The law of Demand

This is the table that shows different price levels and the corresponding quantities demanded of the commodity

1. Individual demand schedule - This is the type of table which shows different quantities demanded of the commodity by an individual
2. Market demand schedule – This is the table which shows different total quantities demanded of the commodity at different prices in the whole market.

In order to get a market demand schedule we add up individual demand schedules.

Assuming there are two buyers in the market for milk, John and Jane, the market demand schedule will be derived as above.

This is a graphical presentation of the demand schedule showing the relationship between price of the commodity and its demand.

A demand curve has a negative slope and its slopes downwards from left to right showing that as the price decrease the quantity demanded increases, other factors remaining constant.

The demand curve

The demand curve of Jane

The market demand curve

Demand of a good or service will be high or low depending on the following factors;

1. The price of the commodity. When the price of the commodity is high the demand will be low, and when the price of low demand will be high, other things being constant.
2. Population size The demand on an area with high population will be high while the demand of the area with low population will be low.
3. Consumer's level of income When the consumer's level of income is high, the demand will be high as the consumer's ability will be high. However the consumer's level of income is low, the demand will also be low as the consumer's ability will be low.
4. Level of advertisement The commodity which is extensively advertised will be highly demanded, while the commodity which is not advertised the demand will be low.
5. Tastes and Preference. If the commodity is favoured, people's taste and preference, the demand will be high while the commodity which is not favoured by people's tastes and preference the demand will be low. E.g. the demand of Hi-jab in Saudi Arabia is higher compared to the demand in USA.
6. The level of Taxation. When the income tax charged is high, demand will be low and when the income tax is low, demand will be high, in which the disposable personal income will be high.
7. The price of the substitute goods If the price of the substitute increases demand of the good will decrease and when the price of the substitute decreases the demand of good in qn will increase. Substitutes are goods for which one can be used instead of the other e.g. Pepsi cola and Coca-Cola

8. Price of the complement Complement goods which are jointly demanded. These are goods which the demand of one result into demand of the other e.g. Car & petrol. If the price of the complement is high the demand of the good in question will be low and when the price of the complement is low the demand f the good in question will be high. (e.g. When the price of a car is high, demand for petrol will be low and when the price of the car is low, demand for petrol will be high)

9. Season The demand of some goods is seasonal in nature. When the prevailing seasons favours certain goods, its demand will be high and when the prevailing season does not favour a certain good, its demand will be low. E.g. the demand of woollen jacket in winter will be high compared to the demand of woollen jacket in summer which will be low.

The demand curve slopes downwards from left to right (negative slope). The indicates that more is demanded as the price falls and less is demanded when the price increases such negative slope is due to the following factors;

2. Income effect As the price falls real income, increases and therefore consumers can now buy more units of a commodity with the same income. On the other hand when the price increases, real income decrease and therefore consumers can now buy less units with the same income.
3. The law of diminishing marginal utility. The law of diminishing marginal utility states that," as more and more units of the commodity is consumed the additional satisfaction goes on declining" therefore more and more units of the commodity will be purchased only if the price is falling.

4. Substitution effect. When the price of the commodity is low it becomes cheaper in comparison to other competing commodities and the consumers start to substitute this commodity in place of other commodity therefore demand for the commodity increases with the fall in price
5. New customers When the price of the commodity for new customers join buying that commodity those who could not afford before and hence increase in demand, on the other hand when the price rises, some old customers may stop to purchase the commodity and hence fall in demand.

• A commodity tends to be to more uses or less urgent uses when it becomes cheaper. For example, if water is dear, we shall use it for drinking only, but when it becomes cheaper, we shall use it for washing and other less urgent uses.

Change in quantity demanded.

• This means increase or decrease in quantity demanded due to change in the price of the commodity, other factors remaining constant
• It is illustrated through the movement along the same demand curve. Through extension it is increase in Qd and contraction is the decrease in Qd

Let us assume the economy in equilibrium at point "E2" that is at price "OP2" and quantity demand is "OQ2"

Case I (contraction of demand)

Let us assume that the price increase from "OP2" to "OP1" and the quantity demand reduce from "OQ2" to OQ1". This behaviour is referred to as "Contraction of demand"

• Case II (Extension of demand)

In this case the price decrease from "OP2" to "OP3" due to this the quantity demand increase from "OQ2" to "OQ3" → this is nothing but the extension of demand.

Change in demand

Is the increase or decrease in demand due to change in all the factors affecting demand apart from the price. It is illustrated through the shift demand curve either to the right (increase in demand) or to the left (decrease in demand). In the diagram, "dd" is original demand curve. "dd" is decrease in demand curve. "" is increase in demand curve, "OP" original price OQ – original quantity. "OP" Original Price "OQ1" Increase in demand. "OP" Original Price "OQ2" Increase in demand.

1. Change in the consumer's level of income When the consumer's level of income increase, demand will also increase because of the increase in purchasing ability and when the level of income decrease, demand will decrease due to decrease in purchasing ability.
2. Change in population size When the population size increases, demand will also increase because of more consumers and the population decrease demand will also decrease due to less consumers.
3. Change in the level of direct taxes When the level of direct tax increase, demand will decrease due to the decrease of disposable personal income and when the level of direct taxes decrease, demand will increase due to the increase of disposable personal income.
4. Expectation or Anticipations Expectations also bring about a change in demand. If prices are expected to rise in future, the demand for goods will increase now in the present. Similarly, expectation of rising incomes will restrain current purchases and post pone purchases to a future favourable situation.
5. Change in tastes, preferences and fashion. When the tastes, preferences & fashion change in favour of certain goods, demand will increase and when the taste, preferences & fashion change against a certain good its demand will decrease.
6. Change in price of the substitute. If the price of the substitute increases, the demand of a good in question will increase and if price of the substitute decrease the demand of a good in question will decrease.
7. Change in the price of the complement. If the price of the complement increases, the demand of the good in question will decrease. However if the price of the complement decreases, the demand of the good in question will increase.
8. Exceptions of the law of demand. There are some situations where the law of demand does not operate. This gives rise to abnormal demand curve (regressive). Aggressive demand curve has a positive slope indicating that as the price increases quantity demand also increases and vice versa. A situation which is against the law of demand. The exceptions of the law of demand are the following;

• Veblen goods or Article of ostentation These are the luxurious goods which are demand to emphasize economic status for example expensive cars, expensive mobile phones etc for such goods as the price increase, quantity demand also increases.

• Giffen goods (inferior goods) This can also be called inferior goods, example of such includes;- maize flour. For such goods when the price increases more is bought of them, but as the price fall less is demand of them for a low income earner when the price of beans increase, he will buy more of them by reducing his expenditure on meat.

• Fear of the future rise in price. When the consumers expect the price of the commodity to increase now and then because of factors such as expected shortage they will tend to buy more of the commodity as the price increases

• Necessities These are goods that are necessities of life, e.g. medicines, food, salt etc. For such goods a minimum quantity has been purchased by the consumer irrespective of their price because of such a situation, the law of demand is operative to a certain extent.

• Ignorance of the consumer. These are situations where consumers buy goods at a higher price because they are ignorant of lower price for the same goods in other market.

Under inter – related we examine the relationship between goods that are related in one way or another by looking at how change of one will affect demand of the other.

1. Joint Demand (complementary demand) This is the demand for two or more commodities which are jointly needed to satisfy a particular need Example; Car and petrol, Increase in demand of one will result into increase in demand for another and decrease in demand of one will result to the decrease in demand for another and increase in the price of one will result to the decrease in demand for another. Price of cars

2. Competitive Demand This refers to the demand for goods which are substitutes to one another. For example tea and coffee, Pepsi and coca cola, increase in demand for one will result into decrease in demand for another and vice versa and increase in price for one will result into the increase in demand for another and vice versa.
3. Composite Demand This refers to demand for a commodity which can be used for several purposes e.g. demand for electricity, demand for steel.
4. Derived Demand This refers to demand for a commodity which is used in the production of the other commodity. E.g. demand for factors of production is derived in demand because it is upon demand for goods that produces demand for factors of produce in order to produce other goods.