SHIFTS IN DEMAND

These involve change in demand and change in quantity demanded.

CHANGE IN DEMAND

A change in demand refers to an economic situation where more or less units of a commodity are demanded at a constant price brought about by a change in other factors affecting demand for that particular commodity.

It is illustrated by a total shift of the demand curve either inwards to the left or outwards to the right holding the commodity price constant.

Illustration

From the above illustration, D_OD_O is the original demand curve.

D₁D₁ shows a shift of the demand curve inwards from D_OD_O representing a decrease in demand.

D₂D₂ shows a shift of the demand curve outwards from DoDo representing an increase in demand.

QUESTION

Explain the factors that cause a change in demand for a commodity.

Solution

NOTE

1.     The factors that cause a change in demand are generated from the determinants of demand other than the commodity’s own price.

2.     Words that can be used when stating the point include;

Ø Change

Ø Variations

Ø Instabilities.

3.     Avoid words like high/ low in your explanation. Use words like increase, rise, decrease, decline, fall, etc.

1.     A change in prices of substitutes.

2.     A change in prices of complements.

3.     A change in the level of consumer’s income

4.     A change in the population size

5.     Expectation of a future change in the price of the commodity.

6.     A change in government policy of taxation and subsidization.

7.     A change in the level of advertisement.

8.     A change in seasons.

9.     A change in tastes and preferences

10. A change in the quality of the commodity

11. A change in the economic conditions.

12. A change in the nature of distribution of income.

INCREASE IN DEMAND

This is the demand for more quantities of a commodity due to conditions of demand/ factors that influence demand becoming (more) favourable while holding price of the commodity (in question) constant.

It is represented by a total shift of the demand curve outwards to the right holding the commodity price constant.

ASSIGNMENT

Explain the factors that lead to an increase in demand for a commodity in your country.

                                                                                                                             (20 marks)

DECREASE IN DEMAND

This refers to a decline in quantity demanded of a commodity due to factors that influence demand becoming unfavourable while holding price of the commodity (in question) constant.

It is represented by a total shift of the demand curve inwards to the left holding the commodity price constant.

ASSIGNMENT

Account for a decrease in commodity demand in your country                          (20 marks)

CHANGE IN QUANTITY DEMANDED

This is an economic situation where more or less units of a commodity are demanded due to change in its price when other factors affecting demand for that particular commodity have not changed.

OR

A change in quantity demanded refers to a rise or fall in the amount of a commodity demanded due to changes in price levels of a commodity assuming other determinants of demand are held constant.

It is illustrated by the movement along the demand curve either upward due to price increase or downward due to price fall.

Illustration

A fall in price from OP_o to OP₂ leads to an increase in quantity demanded from OQ_o to OQ₂ as illustrated by the movement along the demand curve downwards from point a tob.

A rise in price from OP_o to OP₁ leads to a decrease in quantity demanded from OQ_oto OQ₁as illustrated by the movement along the demand curve upwards from point a toc.

INCREASE IN QUANTITY DEMANDED

This refers to the demand for more units of a commodity due to a fall in its price while holding other factors constant/ ceteris paribus.

Illustration

DECREASE IN QUANTITY DEMANDED

This refers to the demand for lesser quantity of a commodity due to increase in its price ceteris paribus.

ABNORMAL/ REGRESSIVE/ EXCEPTIONAL DEMAND CURVES

These are curves which do not obey the law of demand.

Such curves take a different shape from the one of the normal demand curve.

The following are the factors that violet the law of demand.

1.     Demand for articles of ostentation/ luxuries/ conspicuous consumption.

These are goods bought by the rich people to impress or attract the attention of others for example sports cars, golden earrings. More of such goods are demanded at a higher price than at a lower price. The demand curve for luxuries is regressive at the upper level. 

The quantity demanded is very high at a low price. As the price increases to an average price, the quantity demanded reduces so much because many poor people can no longer afford. As the price increases further to a very high price, the quantity demanded increases because all the rich people start buying the commodity.

2.     Demand for giffen goods.

These are inferior goods which take a large proportion of the budget of low-income earners such that when their prices increase, the consumer reduces the consumption of other goods and buys the giffen good. Examples of giffen goods are the basic foodstuffs such as rice, maize, bananas and cassava.

For these giffen goods, the demand curve is regressive at the lower level such that if prices over increase, consumers have to lower the demand altogether.

An increase in the price from OP_o to OP₁ causes an increase in amount demanded i.e. from OQ_oto OQ₂.

3.     Demand for necessities.

Goods which are very essential tend to have a fixed demand at different price levels. E.g. salt.

4.     Speculation (future price expectations)

There are cases when people buy more as prices rise because they expect them to rise even further in future and less as prices fall because they expect them to fall even further. Such behaviour is known as speculation and it’s common in stock exchange, real estate, etc. This creates a positive relationship between price and quantity demanded.

5.     Ignorance effect.

Some consumers may buy more units of the commodity at high prices due to information asymmetry/ market imperfection. Some also buy the more expensive item because they believe it to be of better quality.

6.     Effect of an economic boom or depression.

In times of a depression, fewer quantities of goods are purchased even when their prices are reduced because purchasing power is very low. In times of an economic boom, more quantities of goods are purchased even when their prices are increased because purchasing power is very high. In both cases, the demand curve is positively sloped.

7.     Addiction to the consumption of the commodity.

Consumers who are addicted to consumption of particular commodities normally buy the same quantities of the good even if the price increases e.g. smokers.

8.     Special seasons.

The demand for some goods depends on seasons. A favourable change in seasons for the commodity leads to an increase in commodity demand even if the prices are increasing hence violating the law of demand.

Assignment

a)     Define the term market demand.

b)     State the determinants of market demand in an economy.

ENGEL CURVE

This is a curve that describes how household expenditure on a particular good or service varies with household income. It was named after the German statistician Ernst Engel (1821 – 1896) who was the first to systematically investigate the relationship between demand and income of the consumer in 1857.

From the diagram above, the following can be observed.

1.     For normal goods, the Engel curve has a positive gradient. That is as income increases, the quantity demanded also increases. Conclusively, normal goods have a positive income elasticity of demand

2.     For inferior goods, the Engel curve has a negative gradient. That means that as the consumer’s income increases, fewer amounts of the inferior good are bought because they are capable of purchasing better goods. Conclusively, inferior goods have a negative income elasticity of demand.

3.     For necessity goods, as the consumer’s income increases, the amount demanded increases slightly and then becomes constant. Conclusively, necessity goods have zero income elasticity of demand.

REASONS WHY PEOPLE DEMAND FOR GOODS

1.     For functional reasons/ to create utility.

Some people buy goods to use them to satisfy their needs. A commodity is demanded because of its function or use. For example one buys a bottle of water to quench thirst.

2.     Impulsive effect.

This is the demand for a good after seeing it. For example as a hawker is moving around, some people may develop the idea of buying a product because they have seen it.

3.     Speculative demand/ effect.

Some people buy more of certain goods hoping that they might become scarce in the future. Others buy goods hoping to make gains by buying at a lower price and selling them at a higher price in the future.

4.     Snob effect/ conspicuous consumption.

This is the demand for a good in order to impress the public or to show off. In this case, the good is demanded highly when its price is high. The consumption of expensive commodities in order to show off is referred to as conspicuous consumption.

5.     Veblen effect/ exclusivity.

This is the demand for a good in order to look unique or look different from others.

6.     Band wagon effect/ inclusivity.

This is the demand for a good so as to like others. Some people buy goods because they have seen others using them.

7.     For purposes of producing other goods.

Some people buy capital goods for use in the production of other goods.

8.     For complementary reasons.

Some people buy goods because they want to make other goods in their possession useful or operational e.g. one buys fuel to make a car useful.