CHAPTER 1 : DEMAND AND SUPPLY NOTES

Meaning of demand

Demand is the quantity of a product that buyers are willing and able to buy at a given price over a given period of time.

 

Factors that determine the demand for a product (determinants of demand)

  1. The price of a product:  if the price is low, more will be demanded, if high less will be demanded.
  2. The buyer’s income: the higher the people’s income the higher the demand for gods and services and vice versa.
  3. Government policy: if the government imposes high taxes on a commodity, it becomes expensive and less of it is demanded. The effects of a subsidy are to lower the price of the product leading to an increase in its demand. The government may also influence the demand of a product enacting laws that either limits or promotes the consumption of a product.
  4. The population: with many people available more of the goods are demanded and if the people are few, less is bought from the market.
  5. Tastes, fashions and preferences:  if people have a preference for a product they will demand more of it. If their preferences changes to another product, they will reduce the demand of the product they were using before.
  6. The distribution of incomes: where income is well distributed, the demand for goods and services is high as opposed to when the income in the hands of a few people.
  7.  Future expectations of price changes: if the prices are expected to go up in the future, more goods will be demanded in the present and if the price is expected to go down in the future, fewer goods will be demanded in the present.
  8. The weather: certain goods are demanded more during certain weather conditions e.g heavy clothes during cold seasons or umbrellas during rainy seasons.
  9. Price of related products: for goods that are compliments of one another, e.g pen and ink, a fall in the price of one leads to an increase in the demand of the other. In the case of the goods that are substitutes of one another, e.g soda and fruit juice, an increase in the price of one leads to an increase in the demand of the other.
  10. The terms of sale: the better the terms of sale, for example, provision of credit or better discounts, the higher the demand for a given product.

 

Types of demand

 

Derived demand:  a product is said to have derived demand when it is demanded to help in the production of other goods and services for example the demand of building materials arising from the demand of houses.

Joint demand: items are said to have joint demand if the use of one will require the use of another. The goods are complimentarily used together like pen and ink.

 

Demand schedule and demand curve

Demand schedule

A demand schedule is a table showing the quantities of a commodity that consumers are willing and able to buy at different prices within a given period of time. A demand schedule can be prepared for an individual or for the entire market.

 

Demand curve

A demand curve is the graph showing the quantities demanded against the prices. On the y-axis is recorded price and the x-axis the quantities demanded.

 

Draw a demand curve given the following demand schedule

 

Price of the product in shs Quantity of the goods demanded in kg
10

20

30

40

50

60

70

80

40

35

30

25

20

15

10

5

 

 

The graph shows that the demand curve (DD) slopes from the left to the right, indicating that as prices goes down the quantity demanded increases and vice versa.

This tendency of demand to increase as price decrease and to reduce as the price increase is referred to as the law of demand. Therefore a normal demand curve slopes from left to right.

 

Movement along a demand curve and a shift in demand curve

 

Movement along the demand curve

A movement along a demand curve refers to changes in quantity of a product demanded as a result of change in its price only. As the price of the product increases the quantity demanded decreases. It leads to a movement from one point to another on the same demand curve as shown below:

  • (ii)

 

 

 

 

 

 

 

  • In a movement along the demand curve no new demand curve is created. If price increase from P0 to P1 in the diagram above quantity demanded will fall from Q1 to Q2e. movement from a to b.
  • If price fall from P2 to P3, the quantity demanded increase from Q2 to Q3e. movement from a to c.

 

  Shift of the demand curve

 

This is when the demand curve moves either to the right or left. It occurs as results of changes in factors influencing demand other than price of the product concerned. This can be illustrated as below:

 

In (i) at price OP the quantity demanded is OQ. After the demand curve shift from D0D0 to DD a different quantity OQ1 is demanded although the price remains at OP. thus points L and M are on different demand curves.

 

Similarly when the demand curve shifts from D1D1 to D2D2 as in (ii) a different quantity OQ3 is demand at the same price OP2 as before. Thus the two points R and S are on two different demand curves.

A shift of demand curve to the left (decrease in demand) can be brought about the following factors:

 

  • A decrease in people’s incomes.
  • A decrease in the price of a substitute product.
  • Lower population in the area.
  • Negative changes in tastes, fashions and preferences towards the product.
  • The introduction of a new but cheaper substitute.
  • Deterioration in the terms of sale e.g. lower discounts

 

A shift of demand curve to the right (increase in demand) can be as a result of:

  • An increase in the people’s incomes.
  • An increase in the price of a substitute product.
  • An increase in population.
  • An improvement in terms of sale e.g. where better discount are given
  • A decrease in the price of a complementary product.
  • An improvement in tastes, preferences towards particular product.

 

Differences between a movement along a demand curve and a shift of a demand curve

 

Movement along a demand curve Shift of a demand curve
(i)                It involves only one demand curve It involves two demand curves
(ii)             It is brought about changes in the quantity demanded. Brought about a change in other factors that influences demand other the price of the product.
(iii)           It involves a change in the quantity demanded. Involves a change in demand.
(iv)           A different quantity is demanded only at a different price. A different quantity is demanded at the same price as before.
(v)              A movement along the curve can be traced up and down along the same curve. A shift causes to move either to the right or left.

 

SUPPLY

Supply is defined as the quantity that suppliers are willing and are able to take to market at a given price over a given period of time.

 

Factors which influence supply of a product

  • The price of the product: the higher the price, the higher the supply while the lower the price, the lower the supply.
  • The cost of production: an increase in the cost of production leads to a reduction in the supply of goods, while a decrease in the cost of production leads to an increase in the supply of goods.
  • The level technology: an improvement in the level of technology leads to a reduction in cost of production in an increase in supply.
  • The government policy; this includes the imposition of taxes, subsidies, quotas and price controls. Taxes increase the cost of production hence supply will decrease. A subsidy lowers the cost of production leading to an increase in the supply. Imposition of quotas places an upper limit on the quantity that may be supplied irrespective of the price. Where the government sets prices, firms will react accordingly. If the price set is high, the supply will be high, if the price set is low, the supply will also be low.
  • Available of inputs: shortage of raw materials leads to low production, hence low supply.
  • Future expectations of price changes: where producers expect the price of goods to increase in the future, they may decide to restrict supply, until that when the prices go up.
  • Natural factors: bad weather like droughts and floods leads to poor harvests, hence low supply of agricultural products. Favorable weather conditions leads to more harvests hence more supply.

 

Supply schedule and supply curve

 

A supply schedule is a table showing the relationship between supply of a commodity and its price. It shows the quantity supplied at various prices. The supply curve is a graphical illustration showing the trend taken supply as price either increases or decrease.

Draw a supply curve using the figures given in the supply curve below.

 

Price of x 2 4 6 8 10 12 14 16 18
Supply of x 5 10 15 20 25 30 35 40 45

 

The supply curve (SS) slopes from the right to the left showing that as the price increases, the supply also increase. For example, at a price Shs. 8, the supply is 20 units. As the price goes up to Shs. 16, the supply also goes up to 40 units.

 

Movement along the supply curve

This is said to be a movement along a supply curve when the quantity supplied of a commodity changes as a result of a change in its price “all other factors remaining constant”. It leads to a movement from one point to another on the same supply curve as shown below:

 

 

In (i) when price changes from OP0 to OP1 the movement is downwards from point X to point Y on the same supply curve S0S0. This leads to the supply of OQ1 instead of OQ0.

In (ii) when the price changes from OP2 to OP3 the movement is upwards from T to point Z on the same supply curve. The quantity supplied changes from OQ2 to OQ3.

 

Shift of a Supply curve

A shift of the supply curve is when the entire curve moves either to the left or right as a result of changes in factors influencing supply other than the price of the commodity involved.

 

 

In (iii) the whole supply curves S2S2 shifts to S3S3 resulting in the reduction of quantity supplied from OQ3 to OQ4 at the same price OP3 as before. Instead a point on curve S2S2

 

 

 

EQUILIBRIUM PRICE AND EQUILIBRIUM QUANTITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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