To define demand,
To explain the effective demand, basic law of demand, market and
individual demand
To construct the demand schedule from a demand function
To discuss the demand curve
DEFINITION OF DEMAND

Demand is the quantity of goods or service that a consumer is willing

and able to buy at a particular price and time.
In other words, It is the willingness and ability to buy a product at a
given price and time.
EFFECTIVE DEMAND

• For demand to be effective, it has to be backed and supported by

willingness and ability to pay money.
DIFFERENCE BETWEEN INDIVIDUAL
AND MARKET DEMAND
• Individual demand is just the demand for one consumer while
market demand for a product is the total demand for that product
from all its consumers.
 BASIC LAW OF DEMAND

All things being equal, the higher the price of a product, the lower
will be the quantity demanded and the lower the price, the more the
quantity demanded.
DEMAND SCHEDULE

• Demand schedule is a table that shows the relationship between

price and quantity demanded.
Demand Schedule

Price of a Demand per

chocolate bar week
(cents)
200 20
150 40
100 60
50 80
25 100
DEMAND CURVE

• A demand curve is line that shows the relationship between quantity demanded
of a product and the price.
FEATURES OF THE DEMAND CURVE

• It shows that as price rises, quantity demanded falls, and as price falls, quantity
demanded rises
• It is downward sloping
• Price and quantity demanded move in opposite direction
ACTIVITY

• Given that the demand function 100 – 2p if the prices are

(a) $5 (b) $10 (c)$ 15 (d) $20 (e) $25

From the above data, plot a demand schedule and a demand curve.
 CHANGE IN
QUANTITY
DEMANDED AND
CHANGE IN
DEMAND
LEARNING OBJECTIVES

• To discuss the change in quantity supplied and change in demand

CHANGE IN
QUANTITY DEMANDED
• Change in quantity demanded : This is the movement along the demand curve.
• An upward movement is caused by a rise in the price of a good. This is
known as contraction of demand or decrease in quantity demanded.

• An downward movement along the demand curve is caused by a fall in the

price of a good which lead to the increase on quantity. This is knowns as an
extension of demand or increase in quantity demanded.
 CHANGE IN DEMAND

• Change in demand refers to the shift of the demand curve either to the right or
left. Also, it is when the demand curve shifts to an entirely new position.

• A rightward shift( i.e a shift of the demand curve to the right) from DD to
D1D1 indicates an increase in demand.
• A leftward shift(i.e shift of the demand curve to the left) from D1D1 to DD
indicates a decrease in demand.
FACTORS AFFECTING CHANGES IN
DEMAND
• Changes in taste, habits and fashion
• Changes in consumers’ income
• Changes in market size
• Changes in taxes on incomes
• Expectations of consumers
• Prices of related goods
Other:
• Advertising
• Festival/weather
• Population
TYPES OF DEMAND

• Derived Demand: This is the demand for goods and services not for immediate satisfaction but
for what can be gotten from them. Example: Factors of production
• Competitive Demand: The demand for two goods is said to be competitive if the goods are close
substitute. i.e. A rise in the price of good A would lead to an increase in the demand for good B.
• Complimentary Goods: Two goods are said to complimentary if one cannot be used without the
other. Eg Car and petrol. A rise in the price of cars will lead to a fall in the demand for petrol
• Composite Demand: The demand for a good is said to be composite when a good is demanded
for several purposes. Eg Palm Oil- Used to cook, make soap etc.
HOW THE MARKET
WORKS- SUPPLY
• Supply can be defined as the quantity of goods and services that a producer is
willing, able and ready to offer for sale at a given price and time.
• LAW OF SUPPLY
• At a higher price, the producer is willing to offer more for sale and at a lower
price, the producer offers less goods for sale.
• In other words, the law of supply say all things being equal, the higher the price
the higher the quantity supplied and at a lower price lesser quantity supplied to
the market.
 SUPPLY SCHEDULE AND SUPPLY
CURVE
• This is the table showing the quantities offered for sale at different prices.
Price ($) Quantity supplied
100 1000
80 800
60 600
40 400
20 200
SUPPLY CURVE

• This is a graph showing the relationship between the quantities offered for sale
and the prices.
• The supply curve has an upward slope from the right to the left.
 CHANGE IN QUANTITY SUPPLIED

• A change in quantity supplied is a movement along the supply curve.

• An upward movement is caused by an increase in price which causes the quantity supplied to
increase. This is known as an Extension of demand
• A downward movement is caused by a decrease in price which causes the quantity supplied to
decrease. This is known as a Contraction of supply.
 CHANGE IN SUPPLY

• Change in supply is a shift of the supply curve to an entirely new position. In other words, it is
a shift on the supply curve from its original position either to the left or to the right.
• An increase in supply is a rightward shift of the supply curve from SS to S1S1. This is caused
by non-price factors.
• A decrease in supply is a leftward shift of the supply curve from SS to S1S1.
 FACTORS AFFECTING CHANGES IN
SUPPLY
1. Government policy
• A. SUBSIDY: This is a grant given by the government to local producers to
help reduce their cost of production. This increases the supply, hence, the
supply curves moves to the right.
• B. TAXATION: A tax is a compulsory payment levied or imposed by the
government on income and wealth of individuals, profits of firms, and on the
expenditure of goods and services. Taxes makes the cost of production to
increase, hence, the supply reduces, this shifts the supply curve to the left.
• 2. Cost of factors of production: If the cost of production is low, supply would
increase and vice versa.
• 3. Changes in price and profitability of other goods and services: Price changes
acts as a signals to private sector firms to move their resources to and from the
production of different goods and services.
• 4. Technological changes: Technological progress mean an improvement in the
performance of machines, employees, production methods, management control,
product quality etc. This will allows more to be produced at a lower cost, regardless of
the price at which the product is sold.
• 5. Producers expectations about future prices
• 6. Number of suppliers
ASSIGNMENTS
• Define Abnormal Demand
• State and explain the FOUR causes of abnormal demand
ABNORMAL
DEMAND
MEANING OF ABNORMAL DEMAND

• An abnormal demand is the demand that does not follow or abide by the law of demand that
says all other things being equal, the higher the price, the lower the quantity demanded and the
lower the price the higher the quantity demanded.
• In other words, it is the opposite of the law of demand
CAUSES OF ABNORMAL DEMAND

• ARTICLE OF OSTENTATION:
These are goods which command or have high prestige value. E.g golden jewelries, luxury cars.
Some consumers take pride in buying goods whose price are high because the higher the price,
the higher it is valued and so the greater the quantity demanded.

ARTICLE OF NECESSITY: These are also known as GIFFEN GOODS. These are articles or
goods which are considered essential to the extent that people can do without them.
FUTURE EXPECTATION
RARE COMMODITIES
FACTORS AFFECTING SUPPLY

• A. Government Policy
• 1. Taxation: This is a compulsory levy imposed by the government on income and wealth of
individuals and firms and on the expenditure of goods and services.
• 2. Subsidy
• B. Technological improvement
• C. Cost of factors of production
• D. Producers expectation about future price
• E. Number of suppliers
• F. Global factors
TYPES OF SUPPLY

• A. Competitive supply: This is the supply of a good which can be used for so
many purposes. E.G Crude oil can used for: Gas, petrol, fuel, Vaseline etc

• B. Complimentary/Joint supply: The supply of two goods are said to be

complimentary if these goods are produced at the same time.

• C. Composite Supply: This is where many goods are supplied for the
satisfaction of many wants.
 PRICE
DETERMINATION
IN A FREE
MARKET
T O D AY ’ S T O P I C
 HOW PRICES ARE DETERMINED IN A
FREE MARKET ECONOMY
In a free market economy, prices of goods and services are determined by the
interaction of the forces of demand and supply.
MEANING OF EQUILIBRIUM PRICE

• Equilibrium price is also known as MARKET PRICE. It is the price where

quantity demanded is equal to quantity supplied. Equilibrium price is at the
point of adjustment i.e demand is equal to supply and there is no excess (no
excess supply no excess demand)

• Disequilibrium price is that price where quantity demanded is not equal to

quantity supplied. It is any price either below or above equilibrium price.
ACTIVITY 1: USING THE EQUATION
QD=100-20P, QS=40+10P
Price($) Quantity demanded Quantity supplied
100 10 50
80 20 40
60 30 30
40 40 20
20 50 10
• Calculate Equilibrium price and quantity

ASSIGNMENT
• Activity 2.15 PAGE 55
 CHANGES IN
MARKET PRICES
T O D AY ’ S T O P I C
A SHIFT IN
DEMAND
• An increase in demand for a product because people’s income has increased or
the price of a substitute good has gone up, will cause the demand curve to shift
outwards. (DIAGRAM)
• As result the demand curve shift from DD to D1D1 so also , the market price
rises from P to P1.
• Producer will have to extend the supply of the product to meet the higher level
of demand because they are willing to supply more at higher prices.

• Activity 2.16 On a fall in demand and market price.

A SHIFT IN SUPPLY

• An increase in supply of a product because workers have accepted lower wages

or due to technical progress has increased the performance of capital equipment
will cause a movement outwards in the supply curve from SS to S1S1. As a
result, market price will fall from P to P1 as a greater supply is available.
• As the market price falls so consumers will extend their demand for the product
from Q to Q1. (DIAGRAM)

• Activity 2.17 PAGE 58 on A fall in supply and market price.

ELASTICITY OF
DEMAND
T O D AY ’ S T O P I C
ELASTICITY OF DEMAND

• This is the degree of responsiveness of changes in quantity

demanded to changes in price, income and taste of consumers.
PRICE ELASTICITY OF DEMAND

• This is the degree of responsiveness of a change in quantity

demanded to a change in price.
• PED= Percentage change in quantity demanded/Percentage
change in price.
CLASS ACTIVITY

• The quantity demanded of a good increases from 20,000 cartons to

30,000 cartons due to a fall in the price of the product from $11,000
per carton to $900 per carton.
• Due to an increase in price of a good from $200 to $400, the
quantity demanded fell from 50 to 45. calculate PED.
 DEGREES OF PRICE ELASTICITY OF
DEMAND
• Price elastic demand: The demand for a product is said to be price elastic when a little change
in price leads to a more than proportionate change in quantity demanded. The co efficient of
PED is greater than 1.
• Price Inelastic demand: The demand for a product is said to be inelastic, if a change in price
leads to a less than proportionate change in quantity demanded.
• Unitary elastic demand: The demand for a product is said to be unitary elastic, if a change in
price leads to an equal proportionate change in quantity demanded.
• Perfectly price inelastic demand: The demand for a product is said to be inelastic if at
different prices, the quantity demanded remains the same.
• Perfectly Elastic Demand: The demand for a product is said to be elastic if a zero change in
price leads to different change in quantity. Irrespective of no change in price, the quantities
demanded would change. The co-efficient of PED is infinity.
 FACTORS AFFECTING ELASTICITY OF
DEMAND
• L/O: To identify and explain the factors affecting price elasticity of demand (PANT)

• Proportionate of income spent: If the proportion of income spent on a good is large then the demand for the good
will be elastic but if the proportion of income spent on a good is small then, the demand will be inelastic.
• Availability of substitute: Commodities which have close substitutes tend to have a high price elasticity while
those that do not have close substitutes are inelastic.
• Nature of good: Products that are considered necessity goods have inelastic demand while luxury goods have price
elastic demand.
• Time taken to look for the substitute : The longer the time its takes to look for substitutes, the more likely they
will find one so, it is price elastic while the lesser the time its take for searching for a substitutes, the product will
tend to have a price inelastic demand.
 INCOME ELASTICITY OF DEMAND

• L/O:
• To define the term income elasticity of demand
• To measure YED
• To explain the degree of YED
DEFINITION OF YED

• This is the degree of responsiveness of a change in quantity demanded to a little change in

income. It is measured as
• YED=Percentage change in quantity demanded/Percentage change in income
• TYPES OF GOOD
• A good is said to be normal If as income increases so does the demand for such a good and as
income decreases demand falls.
• A good is said to be inferior if as income increases demand falls and as income falls demand
increase.
ACTIVITY 1
CROSS-PRICE
ELASTICITY OF
DEMAND
T O D AY ’ S T O P I C
CROSS ELASTICITY OF DEMAND

• This is the degree of responsiveness of demand for a commodity to changes in

the price of a related commodity.
• Percentage change in quantity demanded of commodity X/ Percentage change
in the price of commodity Y.
IMPORTANCE OF ELASTICITY OF
DEMAND
1. It helps the producers to determine the price at which to charge consumers:
If a producer offers a product that has price inelastic, it can afford to increase its price. On the
other hand, if a product has price elastic, an increase in price will bring about a fall in its demand.
Thus, the knowledge of elasticity of demand is essential for management in order to earn
maximum profit.

2. It helps in determining prices of various factors of production: Factors of production are paid
according to their elasticity of demand. In other words, if the demand of a factor is inelastic, its
price will be high and if it is elastic, its price will be low.
• 3. It helps the producer to know which goods to channel more resources to. Producer will tend
to produce more of a product with inelastic demand, which it will produce less if the product
has an elastic demand.
• 4. The knowledge of elasticity of demand is also helpful for the government in determining its
policies. Before imposing statutory price control on a product, the government must consider
the elasticity of demand for that product
• 5. It helps the government in allocating taxes and subsidy: Subsidy or protection is given to
only those industries whose products have an elastic demand. As a consequence, they are
unable to face foreign competition unless their prices are lowered through sub­sidy or by raising
the prices of imported goods by imposing heavy duties on them.
ASSIGNMENT

• Discuss the importance of elasticity of demand to:

• A. The Individual
• B. The Firm
• C. The Government