When ever people come together for the purpose of exchange or trade we have a market. E.g.

goods and
services market, labour market, housing market etc.

Demand
All wants are not demand, only wants backed by purchasing power becomes demand. Therefore in
economics demand refers to ‘effective demand’.

Demand (quantity demand) refers to the quantity of a product (goods or services) consumers are willing
and able to purchase at various prices per period of time (e.g. a week, or a month, or a year), while other
factors are constant (ceteris paribus).

Law of demand – when price of a good rise the quantity demanded will fall and when price fall, the
quantity demanded rise, while other factors are constant.
There are two reasons for the law of demand,
(a) income effect of a price change – when price increase real income (purchasing power of money
income) falls and consumers will not be able to afford to buy so much of the good. Therefore quantity
demand falls.

(b) substitution effect of a price change – when price increase good will become dearer relative to other
goods. Therefore people will switch to alternatives or substitutes, reducing quantity demanded.

The law of demand can be reflected in 3 ways.

(a) through a demand schedule
Demand schedule for an individual – it is a table showing the different quantities of a good that a
person is willing and able to buy at various prices over a given period of time.

Market demand schedule – a table showing the different total quantities of a good that consumers are
willing and able to buy at various prices over a given period of time.

Price (£) Mr. A (kilos) Mr. B (kilos) Total market demand

‘000
20 40 100 140
40 30 80 110
60 20 60 80
80 10 40 50
100 0 20 20

Columns 2 and 3 show the demand schedule of individuals and column 4 reflects total market demand
schedule. Aggregation of individual demand gives market demand.

(b) through a demand curve – a graph showing the relationship between the price of a good and the
quantity of the good demanded over a given period of time. The relationship is negative. The demand
curve can be for an individual consumer or group of consumers or more usually for the whole market
(market demand curve).

Draw market demand curve using the table above.

1
© Through demand equation
Is a mathematical expression of the negative relationship between price and quantity demand.
Qd = a - bp

a- Intercept. The quantity demanded when price is zero.

b- Slope ∆ Qd
∆P
P – price
Qd = 120 - 4p

Factors that influence demand

1. Price of the good in concern

2. Price of other goods – other goods are of two types;
(a) Substitutes – these are goods that can be used in place of another good. E.g. butter and margarine.
They have a competitive demand and the relationship is positive. If the commodity in concern is
butter and price of margarine increase then people consuming margarine will switch onto butter and
thus increase the demand for butter.

(b) Complementary goods – these goods require another commodity for consumption. They have a joint
demand and the relationship is negative. E.g. bread and butter. If the commodity in concern is bread
and the price of butter increase it will lead to a decline in the demand for bread as people would
consume less butter.
3. Level of income – when income rise demand for goods and services increase and falls when income
reduces. This is true with normal and luxury goods but with inferior goods demand falls as income rise
as people move onto better quality goods.
4. Changes in income tax – increase in income tax reduces disposable income and thus demand falls.
Disposable income is income in hand for spending and saving after making compulsory payments.
5. Tastes – the more desirable people find the good, the more they will demand. Tastes are affected by
advertising, by fashion, by observing other consumers and by considerations of health.
6. Population – no. of people consuming the product. If the no. increase demand would increase. E.g. if
the no. of school children increase the demand for school stationary would rise.
7. Expectations of future price changes. – if people think that prices are going to rise in the future, they
are likely to buy more now before the price does go up.

Note – point 2 to point 7 are classified as ‘other factors’ that influence demand.

Changes in the price of a commodity while other factors are constant cause movement along the
demand curve.
 An increase in price causes a reduction in the quantity demanded, this results in an upward
movement along the demand curve. This is a contraction in demand.
 A decrease in price causes an increase in the quantity demanded, this results in a downward
movement along the demand curve. This is an extension in demand.

Changes in other factors while price is constant cause shift of the demand curve.
 An increase in income, an increase in price of substitute, fall in price of a complement will
increase demand and thus cause a rightward shift of demand curve.
 A fall in income, an increase in income tax, a fall in price of substitute will reduce demand and
thus cause a leftward shift of demand curve.

2
Exceptions to the law of demand
1. Giffen goods – if price of basic food items such as bread and potatoes increase, quantity demand will
also increase. This is because as price increase it makes it impossible for consumers to purchase better
quality food items. Therefore they substitute the poor quality food items despite high price.

2. Veblen goods – goods purchased for ostentatious purpose. As price rise so does their attractiveness
because they display superior wealth. They are also called status symbol goods or article of ostentation.