THE CONCEPT OF DEMAND & SUPPLY

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Last Updated on November 23, 2020 by Simnify

1.0 CONCEPT OF DEMAND
Demand may be defined as the quantity of a commodity which a consumer is willing and able to buy at a given price and at a particular period of time.  In the ordinary meaning of demand, it is known as “want or desire”. But in Economics, demand is not mere desire or want. It is the quantity of a commodity people want, and at the same time, able to buy at a particular price. For instance most people want to buy cars, buy a good house, but since they cannot afford to pay for these, their desire will not constitute demand.
1.1 CONCEPT OF SUPPLY
Supply may be defined as the quantity of a good or service which a producer is willing and able to offer for sale at a particular period of time and at a given price. Supply does not mean the total number of products made but the amount of goods and services a producer is able to offer for sale at a particular period of time and at a given price. For example, vehicles stored in the inventory of the manufacturers which are not offered for sale at that point in time are not part of supply of motor vehicles.
1.2 DEMAND SCHEDULE
A demand schedule means an orderly, tabular presentation that shows the quantity of a commodity demanded at various prices in a given period of time.  The table below shows Mrs. Bell’s Demand Schedule for loaves of bread.
Mrs. Bell’s Demand Schedule for Loaves of Bread
Price per loaf of bread
Quantity demanded per month
50
5
40
10
30
15
20
20
10
25

Since the table above involves only one individual, it is referred to as Individual Demand Schedule.  
On the other hand, if it involves many consumers in the market, it is called Market Demand Schedule.  If we look at the table carefully, we can notice that more of the product is demanded at a lower price, while at higher price less of it is demanded.  Therefore, it means that as the price of bread falls, the quantity of bread demanded rises. Similarly, as the price of bread rises, the quantity of bread demanded decreases.  
1.3 DEMAND CURVE
The information contained in a demand schedule may be illustrated in a graphical form and the resulting curve is referred to asDemand Curve – to get a better picture of the behaviour of the law of demand.  We can therefore say that demand curve is a graph which shows the relationship between the price and quantity demanded of a product at a particular time, where price of the commodity is plotted on the vertical Y-axis and quantity demanded on the horizontal X-axis.
1.4 SUPPLY SCHEDULE
A supply schedule like demand schedule may be defined as a table showing the relationship between price and the quantity that is offered for sale at a particular period of time.
We have two types of supply schedule
  • Individual supply schedule
  • Market supply schedule
1.5 INDIVIDUAL SUPPLY SCHEDULE
Let’s examine quantities of yam offered for sale at different price by Mr. Adeolu
Mr. Adeolu’s Supply Schedule for yam.
Price (N)
Quantity supplied
55
50
45
40
35
35
28
21
14
7

1.6 MARKET SUPPLY SCHEDULE
When many suppliers’ individual schedules are combined, we have a Market Supply Schedule. For example let’s assume other farmers,Mr Adeola and Mr. Ige, also combined their supply schedules with MrAdeolu’s, we will have a market schedule as shown below:

Hypothetical market supply schedule for Yam
Price per tuber of yam
Quantity supplied per Month
Total Quantity
Supplied
Mr. Adeolu
Mr. Adeola
Mr. Ige
55
50
45
40
35
35
28
21
14
7
36
32
28
24
20
38
33
28
23
18
109
93
77
61
45

2.0 SUPPLY CURVE
A supply curve can be described as one which shows the relationship between the price of a commodity and the quantity of that commodity that is offered for sale at a particular period of time. This then becomes the Supply Curve.
2.1 INDIVIDUAL SUPPLY CURVE
The Law of demand states that, the higher the price of a commodity, ceteris paribus(i.e. all other things being equal), the lower the quantity demanded; and the lower the price, the higher the quantity demanded.  This law means that a rational consumer will buy more of a commodity if its price is lowered and less if its price is increased. This law holds for most commodities, except for some special cases like giffen good.  Giffen goods are goods that still command high demand despite increase in their prices. That is the quantity demanded by consumers will not be reduced because of increase in price. Example of giffen goods are salt, specified drugs, etc.  
2.2 LAW OF SUPPLY
The law of supply states that, the higher the price of a commodity, (ceteris paribus) all other things equal, the higher the quantity supplied. Also the lower the price the lower the quantity supplied.This law means that sellers will only be motivated to offer more of their good or service for sale with increase in the price of that commodity.
3.0 FACTORS AFFECTING DEMAND
Factors affecting demand: The factors affecting demand are:
  1. Price of the commodity.
  2. Government policy.
  3. Taste and fashion.
  4. The prices of other commodities.
  5. An expectation of future changes in prices.
  6. Weather conditions and the season.
  7. The size of the population and the age distribution of population.
  8. Taxation on commodities.
  9. Change in real or disposable income.

  1. The Price of the Commodity
Whenever the distribution of real or disposable income increases, the demand for those goods which are purchased by the consumers who are now earning higher income will surely increase.  On the other hand, if incomes should reduce, demand will also reduce.
  1. Government Policy
Government policy may affect demand either adversely or favorably as the case may be.  Some government policies may encourage demand while others may discourage it e.g. smoking of cigarettes.
  1. Taste and Fashion
A change in taste and fashion will adversely affect the demand.  A consumer would usually purchase more of the commodities he likes or prefers.  If the change in taste favours a commodity, the demand for it will be high, while a change in taste against a commodity will lead to a lower demand for it.
  1. The Prices of Other Commodities
If there is change in the price of other commodities it may influence the demand for a commodity.  This affects the goods with close substitutes and complementary goods. Examples are margarine and butter, coffee and tea, semovita and wheat.  If the price of one increases, the consumer may switch over to its substitute.
  1. An Expectation of Future Changes in prices
A promise by the government to increase personal incomes, lower taxes, raise import duties, or improve exchange rates for the local currency can encourage credit buying among consumers of various products irrespective of the fact that such promises are yet to be implemented.
  1. Weather Condition and the Season
The condition of weather and climate usually affect the demand for certain products positively or negatively.  For example, umbrellas and raincoats will be demanded more during the rainy season than in the dry season.
  1. The Size of the Population and the Age Distribution of Population.
The size of the population will surely determine the level of demand for a particular commodity.  If there is a change in the size of population, it would bring about a change in the number of consumers.  If the population increases, there is tendency to be an increase in demand for food and other essentials of life and vice versa.
  1. Taxation on Commodities
When taxes and tariffs changes and also duties paid on goods and services; there are resultant changes in demand for them.  Once there is increase in taxes of certain goods, demand for them will be affected. In other words, demand for goods and services will fall.    
  1. Change in Real Disposable Income
Whether there is increase in the structure of income either real or disposable, there will be definite change in demand for goods and services.  For instance, in the case of lecturers and researchers, it should be expected that a rise in their incomes will translate to the purchase of products such as computers, internet connectivity and satellite television subscriptions.
4.0 FACTORS AFFECTING SUPPLY
These are:
  1. Changes in the prices of inputs
  2. Changes in the prices of substitute goods and services
  3. Climatic conditions
  4. Future price expectations
  5. Government policies
  6. Changes in Taxation and subsidies
  7. Changes in the number of producers in a market
  8. Technological change
a.Changes in the prices of inputs: – If the price of raw materials, electrical power, fuel, rents, wages and salaries, interest rates increases or decreases it will cause the supply of the product to decrease or increase as the case by be.
b.Changes in the prices of substitute goods and services: – an increase in the prices of good or service relative to its substitute will shift producer’s attention to increasing the production of such a good.
c.Climatic conditions: – changes in the weather condition can affect the supply of agricultural products. Good weather like good rainfall will surely increase the supply of farmers’ output, and on the other way, bad weather such as excessive flood will reduce the output of the farmers.
d.Future price expectations: – when the supplier has the expectation about the future behaviour of the prices of some goods, this may affect supply. For example if producers expect the price of beans to increase, they will change from producing maize and produce beans. As a result the supply of beans will increase while that of maize will fall.
e.Government policies: – the Federal Government of Nigeria has been encouraging the production of cassava in her bid to raise its status as a significant export crop. When government policies discourage the importation of certain goods it may encourage local production of such products and this can translate to enhanced supply.
f.Changes in taxation and subsidies: – increase in taxes paid by producers discourages supply in that the imposition of more taxes adds more cost to producers. In another way, the granting of subsidies will reduce cost of production.
g.Changes in the number of producers: – the more the sellers in a market the more the supply of goods in that market. Markets with a larger number of sellers are more competitive and all the competitors push their products into the market continually.
h.Technological change: – the current state of technology defines the production and product distribution capacity in a market as well as their costs. Improvement in technology often implies higher productivity, greater marketing efficiency and lower costs.

5.0 EVALUATION
5.1 OBJECTIVE TESTS
1.The market supply curve slopes upwards from left to right indicating that
  1. at a lower price more is supplied
  2. Two commodities can be supplied at the same time
  3. At a lower price, less is supplied
  4. Producers pay high taxes
2.The law of supply states that
  1. The higher the price the higher the quantity supplied
  2. The lower the lower the price the higher the quantity supplied
  3. The higher the price the lower the quantity supplied
  4. All of the above

3.Supply may be defined as
  1. Quality of goods and services a producer is willing and able to offer for sale
  2. Total number of production
  3. Total number of goods and services
  4. All of the above

4.Supply schedule is a table
  1. of scale  of preference
  2. showing relationship between price and quantity supplied
  3. showing relationship between price and quantity demanded
  4. none of the above

5.A demand schedule is _________
  1. A table containing the price of goods.
  2. A table showing the relationship between price and quantity demanded of a commodity.
  3. A table showing the consumer demand in order of importance
  4. The quantity of goods the consumer is prepared to buy
  5. The market demand
6.The following are factors affecting the demand for a commodity except___________
  (a)  Change in income
(b)  Taste and fashion  
(c) Change in Price
(d) Population
(e) mobility of labour.
7.The law of demand states that:
  1. As price increases, quantity demanded remains constant.
  2. Demand increases as price increases.
  3. As price falls, quantity demanded also falls
  4. As price falls, quantity demanded increases
  5. Demand and supply remain constant whether price falls or increases.
8.Demand in Economics is synonymous __________
  1. Needs
  2. Wants of the consumers
  3. all goods demanded in the market.
  4. Wants supported with ability to pay.
  5.  all consumer goods
9.The market supply curve slopes upwards from left to right indicating that
  1. at a lower price more is supplied
  2. Two commodities can be supplied at the same time
  3. At a lower price, less is supplied
  4. Producers pay high taxes
10.The law of supply states that
  1. The higher the price the higher the quantity supplied
  2. The lower the lower the price the higher the quantity supplied
  3. The higher the price the lower the quantity supplied
  4. All of the above

11.Supply may be defined as
  1. Quality of goods and services a producer is willing and able to offer for sale
  2. Total number of production
  3. Total number of goods and services
  4. All of the above

12.Supply schedule is a table
  1. of scale  of preference
  2. showing relationship between price and quantity supplied
  3. showing relationship between price and quantity demanded
  4. none of the above

13.A demand schedule is _________
  1. A table containing the price of goods.
  2. A table showing the relationship between price and quantity demanded of a commodity.
  3. A table showing the consumer demand in order of importance
  4. The quantity of goods the consumer is prepared to buy
  5. The market demand

5.2 ESSAY QUESTIONS
1.Write out the laws of demand.
2.Distinguish between demand schedule and demand curve.
3.Identify six factors which cause a change in supply of a product
4.Discuss government policies as one of the factors which cause a change in supply of a product.
5.Define demand.
6.State the laws of demand.
7.Explain demand curve
8.Mention five factors affecting demand
9.What effect does change in income of consumers has the demand for a commodity?
Author: Simnify

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