Demand and supply analysis

Topics: Supply and demand, Consumer theory, Demand curve Pages: 24 (7021 words) Published: September 24, 2013
CHAPTER THREE
DEMAND, SUPPLY AND EQUILIBRIUM

DEMAND
Definition of demand
Demand refers to the quantity of a commodity1 that consumers are willing and able to purchase at any given price over some given period of time. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Three important aspects that must be mentioned in the definition of demand are 1. Quantity

2. Price
3. Time period
Demand is not the same thing as need, want or desire, only when want is supported by ability and willingness to pay the price, dose it become effective demand and have influence the market prices hence resource allocation2. (Hence in economics demand always means effective demand). Determinants of demand

The demand for a commodity can be considered from two points of view 1. Individual demand
2. Market demand

Individual Demand
Individual demand for a commodity is the amount an individual is willing and able to buy at any given price over a given period of time. This demand is influenced by several factors. Thus factors influencing the demand (dx ) for good X over a given period are; 1. Price of the good (Px)

2. Price of other goods related to the good (PR)
3. Consumers’ income (Y)
4. Consumers taste and preferences for good X (T)
5. Consumers’ expectations about future prices (E)
6. Advertising (A)
7. Any other factors (O)
As a functional notation, demand for commodity X can be expressed as follows dx = f ( Px, PR ,Y ,T ,E ,A,O)
Which means that an individuals demand for commodity X is a function of all factors listed in the brackets.

Price of the good
The price of a commodity is the most important factor or determinant influencing an individual’s demand for it. All other factors other than price are called conditions for demand. In analysing the relationship between an individual’s demand for commodity X and the price of commodity X, economists assume that all other influencing factors remain unchanged (Assumption of ceteris paribus). Thus demand for X can be written as dx = f(Px) , ceteris paribus

Which means that an individual’s demand for commodity X is a function of, or is determined by the price of X, assuming that all other influencing factors are held constant. Demand for X can also be expressed as a schedule i.e. a demand schedule. A demand schedule shows the different possible prices of commodity X, listed together with consumers’ demand for commodity X over a given period of time (Ceteris paribus).

To illustrate the demand schedule for commodity X

Price of X (Ksh per unit)
Consumers demand (weekly)
6
65
5
70
4
80
3
90

According to the table, 65 units of commodity X will be demanded weekly if the price is Ksh. 6 per unit, 70 unit if the price is Ksh. 5 Per unit and so on.

Another way of representing demand is by using a Demand curve. The DEMAND CURVE is defined as the relationship between the price of the good and the amount or quantity the consumer is willing and able to purchase in a specified time period, given constant levels of the other determinants--tastes, income, prices of related goods, expectations, and number of buyers. This can be done by reproducing the information in the demand schedule in a graph whose vertical axis represent the unit price of the commodity while the horizontal axis represent the Quantity demanded in a given time. This is shown below To illustrate the Demand curve for commodity X

DD is the individual demand curve for commodity X, it shows the relationship between quantity demanded of X by an individual and the price of the good (ceteris paribus) It reproduces the information contained in the demand schedule. The demand curve has a negative slope, i.e., it slopes downwards from left to right3 showing an inverse relationship between demand for commodity X (dx ) and the price of X PX (ceteris paribus). There are...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Demand and Supply Analysis Essay
  • Demand and Supply Analysis Essay
  • Automobile Demand and Supply Analysis in India Essay
  • Essay about Supply Demand
  • Essay about R14 Demand and Supply Analysis Consumer Demand
  • R13 Demand and Supply Analysis Introduction Essay
  • Analysis of Demand Essay
  • Essay about Demand and Supply Study Guide

Become a StudyMode Member

Sign Up - It's Free