DEMAND_AND_SUPPLY_ANALYSIS

Module IV: Demand and Supply Analysis

Demand

• Definition of Demand: The amount of goods and services that people are willing and able to buy at a given price during a specific time period.

• Effective Demand: Demand must be backed by the ability and willingness to pay, distinguishing it from mere needs or wants (e.g., wanting a car without purchasing power is not considered demand).

• Flow Concept: Demand is a flow concept that incorporates time dimensions.

The Law of Demand

• Relationship: Illustrates the inverse relationship between price and quantity demanded: as price increases, demand decreases, and vice versa.

• Demand Schedule: A table showing quantities demanded at different prices.

Individual vs. Market Demand Schedule

• Individual Demand Schedule: Represents the quantity demanded by a specific individual (e.g., Mr. Adams) at different prices.

• Market Demand Schedule: The aggregate demand combining individual schedules, reflecting total quantity demanded in the market.

Graphical Representation

• Demand Curve: A graphical portrayal where each point reflects the relationship between price and quantity demanded, typically slopes downward from left to right (law of downward-sloping demand).

Types of Demand

Complementary Demand

• Definition: Two goods are jointly demanded; an increase in demand for one (e.g., cars) leads to an increase in demand for the other (e.g., petrol).

Competitive Demand

• Definition: An increase in demand for one commodity results in a decrease for a substitute commodity.

  • Example: Increased demand for tea can decrease demand for coffee.

Composite Demand

• Definition: Total demand for a single commodity used for various purposes (e.g., cassava for garri, starch).

Derived Demand

• Definition: Demand for a commodity based on the goods it produces (e.g., labor is demanded for its production capabilities).

Factors Affecting Demand

1. Prices of Other Products: Substitutes can decrease complementary goods' demand and vice versa.

2. Consumer Income: Higher income generally increases demand (except for inferior goods).

3. Consumer Tastes: Changes in preferences can shift demand positively or negatively.

4. Population: More consumers lead to higher demand for basic needs.

5. Expectations: Anticipated future price changes can affect current demand.

6. Seasonal Factors: Demand changes with seasons (e.g., soft drinks in summer).

7. Government Policy: Taxation can inflate prices and reduce demand.

Changes in Quantity Demanded vs. Change in Demand

• Quantity Demanded: A movement along the same demand curve due to price changes.

• Change in Demand: A shift in the demand curve due to factors other than price (i.e., consumers demand different quantities at the same price).

Abnormal Demand Curves

Giffen Goods

• Definition: Basic goods consumed more when prices rise, primarily for low-income consumers.

Abnormal Demand due to Status

• Goods of Ostentation: Higher prices make some luxury items more desirable (upward sloping demand).

Supply

• Definition of Supply: The quantity of goods and services that producers are willing and able to sell at a given price and time.

• Law of Supply: A positive relationship exists: higher prices increase quantity supplied.

Supply Schedules

• Supply Schedule: A table that shows quantities supplied at various prices.

• Individual Supply Schedule: Represents quantities one producer is willing to supply at various prices.

• Market Supply Schedule: Total quantities supplied in a market from all producers at various prices.

Graphical Representation of Supply

• Supply Curve: Completely upward sloping; as prices increase, quantity supplied increases.

Factors Affecting Supply

1. Price of Other Products: Rising prices of alternative products can shift resources away, decreasing supply.

2. Production Costs: Higher production costs can reduce supply.

3. Firm Objectives: Firms aim to maximize profit; supply increases with price rises.

4. Technical Advancements: Improvements boost production efficiency and increase supply.

5. Government Policies: Taxes can decrease supply by raising input costs.

6. Expectations of Future Prices: Anticipated future price rises can reduce current supply.

7. Weather and Socio-political Factors: Weather impacts agriculture; cultural considerations can limit production.

Types of Supply

Competitive Supply

• Commodities can be used for multiple purposes, competing for resources.

Joint Supply

• Goods that are produced together, like palm oil and palm kernel.

Composite Supply

• When multiple goods can meet a specific need; e.g., heating from various energy sources.

Elasticity of Demand

• Definition of Elasticity: Measures the responsiveness of quantity demanded to changes in relevant factors.

• Types of Elasticity: Elastic, Inelastic, Unitary Elastic, Perfectly Inelastic, Perfectly Elastic.

• Elastic demand means a significant response to price changes; inelastic indicates small response.

Factors Affecting Elasticity of Demand

1. Consumer Income: Higher proportion spent aligns with greater elasticity.

2. Substitution Effect: More substitutes lead to more elastic demand.

3. Consumer Habits: Adjustments in habit influence elasticity.

4. Necessity: Essential goods tend to have inelastic demand.

5. Time Factor: Short run demands are price inelastic, while long run demands become elastic as consumers adjust.

Practice Problems

1. Changes in demand responsiveness due to price shifts.

2. Calculate elasticity using given price and quantity changes.