4.0     INTRODUCTION

Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period of time.

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          4.1     DETERMINANTS OF DEMAND

• Price of the Good: As the price decreases, the quantity demanded typically increases (and vice versa).
• Income of Consumers: An increase in income generally leads to an increase in demand for normal goods and a decrease for inferior goods.
• Prices of Related Goods: An increase in the price of a substitute good can increase the demand for the original good. An increase in the price of a complementary good can decrease the demand for the original good.
• Consumer Preferences: Changes in tastes and preferences can shift demand.
• Expectations: If consumers expect prices to rise in the future, current demand may increase.

•     DEMAND SCHEDULES AND CURVES

• A DEMAND SCHEDULE is a table that shows the quantity demanded at different price levels.

• A DEMAND CURVE is a graphical representation of the demand schedule, typically downward sloping from left to right, indicating the inverse relationship between price and quantity demanded.

NB: The Shape of the demand curve is typically downward sloping from left to right, indicating that as price decreases, quantity demanded increases.

AXES                            Y-axis: Price of the good,

X-axis: Quantity demanded.

MOVEMENTS IN THE DEMAND CURVE

• Along the Curve: Caused by a change in price (increase or decrease in quantity demanded).
• Shifts of the Curve: Caused by changes in non-price factors (e.g., income, preferences).
• Rightward Shift: Increase in demand.
• Leftward Shift: Decrease in demand.

4.3     CHANGE IN QUANTITY DEMANDED VS. CHANGE IN DEMAND

CHANGE IN QUANTITY DEMANDED refers to a movement along the demand curve due to a change in the price of the good.

CHANGE IN DEMAND refers to a shift of the entire demand curve due to changes in determinants other than the price of the good (e.g., income, preferences).

TYPES OF DEMAND

• Composite Demand: Demand for a good that has multiple uses (e.g., water can be used for drinking, irrigation, etc.).
• Derived Demand: Demand for a good that arises from the demand for another good (e.g., demand for steel is derived from the demand for cars).
• Competitive Demand: Demand for goods that are substitutes for each other (e.g., tea and coffee).
• Joint Demand: Demand for goods that are used together (e.g., printers and ink).

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4.4     ELASTICITY

In economics, “elasticity” measures the responsiveness of one economic variable (like demand) to a change in another (like price), indicating how much one variable changes in relation to another.

          4.5     TYPES, NATURE, AND DETERMINANTS OF ELASTICITY

• Price Elasticity of Demand (PED): Measures the responsiveness of quantity demanded to a change in price.
• Elastic Demand: PED > 1 (quantity demanded changes significantly with price changes).
• Inelastic Demand: PED < 1 (quantity demanded changes little with price changes).
• Unitary Elastic Demand: PED = 1 (proportional change in quantity demanded and price).
• Income Elasticity of Demand (YED): Measures the responsiveness of quantity demanded to a change in consumer income.
• Normal Goods: YED > 0 (demand increases as income increases).
• Inferior Goods: YED < 0 (demand decreases as income increases).
• Cross Elasticity of Demand (XED): Measures the responsiveness of quantity demanded for one good to a change in the price of another good.
• Substitutes: XED > 0 (demand for one good increases as the price of the other increases).
• Complements: XED < 0 (demand for one good decreases as the price of the other increases).

•      IMPORTANCE OF ELASTICITY OF DEMAND
• To Consumers: Helps consumers understand how price changes affect their purchasing decisions.
• To Producers: Assists producers in setting prices and forecasting sales based on how sensitive consumers are to price changes.
• To Government: Aids in tax policy formulation and understanding the impact of price controls on different goods.

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          4.7     UTILITY

Utility is defined as the measure of satisfaction or pleasure derived from consuming goods and services. Economists use this concept to understand consumer behavior and predict demand, assuming people strive to maximize their utility.

TYPES OF UTILITY

• Cardinal Utility: Quantifiable satisfaction (measured in utils). It assumes that utility can be measured and compared.
• Ordinal Utility: Qualitative satisfaction where preferences can be ranked but not measured (e.g., preferring apples over oranges).
• Total Utility: The total satisfaction received from consuming a certain quantity of a good.
• Average Utility: Total utility divided by the quantity consumed (AU = TU/Q).
• Marginal Utility: The additional satisfaction gained from consuming one more unit of a good (MU = ΔTU/ΔQ).

4.8     INDIFFERENCE CURVE AND BUDGET LINE

INDIFFERENCE CURVE: A graph showing combinations of two goods that provide the same level of utility to the consumer. Higher curves represent higher utility.

BUDGET LINE: Represents all combinations of two goods that a consumer can purchase given their income and the prices of the goods. The slope of the budget line is determined by the ratio of the prices of the two goods.

LAW OF DIMINISHING MARGINAL UTILITY: As a consumer consumes more units of a good, the additional satisfaction (marginal utility) derived from each additional unit decreases.

LAW OF DEMAND: States that, all else being equal, as the price of a good decreases, the quantity demanded increases, and vice versa. This is influenced by diminishing marginal utility.