Theory of demand

Quantity demanded refers to the specific amount of a good or service that consumers are willing and able to buy at a particular price over a given period of time.

The law of demand states that, if all other factors remain constant (ceteris paribus), when the price of a good or service increases, the quantity demanded will decrease, and when the price decreases, the quantity demanded will increase.

Example: If the price of a loaf of bread rises from TShs 1,000 to TShs 1,200, a consumer may buy less bread or switch to an alternative like pancakes.

1. No change in consumers' income – purchasing power remains the same.
2. No change in consumer tastes and preferences – preferences remain constant.
3. Prices of related goods (substitutes or complements) do not change.
4. Consumers do not expect future changes in price.

A demand schedule is a table that shows the relationship between the price of a good or service and the quantity demanded over a specific period.

Example:

A demand curve is a graph that shows the relationship between the price of a good or service and the quantity demanded over a specific period of time.

The vertical axis (Y-axis) represents the price, while the horizontal axis (X-axis) represents the quantity demanded.

Using data from an individual's demand schedule (e.g., student A's demand for packets of mango juice), the demand curve can be drawn.

Demand curves

Key features of the demand curve:

1. It slopes downwards from left to right – meaning it has a negative slope.
2. This downward slope shows the inverse relationship between price and quantity demanded:
   • When the price decreases, the quantity demanded increases.
   • When the price increases, the quantity demanded decreases.

This behavior happens under the assumption that all other factors affecting demand remain constant (ceteris paribus), such as income, tastes, and prices of related goods.

A market demand schedule is a table that shows the total quantity of a good or service demanded by all consumers in the market at different prices during a given period of time.

This is done by adding up the individual demand of each consumer at each price level.

Example

As the price of mango juice increases, the market demand decreases, confirming the law of demand.

A market demand curve is a graph that shows the total quantity of a good or service demanded by all consumers in the market at different prices.

The curve is drawn by plotting the market demand schedule on a graph:

1. The vertical axis (Y-axis) represents the price.
2. The horizontal axis (X-axis) represents the total quantity demanded by all individuals.

Like the individual demand curve, the market demand curve slopes downwards from left to right, showing the inverse relationship between price and quantity demanded.

Student A's demand curve

Student B's demand curve

Market demand curve

Therefore, the market demand curve represents the total consumer behavior in the market and is used to analyze overall demand trends.

Interrelated Demand: This is the demand for two or more goods that are related to each other in consumption or production. The demand for one good affects the demand for another.

There are various types of interrelated demand explained below:

1. Competitive demand: This is the demand for goods that satisfy the same want. An increase in the price of one leads to an increase in demand for the other. Example: Coca-Cola and Pepsi.
2. Complementary demand: This refers to the demand for goods that are used together. An increase in the price of one reduces the demand for the other. Example: Car and tyres.
3. Composite demand: This is the demand for a good that has multiple uses. An increase in demand for one use affects availability for other uses. Example: Land used for both farming and building.
4. Derived demand: This is the demand for a good that is not desired for its own sake, but because it is needed to produce another good. Example: Sunflower seeds for making sunflower oil.
5. Joint demand: This is similar to complementary demand, where two goods are demanded together to satisfy a particular want. Example: Pen and ink.
6. Alternative demand: This is when a consumer can choose between different goods to satisfy the same need. Example: Using gas or charcoal for cooking.

Change in quantity demanded: Caused by change in the price of the good. It is shown by movement along the same demand curve.

Change in demand: Caused by other factors (not price), such as income, tastes, price of other goods. It is shown by a shift of the demand curve.

Example:

• Price drops from TShs 1,600 to TShs 1,000 → quantity demanded increases (movement along curve).
• Income increases → more quantity is demanded at the same price (shift of the curve to the right).

1. Change in consumers' income: When consumers' income increases, their purchasing power increases, leading to more demand for normal goods. For inferior goods, demand may decrease as income increases.
2. Change in price of related goods: A change in the price of substitute goods (like tea and coffee) or complementary goods (like cars and tyres) can lead to an increase or decrease in demand. For example, if the price of tea increases, the demand for coffee may increase.
3. Change in tastes and preferences: When consumers' preferences shift due to fashion, health awareness, or trends, the demand for certain goods changes. For example, more people preferring fruits over fast food will increase fruit demand.
4. Consumers' expectations about future prices: If consumers expect prices to rise in the future, they will increase current demand. If they expect prices to fall, they will reduce current purchases and wait.
5. Change in population size and structure: An increase in population generally leads to an increase in demand for goods and services. Also, the age distribution (youth vs. elderly) affects demand for specific types of goods.
6. Change in government policies: Government interventions such as subsidies, taxation, or regulations can influence demand. For example, subsidies on maize flour can increase its demand, while heavy taxes on alcohol may reduce its demand.

Price Elasticity of Demand is a measure of the degree of responsiveness of the quantity demanded of a good to a change in its price, assuming all other factors remain constant.

It shows how much the quantity demanded will increase or decrease when the price of the good changes.

Mathematical Formula:

Or using symbols:

Where:

• $\Delta Q$ = Change in quantity demanded
• $\Delta P$ = Change in price
• $Q$ = Original quantity demanded
• $P$ = Original price

Interpretation:

• If $PED > 1$: Demand is elastic (consumers respond strongly to price changes)
• If $PED = 1$: Demand is unit elastic
• If $PED < 1$: Demand is inelastic (consumers respond weakly to price changes)