Concept of Demand and Supply – SS1 Economics Lesson Note (First Term)

Demand is the quantity of a commodity that consumers are willing and able to buy at a given price, at a particular place and time. Supply is the quantity of a commodity that producers are willing and able to offer for sale at a given price, at a particular place and time.

Behavioural objectives

By the end of the lesson, students should be able to:

1. define demand and supply, and state the conditions for effective demand;
2. state the law of demand and the law of supply;
3. explain a demand schedule, a supply schedule and their curves;
4. describe the four types of demand with examples;
5. list the factors that affect the demand for and the supply of a commodity;
6. name the exceptions to the law of demand.

What is demand?

Demand is the quantity of a commodity (goods and services) that consumers are willing and able to buy at a given price and at a particular place and time.

• Demand is not a want: a want, need or desire has no money behind it, so it is not demand.
• Demand is linked to price: price largely decides how much consumers are willing to buy.

What are the conditions for effective demand?

Effective demand is demand that is backed by the power to buy, and it must meet three conditions.

1. Ability to pay: the consumer has enough money to buy the commodity.
2. Willingness to pay: the consumer is ready to spend the money on it.
3. Authority to buy: the consumer is allowed to buy the commodity.

What is the law of demand?

The law of demand states that, all things being equal (ceteris paribus), the higher the price, the lower the quantity demanded, and the lower the price, the higher the quantity demanded.

• High price: when yam is expensive in the market, consumers buy very little of it.
• Low price: when yam is cheap, consumers buy more of it.
• Ceteris paribus: this means other factors, such as income and taste, are assumed not to change.

What is a demand schedule?

A demand schedule is a table showing the quantities of a commodity demanded at various prices, at a particular time.

The figures below are illustrative only.

• Reading the table: as price rises, quantity demanded falls.

What is a demand curve?

A demand curve is the graph of the information in the demand schedule.

• Vertical axis: price is plotted here.
• Horizontal axis: quantity demanded is plotted here.
• Shape: the normal demand curve slopes downwards from left to right.

• Note: the demand schedule and the demand curve both illustrate the law of demand.

What are the types of demand?

There are four types of demand: complementary, competitive, composite and derived.

Complementary (joint) demand

• Meaning: two or more goods are needed together at the same time by a consumer.
• Examples: tea and sugar, car and petrol.
• Effect: an increase in the demand for cars raises the demand for petrol, and vice-versa.

Competitive (substitute) demand

• Meaning: two goods are close substitutes and serve the same purpose.
• Effect: when the price of one rises, its demand falls and consumers shift to the cheaper substitute, whose demand rises.
• Examples: fish and meat, tea and coffee, butter and margarine, pen and biro.

Composite demand

• Meaning: a single commodity is demanded for many uses.
• Example (cocoa): cocoa beans are demanded for cocoa beverages, cocoa bread, cocoa wine and chocolate.
• Example (cassava): cassava is demanded for foofoo, garri, starch and cassava powder (Elubo).

Derived demand

• Meaning: a commodity is demanded to produce another commodity, not for immediate consumption.
• Example: flour is demanded because people demand bread and cake.

What factors affect the demand for a commodity?

The demand for a commodity is affected by its price and by many other factors listed below.

• Price of the commodity: the higher the price, the lower the quantity demanded, and vice-versa.
• Price of other commodities: this applies to complements and close substitutes. If a commodity becomes dear, consumers may buy its substitute.
• Income of the consumer: as income rises, demand for goods and services generally rises.
• Taste and fashion: demand changes with the fashion of the day and people’s differing tastes.
• Distribution of income: demand differs where income is evenly spread compared with where a few people hold most of it.
• Size of the population: a larger population means higher demand. Age and sex structure also affect demand for particular goods.
• Weather: umbrellas are in high demand in the rainy season.
• Expectation of future price changes: expected price changes raise or lower present demand.
• Advertising: a well-packaged, convincing advertisement increases demand.
• Availability of credit: when consumers can buy now and pay later, demand rises.
• Introduction of new commodities: a new commodity raises its own demand and reduces demand for the one it replaces.
• Taxation on commodities: higher taxes make goods cost more and reduce demand. Lower taxes have the opposite effect.

What are the exceptions to the law of demand?

Exceptional (abnormal) demand is a demand pattern that does not follow the law of demand.

• Goods of ostentation (prestige goods): some buyers want more of an item, such as a luxury car or jewellery, when its price rises, because it shows status.
• Necessary but cheap commodities: demand for items like salt stays about the same even if the price falls.
• Inferior (Giffen) goods: a very poor household may buy less of a cheap staple when its price falls, and buy a better food instead.
• Expectation of future price change: if buyers expect prices to rise, they may buy more now even at a higher price.

In abnormal demand, a higher price may bring higher demand or no change. A lower price may bring lower demand or no change.

What is supply?

Supply is the quantity of a commodity that producers or sellers are willing and able to offer for sale at a given price, at a particular place and time.

• Willing: the seller wants to sell at that price.
• Able: the seller has the goods or the means to produce them.

What is the law of supply?

The law of supply states that, all things being equal, the higher the price, the greater the quantity supplied, and the lower the price, the smaller the quantity supplied.

• High price: sellers earn more, so they offer more yam for sale.
• Low price: sellers earn less, so they offer less.

What are a supply schedule and a supply curve?

A supply schedule is a table showing the quantities of a commodity supplied at various prices, and a supply curve is its graph.

The figures below are illustrative only.

• Axes: price is on the vertical axis and quantity supplied is on the horizontal axis.
• Shape: the normal supply curve slopes upwards from left to right.

What factors affect the supply of a commodity?

The supply of a commodity depends on its price and on the factors listed below.

• Price of the commodity: a higher price encourages sellers to supply more.
• Cost of production: higher costs of labour, raw materials or fuel reduce supply.
• State of technology: better methods and machines lower costs and raise supply.
• Price of other goods: producers may switch to a more profitable good, reducing supply of the other.
• Weather and natural events: good rain raises farm output, while drought or flood reduces it.
• Taxes and subsidies: taxes raise costs and cut supply, while subsidies lower costs and raise supply.
• Number of producers: more firms in the industry mean greater supply.
• Expectation of future prices: sellers may hold back goods if they expect prices to rise.

Evaluation

1. Define demand and state the three conditions for effective demand.
2. State the law of demand and the law of supply.
3. What is the difference between a demand schedule and a demand curve?
4. Name the four types of demand and give one example of each.
5. List four factors that affect the demand for a commodity.

Assignment

1. Explain any four factors that affect the demand for a commodity.
2. With examples, explain the difference between complementary demand and competitive demand.
3. List the exceptions to the law of demand.
4. List four factors that affect the supply of a commodity.