Economic Idea- Theory of Demand and Supply

Theory of Demand

Demand is one of the economic theories that form the heart of Economics. Before proceeding, it is necessary to talk about its  framework which is Market. Market can be said to be network of communications between economic agents (individuals or firms) for the purpose of buying and selling goods and services. It is the platform where  buyers and sellers interact to make transactions.

Demand can therefore be simply referred to as the willingness to purchase a goods or services with ability to pay a particular price at a particular point in time.

Quantity demanded is the unit of goods or services is willing to buy at a given price in a given period of time.

Price is the monetary value attached to a commodity or services.

Determinants of Demand

1.      Price of the commodity: This is the basic determinant of demand, it has an indirect (negative) relationship with quantity demanded. An increase in price will result to decrease in quantity demanded ceteris paribus (all other determinants of demand held constant).

2.      Income: This represent the revenue or earnings of individuals. An increase in an individual income will cause an incrtease in the quantity of a commodity he/she demand . ceteris paribus .

Other determinants are Taste, Weather, Market expectations, Government policy, Population, Price of other commodities (Substitutes or Complementary).

Demand Schedule

This is a table showing the relationship between quantity of a commodity consumers are willing and able to buy at a particular price over a given period of time ceteris paribus . We have the individual demand schedule and the market demand schedule. The former represents that of an individual while the latter represents that of the market (which is aggregate of all individuals in the market). 
     
 Table 1: Mr. K demand schedule for Micro Books       

Price (# / Book)	Quantity demanded
20	3
10	8
15	5

          

Table 2: Market demand schedule for Micro Books

Price (# / Book)	Quantity demanded
20	18
10	50
15	32

Demand Function

This is a mathematical expression which depicts functional relationship between quantity demanded and one or more of the determinants of demand. E.g the relationship between price of a commodity and the quantity demanded can be expressed below;

Q_d = 8-3P

Demand Curve

This shows the graphical representation of quantity demanded and any of the dterminants of demand. It depicts the information in the demand schedule in a graphical form. An example is presented below, showing the relationship between quantity demanded and price. A downward sloping curve (as in that of price and quantity demanded for normal goods) shows negative relationship while a positie sloping curve shows positive relationship (as in that of income and quantity demanded for normal goods).

GRAPH 1:

GRAPH 2:

Change in Quantity Demanded and Change in Demand

Quantity demanded for a commodity has inverse or negative relationship with price of such commodity i.e if price increases, quantity demanded will decrease. As price changes, there will movement along the same demand curve, this is referred to as change in quantity demanded. This is shown in Graph 3 below.

Change in demand on the other hand occurs when there is a total shift from the existing demand curve to a new demand curve. This is usually caused by effect of other factors (apart from price of such commodity) on quantity demanded. This is shown in graph 4 below.

GRAPH 3:

GRAPH 4:

Types of Demand

1.      Derived: When a commodity is demanded due to demand for another conmmodity. As in factors of production which are demanded in other to produce.

2.      Joint: This occurs when two commodities are demanded jointly, a demand for one will result in demand for the other. As in Milo and milk.

3.      Composite: This is a type of demand that occurs due to the fact the commodity can serve more than one purpose.

4.      Competitive: This is a type of demand mostly influenced by goods or commodity of close substitute. An increase in price of substitute will increase the demand of such conmmodity. As in Milo and Bournita.